CONCENTRATION AND CONTROL A SOLUTION OF THE TRUST PROBLEM IN THE UNITED STATES CHARLES R.VAN HISE CORNELL UNIVERSITY LIBRARY Date Due Cornell University Library HD 2795.V25 concentration and co"»™' ;,^„?°K?,|:m?' 3 1924 019 225 766 Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924019225766 CONCENTRATION AND CONTROL A SOLUTION OF THE TRUST PROBLEM BT THE UNITED STATES ^^^y^ •Tl •^^ THE MACMILLAN COMPANY NEW YORK • BOSTON • CHICAGO DALLAS • SAN FRANCISCO MACMILLAN & CO., Limited LONDON • BOMBAY - CALCUTTA MHLBOURNE THE MACMILLAN CO. OF CANADA, Ltd. TORONTO CONCENTRATION AND CONTROL A SOLUTION OF THE TRUST PROBLEM IN THE UNITED STATES BY CHARLES R. VAN HISE AUTHOR OF " CONSEHVATION OF NATURAL RESOURCES IN THE UNITED STATES," ETC. THE MACMILLAN COMPANY 1912 All rights reserved copteight, 1912, By the MACMILLAN COMPAN-T. Set up and clectrotyped. Published May, igia. NorfaJOOtl ^Xt%S J. B. Gushing Co. — Berwick & Smitli Co. Norwood, Mass., U.S.A. PREFACE This book is one of opportunism. Its aim is to present an outline picture of the situation regarding concentration of industry in the United States, and to suggest a way to gain its economic advantages and at the same time to guard the interests of the public. The book is written because this is the most pressing problem now before the people and before Congress and state legislatures. No other problem is likely to have so large discussion in the political campaign now waging. If this book has the good fate to assist in the rule of enlightenment, reason, fair play, mutual consideration, and toleration, and thus advance the solution of the problem, the author will have been repaid many fold for his labor in its preparation. The scope of the treatment does not include the public utilities. They are only considered in so far as their develop- ment and control throw light upon the other industries. The reader who is familiar with trust literature will recog- nize the influence of Ely's "Monopolies and Trusts," Jenks's " The Trust Problem," von Halle's " Trusts or Industrial Com- binations of the United States," Ripley's " Trusts, Pools, and Corporations," Montague's "Trusts of To-day," Nolan's Com- binations, Trusts, and Monopolies," Collier's "Trusts," Wyman's "Control of the Market," and Macrosty's "Trust Movement in British Industry." Aside from these standard works, the most important sources of information in presenting a picture of the situation as it is at the present time are the special reports on manufactures in 1905 by the Census Office, reports of the Commissioner of Corporations upon Standard Oil, tobacco, steel, beef, lumber, and water powers, and the hearings and reports before the com- mittees of the Sixty-second Congress. Especially important in this connection have been the hearings before the United vi PREFACE States Senate Interstate Commerce Committee, the report of Mr. Hardick for the special Committee of the House of Eep- resentatives to investigate the Sugar Refining Industry, and the reports of the House Committee of Investigation for the United States Steel Corporation. Further, I had the opportunity to see the manuscript of a book now published by Dr. Charles McCarthy, upon " The Wis- consin Idea," from which I have taken material concerning the situation in that state. Professor T. K. Urdahl has pre- pared for insertion a summary account of the steel combina- tions of Germany. Professor Richard T. Ely and Professor Urdahl have kindly read the manuscript and made many suggestions of value to me. Professor E. A. Gilmore has done the same for the chapter upon the law regarding cooperation. To these men I am especially indebted. Also I have had many valuable suggestions from other members of the staff of the University of Wisconsin in the departments of political science, political economy, history, and sociology. Pinally, a number of the students in that university, under the direction of Mr. W. I. King, have given me important assistance in looking up decisions and summarizing material along special lines ; these are S. A. Barrett, W. K. Braasch, Harlow Brown, F. A. Buechel, N. B. Bunin, W. H. Butt, J. S. Josiassen, J. C. Pritzlaff, John Schmidt, R. A. Weir, E. E. Witte. No one has a keener realization than the author of the imperfections of the volume, but since the policies of the nation concerning concentration are now under consideration by the people, promptness in publication seems to be more important than completeness of statement. In preparing the book, it has been the purpose to put in a small volume the information which is essential to reach a sound conclusion regarding the handling of the great problem of concentrations of industry, both in the way of legislation and administration. Following a statement of facts, the conclusions of the author are given in these matters, and it is hoped that these may appeal to the judgment of the reader. However, even if the conclusions are not followed in all respects, it is still hoped that the summary of facts bearing on the problem of concen- tration may be helpful. PREFACE vii The material published in the magazines and newspapers, even much of the testimony before the committees of Congress, shows a lamentable lack of comprehension of the facts in- volved in concentration of industry, and in many cases con- clusions are presented withovit taking into account more than a very small part of the facts. It is hoped that a brief and clear presentation of the more important factors of the problem may help in leading to logical thinking, and thus assist in reaching a consensus of opinion which may finally result in sound remedial legislation. CHARLES R. VAN HISE. The University of Wisconsin, April, 1912. TABLE OF CONTENTS Preface ... Ihtroductiok : The Self-sufficient Community The Civil War and Concentration The Development of Transportation and Communication PAGE V CHAPTER I THE GENERAL FACTS REGARDING CONCENTRATION \^ Section 1 — The Economic Advantages or Concentration (1) The Handling of Material . (2) The Use of Machinery and Departments (3) Subdivision of Labor .... (4) Integration (5) Parallel Consolidation and Specialization (6) Saving By-products .... (7) Consolidation of Allied Industries (8) Keeping Establishments up to Date . (9) Investigating Departments (10) Business Advantages of Concentration (11) Opportunities for High Order of Ability (12) Other Advantages of Concentration . Total Advantages of Conoentratiou . Section 2 — The Causes of Concentration (1) The Limited Liability Corporation (2) The Protective Tariff . (3) Railway Rebates and Drawbacks (4) Local Underselling (5) Patents (6) Manufacturers' Rebates General Statements . ■^CBection 3 — The Purposes op Concentration (1) Elimination of Competition (2) Regulation of Output and Division of Business tory (3) Maintenance of Prices .... (4) Profits of Promoters and Terri- 9 9 9 10 11 12 12 13 14 16 17 17 21 21 21 22 23 24 24 24 25 26 26 27 27 TABLE OF CONTENTS Section 4 — The Kinds op Business Most Likely to become concentkated 31 Section 5 — The Extent of Concentration Concentration in Management Greater than Conceutratiou in Plants Statistics confined to Factory Systems Localization of Industries . Concentration in Representative Industries General Statements .... Section 6 — Forms op Organizations (1) Informal or Formal Associations for the General Protec- tion or Advancement of a Business (2) Formal Agreements (3) Trusts .... (4) Holding Corporations . (5) Complete Merger . General Statements Section 7 — The Kinds of Competition (1) Competition in Quality (2) Competition in Price . (3) Competition in Service Section 8 — The Break-down of Competition The Faith in Competition .... The Failure of Competition adequately to regulate Quality The Failure of Competition adequately to regulate Price General Statements . . . . . Section 9 — The Wastes of Competition . (1) Expense of Salesmen . . . (2) Expense of Advertising (3) Competition and Conservation .... ^ The Consumer pays for the Wastes of Competition Wastes of Competition drive to Combination Euin or Combination 34 85 35 35 36 58 60 60 64 71 71 72 72 74 75 76 76 76 78 83 89 89 97 97 99 •^ CHAPTER II SOME IMPORTANT ILLUSTRATIONS OP CONCEN- TRATION Section 1 — The Michigan Salt Company ... Section 2 — The Standard Oil Company . The Rise of the Company .... The Monopolistic Position of the Company 101 104 104 106 TABLE OF CONTENTS XI Margins and Profits Price Discriminations Excessive Profits Summary of Evils Section 3 — The United States Steel Corporation Early Consolidations . Causes of Consolidation Organization of the Corporation Overcapitalization Earnings .... Proportion of Business Cost of Production The Value of Iron Ore Practices of the Corporation The Efficiency of the Corporation Relative EfBciency of Large and Small Steel Companies Relative EfBciency of the Large Steel Companies Summary of Evils Section 4 — The American Tobacco Company History of Company ... . . Overcapitalization ... . . Illegitimate Competition International Combination . Expansion into Allied Businesses Concentration of Manufacture . Excessive Profits Monopoly and Competition Summary of Evils Section 5 — The American Sugar Refining Company Commanding Position of the Company Increase in Margins . Price of Raw Material Capitalization Excessive Profits Evils Illustrated . Section 6 — The Meat-Packing Industry The "Big Six" . Capitalization and Profits . Principles Illustrated .... Section 7 — The Lumber Industry The General Situation PAGE 108 109 109 110 111 111 112 113 115 117 119 120 129 132 134 136 138 140 140 140 142 143 143 144 144 145 146 147 147 147 148 148 149 149 149 150 150 152 153 154 154 Xll TABLE OF CONTENTS PAGE Concentrated Ownership of Timber ...... 166 Rising Prices ... 159 Section 8 — The Watbk Powers ....... 160 Amount and Distribution 160 Concentration of Ownership 162 Public Control 164 CHAPTEE III THE LAWS REGARDING COOPERATION Section 1 — England .... Section 2 — The United States . Section 3 — The Sherman Antitrust Law The Standard Oil Company The American Tobacco Company The DuPont Powder Company Dissolution by Mutual Agreement Other Corporations under Attack General Statements . Section 4 — State Legislation against Trusts The Statute Laws Decisions under the Statutts General Statements . 167 170 174 181 183 187 187 189 191 192 192 197 200 CHAPTEE IV THE SITUATION IN OTHER COUNTRIES Section 1 — England Section 2 — Germany The German Steel Combine The Potash Industry . Section 3 — Austria Section 4 — Prance .... Section 5 — General Statements. Section 6 — International Combinations 203 206 207 218 219 220 221 222 CHAPTEE V REMEDIES Section 1 — Specifications to be Met Minimum Specifications 226 281 TABLE OF CONTENTS xiii PAGE Section 2 — Commission Contkol of Poblio Utilities . . 233 Early Commissions 234 The Wisconsin Commission 236 The Interstate Commerce Commission . . . 238 General Statements ......... 242 Section 3 — -PnKE Food and Drug Laws . . . 244 Section 4 — -The Creation of Trade Commissions . . . 248 Section 6 — Proposed Minimum Amendments to Antitrust Laws 249 (1) Business of a Public Interest . . . 249 (2) Cooperation Reasonable ... . . 250 (3) Competition to remain Free ... . 252 (4) Unfair Practices should be Prohibited .... 252 General Statements . 252 Section 6 — Further Extension of Power of Commissions . 254 (1) Publicity Required .... . . 255 (2) Regulation of Prices . . . ... 255 (3) Conservation Enforced . . . . 262 (4) Good Social Conditions Securable . . . 263 (5) Fair "Wages Realizable . . . 264 (6) Control of Capitalization . . 265 (7) Delimitations of Powers of State and Nation . . . 265 General Statements .... . 265 Section 7 — Other Plans for Amendment to Sherman Anti- trust Law ... ..... 266 Section 8 — Patent Monopoly 268 Section 9 — -Possible Objections to Plan of Regulation Pro- posed .... 270 Section 10 — Conclusion 277 Append LX — The Sherman Antitrust Law .... 279 CONCENTRATION AND CONTROL INTRODUCTION The history of industry in the United States may be di- vided into two great periods, that antecedent to the Civil! War of 1861-1865, and that following this conflict. In the ! years preceding the Civil War the Middle West became' settled. A few railroads had crept as far west as the Missis- The Civil sippi River. The large cities east of that great north-south ^ar^dmdes water thoroughfare were thus connected. The railroads were trial periods, wide apart ; their efiiciency as compared with present times was small. West of the Mississippi River the population was sparse. That part of the country was still in its frontier stage, with the exception of portions of California and Oregon. Under the conditions above given many small manufac-'i tories had grown up to meet the needs of the communities ' in which they existed. Indeed manufacture in a small way had begun in the eastern cities before the end of the eighteenth century. During the first half of the nineteenth century there was steady and slow expansion of manufacture, not mainly by increasing the size of plants which already existed, but by the multiplication of plants wherever a clientele was found in the township, county, or district. Thus in the Middle West during these times almost every community had its gristmill run by the power of the adjacent creek or small river. Simi- larly there were many small plants for the smelting of iron. For the most part these were located adjacent to small banks of iron ore, and especially in districts where coal and lime- stone were near at hand to serve for fuel and flux. The great ! drift to the cities had not yet begun, and a large proportion of the population was rural, 87.5 per cent in 1850, and 83.9 per cent in 1860. B 1 CONCENTRATION AND CONTROL THE SELF-SUFFICIENT COMMUNITY The farmer in the sparsely settled districts of the Middle West was largely self-sufScient. For heat he cut his own wood. He raised his own wheat and corn, took the same to the adjacent mill and returned, after paying proper toll, with flour The farm- and com meal for his family and bran for his stock. He stead a raised and killed his own meat : in the winter he had fresh workshop. meat ; in the summer, salt pork and corned beef. As a matter of course each farmer raised his own vegetables ; he had cows which furnished him with milk, butter, and perhaps cheese ; he had his poultry yard, which might include chickens, geese, and ducks. The farmer of the North produced his own wool and many had a crop of flax. In the South cotton was the stable for textiles. In the earlier part of the nineteenth century the wool was cleaned and carded at the house, but at a little later stage of development was taken to a factory in the adjacent small town to be cleaned and made into rolls ready for spinning. The equipment of the farmer's house included the spinning wheel and often the loom. With spin- ning wheel the wool and flax were made into yarn or thread to be later transformed into stockings, mittens, or cloth. The home loom produced either somewhat coarse cloth or car- pets. Cotton very early faund its way to the factories, which before the Civil War were largely located along the streams of New England. The village or town contained a shoemaker, whose raw material frequently came from leather supplied by the farmer. In a town of a few thousand inhabit- ants, there was likely to be a small agricultural implement factory. Not every farmstead would have all of the equipment indi- cated, but all would be found in the neighborhood; and by barter among the farmers, or trade between the farmers and the villagers, the chief necessities not produced at home were supplied. The articles not produced in a community were mainly those which are relatively light as compared with their value, sugar, tea, coffee, starch, tobacco, and cloth-cotton or woolen. INTRODUCTION 3 These were the staples which the farmer purchased from the sales of a part of his wheat or other crop. From the above, it is apparent that each community of fair size was essentially self-sufficient ; and this was true without reference to the different parts of the United States, although there were differences as to the approach to completeness of the self-sufficient character of the community, the approach to this situation being nearer in the North than in the South. A city, and in many cases a county, if cut off from the rest of the world would have gotten along without any special hardship. Some luxuries and conveniences would have been missed, but no far-reaching change would have been made in the habits of the community. The situation above described has now ceased to exist for the United States, with the exception of those communities which, isolated by natural barriers, have been left behind in the industrial movement. Some such commimities have remained nearly as they were a hundred years ago, Self-suffi- not affected by the great stream of progress which has cientcom- moved past them. In the coves of the Great Smoky atiii exist. Mountains to-day may be found essentially the situation described, and that not more than twenty or thirty miles from a city of considerable size, for instance, Cades and Tuckaleeche coves, a short distance east of Knoxville. In one of those coves, only a few years ago, I saw upon the porch of a little cabin the complete change from wool to stockings going on at the same time, one of the three daughters card- ing the wool, the second spinning it into hard yarn, and the third knitting it into stockings. What is true for the coves in this coimtry still obtains for great regions in less-developed countries. For instance, in Brazil, in the province of Minas Geraes, the people are substantially self-sufficient. The ar- ticles which they raise are not the same as those produced in the United States. Their products are beans, 'bananas, other fruits, tobacco, coffee, etc. In the district are still running many small bloomeries for the manufacture of iron, the most primitive type known to man. From the blooms are wrought iron for rods, nails, horseshoes, etc. The walls 4 CONCENTRATION AND CONTROL of the houses are constructed of a lacework of poles between which mud is filled in, and the roof is of tile burned from clay close at hand. The Civil War de- manded large scale operations. THE CIVIL WAR AND CONCENTRATION In the United States, before the Civil War, industry was dis- persed, the shops and factories being small ; indeed, every farm to a considerable extent was a shop and factory. In any community the shops and factories mainly supplied the needs of the people. The Civil War, the most gigantic strife which to that time had existed among men, required that things be done on a great scale. More than a million and a half of men were in the field at one time from the North and the South together. The North built up the greatest navy that the world had then seen. The great armies required similar equipment for more than a million men, — a million blankets, a million muskets, etc. The artillery required great quantities of iron, and the newly devised monitors more. Metal was used upon a scale never before approached in this country. Above all, the mil- lion men must be fed. Thus as a result of the demands of civil strife the large manufactory grew up especially adapted to producing the materials and munitions of war. These supplies must be transported to serve a vast and shifting army. / But even more important than the great factory was the / training of many thousands of men, both South and North, ; to do things in a large way through the use of a multitude of ,' men, in order that a given big result might be reached at a , definite time and place. One of the most far-reaching effects of the Civil War was the acceleration of concentration under the tremendous ■necessity to do things on a great scale. THE DEVELOPMENT OF TRANSPORTATION AND COMMUNICATION Beginning with the Civil War the period of concentration in industry was on; but a condition precedent to its full INTRODUCTION growth was the development of transportation and communi- cation. Following the Civil War came the time of great railway building. The increase in the number of miles of railway in the United States by decades from 1850 to 1910 and the per- centages of increase per decade are shown by the following table : — Table 1. Railway Extension by Decade3 since 1850' Year Miles Peh Cent 1850-1860 89,012 to 36,626 306.0 1860-1870 36,626 to 52,922 44.4 1870-1880 52,922 to 93,262 76.3 1880-1890 93,262 to 166,703 78.7 1890-1900 166,703 to 194,262 16.4 1900-1909 194,262 to 238,356 22.6 Concurrently with the expansion of the railways was the extension of the telegraph lines, and finally, with the centennial exhibition in 1876, came the telephone. When the Union Pacific Railroad was completed in 1869, it was thought to be a mighty achievement ; and it was accomplished only through liberal, indeed extravagant, federal grants and guaranties. At the present time there are six continental roads stretching from the Mississippi to the Pacific coast. Also the increase in the railway mileage east of the Mississippi has gone on with accelerating speed. Thus the country is now linked together by agencies of transportation and communication. A large proportion of Railways the population lives within a half dozen miles from a rail- everywhere, way ; it is only in the sparsely settled sections of the country that a railway is ten or twenty miles distant. Railway speeds and weights have been increased. A few trains move pas- sengers and the more valuable freight a thousand miles in twenty-four hours. A single train with one locomotive may carry five thousand tons of iron ore. The telegraph and the telephone make communication instantaneous. ' Poor's "Manual of Railroads," 1910. CONCENTRATION AND CONTROL Decreasing freights. Navigable streams. The vanish- ing water traffic. The freight and passenger rates have steadily fallen. In 1864, the charge on a bushel of wheat, in carload lots, from Chicago to New York, was from 48 to 96 cents; in 1902, 7.8 to 9.6 cents, one sixth to one tenth as much. The heavier, cheaper products, such as coal and iron ore are transported in great quantities at a cost of about one fifth of a cent per ton mile, and the rates for such commodities at various places are less than one half a cent a ton mile. It may cost the farmer who lives twenty miles from a railroad more to get his wheat to the station than it does from the railroad point to the central market. It is not meant to imply that the railways are the only means of transportation, although from the present point of view they are dominant Before railways existed, navigable streams furnished means of communication and transportation for commodities heavy and light for those communities which were fortunate enough to be thus reached. Thus there grew up in the early part of the nineteenth century a great traffic upon the Mississippi, Ohio, and upon many other rivers of smaller size. The Great Lakes furnished cheap transportation from Buffalo to Chicago and the head of Lake Superior. Inevitably, settle- ment and development proceeded much more rapidly along the naturally navigable waters than elsewhere. But even where the conditions were most favorable, navigable waters fur- nished transportation facilities to only a small part of the country, and for that part at a very low speed. The next stage in transportation development was the system of canals. The Erie Canal coimected the Hudson and the Great Lakes. Many other less important canals were built. But even at best the construction of canals was expen- sive ; the transportation of materials upon them slow ; and only a small part of the coimtry was ever reached by them. With the era of railroad development, canals began to wane. Many of them were acquired by railroad companies and put out of commission. Upon the Mississippi itself, through the acquisition of terminals, purchasing boat lines, cutting rates, refusing to prorate, etc. the railroad companies have reduced INTRODUCTION river transportation above St. Louis almost to a negligible quantity. The country as a whole, even at the present time, has very few good highways. Only a few sections of the country have well-made roads. Before the Civil War, and locally since, until our own time, toll roads have connected some of the great cities. Upon the toll and free public roads wheel vehicles move; but before the automobile appeared speeds were limited to ten miles per hour, and quantities to a few tons per load. Consequently, by 1875 railroads had a leading place in transportation in this country, and they are now dominant. It is not meant to imply that the development of transporta- tion went on without concentration of industry taking place at the same time. Naturally there was action and reaction between them. Without concentration of industry and, con- sequently, large amounts of goods to ship, the railroads would not have developed so rapidly; and on the other hand, without the development of transportation and communication, concentration of industry would have been impossible. '< The development of transportation and communication furnished the fundamental basis for concentration of industry, because through them it became possible at a moderate cost to transport goods long distances in a short time and easy to communicate with the customer who desired goods. As soon as the freight rates became sufficiently low so that the advan- tages of concentration were greater than the cost of freight and doing business at a distance, the small concerns began to suffer in competition with the large manufactory. ' Transporta- tion and concentra- tion. My treatment of the subject of concentration and control will be divided into five chapters: I, The General Facts regarding Concentration; II, Some Important Illustra- tions of Concentration ; III, The Laws Regarding Coopera- tion; IV, The Situation in Other Countries; and V, Remedies. CHAPTER I THE GENERAL FACTS REGARDING CONCEN- TRATION The general facts regarding concentration of industry will be considered under the sections : 1, The economic advantages of concentration ; 2, The causes of concentration ; 3, The pur- poses of concentration ; 4, The kinds of business most likely to become concentrated; 5, The extent of concentration; 6, The forms of organization ; 7, The kinds of competition ; 8, The break-down of competition ; 9, The wastes of com- petition. Section 1 THE ECONOMIC ADVANTAGES OF CONCENTRATION What are the economic advantages of manufacturing in a large plant and doing business on a large scale, and how im- portant are they? Different industries differ among them- selves very greatly in these respects, and any general state- ment will need modification when applied to a particular case. What is said will be more applicable to those groups of indus- tries which are better adapted for concentration. (1) The Handling of Material. — The handling of material on a large scale in itself gives great economy. In any manu- factory the material must be there assembled. For instance, if it be an iron manufactory, and we have a primitive bloom- ery depending upon an adjacent bank of ore, it will not pay to go to any great expense in providing for transportation of the ore to the bloomery; and the ore will be hauled in a cart. When the bloomery changes to the blast furnace, the quantity of ore needed will be so great that the ore is brought with trams or some kind of mechanical haulage. The same is 8 FACTS REGARDING CONCENTRATION 9 true of the coal. Thus the economies due to mere magnitude of operation in this industry become very great. Also in the manufacturing process itself the large furnace has an advan- tage in economy of fuel and efficiency over the small furnace. (2) The Use of Machinery and Departments. — In the large manufactory it is possible to use machinery to an extent not possible in the small establishment. The introduction of labor-saving machines is well known to be one of the greatest causes of economic efficiency. The illustration of the cotton gin is classic. Where there are many processes in the manu- facture of an article, if the concern be a large one, it is possible to have a separate machine or a number of them for each process. Similarly for different departments. In making agri- cultural implements, if the plant be a large one, the iron and wood departments will be separate. These again will be specialized for different lines of work. The parts of iron and wood will be assembled in another department; and finally the painting and varnishing will be done in still another. (3) Subdivision of Labor. — In most manufactories an article must go through many processes before it is completed. In the old primitive shop, the shoemaker at the bench did all of the different stages of work in making the entire shoe. In the large manufactory the part that any one man does has been steadily lessened until now in the making of a single shoe many persons participate. In the making of a wagon or a binder in a large manufactory scores of people take part. In the wagon shop which served the country commimity one man, or one man with his helper, made the wagon in all its parts except that the iron in bars or rods was furnished to him. Specialization of labor is only possible in the large manufactory, and it is generally agreed that such speciahza- tion gives increased efficiency. (4) Integration. — A further step in the development of concentration of industry is its integration; that is, a cor- poration handles not one stage of manufacture only, but a number or even all of the stages from the raw material to the 10 CONCENTRATION AND CONTROL finished product. This again gives increased economy and efficiency, because all the different units of the integrated in- dustry are in harmony, one with reference to the other. Thus the United States Steel Corporation mines its raw materials, assembles them, smelts the ore into pig iron, changes the iron to steel, and the steel into structural forms, — plate, wire, or nail. Other illustrations of in- tegrated industries are oil, sugar, etc., described pp. 104-150. While there is great economic advantage in integration for almost every industry, that of iron and steel furnishes one of the best illustrations. When the blast furnace was inde- pendent of the converter, the molten pig iron was allowed to cool, and was melted for the Bessemer converter. The steel from the converter was again allowed to cool in the ingot and was reheated before rolling into the rail. At the present time the molten pig iron goes to the converter, is transformed into steel, and then after solidification but before cooling goes to the rolls where it is wrought into rails. Similar methods are introduced for other products. The saving of energy by in- tegration is great, as is also the saving in labor. Independent blast furnaces, Bessemer converters, and rolling mills cannot possibly give the economic efficiency of integrated establish- ments combining the three. (5) Parallel Consolidation and Specialization. — The con- centration of management goes not only to the point of the manufacture on a large scale, integration, and saving of by- products, but extends to the point of ownership of manufac- tories of the same general kinds at various points. Under these conditions it is possible to make the same product at the different plants, or to specialize the different manufacto- ries under the same organization so that one shall handle one line of work, and another another. Further, the work of any one branch may become standardized and require com- paratively little shifting or changing of machines. Thus the shapes, forms, and sizes of the manufactured iron which comes from a given plant may remain the same month after month, or even year after year ; and this very greatly pro- motes efficiency. If the industry be tobacco, one manufac- FACTS HEGARDING CONCENTRATION 11 tory may produce cigarettes, and another cigars. A proof of the superior efficiency of completely equipped concerns is fully admitted in the case of tobacco, as is shown by the objections filed by Messrs. Brandeis and Levy against the plan of disintegration of the American Tobacco Company (see pp. 183-187). As counsels for the independent com- panies they say that no independent tobacco company is now completely equipped to do tobacco business covering all the main branches of the tobacco trade, and that any plan to restore competition will be ineffective which does not compel each of the elements of the disintegrated tobacco company to confine itself to one line of business. They state: "It follows that any corporation taking over a part of the plug tobacco business or smoking tobacco business of the trust shall not take over any of the cigarette or cigar business; that a corporation taking over a part of its cig- arette business shall not take over any of its smoking to- bacco business, plug tobacco business, or cigar business; and that a corporation taking over any part of the cigar business shall not take over any of its smoking tobacco business, plug tobacco business, or cigarette business." ^ There can scarcely be stronger evidence of the economic efficiency of parallel consoUdation and specialization under a single corporation than the above remonstrance of Messrs. Brandeis and Levy upon behalf of the independent tobacco companies. The consolidation in management of plants making the same class of products at different points is especially eco- nomical for those articles in which transportation is an im- portant factor. Cross freights are avoided to a large extent when the manufactories of one district supply the markets of that district. For articles which are heavy as compared with their cost, for instance salt and steel rails, this factor may be one of controlling importance. (6) Saving By-products. — A further advantage of magni- tude is the use of by-products. The small manufactory • Hearings before the Committee on Interstate Commerce United States Senate, Part VII, p. 319. 12 CONCENTRATION AND CONTROL cannot spend much money in such utilization, although the coarser of them may be saved. In the production of meat, the by-products, — hides, fat, bone, etc. are a very important part of the income. These materials are much more largely util- ized in the large abattoir than in the small slaughter-house. For the great oil refiners, if kerosene be regarded as the chief, as it was the original product, then lubricating oil and gaso- line are by-products. Also in addition to these scores of other by-products are saved. In fact for all chemical and metallurgical industries by-products are the source of a large part of the profits. But to save these materials economically requires large scale manufacture. (7) Consolidation of Allied Industries. — The final stage in consolidation is the union of allied and connected industries. This frequently goes beyond integration, in that the lines of manufacture are absorbed which use as raw material the by-products of the central organization. Thus the United States Steel Corporation has begun the manufacture of cement, using slag, a by-product of the blast furnace, for that purpose ; but the manufacture of cement is itself a great industry which requires a large and expensive plant, and slag is therefore a by-product which it is not possible to save ex- cept in plants of great magnitude. The big beef firms have entered lines of business related to their own. Those having refrigerator cars have begun the transportation of fruit. They are largely interested in the stockyards. In order to use the by-products the packing house companies have formed fertilizer companies, soap companies, glue companies, curled hair companies, and felt companies ; all of which industries are large users of materials furnished by the packing industry. (8) Keeping Establishments Up to Date. — The large com- pany uses only the most modern manufactories which have complete and highly efficient machinery and practices, in- cluding the latest labor-saving devices and the best technical improvements. The weak company will frequently con- tinue to use an inadequate plant because it has not and cannot get sufficient capital to put its plant into an up-to-date FACTS REGARDING CONCENTRATION 13 condition. The American Sugar Refining Company after organization built one large new plant fully equipped with the most modern machinery, simply as a safeguard in case of in- creased demand or stoppage of other factories. Shortly after it abandoned altogether a number of refineries acquired at the time of consolidation, because of their inefficient equip- ment or disadvantageous location, or both. (9) Investigating Departments. — Not only is the large organization able to use the most modern methods, but it is able to have an investigating department in order that dis- coveries may be made for still further improvements. The economies which have come from such a department are strongly emphasized by many men coimected with great organizations. The Cotton Oil Company has an experiment station. The Standard Oil Company carries on chemical investigations of the most elaborate and extensive kind in order to utilize fully the by-products of the oil ; as a result of which they have on the market some three hundred by- products, many of which come from the part of the oil which otherwise would have been thrown away.' The United States Steel Corporation, the General Electric Company, and indeed practically all great organizations have inves- tigating departments in which large sums of money are spent. Mr. Louis Brandeis,^ who is strongly opposed to the existence of large concentrations, recognizes the economic advantage of investigative departments to be so great as to threaten the practicability of retaining relatively small industrial units under the competitive system; this is shown by the fact that he urges that all investigations which are necessary for the advancement of applied science should be carried on by the government. Apparently, he does not realize the enormous expense that this proposal, if taken seriously, would entail. Says Mr. Brandeis, "Whenever in- dustry requires for its advance investigations of the character which are so expensive that only a huge concern can assume 1 Ernst von Halle, "Trusts or Industrial Combinations in the United States," pp. 66-67. ' Hearings before the United Stfttes Senate Conainittee on Interstate Com- merce, Part XVI, p. 1169, 14 CONCENTRATION AND CONTROL the burden, then it is the government's function to secure the information for all the people." In favor of this position he cites the investigations by the government for the farmer. This illustration seems scarcely- applicable, since the most distinctive feature of the farmer's business is the vast number of those following it and the av- erage smallness of a single holding of land. Because of this the individual farmer is wholly incapable of carrying on the necessary investigations. Hence the goverrxment, national and state, has undertaken the function. The proposal of Mr. Brandeis, if carried to its logical conclusion, would blot out, or at least profoundly modify, our patent system, under which discoverers are protected to the extent of monopolistic use for a limited period. No stronger testimony than the proposal of Mr. Brandeis could be given as to the economic advantage of concentration of industry gained through investigating departments. (10) Business Advantages of Concentration. — Thus far the industrial advantages of concentration only have been given. Upon the business side there are also great economies. Some of the more important of these are as follows : — (a) Big organizations are able to buy in large quantities and thus gain the advantages of the lowest rates of purchase. (6) Big organizations are able to sell in large quantities and most advantageously. A large part of the cost of busi- ness imder new conditions is the marketing of products. In the marketing there are great costs in commercial travel- ers, in advertisements, etc. (see p. 89). With the large concentration the advertising cost per unit of sale is much lower than with the small industry. Work is organized so that a traveling salesman or agent does the work in a given Marketing community for a large concern instead of several for the dif- pro uc 3. fgrent plants of that concern. When the American Steel Hoop and Wire Company was formed, about two hundred salesmen were discharged. Similarly with the formation of the whisky combination three hundred salesmen were spared. With the organization of the International Harvester Company the expense of marketing was reduced by $500,000 a year. FACTS REGARDING CONCENTRATION 15 (c) When there is a single great federated establishment, orders can be received at a central office and from that ofifice distributed to the different plants as best required by effi- ciency in manufacture, taking into account the expense of transportation. (d) Also the mere size of an establishment, so that it may be able to take a large order at almost any time and fill it promptly, gives a great advantage over smaller concerns. (e) For entering foreign trade the business economies of concentration are undoubtedly very great. Sending agents to foreign countries to build up a trade for an industry is an Foreign expensive imdertaking. Especially is this the case when the *'''"^^ ^f^ , 1 1 • 1 !■ c ■ concentra- markets are already m the possession of foreign competitors, tion. In this respect the great corporations of the country, such as the United States Steel Corporation and Standard Oil Com- pany, have proved themselves to be economically superior to smaller organizations, more than 90 per cent of the export business in their respective lines being done by United States Steel and Standard Oil. Moreover, the foreign trade in iron and oil has been almost wholly built up since the organization of the steel combination and the Standard Oil Company. (/) The losses through poor debts are less with large organizations than with small ones. Frequently where there are many organizations having keen competition with a large nimaber of travelling salesmen, sales are made without careful reference to the ability of the purchaser to pay. To illustrate, it is stated that after the American Steel and Wire Company was formed, the loss from bad debts for the constituent com- panies was reduced from one half of one per cent to one twentyfifth of one per cent.^ (gr) One of the greatest advantages of concentration with cooperation of the independent units is the regulation of production. As we shall see in other connections, with the Regulation competitive system, underproduction alternates with over- °^ oi^tp^it- building and overproduction. Where instead of fierce compe- tition there is cooperation (and this is only possible where there are large units), the great losses are avoided which re- 1 '.'Trusts of To-day," G. H. Montague, p. 43. 16 CONCENTRATION AND CONTROL suit from investments of capital in manufactories which run only a portion of the time and before they shut down produce more goods than can be sold at a profit. (h) Another advantage of concentration is that a less amount of capital is necessary in order to handle a combined business than would be necessary if a great organization Efficiency of Were Subdivided. If a concern be fairly independent of the capital. banks and the necessity to pay excessive rates of interest, it must keep a considerable amount of ready cash on hand to handle its business. A very large concern, in which the variation in the demands for the d fferent products compen- sate for one another to some extent at least, is able to handle its business with a relatively small cash reserve. This is one of the advantages which the United States Steel Corporation has had since its organization. By keeping from $50,000,000 to $75,000,000 in cash, a very large amount as a whole, but rather small as compared with its total business, the corpora- tion has always had sufficient money on hand to meet its needs without borrowing, and therefore has been independent of the banks at times of financial depression. (11) Opportunity for High Order of Ability. — It may be that a final advantage of concentration will be the opportu- nity for the display of ability of the highest order. A farmer who can successfully run a dairy with twenty cows may fail with a hundred. A man who can handle a single manu- factory may be unable to see the broader comparative aspects of a dozen. The manager of each factory will be required as before; but also there will be needed the man who, while giving large Hberty to the individual manager, will see the work of the whole in its broader relations. Concentration of industry will demand the highest and best trained intellect along all lines. Says Maerosty ' : " Rule of thumb is dead in the workshop, the day is with the engineer and the chemist with their methods of precision ; in the countinghouse and board room there is no longer a place for the huckster or gambler, the future is with the commercial statesman whether in a large individual business or a combination." 1 "The Trust Movement in British Industry," H. W. Macrosty, p. 337. FACTS REGARDING CONCENTRATION 17 (12) Other Advantages of Concentration. — Other advan- tages of concentration are frequently claimed. Among these are: steady employment of labor, better wages, better protection against industrial accidents, the maintenance of superior quality, etc. These points are not here introduced as advantages of concentration, since in reference to them there is a marked difference of opinion. In some cases it appears that concentration of industry has led to the steadier employment of labor, improvement in wages, and lessening Wages and of industrial accidents. In other cases the great industrial y^"^' ''°"'^'' corporations have been careless or openly regardless of the conditions of the laboring population, and instead of im- provement there has been no improvement or even retro- gression. Theoretically the advantages mentioned should be possible with concentration, and under proper control they should become available; but they cannot be claimed as general advantages of the great corporations as they now exist. (See pp. 104-154.) Total Advantages of Concentration. — It is not easy to give the economic advantages in terms of percentages for any industry which result from the large factory, the subdivision of labor, the full use of mechanical appliances, the specializa- tion of departments, integration, utilization of by-products, entrance into allied industries, distribution of plants of the same kind, using only the most efficient plants, maintenance of investigating departments, economies of business manage- ment, and reduction of amount of capital ; but it is safe to say that the gain is very great for the large concentration as compared with the small plant. While percentages cannot be given, the economic advan- tages of concentration have been conclusively proved! Evidence of for many consolidations. Thus under the competitive I ^ system some businesses became greatly overbuilt, as, for ' instance, whisky distilling. At the time consolidation took place when the whisky trust was organized, it was found advantageous to concentrate the business in a few plants. It closed 68 of its 80 distilleries, doing the entire business of the country with the remaining 12, furnishing economies. 18 CONCENTRATION AND CONTROL Small manu- factories disappear- ing. the same output, and in a short time even an increased output. Von Halle ^ mentions as evidences of efSciency that the cotton oil trust shortly after its formation closed more than a dozen of the small old-fashioned plants. The sugar trust after formation was able to supply the whole market with one fourth of its refineries. According to the census of 1900, many of its plants were idle. Under one of the pool arrangements in steel the Carnegie Company paid to a Maryland company which did not operate at all $300,000, this sum being paid to close the mill ; but the form was gone through of having the orders come to this mill while the rails were supplied by the Carnegie Company. It was more economical to close the mill and pay $300,000 than to pro- duce the rails in the smaller mill.^ Without further development of the economic gain of concentration, it is evident that the advantages are so great as to enable the large organizations to pay the freights to markets that are not local and to pay the expenses of market- ing products at a distance. Thus transportation once developed, concentration became inevitable. As already indicated the two have acted and reacted ; for once a market secured at a distance, freight and passenger service improved so as further to encourage the development of concentration, which in turn further assisted transportation, and so on continuously. The small manufactory in the little town, except for specialities and patent-protected articles, has either disap- peared for the most part under the stress of competition, or else by combination has become a unit of a larger organization. The larger proportion of the small manufac- tories of standard and widely used articles have been discontinued; but an occasional concern has been saved by becoming a part of a combination. Those whose years number fifty have seen the gristmill on the small stream become intermittent in its running, then cease altogether, although here and there one favorably located still continues its small business. The many widely dispersed 1 Von Halle, Trusts, pp. 65-6 '^ Ibid, pp. 62-63. , FACTS REGARDING CONCENTRATION 19 small furnaces for smelting iron ore have gone, and their place is taken by the relatively few great blast furnaces. No longer is the spinning wheel or the loom found in the house. The work has gone to the great factory located where labor is available and adjacent to some stream which furnishes adequate power, or where coal is sufficiently cheap so as to furnish energy at a reasonable rate. The shoemaker of the village has become the cobbler, the shoes are manufactured at great industrial centers, such as Boston and vicinity. The concentration of industry during the past fifty years has been one of the chief factors which has led to the phe- Growth of nomenal growth of the cities, the inevitable centers for congentra- manufacture because of their transportational facilities and tion. the abundance of labor. Thus Chicago, at the head of Lake Michigan, having cheap water transportation to all lake ports, and the center of the greatest railroad system in the world, has become a colossus among the manufacturing cities of the nation. The same is true of New York, the gate of the continent, and the great group of cities which cluster about that harbor. Boston and Philadelphia are centers less in importance only to the two mentioned. While it seems clear that the above statement regarding the economic advantages of concentration cannot be gain- said, there may be a limit beyond which additional economic advantages may not occur from further increase in magnitude or from federation of great estabhshments. 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Dutton, Hearings Senate Interstate Com- merce Committee, XIX, pp. 1672-1699. 140 CONCENTRATION AND CONTROL smaller ones. Also it is to be hoped that these investiga- tions will take into account interest on capital in order that we may have exact data to base a conclusion concerning the relative economic efficiency of the large independent organi- zations, and of these as compared with the small companies. Summary of Evils. — In conclusion, the chief evils which have appeared in connection with the United States Steel Corporation are : — 1. Unparalleled overcapitalization. 2. Large sums paid to organizers and manipulators at the time of the conversion of the preferred stock into bonds. 3. Excessive prices; these have resulted in enormous earnings. 4. Selling products cheaper abroad than at home. Section 4 THE AMERICAN TOBACCO COMPANY » The tobacco industry is one of those in which a single combination controlled a large percentage of the business of the United States until the organization was dissolved by order of the Supreme Court into fourteen companies. History of Co7npany. — The dominant corporation in the tobacco industry during recent years has been the American Tobacco Company. This company had three great subsid- iary companies, the American Snuff Company, the American Cigar Company, and the British-American Tobacco Com- pany. All four of these companies controlled a large number of subsidiary companies, the total number of companies under the combination doing business in the United States, Porta Rico, and Cuba being eighty-six. This group of companies in 1909 controlled 92.7 per cent of the cigarette business of the country, 62 per cent of the plug tobacco, 59.2 per cent of the smoking tobacco, and in 1901, ' Report of the Commissioner of Corporations on the Tobacco Industry : Part I, Position of the Tobacco Combination in the Industry ; Part II, Capitahzation, Investments, and Earnings. Washington, Government Print- ing Office, 1909, 1911. ILLUSTRATIONS OF CONCENTRATION 141 the first year it entered the snuff business, 80.2 per cent Monopo- of the snuff. Later the American Tobacco Company entered pfg^tig^ the cigar business and by 1903 it had acquired about one sixth of the cigar output of the United States. The capi- tahzation of the companies of the combination in stocks and bonds, when reported upon in 1909 by the Commissioner of Corporations, was, without coimting duplication of stock by interholdings, $316,346,281. The business of the American Tobacco Company included the manufacture and handling of chewing and smoking tobacco, of cigarettes for domestic consimiption, and Uttle cigars, together with enterprises allied with the tobacco Scope of industry. The American Snuff Company confined its '^"^'°'^^^- operations to the manufacture of snuff. The American Cigar Company, with its subsidiaries, handled the cigar business of the combination. The British-American Tobacco Com- pany handled all the foreign business of the company. The dominating organization was the American Tobacco Com- pany, which held a majority of the capital stock of the American Cigar and the British-American Companies, and over 40 per cent of the stock of the American Snuff Company. The total number of companies absorbed in building up the combination was in the neighborhood of two hundred and fifty. The organization went through three stages. It began with the formation of the American Tobacco Two hun- Company in 1890. This company, beginning with the ^t*^^"^ manufacture of cigars and cigarettes, soon expanded its panies operations into the plug tobacco business. By carrying on ^°^°'^°ed. a vigorous war, the American Tobacco Company acquired a number of its competitors, and in 1898 imited with the strongest of the others into the Continental Tobacco Com- pany. Following this, in 1900, came the snuff combination under the name of the American Snuff Company. This presents the first stage of combination. In 1901 the Consolidated Tobacco Company was formed, which took over the Continental and American Tobacco Companies, being itself strictly a holding corporation. As a result of a campaign of the new combination to push its 142 CONCENTRATION AND CONTROL stages of develop- ment. Expansion of stock. business in Great Britain, the British-American Tobacco Company was formed in 1902 for the foreign tobacco business outside of Great Britain and the United States. After the decision of the Supreme Court dissolving the Northern Securities Company (see p. 180), the companies above mentioned were merged in 1904 into one corporation, the reorganized American Tobacco Company. In the process of growth of the American Tobacco Com- pany, we have illustrated all of the stages of most of the great concentrations of industry, with the exception of pools and trusts, which stages of development had been gone through before the organization of the first American Tobacco Company. These included the consolidation of numer- ous companies into a large company, then control of groups of companies through holding companies, and finally a single consolidated combination, the American Tobacco Company. Overcapitalization. — At each step in the development of the American Tobacco Company, there was opportunity for increasing its securities, both stocks and bonds ; and this was done at each transformation upon a great scale; ac- crued earnings and good will were capitalized and common stock was issued as a bonus. Each company when taken into a new organization was treated most liberally in the estimate of values, in some cases the amount of bonds issued being double stock previously held. In 1908 the good will of the American Tobacco Company represented a capitaliza- tion of $105,000,000 ; whereas its cash value according to the Bureau of Corporations was only about 139,000,000, or 37 per cent. vUtogether, the transformations resulted in the enormous capitalization mentioned. As illustrating the amount of the expansion, it may be said that the capital of one of the constituent businesses of the company in 1885 was $250,000. When the American Tobacco Company was organized this went in on the basis of $7,500,000 in stock. By 1908 the readjustment of this amount had reached $22,000,000; and cash dividends and interest had amounted to $16,900,000. Thus an original ILLUSTRATIONS OF CONCENTRATION 143 investment of $250,000 had by 1908 realized in stock, bonds, dividends, and interest $39,000,000, or one liundred fifty-six times the value of the business in 1885. Illegitimate Competition. — After the combination formed, the methods of ruthless competition were used. Having control of several lines of business, when a new line was entered, there were put upon the market certain brands which were sold either at no profit or at a loss. These were called "fighting brands." In the case of plug tobacco, one of these was appropriately called "Battle Ax"; another was known as the "Horse Shoe." In order more effectively to carry on destructive competition some twenty or more companies were secretly purchased, and, while a part of the American Tobacco Company, were supposed to be independ- ent firms. These companies were used in the campaign of xmderselling ; and in this way pubhc disapproval of the illegitimate campaign was avoided by the American Tobacco Company. Exclusive contracts were made with sellers, and bonuses given for compliance with the same. The business of competitors was placed under secret espionage. The methods of competition were so fierce as often to destroy the weaker competitors. Others found too strong to be killed by the illegitimate methods of competition were purchased from time to time, usually at very high prices. Continuity in the plans for expansion and monopoly was secured through a group comprising only about half a dozen men who always controlled the business of the American Tobacco Company, the center of the organizations and reorganizations. International Combination. — After the American Tobacco Company had acquired a dominant position in the United States, the British market was vigorously entered. In order to meet the competition of the strong American com- pany, many British companies united into the Imperial Tobacco Company; and thus the forces of the war were equahzed. This led to a mutual agreement upon the part of the combinations, each to respect the territory of the other, leaving the British field free to the British Company and the American field to the American Company. At the 144 CONCENTRATION AND CONTROL same time the two combinations united to form an additional company, the British-American Tobacco Company, which was to push vigorously the tobacco business in all other parts of the world, except the United States and Great Britain. Thus the formation of the great combination in America led to a similar combination in Great Britain, and also made a step toward world combination. Expansion into Allied Businesses. — As is usual when a great combination is formed, the companies concerned went into allied businesses. Since licorice is one of the important materials used in the manufacture of tobacco, this was one of the businesses which was entered ; and the American To- bacco Company obtained more than 95 per cent, nearly a complete monopoly, of the licorice business of the United States. In addition to acquiring allied manufacturing businesses, the American Tobacco Company had a stock interest, often controlling, in the concerns of the country which were en- gaged in the distribution of tobacco. Concentration of Manufacture. — The organization concen- trated the manufacturing of tobacco in a limited nmnber of large plants, the small plants which were acquired from time to time being closed. Also the manufacture of tobacco was specialized, a given great factory devoting itself to one line of product. Thus, while there were two hundred and fifty or more plants acquired, the main part of the business of the company was carried on in the great plants. The cigarette and little cigar business was conducted in nine plants; all of the business in plug and twist tobacco was carried on in six plants, and about seven eighths of this amount in two plants. About 30 per cent of the business was distributed among ten subsidiary companies, of which the relation of eight with the American Tobacco Company was kept a secret. Half of the business of the fine-cut tobacco was done in nine plants and the remainder in sub- sidiary plants. The entire snuff business of the company was conducted in ten plants, four directly owned and six subsidiary. Thus through size and specialization the com- ILLUSTRATIONS OF CONCENTRATION 145 bination had a marked advantage over its competitors; and still further advantage was gained by the control of more efficient machinery for marketing. Excessive Profits. — The profits of the combination were very large. After the formation of the reorganized Ameri- can Tobacco Company in 1904, the average earnings upon actual investments to 1908 were 19 per cent, or $31,200,000 yearly; and this upon the basis of a capitalization of $316,000,000, which we have already seen was reached by several manipulations, each with great expansion of the stock and bonds. The combination was greatly assisted in securing these enormous profits through changes in the internal revenues. In 1898, as a result of the Spanish War, taxes were greatly increased upon tobacco and prices were raised accordingly. In 1901-1902 this tax was reduced to its former level; but by this time the combination had become sufficiently power- War tax ful to hold up prices, so that practically all of the advantage eombiim- of the reduction of the tax on the manufactured tobacco tion. from twelve cents to six cents per pound went, not to the consmner, but to the combination, in this way adding many millions to its income. The enormous profits of the combination were thus due largely to the following causes : the reduction of the Spanish war tax, the capitalization of the good will of the business at each consolidation or reorganization, putting in surplus to increase the capital stock, exchanging at inflated values at times of reorganization, and issuing common stock as a bonus. These enormous earnings were derived from an article mainly sold in small packages. Much the greater propor- tion of the retail sales of tobacco is in amounts of fifty cents or less; but tobacco is very widely used. The American Tobacco Company, by adding a little additional tribute to the purchases of millions of people, has made fabulous profits. According to the Commissioner of Corporations the rates of profit obtained by independent concerns average much 146 CONCENTRATION AND CONTROL The limits of tribute. Aim to gain monopoly. lower than those of the combination.' The average rate of earnings of forty-eight independent companies for 1906 was 15.9 upon the total tangible assets; whereas, for the same year the earnings of the American Tobacco Company were 40.9 of its tangible assets or more than three times as much.^ Monopoly and Competition. — Notwithstanding the great advantage which the American Tobacco Company had through large plants, specialization of business, and control of machinery, the competitors of the combination steadily gained in their business ; and this in spite of the fact that they were put to great expense for advertising to meet the "fighting brands" of the American and illegitimate com- petition through secret companies. This was possible because of the enormous profits which the combination was taking. These facts go to show that even a combination of gigantic size, controlling 80 per cent of the business of the country along various lines, may exist, and competitors gain upon it, if the prices charged are very excessive and the profits correspondingly great. They indicate that there is a limit beyond which extortionate charges may not be levied. If the amount of tribute be made too great, even fear of a mighty combination will not prevent capital from entering a business in order to share in the great profits. Upon the other hand, the facts clearly show that excessive prices may be retained sufficient to give the combination enormous profits. This is true for the American Tobacco Company, even upon the basis of the fictitious capitalization ; and if we consider the great gains made by the chief manipulators of the company at the various transformations, the profits for these men are nothing short of amazing. It is the opinion of the Commissioner of Corporations that almost from the outset it was the aim of the American Tobacco Company to acquire monopoly. This plan was first applied to one line of business, the cigarette and little cigar; from this it was extended to plug tobacco and I "The Tobacco Industry," Part II, p. 314. ^Ibid., pp. 326, 328. ILLUSTRATIONS OF CONCENTRATION 147 later to snuff and fine-cut tobacco. The purpose was largely- accomplished in these lines, since the combination succeeded in getting four fifths of the business of the country ; but the combination never accomphshed its purpose in the cigar business, the maximum proportion gained in this line being about one sixth. The dissolution of the American Tobacco Company by order of the courts is discussed pp. 183-187. Summary of Evils. — The chief evils illustrated by the American Tobacco Company are : — 1. Overcapitalization, and especially excessive capitali- zation of good will, exchanges at each reorganization at inflated values, and giving common stock as bonus. 2. Stock manipulation. The reorganizations were made in such a manner as greatly to benefit those who were on the inside. 3. Excessive prices due in large measure to monopolistic position. The high prices lead to enormous and unwar- ranted earnings. 4. The use of secret companies to kill competitors. 5. The compelling of purchasers to deal exclusively with the American Tobacco Company. 6. Espionage of competitors' business with other unfair practices in connection with the same. Section 5 THE AMERICAN SUGAR REFINING COMPANY i Commanding Position of Company. — The initial organiza- tion of the sugar combination was the Sugar Refineries Company. From 1887 to 1891 this company purchased refineries in various parts of the country imtil finally twenty refineries were controlled. In 1891 this organization incor- porated under the laws of the state of New Jersey as the American Sugar Refining Company, with a capital of $50,000,000. Most of the plants purchased were abandoned, ' House of Representatives, 62nd Congress, 2nd Session. Report by Mr. Hardwick from the special committee to investigate the American Sugar Refining Company, and others. 148 CONCENTRATION AND CONTROL all the refining being done in seven establishments. The American was engaged in the refining of cane sugar. When organized it controlled 75 per cent of that class of business. Shortly after the organization of the New Jersey corporation the Spreckles Company of the West united with the American, so that as early as 1892 the combination controlled 90 per cent of the sugar refining business of the country. From this time until 1898 the company had practical monopoly of the refining business in the United States. In 1898 Arbuckle Brothers entered the refining business, and for a time there was fierce competition ; but the two companies got together in 1903 and the war ended. Beginning with 1901 the American Company began to acquire an interest in the beet sugar companies and soon secured a large interest in that line of business. In 1900 the American Sugar Company refined 67 per cent of the sugar. This proportion declined, imtil, in 1910, it refined only 42 per cent. But the company also owned stock or controlled a nrunber of so-called independent com- panies. As a result, it is calculated that of the cane sugar refining business and beet sugar manufacture of the United States in that year the American Sugar Refining Company controlled 62 per cent. Increase in Margins. — During the years in which the American Company has had approach to monopoly the margins for refining have been increased. During the four years prior to the formation of the Sugar Refinery Com- pany, competition was severe and the average margin was 79.6 cents per hundred pounds. As soon as the refiners became well organized the margin was raised to $1.25. At the time of the competition between the Havemeyer, the Spreckles, and the Arbuckle interests, it fell to between 70 and 75 cents, and in 1899 was as low as 50 cents. After the Arbuckle war closed, in 1901, it rose to $1; but since 1905 has gradually declined, and while variable from time to time, in 1911 it was 89.2 cents. Price of Raw Material. — There is complaint on the part of the sugar planters of Louisiana that the price for cane raw ILLUSTRATIONS OF CONCENTRATION 149 sugar has been unduly depressed, being made 15 cents per hundred pounds lower at New Orleans than at New York; but doubtless at least a part of this difference is justified on the ground of the transportational advantages of New York. The sugar planters of the Hawaiian Islands, Porto Rico, and the Philippines are united and have been able to protect themselves. Similarly the prices paid to the farmers for beets have been satisfactory, there being no evidence of a combination between manufacturers to depress prices. Overcapitalization. — The Sugar Refining Company when organized with a stock of $50,000,000 was greatly over- capitalized. As other companies were united they were taken in at excessive values, and this led to a capitaliza- tion of $90,000,000 by 1901. At least 50 per cent of the common stock is regarded as water, of which the insiders and promoters got a large portion. Excessive Profits. — The preferred stock has paid 7 per cent and the common 9.4 per cent, an average of 8.2 for the whole stock issue, or at least 15 or 16 per cent on a fair val- uation of the properties and business. The promoters of the organization and the manipulators have, with the excep- tion of a single firm, sold these watered stocks to the public at a price of from $120 to $130 per share, so that at the present time a large part of the stock originally owned by fifty men is now in the possession of nineteen thousand people scattered all over the country, but largely located in New England and the North Atlantic states; of these nineteen thousand, ten thousand are women. Evils Illustrated. — The American Sugar Refining Com- pany has engaged in exceptionally objectionable practices. (1) Through collusion of the officers of the sugar com- pany and the officers of the government, duties were paid upon the basis of short weights. There were recovered from the company on account of these weighing frauds $1,835,486. The secretary-treasurer of the American Sugar Refining Company and the general manager of the Brooklyn Refinery were convicted for participation in them. (2) In the investigation of the weighing frauds illegalities 150 CONCENTRATION AND CONTROL were also discovered under which the company had re- ceived drawbacks for exported syrup in excess of the amount justly due. The company settled the case with the govern- ment by the payment of $700,000. (3) The company has been convicted of taking rebates from a number of railways; and in consequence of those practices has been fined sums aggragating $98,000.^ (4) In addition to the above, the Congressional Com- mittee finds strikingly developed several evils which they regard as characteristic of combinations. These are as follows : — "a. Origiaal overcapitalization of great industrial corpo- rations resulting in increased cost of production, if a profit is to be made (as is always insisted upon) on the inflated capitalization, and higher prices of the product to the con- suming public. " b. The temptations of the persons who organize and control these large corporations to earn dividends on watered stock as soon as possible, so that such stock may be unloaded in the open markets upon the investing public. These dividends can rarely if ever be made without increasing prices to the consumer. " c. Exploitation not only of the consuming public and of the investing pubUc, as already set out, but also of the corporations themselves, by their officers, directors, and trustees, who do not hesitate to overburden the consumer, to deceive the investor, and to take advantage of the cor- porations that have trusted them, whenever it will line the pockets of such iudividual trustees." Section 6 THE MEAT PACKING INDUSTRY ^^ The Big Six. — Another industry in which a large part of the business has been concentrated with a few companies is 1 Report of the Attorney-General, 1910, pp. 12-142, 1911, p. 21. 2 Report of the Commissioner of Corporations on the Beef Industry. Washington Government Printing Office, 1905. ILLUSTRATIONS OF CONCENTRATION 151 meat packing. The report of the Commissioner of Corpo- rations is based upon facts available to the end of 1904, and the statements below should be considered of that date. The large packing companies are: Armour, Swift, Morris, National, Schwartzchild & Sulzberger, and Cudahy, fre- quently called the " Big Six." These control 50 per cent of the beef packing industry of the United States. Also these companies handle hogs, sheep, calves ; and they do an exten- sive business in the purchase, storage, and sale of dairy and poultry products. The by-products of these companies are very important; some of these are hides, fat, and fertilizer. Each of the companies owns refrigerator lines for the trans- portation of products, and each does a general refrigerating business. While the total business of the "Big Six" is only about 50 per cent of the whole, in the large cities of the East they do a much larger proportion; for instance, in New York 75 per cent, in Boston 85 per cent, in Philadelphia and Pitts- burg 60 per cent. On the other hand, in cities west of Percentage Pittsburg, such as Cleveland, Cincinnati, and Indianapolis, not one half of the business belongs to these companies. Even in the small towns in New England these companies control about three fourths of the business; but in the Western states, in cities having populations of fifty thousand or less, they usually control less than half of the business. The total capitahzation of these companies in 1905 was $93,000,000, which included $5,000,000 in bonds. The gross business of the six companies was about $700,000,000 per annum. With one exception these companies have largely groAvn up as a single corporation and have increased in size as business has grown, although to a certain extent the growth has been by accretion through the purchase of other com- panies. However, the National Packing Company is an exception to this, in that it was organized in 1903 through the consolidation of a number of existing companies. In 1906 there was comparatively little interownership among the large companies. The big companies have either owned or are largely in- of business. 152 CONCENTRATION AND CONTROL terested in a number of subsidiary packing companies and other companies, the business of which is allied to the pack- ing business. Thus the Armour Company of Illinois owns or controls packing companies in New Jersey and Louisiana, car lines, fertiUzer works, soap works, and glue works. Also owned or controlled by the company are the Armour Grain Enter allied Company, the Armour Elevator Company, the Continental business. Fruit Express, and large interests in stockyards at Omaha, Fort Worth, Sioux City, St. Louis, and Kansas City. A similar but not identical line of business is owned or con- trolled by each of the other large companies. This is espe- cially true of the Swift and the National Packing com- panies. Each of the large companies owns large packing houses in various cities; for instance, the Swift Illinois corporation has packing houses at Chicago, Omaha, Kansas City, East St. Louis, St. Joseph, St. Paul, and Fort Worth. Capitalization and Profits. — It is the opinion of the Commissioner of Corporations, at the time his report was rendered in 1906, that these companies are not largely over- capitalized. At any rate, they are in a very marked contrast with the American Tobacco Company, a business of much less importance ; but in which the capitalization is between three and four times that of the six beef companies combined. At the time the Commissioner made his report he did not regard the profits of the companies as excessive as compared with the business. Thus the profits of Swift in 1904 were placed at .'$.'3,850,000, and this profit includes that on private cars, or 1.9 per cent on the entire transactions of the com- pany. In no case, from 1902 to 1904, did the profits of the company exceed 2 per cent on the sales. However, if the profits be looked at from the point of view of capitaliza- tion, for Swift, $3,850,000 would represent a profit of 11 per cent on the capitalization of $35,000,000. The net profits of the Cudahy Company are reported to be $927,969 in 1904, 1.8 per cent of the volume of the business. If the car lines be considered separately, the profits on this part of the business are greater, from 14 to 17 per cent on the capital invested on the basis of $1000 per car. ILLUSTRATIONS OF CONCENTRATION 153 If the price of cattle and the price at which dressed beef is sold are compared, it is found that there is a rough parallel- ism between the two. However, when the price of cattle rose, there was a tendency for the price of beef to rise to a somewhat greater extent, giving a larger margin of profit. This was especially marked in 1902. The above statements refer to the wholesale prices of beef ; the retail price is quite another matter. It is probable that the retailer has been able to secure a larger profit upon his sales than was possible before the combinations existed. This is not due altogether to the great combination, but to the tendency for retail men at a given point to cooperate, this tendency being synchronous with the general movement in recent years toward combination of the men engaged in the same business in the United States. Principles Illustrated. — Concentration in the packing industry has given various economic advantages, among which are the following : The returns from the by-products are a considerable portion of the entire business, the value being roughly 25 per cent of the total. The small slaughter- house is at a great disadvantage in respect to these by- products ; a large abattoir may save everything. A second advantage of concentration is the location of abattoirs by the same company in different cities. Through this arrange- Economic ment cross freights are saved. The beef cattle for the ^ams. packing house at a given city are acquired from the territory contiguous to that city. The demands for beef in that territory are supplied by that plant. Furthermore, for the eastern part of the United States there is an advantage in that the beef cattle are killed near the source and only the dressed product shipped to the market, thus reducing greatly the amount of freight to be handled, since the weight of the dressed beef is only from 54 to 57 per cent of the weight of the live cattle. There can be little doubt that, since the organization of these six great beef companies and their combination with affiliated companies in controlling the stockyards, it has become more difficult for an additional great company to 154 CONCENTRATION AND CONTROL enter the business. The large interstate business of the country is in very great measure controlled by the " Big Six " ; the local business is still largely with the small company. In 1905 an indictment was brought against a considerable number of the officers of the " Big Six," charging that they were in combination and in restraint of trade and that they had " an agreement, understanding, and arrangement among themselves whereby they fixed, regulated, and controlled prices." ^ The trial of those charged under the indictment did not take place until in 1912. On March 26, the long contest was closed by the jury finding that the officers of these companies were not guilty under the criminal section of the Sherman act against conspiracy in restraint of trade. Section 7 Timber supply. Concentra- tion of ownership. THE LUMBER INDUSTRY ^ In the United States concentration of the ownership of standing timber has progressed far. The General Situation. — "Certain basic facts in the lumber industry are as follows : — " First. The entire remaining supply of standing timber in continental United States (excluding Alaska) is now about two hundred and eighty billion board feet, of which about twenty-two hundred billion is privately owned. (The unit ' board foot ' is a foot square and an inch thick.) " Second. There has come about, and there is still pro- ceeding, a very remarkable concentration in the ownership of this remaining standing timber in the hands of a com- paratively few interests. This concentration results chiefly from the speculative holding of timber lands for future profit, primarily made possible by our long-standing pubhc land pohcy. " Third. From the time when the vast majority of our • United States of Amerira v. Louis F. Swift ct al., Decision, p. 2. ' Summary of Report of tlie Commissioner of Corporations on the Lumber Industry, Part I, "Standing Timber." ILLUSTRATIONS OF CONCENTRATION 155 present timber supply left the hands of the one great original owner, the United States, till the present there has been an enormous increase in the value of standing timber. This increase has varied greatly, according to local conditions, increase but practically everywhere it has been manyfold — sixfold, in value, tenfold, twentyfold, thirtyfold, and in some cases fifty- fold. The present commercial value of the privately owned standing timber in the coimtry, not including the value of the land, is estimated (though in the nature of the case such an estimate must be very rough) as at least $6,000,000,000. 'These conditions must be considered in the light of the further facts that our standing timber is a natural resource created almost exclusively by nature; that where it has not been destroyed it is substantially in the same condition as when it left the hands of the government ; that human effort, or the private owners that hold and have left it, have added practically nothing to it ; that while a certain amount The un- of reforestation is possible, standing timber is a resource f^^'^'^'^ '^ ' ° increment. in the main quite similar to .our ore and coal measures ; that our present annual consumption of timber is about three times the annual growth, and the demand is steadily increas- ing; that speculative holding of timber land for future rise in no way improves the character of the timber and does not give such public service as is given by those who acquire lands for actual present use and improvement. While the profits of speculative timber holding have been enormous, as will be hereafter shown, the risks of such hold- ing and the services rendered by the holders are peculiarly small in comparison with those profits. "These great facts have brought about certain results of tremendous significance from the standpoint of the public welfare. The timber supply is a diminishing natural resource. Rise in Its increasing concentration into a comparatively few strong p™es and hands has conferred upon those strong holders a vast power tion. over the timber industry and over prices therein; and has itself greatly accelerated the enormous rise in timber values." The lumber industry is one in which the imits of manu- facture are not of extremely large size, because the material 156 CONCENTRATION AND CONTROL Limit in size of mill. Four fifths in private ownership. is SO heavy as compared with its value that it cannot be transported a great distance advantageously. The logs, by stream in favored localities and by railroad in others, must be transported to the mill. Where the logs float downstream the expense is not great. For the lumber so located that it must be transported by rail the cost in- creases more rapidly with distance, so that there is a limit beyond which it is not advantageous from the point of view of economic efficiency to transport logs, and this fixes the size of the mill to that adapted to the work of sawing the logs for the tributary area. "The largest sawmill in the country cuts less than one half of one per cent of the total annual output of lumber." Since the control of the mar- ket is not readily secured by concentration of sawmills, it has been secured by the concentration of the ownership of standing timber. Concentrated Oivnerskip of Timber. — Of the merchantable saw timber of the United States 20 per cent is still owned by the government, leaving 80 per cent in private hands. Of the vast amount of timber in private holdings the concentra- tion of ownership is shown by the following table : — Table 46. Concentration op Timber Ownership bt Groups, Shown Cumulatively, in Entire Investigation Area Number of Holders Amount of Timber Owned in Billions OF Feet Per Cent op Total Total .... 1747.0 100.0 Group 1 . 3 237.5 13.6 Groups 1-2 8 339.5 19.4 Groups 1-3 . 22 459.0 26.2 Groups 1-4 . . 48 574.3 32.8 Groups 1-5 . . 90 690.5 39.5 Groups 1-6 . . . 195 839.7 48.0 Groups 1-7 . . 385 972.1 55.6 Groups 1-8 . . 658 1068.5 61.1 Groups 1-9 . . . 1147 1153.3 66.0 Groups 1-10 . . 1802 1208.8 69.2 Group 11 . . . 538.2 30.8 three. ILLUSTRATIONS OF CONCENTRATION 157 "From this table it will be seen that three holdings include no less than 237.5 billion feet, or nearly 11 per cent of the privately owned timber in the entire country, and over 13.5 per cent of the privately owned timber in the investigation area. These three holders are the Southern Pacific Com- The big pany, the Weyerhaeuser Timber Company, and the Northern Pacific Railway Company. Five other holders ranking next in importance own in the investigation area an aggregate of 102 billion feet, or 4.6 per cent of the total privately owned timber of the country and 5.8 per cent of that in the investi- gation area. Thus the eight large holders together own approximately 340 billion feet of timber, or 15.4 per cent of the total privately owned timber of the country and 19.4 per cent of that in the investigation area. "Twenty-two holders own 26.2 per cent of all the timber in the investigation area; 195 holders own 48 per cent. Stated in another way, more than one eighth of the total tim- ber in the investigation area (this representing 80 per cent of the total privately owned timber of the United States) is owned by only 3 holders ; more than one fourth is owned by only 22 holders. Almost one half is owned by 195 holders. "The most marked concentration is in the hands of the comparatively few large holders of the upper groups; the lower groups control a much less important percentage. Thus, while the 385 holders in groups 1 to 7, inclusive, con- trol 55.6 per cent of the timber in the investigation area, the 273 holders in group 8 control only 5.5 per cent, the 489 holders in group 9 only 4.9 per cent, and the 655 holders in group 10 only 3.2 per cent. "Furthermore, these 10 groups, 1802 holdings, embrace nearly 70 per cent of the total timber in the investigation area, while group 11, the remaining holdings, aggregating urmumbered thousands, have in all only 538.2 billion feet, or 30.8 per cent of the total." An organization is regarded as holding a property when it has more than one half of the stock of a corporation. Even the above statements do not indicate the real extent of con- centration of ownership, since many great timber holders 158 CONCENTRATION AND CONTROL Enormoua holdings in Pacific states. The timber given away. have stock in several companies. Further, where in great holdings of timber small holdings are blocked in, they are practically controlled by the large holders, since the owners of the smaller blocks can only sell to the surrounding holders or get the timber out through cooperation with such holders. Of the three great companies, the Southern Pacific is first, the Weyerhaeuser is second, and the Northern Pacific is third, the holdings of the three together constituting 23.5 per cent of all the privately owned timber in the five states of the Pacific Northwest. In order to appreciate the magnitudes of the Southern Pacific holdings it may be said that the timber of this company "stretches practically all the way from Portland, Ore., to Sacramento, Calif., a distance of 682 miles. The running time of the fastest train between these two points is thirty-one hours ; yet during all that time the traveler is passing through lands a large proportion of which for thirty miles on each side of him belongs to the corporation over whose track he is riding, and in almost the entire strip, 60 miles wide and 682 miles long, this corporation is the dominating owner of both timber and land." The holdings of these three great companies are based upon government grants. That of the Southern Pacific was ac- quired almost exclusively by government gift, and the Weyer- haeuser holdings were largely purchased from the goverrmaent- granted lands of the Northern Pacific. The original vast grants were made more valuable by the law which permitted the exchange of lands in the forest reserves and parks for other lands. Much of the land released in the Pacific forest reserve and Mount Ranier National Park had comparatively little timber, and in exchange the great companies selected heavily timbered land. While the concentration in timber holding is great for the country as a whole, it is still greater in single regions. At the present time the largest quantity of the most valuable timber is in the Pacific Northwest. Concentration in this region is shown by the following table : • — ILLUSTRATIONS OF CONCENTRATION 159 Table 47. Concentration of Timber Ownership by Groups, shown Cumulatively in Pacific Northwest Amount of Timber Number of Holders Owned in Billions op Feet Per Cent of Total Total . . . 1013.0 100.0 Group 1 . . . 3 237.5 23.5 Groups 1-2 . . . 8 338.9 33.5 Groups 1-3 . . . 20 436.3 43.1 Groups 1^ . . 38 507.3 50.1 Groups 1-5 . . . 64 571.9 56.5 Groups 1-6 . . . 131 663.8 65.6 Groups 1-7 . . . 217 723.0 71.4 Groups 1-8 . . . 313 757.3 74.8 Groups 1-9 . . 489 789.1 77.9 Groups 1-10 711 807.4 79.7 Group 11 205.6 20.3 "The pronounced concentration of timber o\\Tiership in the Pacific Northwest is at once apparent from this table. The 3 largest companies own over 23 per cent of the total, or almost one fourth, while 5 more own 10 per cent, these 8 holders having a little more than a third of the total for this region. The next 12 holders own over 9 per cent, giving the 20 principal holders 43 per cent of the total. The next 18 own 7 per cent; thus no less than 50 per cent of the total privately owned timber in this vast region is in the hands of 38 holders. The next 6 groups, comprising 673 holders, to- gether own less than 30 per cent of the total." Concentration of ownership in the southern pine belt and in the lake region, while great, is not so far advanced as in the Pacific Northwest. In all regions the concentration is greater for the high class timber, such as fir, pine, and cy- press, than it is for the less valuable hard wood. Rising Prices. — Since timber is a natural resource, which is diminishing in quantity, it is inevitable that in anticipa- tion of a lack of supply, the prices for timber are continually 160 CONCENTRATION AND CONTROL Multipli- cation of prices. Our heri- tage squandered. rising; for timber is being cut at the present time about three times as fast as it is renewed. However, the enhance- ment of price has been greatly accelerated because of the concentration in ownership. Many illustrations could be given as showing the increase in the value of timber. For instance, upon the average for Miimesota, the state has re- ceived from its pine lands a steadily increasing amount. In 1880, the average price per thousand feet was $1.47 ; in 1890, S2.'25; in 1900, S5.17; and in 1909, S7..53, or more than five times the price in 1880. Other illustrations of the rise in price during the past twenty years are as follows : from $5 to $.30 an acre, $7 to $40, $20 to $150, $1 to $13, $4 to $140, $1 to $oO. The government gave its lands as bonuses to railroads, canals, and wagon roads, or received $1.25 or $2.50 per acre for the same. In short, our reckless liberality in giving away our natural resources and our defective land laws were the chief underlying causes which have led to the extraordinary concentration in ownership of one of the great natural re- sources of the country, the timber. Section 8 THE WATER POWERS i The water powers of the country have in recent years be- come of rapidly increasing importance. This has followed as a consequence of the improvements in the electrical trans- mission of power. It is now possible to transmit power economically from a given center to a distance of two hun- dred miles and over an area of one hundred thousand square miles. The Amount and Distribution. — The minimum potential water power of the United States is estimated at 32,083,000 h.p., and the maximum at 61,678,000 h.p. Assuming an * Report of Commissioner of Corporations on Water Power Development in the United States. AVashington Government Printing Office, 1912, p. 220. "Conservation of Natural Resources in the United States," C.R. Van Hise, pp. llS-161, The Maomillau Company, New York, 1910. ILLUSTRATIONS OF CONCENTRATION 161 efficiency of 75 per cent for this potential horse power, the water powers would give a minimum effective energy of 26,736,000 h.p., and a maximum of 51,398,000 h.p. By mini- mum horse power is meant the average available for the two weeks of lowest water during a period of seven years ; by the maximum is meant that which is available during a period of not less than six months each year. From 1905 to 1907 the amount of mechanical energy used in the United States was approximately 23,000,000 h.p., of which 3,432,000 h.p., or 15 per cent, was produced by water, the remainder being developed by steam and internal com- bustion engines. In June, 1911, the developed water power installations, greater than 1000 each, amounted to 4,016,127 h.p., and that in units less than 1000 h.p., to 2,000,000 h.p., making a total in round numbers of 6,000,000 h.p. Of the water power installations nearly 50 per cent of those developed for sale and for public service corporations was located in five states, as shown by Table 48. Table 48. Showing Commbbcial Wateh Power in Five States Pbh Cent California ... . . .... 14 New York 13 Washington . 10 Pennsylvania . 6 South Carolina 5 Total 48 The water power which is used for manufacturing is even more concentrated than the "commercial" water power, as is shown by Table 49. Table 49. Water Powbb in a Number of States Employed in Manufacture Pek Cent New York 30 New England States 36 Minnesota and Wisconsin 17 South Carolina 5 Total 88 162 CONCENTRATION AND CONTROL Concentration of Ownership. — There are strong economic forces which tend to concentrate the ownership of water powers. The demand for energy is very unequally distributed, both as to time and place. There are variations in the amount of power needed in winter and in summer ; there are even greater variations in the demands during a given day. If, for any district, the different water powers are coupled up, a greater amount of energy can be utilized than if each be managed separately. Consequently the most efi&cient use of water power is gained by "gathering into a single unit all Reasons for the power available for a given market or group of markets tkm '''^ ^^' using the same system of transmission lines." Another reason for concentration is that the limit of two hundred miles for economic transmission of power makes it impossible for the water powers of one district to compete with those of another. Therefore, if all the water powers of a single dis- trict or a large portion of them can be acquired by a single concern, there will be monopoly in that district. Concen- tration has also been promoted by the close connection be- tween the manufacturers of hydro-electric machinery and the water power companies, and by a union of these with financial concerns especially interested in these lines of busi- ness. In consequence of the foregoing factors, in each of the principal regions in which water powers are developed on a large scale, the control of the greater part of the same is by one or two companies. "In California the bulk of the power produced in the northern half of the state is controlled by a single interest, and that in the southern half by only two companies. In Montana two companies control 96 per cent of all the de- veloped power of the state; and in Washington a single interest controls the power situation in the Puget Sound region, while another interest, more or less closely affiliated with it, controls the developed power elsewhere in the state. All the developed power in the vicinity of Denver, Colo., and nearly 70 per cent of the total developed power in that state, ILLUSTRATIONS OF CONCENTRATION 163 is controlled by one interest. In South Carolina one corpora- Strong tion owns 75 per cent of the developed commercial power, ^eat °° ° while in North Carolina 45 per cent of such power, developed companies, and under construction, is controlled by a single interest. One group of interests practically controls 58 per cent of all the commercial power, developed and under construction, in Georgia. In the Lower Peninsula of Michigan a single group owns 73 per cent of all such power. The great devel- opment at Niagara Falls on the American side is controlled by only two companies." Not only is there concentration in control of districts, but the same companies have large interest in water powers in different districts. "The General Electric interests control the water power situation in large portions of Washington, Oregon, Colorado, Montana, and elsewhere. The Stone and Webster interests exercise control (based largely, however, on management rather than ownership) in localities in Washington, Iowa, and Georgia. The Pacific Gas and Electric Co., practically dominates the power situation in a large number of localities in the northern half of California. The Southern Power Co., controls the power situation in South Carolina and has a strong foothold in North Carolina. The S. Morgan Smith interests dominate the power situation in the vicinity of Atlanta, Ga. The Telluride Power Co. controls absolutely a large territory in Utah and Idaho. The Commonwealth Power, Railway, and Light Co., which is a part of the Clark- Foote-Hodenpyl-Walbridge interests, dominates the power situation in the Lower Peninsula of Michigan. The Gould interests control the best of the available water powei sites in the vicinity of Richmond, Va." Also there is a very close relation between the water power companies and the public service corporations, since the largest use of the power is for street railways, electric lighting of cities, etc. "In the country as a whole, water power companies, or companies affiliated with them, own or control and operate street railways in no less than 111 cities and towns in the 164 CONCENTRATION AND CONTROL United States, electric lighting plants in 669 cities and towns, Commu- and gas plants in 113 cities and towns. These companies, interests moreover, supply power to municipal lighting plants in a considerable number of cities and towns. Many of these are among the most important municipalities in the states involved. Furthermore, in many cities and towns in the United States all the public utihties — street railways, electric lighting and gas plants — are controlled by water power interests." Finally there is very close interrelation of the large water power interests through common financial houses, common directorates, and common ownership of public utilities. The use of the 6,000,000 h.p., now developed, saves at least 33,000,000 tons of coal. If the amount of water power used could be made fourfold, this would save annu- ally more than 130,000,000 tons of coal. So great a saving of a fundamental resource would mean much to the future of Saving the nation. It is clear, therefore, that the greatest "waste ° ""'^ ■ of water power is its non-use." But we must recognize that its rapid development can only be accomplished by unifica- tion of storage, coupling up, and cooperation with public utilities corporations. Thus water powers probably furnish the best illustration of the tendency toward concentration of a natural resource limited in quantity. Public Control. — The prices charged for water power at present are substantially those that the traffic will bear. If the prices are made too high, public utilities and manufac- tories using water power will not be rapidly developed. It is obvious that the price for water power cannot be made higher than for equivalent energy produced by coal; there- fore in the part of the East where coal is cheap, water- developed energy is relatively low. In localities where coal is expensive, as in the Pacific Northwest, the traffic will bear Price of more ; and the price of water-created energy is placed very water- j^jgjj ]-,„ ^j^g controlling companies, in some instances as created , . , ^,„ energy. high as $40 per horse power per annum to the large con- sumers. The amount of water in the United States even when fully ILLUSTRATIONS OF CONCENTRATION 165 developed will be far short of the energy which in the future will be required for the industries and pubUc utihties. This is evident by the fact that there is already in use al- most as nauch energy as the entire minimum horse power available for the United States. For the great, densely settled regions, it will not be possible to gain through the use of water more than a relatively small fraction of the energy needed. Hence there is a sound reason for not placing the price of energy derived from water on the market at a lower rate than that derived from the consumption of coal, otherwise those who are obliged to obtain their power from coal would be at a disadvantage. Since, however, energy derived from water power is upon the whole very cheaply produced, requiring only a capital investment of from $40 to $300 per horse power for instal- lations of moderate size, and the expense of the operation is verj' low, it is clear that the profits from the development of water power upon the average are large. The public should gain the advantage of this natural source of power which will Public be available in perpetuity. In all cases in which the public ^'^^ ^^^ still retains the right to the energy of falling water, some plan should be devised which will give to the public a large part of the difference between the cost of producing energy by water and of producing an equivalent amount of energy by coal. Where the government or the states retain the water power sites this will be easily accomplished through a lease or rental system. Fortunately the United States government still owns the land adjacent to many of the streams in the western part of the United States, and has all the water rights for a large nimaber of water power sites. Some of the states, illus- trated by Illinois and New York, also own some of the water power there located. A number of municipalities own water powers, among which Los Angeles has first place, controlling more than 100,000 h.p. ; and Chicago, Augusta, Ga., Seattle, and Tacoma, are very important, each controlling from 12,000 to 76,000 h.p. In several of the Western states, illustrated by Colorado, California, North Dakota, Wash- 166 CONCENTRATION AND CONTROL Future importance of water powers. ington, Wyoming, Idaho, and Oregon, the use of water for all purposes has been declared to be a public use ; and in some of them the water in its entirety has been declared to belong to the public. Whatever public rights to the use of water for the develop- ment of energy exist, they should be jealously guarded ; for in the distant future, when the coal is gone, the power of falling water is the only source of cheap energy of which we have knowledge at present. When that time comes, the owners of the water powers will control the industries of the nation. The energy from falling water so far as publicly owned or controlled should be sold for a limited term of years at a rate sufficiently low to lead to prompt development, and thus displace as much coal as possible. A large part of the margin between the selling price and the cost of develop- ment should go to the public. In those states in which the energy of falling water has been given through legislative enactment or judicial decision to the riparian owners, the problem of water power control is more difficult. In such instances one way to secure con- trol by the public would be to condemn privately owned water powers, and after such condemnation have them oper- ated as public utilities. CHAPTER III THE LAWS REGARDING COOPERATION' Section 1 ENGLAND In England, in the time of Edward VI, a very strict statute was passed by Parliament against "forestalling, enhancing, regrating, and engrossing." Without going into details the things prohibited by these laws were roughly as follows : Early rigid Forestalling was the offense of going out on the road and statutes. buying merchandise which was coming to the market, with the intention of selling at a higher price upon its arrival. This applied especially to wheat, or as it is called in England, corn. Enhancing defines itself ; it applied to buying a prod- uct, one of the necessities of life, with the intention of selling again at an increased price. Regrating was the offense of going into the market and buying products in a greater quan- tity than needed for consumption with the intention of selling in the same market at a higher price. Engrossing was buy- ing corn growing, or any other corn, butter, cheese, fish, or other dead victual, with intent to sell the same again. Under these old laws transactions were prohibited which raised the price of an essential article. Many of the regulations went so far as to fix prices. While at this time these offenses were made statutory, they apparently had been offenses against the common law at a much earlier date. Indeed, so far as we can ascertain, the common law in the Middle Ages was very strict against com- binations in restraint of trade, as well as against regrating, • For full information concerning this part of the subject, see Eddy on Combinations, Callaghan & Co., 1901 ; Noyes on Intercorporate Relations, Little, Brown & Co., 1902 ; Wyman on Control of the Market, Moffat, Yard & Co., 1911, and Jenks Report of the Industrial Commission, Vol. II. 167 repealed. 168 CONCENTRATION AND CONTROL forestalling, and engrossing. Since the statutes were found to have a tendency to prevent free trade and to enhance the price of essential commodities, they were repealed during the reign of George III. Notwithstanding this fact some of the judges held that the common law against these offenses still existed and penalties were imposed for them. In order to clarify the situation, in 1844, Parliament definitely abolished the offenses of badgering, engrossing, forestalling, and regrat- ing, for Great Britain as a whole, and repealed a large number Rigid of acts which had been passed prohibiting restraint of trade. statutes The repealed acts included those which required foods to be sold at reasonable prices, which allowed justices of the peace to fix the rate of wages of laborers, various statutes fixing the prices of different articles, and finally acts which prevented men from engaging in allied lines of business, such as not permitting "an hostler to make horse bread," and prohibiting a butcher from being a grazer. Thus, at one stroke Parlia- ment repealed the statute laws against restraint of trade. This repealing act guarded against fraudulent or unfair prac- tices by adding the following clause : — "Provided always and be it enacted, that nothing in this act contained shall be construed to apply to the offense of knowingly and fraudulently spreading or conspiring to spread any false rumor, with intent to enhance or decry the price of any goods or merchandise, or to the offense of preventing or endeavoring to prevent by force or threats any goods or wares, or merchandise being brought to any fair or market, but that every such offense may be punished as if this act had not been made." Combination in trade may be defined as the cooperation of two or more persons, partnerships, or corporations to achieve a given result. According to Eddy ' the purposes of combi- nation are to reduce the cost of producing and marketing products, to control prices, and to discourage and if possible to suppress, competition. Since 1844, the law in England has permitted combination in all commodities including the essentials of life even if the purpose of the same were to 1 Eddy on Combinations, Vol. I, Sections 167, 176, 184. THE LAWS REGARDING COOPERATION 169 enhance the price. Any combination is permitted which does not involve immoral, unlawful, and oppressive acts, is Law per- not contrary to public policy, and does not go to the ex- ^'ration' tent of monopoly. Magnitude alone does not make a com- bination illegal; but monopoly is prohibited in order to retain competition. It is realized in England that "com- petition has it disadvantages as well as its advantages, and may be the death as well as the life of trade." ^ < In England also in early times the common law restrictions were very severe upon contracts in restraint of trade. By contract in restraint of trade is meant any contract "whereby any party binds himself to not follow some particular occupa- tion, trade, calling, or profession, or engage in some particular business or enterprise for a period within a particular terri- tory." 2 Gradually the rigidity of the early rule forbidding contracts in restraint of trade was modified, so that in England Early Umi- at the present time whether contracts in restraint of trade are contracts" lawful is dependent upon their reasonableness. They may be removed, sustained even if they be indefinite, both as to time and place ; but such contracts to be lawful are to be supported by a consideration, are to be essential to the protection of the legitimate interest of the contractees, and must be reasonable.' The above statement shows that at the present time the laws have so developed in England that there is freedom to combine in trade to any extent, provided that the combina- tion is not immoral, imlawful, or oppressive, is not contrary Freedom to to public policy, and is not a monopoly. Thus there is free- ^ndfreed dom to combine in trade as well as freedom to compete. This to compete, great policy is in accordance with the principle of laissez faire which for many years has had such a vast influence in England. It is a very radical departure from the early decisions under the common law and the policies of the old statutes. As we shall see, freedom for combination as well as freedom for competition has had a very far-reaching influ- ence upon the development of trade in the United Kingdom. ' Eddy on Combinations, Vol. I, Section 308. » Ibid., Section 688. ' Ibid., Section 713. 170 CONCENTRATION AND CONTROL Section 2 THE UNITED STATES tracts in restraint allowed. The laws of England regarding trade, both common and statute, were brought over to this country; and here they have gone through the same stages of development as in Great Britain. The statute laws, originally severe, were gradually amelio- rated and finally wiped out. The common law regarding con- tracts and combination in restraint of trade went through the same stages of development as in England, xmtil finally they permitted combination and contracts which were reasonable. The purposes of contracts may be to restrain Partial con- trade, to suppress competition, or to control the market. It has been held that contracts in restraint of trade which go to the extent of the entire United States for an unlimited time are unreasonable. Contracts in partial restraint of trade, such as not to use a trade in a particular place for a definite term, if founded on a good consideration and for a proper and useful purpose, were valid ; and they were so even if an entire state was comprised by the contract. The limits of the combinations which were permitted are given in general terms by Noyes ' as follows : — " (1) Any combination of corporations or individuals the object of which is, or the necessary or natural consequence of the operation of which will be, the control of the market for a useful commodity, is against public policy and un- lawful. " (2) Any combination of quasi-public corporations, the object of which is, or the necessary or natural consequence of the operation of which will be, the increase of charges be- yond reasonable rates, or the curtailment of facilities afforded the public, is against public policy and unlawful." Under the above principles the following have been held to be lawful, viz., combinations which had for their object maintenance of a fair price, union of rival manufacturers, Principles Hmiting combina- tions. ^ Noyes on Intercorporate Relations, Section 352. THE LAWS REGARDING COOPERATION 171 agreements in selling price or division of profits, and ex- Extent of elusive trade agreements. Even if such combinations t^naJiowed tended to raise the price of a commodity, they were lawful. Also, agreements to remove a rival from the field are legal unless they result in monopoly.^ From actual cases which have been considered by the courts,^ Eddy gives the following statement regarding the na- ture of combinations which were permitted before the stat- utes of recent years were passed : — " Combination to control competition is legal where op- pressive monopoly is not intended." — " Combination by consoUdation of competing companies, by the formation of a new corporation to take over the assets of the compet- ing companies, the object being to diminish competition, is legal." — " Combination among individuals by the forma- tion of a partnership to handle produce or merchandise and control competition in a given market is legal where no fraud or deception is practiced." — "Combinations among com- petitors, the object of which is to realise a fair price for the goods manufactured and sold, do not contravene any rule of pubhc policy, even though they operate in some respects as in restraint of trade." — " Combination of all competitors Illustrations to control trade and prices by formation of new corporation ?^ combma- to take entire product and act as exclusive selling agent is legal." — " Combination by voluntary association among competitors for the purpose of suppressing ruinous competi- tion and establishing better prices through the appointment of an exclusive selling agent and a supervisory committee, held legal." — ■ "Combination to prevent competition by subsidizing competitor is legal." — " Combination to sup- press competition by means of contracts with independent manufacturers for their entire products is not illegal so long as there is not a conspiracy to monopolize the market." — " Combination of workmen for protection and to increase wages is legal ; so also is the combination of common carri- ers to guard against undue competition and the reducing of 1 Eddy on Combinations, Vol. I, pp. 124-127. 2 Ibid., Chapter 7, pp. 131-198. 172 CONCENTRATION AND CONTROL freights below a fair compensation." — "Combinations between individuals or firms for the regulation of prices, and of competition in business, are not monopolies, and are not unlawful as in restraint of trade, so long as they are reasonable and do not include all of a commodity or trade, or create such restrictions as to materially affect freedom of commerce." — " An agreement between a number of per- sons to act concertedly in fixing prices at which they will sell a particular commodity in a particular city is not illegal as being in restraint of trade unless it appears that they have a monopoly of that commodity." — "I know of no rule of law ever having existed which prohibited a certain number (not all) of the producers of a staple commodity agreeing not to sell below a certain price. " ' The general principle regarding contracts in restraint of trade was admirably stated by Justice Guthrie as follows i^ " That all contracts in partial restraint of trade are not void as against public policy is too well settled to be gainsaid; while, on the other hand, it is as fully established, as a general rule, that contracts in general restaint of trade are against public policy and, therefore, absolutely void." While combinations and contracts in restraint of trade are permitted in England to a large degree and were permitted Freedom for in America to a similar extent under the common law, in tition"'"^''' both countries it is a fundamental principle that there must be freedom for fair competition. Contracts must not be tainted with fraud, against public policy, or contrary to the statutes. All claims on the part of any person or partner- ship to have the exclusive right or monopoly in any business have universally been denied the protection of the law, whether such exclusive privilege was claimed as a general right or because of a contract. Moreover, freedom of com- petition under the common law has not been allowed to go to the point of establishing business to injure a person through a malicious purpose, nor so far as to allow the breaking of one contract to make another on more advantageous terms. If 1 Eddy OQ Combinations, Vol. I, Sections 270, 271, 272, 276, 277, 278, 280, 281, 282, 313, 315, and 316. ^ 35 Qhio State, 666. THE LAWS REGARDING COOPERATION 173 fraud be used in competition, it is illegal ; as, for instance, the misleading use of a firm name. A company manufacturing watches in Waltham was not allowed to call the same Wal- tham watches, since this was a well-known manufacture of a previously established company. Libelous statements may not be used to secure business. Intimidation or coercion to secure trade or to compel exclusive employment of a certain class, such as the members of a business, has not the pro- tection of the common law. Since by reference to Eddy the very numerous cases in which combinations in restraint of trade have been per- mitted in this country under common law may be easily found, they are not here repeated. There will be mentioned a few cases showing how far contracts in restraint of trade have been permitted. In New Jersey a contract not to manufacture anywhere in the United States except in Nevada and Arizona for fifty years was held to be valid so far as the state of New Jersey was concerned.^ In New York a contract not to engage in the manufacture of matches for ninety-nine years except in the state of Nevada and the territory of Montana was held to be partial and not general restraint of trade, and there- fore valid.^ In another case in that state it was held that a contract under which a steamboat company paid another company not to run a competing Une of steamboats was valid on the ground that it may be a benefit to keep com- petition from becoming too strong.' < While it is clear under the common law in this country that there was great liberality regarding combination and contracts in restraint of trade, when such contracts and com- binations affected partnerships or corporations, they were uniformly declared to be illegal.* ' Here falls the famous case of the People v. the North River Sugar Refining Company under which the shares of the capital stock of the constituent companies were trans- ferred to a, board of trustees. This was the case in which 1 56 N. J. Eq. 680. ' 106 N. Y. 473. » 110 N. Y. 519. ' 121 111. 530; 58 S. W. Rep. 853; 86 Tenn. 698. 174 CONCENTRATION AND CONTROL the trust was first brought before the court. Speaking of the trust, Justice Barrett of the circuit court says that the acts of this trust are unlawful for two reasons: "l. They constitute the corporation a partner and a corporation is not allowed by law to enter into partnership. 2. Any com- bination, the tendency of which is to prevent competition in its broad and general sense and to control, and thus at will enhance prices to the detriment of the public, is a legal monopoly, and is against public interest." Justice Finch, of the court of appeals, declared " that defendant corpora- tion has violated its charter and failed in the performance of its corporate duties, and that in respects so material and important as to justify a judgment of dissolution." ^ Under this principle the Standard Oil Trust of Ohio was declared to be illegal.^ In this case the action of the cor- poration was held to be ultra vires, against public pohcy, and therefore ground for the forfeiture of the charters of the offending companies. Apparently in this decision was also the element of monopoly since Justice Minshall declared that under the trust form of combination " by the invari- able laws of human nature, competition will be excluded and prices controlled in the interest of those connected with the combination or trust." Numerous cases could be cited which have declared combi- nations which go to the extent of monopoly to be contrary to public policy as intending to control the market, but the principle is so well known that details will not be given.' Section 3 the sherman antitrust law^ The law as above described in Section 2 for this country was a natural development under which the law conforms to the conditions of trade. Large liberty was permitted. 1 121 N. Y. 582. 2 49 Ohio State 131, 1892. ' 139 N. Y. 105; 145 N. Y. 267; 47 Ohio 320; 111 Pa. 473; 77 Mich. 632. * For the full text of the law see Appendix I. Many discUoJons of the Sherman antitrust act and its influence on law and trade have been pub- lished. Some of the more enHghtening are the following : '' The Federal of Sherman act. THE LAWS REGARDING COOPERATION 175 Suddenly, in 1890, a new policy was introduced by statute Sudden law, the principle of which was to go back to severe restric- po^fgy, tions regarding trade, not so severe as in the Middle Ages in England, but far in that direction. This policy was in- augurated by the Sherman antitrust law. Combinations of the kind above mentioned and which before had been regarded as legitimate were by congressional act for inter- state commerce declared to be unlawful. The Sherman act clearly stated that restraint of trade in any degree is ille- gal. How marked is the contrast between this law and the Provisions previously existing common law is shown by the following summary of its important provisions. Sections 1 and 3 of the Sherman act make " every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce" illegal. This provision applies as among the several states and territories, the Dis- trict of Columbia, and foreign countries ; as between per- sons, corporations, and associations engaged in interstate commerce ; and as between one of any of these groups with any member of another group, except contracts between two foreign countries. Section 2 provides that " every person who shall monopo- lize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign countries, shall be deemed guilty of a misdemeanor." Thus the law forbids both restraint of trade and monopoly or attempt at monopoly. Violation of any of the above pro- visions of the act is made a misdemeanor and is punishable by a fine not exceeding $5000, or imprisonment not exceed- ing one year, or by both. Section 7 provides that any person who is " injured in Antitrust Act," Robert L. Raymond, Harvard Law Review, Vol. XXIII, pp. 353-379 ; " The Standard OU and Tobacco Cases," Robert L. Raymond, Harvard Law Review, Vol. XXV, pp. 31-58; "Antitrust Legislation and Litigation," annual address before the American Bar Association, Boston, 1911, by William B. Hornblower ; "Recent Interpretation of the Sherman Act," George W. Wickersham, Michigan Law Review, Vol. X, pp. 1-25, Hearings, Senate Interstate Commerce Committee, Albert H. Walker, Part XIX, pp. 1537-1571, and Victor Morawetz, Ibid., pp. 1629-1642. 176 CONCENTRATION AND CONTROL his business or property by any other person or corporation by reason of anything forbidden or declared to be unlawful by this act . . . shall recover threefold the damages by him sustained and the cost of suit including reasonable attorney's fee." Other sections of the Sherman law provide for instituting proceedings by the Attorney-General of the United States and the conduct of cases by the court. Amendments to the Sherman law have extended the inhibition of combinations to importers, and have given cases which arise under the law precedence over others. While the act is called the Sherman antitrust law because introduced by Senator Sherman, it was more largely written by Senator Edmunds than any other one man, although some clauses were based upon drafts by Senator Sherman and other clauses were written by Senators Hoar and Ingalls.^ The Sherman antitrust act has now been on the statute Early books for twenty-two years, and many cases have been de- decisions. cided under it. Some of the early decisions were of a kind which gave little promise of the effectiveness of the law. Thus in 1890 some seventy distilleries united, capable of producing 77,000,000 gallons of whisky. Their output was three fourths of that of the United States. The combina- tion approached if it did not reach monopoly. The distil- leries were located in different states. The products were shipped into states other than those in which the distilleries were located. It was held by the court that these acts did not constitute an unlawful agreement under the antitrust act.^ Again it was held to be a legal act for two or more traders to agree among themselves that they will not deal with those who purchase goods of any designated traders in the same business. ^ An agreement to make exclusive pur- chases from a dealer with the provision that this would en- title the purchaser to a rebate if the agreement was carried out, was held not to violate the law.* When dealers in lumber in different towns and cities of ' Hearings, Senate Interstate Commerce Committee, XXVI, pp. 2422— 2431. 2 61 Fed. 205. ' 55 Fed. 851. « 51 Fed. 213. sion discon- certing. THE LAWS REGARDING COOPERATION 177 the states of Wisconsin, Minnesota, Iowa, Illinois, and Mis- souri agreed to raise the price of lumber fifty cents per Early deci- thousand feet in advance of the regular market price of pine lumber, it was held that the agreement did not necessarily raise the price generally and that the combination to come under the statute must be such that the members of the com- bination through the combination controlled the price of the entire output.^ In other words, if the combination was not such as to introduce the element of monopoly, it was not illegal. Even more important than this case was that of the Ameri- can Sugar Refining Company. This corporation, organized under the laws of New Jersey, secured control of four Phila- delphia refineries, thus gaining practical monopoly of the business. It was held by the court that monopoly in the manufacture of an article necessary to life is not interstate commerce, and that combinations which restrain interstate commerce indirectly are not under the ban of the law.- This decision was all the more disconcerting because the manu- facturers who combined were located in different states. While the decision did not say so, it was supposed that manu- facturers in different states could combine and the company afterwards dispose of the products without reference to state lines. Apparently this was not the intention of the decision, or if so it was reversed by later decision. The Kansas City Live Stock Exchange was a volimtary association doing business in Kansas and Missouri. The business was essentially that of a selling agency for cattle. The association had very strict rules regarding the methods of dealing of its members and also rules forbidding members of the exchange from buying of non-members. In this case it was held that the effect of the agreement in restraining in- terstate commerce was only indirect and therefore not under the ban of the act.^ The Traders' Live Stock Exchange, which at the Kansas City yards bought live stock coming from more than one ' U. S. T. Nelson, 52 Fed. 646. » U. S. I. E. C. Knight Co., 156 U. S. 1. ' 171 U. S. 78. N 178 CONCENTRATION AND CONTROL Reasonable and unrea- sonable im- material. state, differed from the above exchange in that cattle were bought and sold. The members of the Traders' Exchange cooperated under strict rules as to the method of conducting their business, among which was the provision that the ex- change would not recognize any trader who was not a mem- ber. The undoubted effect of the arrangement was coopera- tion in prices and in other ways in buying and selling. In this case, it was held that if there was restraint of trade, it was not direct, but only an indirect result of the operation of the association; and that the business, all being done in Kansas City, was intrastate rather than interstate commerce, although the cattle came from more than one state.' While the above decisions seemed to promise little for the effectiveness of the Sherman act, even in early years there were other decisions which looked toward its effectiveness. Thus, combinations fixing price and contracts for exclusive dealing were declared to be in restraint of trade,^ also all the earlier decisions held that whether the restraint of trade was reasonable or unreasonable was immaterial.' The more important of these decisions were the Trans- Missouri * and the < Joint Traffic ^ cases. In the Trans- Missouri case. Justice Peckham said it is "urged that the statute in declaring illegal every combination in the form of trust or otherwise, or conspiracy in restraint of trade or com- merce, does not mean what the language used therein plainly imports, but that it only means to declare illegal any such contract which is in unreasonable restraint of trade while leaving all others unaffected by the provisions of the act." With this view the court disagreed, and held that all combina- tions in restraint of trade without exception or limitation are prohibited by the act. This was a bare majority decision. In the same case it was held that the Sherman act applies to railways and other public utilities as well as to industries. In the Joint Traffic case the same justice shaded this sweeping decision somewhat, by saying, "The act of Congress must 1 171 u. S. 604. '85 Fed. 252; 115 Fed. 610; 166 Fed. < 166 U. S. 327. 290: 2 432 Fed. 898. 167 Fed. 721. ' 171 U. S. 566. THE LAWS REGARDING COOPERATION 179 have a reasonable construction," and he indicated in his opin- ion that certain combinations were not necessarily inhibited by the act. The decisions under the Sherman act have uniformly held that exchanges and selling agencies and combinations, where the commerce was clearly interstate, which fix prices, Combina- divide territories or business, or limit output, are illegal.' mitt^^bv This statement is slightly modified by a decision ^ concern- common ing a boat company which sold to another company with '^^ illegal, the agreement not to do business between Cincinnati and Portsmouth for five years after the sale. This agreement was held to be valid. In the case of an agreement between a number of manu- facturers to market their entire output through a selling agency at specified prices, it was held that a selling agency organized to control all the business of the manufacturers was in restraint of trade and contrary to law. Combinations Selling of companies for the purpose of preventing others from enter- ^f^^"^"^^ ing a business are in restraint of trade.' All combinations which have been shown to have the ele- yC ment of monopoly, or agreements which attempt to produce monopoly, have been declared to be illegal. This principle has been applied not only to industry, but to transportation, both boats and railways. While the decisions have been Mere size uniformly against monopoly, it has been decided that mere constitute size does not constitute monopoly.* Unfair practices, the monopoly, aim of which was to drive from business and thus secure monopoly, are illegal.' The antitrust act forbids combinations of labor in re- straint of commerce as much as it does combinations of capital. For laborers to interfere with interstate commerce is illegal under the act. It is illegal for an organization to attempt to compel an establishment to employ none but union men. Boycotts have been declared to be illegal. It Act applies is immaterial whether the persons who combine in a boycott ° ^ °^^^^' 1 175 U. S. 211 ; 196 U. S. 375; 203 U. S. 390; 212 U. S. 227. 2 200 U. S. 179. ' 209 U. S. 423. ' 172 Fed. 455. <■ 193 U. S. 38 ; 196 U. S. 375. 180 CONCENTRATION AND CONTROL Legality of holding company. Word "rea- sonable " introduced into statute by decision. are themselves engaged in interstate commerce.^ As illus- trating these principles may be cited the award of $222, 000 against the striking hatters of Danbury, Connecticut, same being against about two hundred working men.^ Of the more important decisions which have laid down broad principles affecting the future interpretation of the Sherman act the following may be mentioned : — The Northern Securities Company ' was a holding com- pany, possessing all or the majority of the stock of several railroads. This company was declared to be in retraint of trade. The decision was rendered comparatively early, and the question of reasonable or unreasonable restraint of trade was held to be immaterial. This decision, like the Trans- Missouri and Joint Traffic decisions, was by a five to four vote. While Justice Brewer was with the majority, he dissented from the opinion given by Justice Peckham already cited that every contract or combination in restraint of trade was within the statute. This decision is of far-reaching impor- tance, in that it appears to raise a doubt as to the legality of the great holding companies. Recently there have been broad decisions declaring the Standard Oil, the American Tobacco, and the Dupont Powder Companies to be illegal combinations. As has already been pointed out, the earlier decisions of the Supreme Court, under the first section of the Sherman act, insisted that the reasonableness or unreasonableness of the restraint was immaterial ; and in this position the court fol- lowed the literal statement of the law as it looked to Peck- ham and as it still looks to a layman. The interpretations of the act in the cases of Standard Oil and American Tobacco shows a change in the position of the court. In the future it will declare only business to be interdicted by the act which is in undue restraint of trade. The second and third sec- 1 54 Fed. 994 ; 208 U. S. 274. 2 Hearings, Interstate Commerce Committee, XX, pp. 1729-1730. For full presentation of the two sides of the Sherman act as applied to laborers see Hearings, Senate Interstate Commerce Committee, XX, pp. 1727—1778; XXIII, XXIV, pp. 1979-3102. ' 120 Fed. 72. common law principle. THE LAWS REGARDING COOPERATION 181 tions of the Sherman act are apparently interpreted together. It seems to be the argument that the first section, prohibiting all combinations and contracts in restraint of trade, is meant to cover the same ground as the second section, which pro- hibits monopoly or attempt to monopolize ; and thus the interpretation seems to be that restraint of trade which monopolizes or attempts to monopolize is interdicted by the law. This is the restraint of trade which is undue, and being undue is uiu-easonable ; that is, undue and unreason- able are made synonymous terms. '^ The court gives the opinion that it was the intention of Congress that "the standard of reason, which had been applied Return to at the common law and in this country in dealing with sub- jects of the character embraced by the statute, was intended to be the measure used for the purpose of determining whether in a given case a particular act had or had not brought about the wrong against which the statute provided." The court says, "The fact must not be overlooked that injury to the public by the prevention of an undue restraint on, or the monop- olization of trade or commerce is the foundation upon which the prohibitions of the statute rest, and, moreover, that one of the fundamental purposes of the statute is to protect, not to destroy, rights of property." Apparently the decision of the court goes as far as practi- cable towards reintroducing the common law regarding com- binations and contracts in restraint of trade. Combinations and contracts may take place provided they are reasonable ; but the sweeping decrees regarding the disintegration of the Standard Oil and American Tobacco and other companies make it appear that it was not the intent of the court to go as far toward freedom as was permitted by the common law. Thus we are left in doubt as to how far the court will in the future permit combinations and contracts in restraint of trade. The effects of the Standard Oil and American Tobacco decisions upon those organizations were as follows : — The Standard Oil Company. — The Circuit Court of the • The Supreme Court of the United States, No. 398, October term, 1910 ; Ibid., Noa. 118 and 119. 182 CONCENTRATION AND CONTROL Standard Oil Com- pany a monopoly. Disintegra- tion of Standard Oil Com- pany. United States for the Eastern district of Missouri on November 20, 1909, declared the Standard Oil Company to be an illegal combination; that the officers of the Standard Oil Company and thirty-seven constituent com- panies have combined and conspired to monopolize and have monopolized a substantial part of the commerce in oil among the states and in the territories and with foreign nations. The officers of the Standard Company were prohibited from voting the stock of the subsidiary com- panies, and the officers of the subsidiary companies were enjoined and prohibited from paying any dividends to the Standard Oil Company, although they were not prohibited from distributing rateably to the shareholders of the com- pany the shares of the subsidiary companies. The subsidiary companies were enjoined from acquiring stock interests in potentially competitive companies, or from placing the con- trol of any of the corporations under a trustee and making any agreement, implied or expressed, as to the management of other corporations, or to regulate prices, sales, rates of transportation, or outputs. On May 15, 1911, this decree of the Circuit Court was af- firmed by the United States Supreme Court, except in the minor modifications of time for executing the decree and for continuance of business during the time necessary to carry out the decree. The time for the dissolution of the cor- poration was extended to six months from the 21st of June, 1911, and pending the dissolution the Standard Oil Company continued business in the United States. As a result of these decisions and orders the Standard Oil Company has now been broken into thirtyeight com- panies. These companies are not to have common officers or directors. The stock of the Standard was not widely dis- tributed and the new companies have common owners. The officers of seven of the more important new companies remain in the same quarters which the Standard Oil Company be- fore occupied, 26 Broadway. President Taft has announced that the plan of the adminis- tration in prosecuting trusts is to secure " a degree of disin- THE LAWS REGARDING COOPERATION 183 tegration by which competition between its parts shall be restored and preserved." '■ Will this result be reached in the case of the Standard Oil Company ? Will the officers of the seven large companies in different rooms at 26 Broadway really compete in prices ? That this will occur has been widely doubted by the public from the outset, and on February 29, 1912, it was announced that the Waters-Pierce Company of Is coopera- Texas had alleged that the disintegrated companies are com- ^°" , y bining, and this company had instituted an investigation in order to show the facts. Also the "Street" evidently does not take the Standard Oil decision seriously. When the case was in the courts, the stock gradually declined and reached a low level of 585. After the decision was rendered which finally dis- Oil rising, solved the company, Standard Oil stock again rose until 900 was reached, more than 300 points higher than when the company was under attack. Apparently the men who know believe that the decision of the court will not be sufficiently destructive to reduce the great profits which the Standard has enjoyed and which will now go to the constituent companies. The American Tobacco Company. — On May 29, 1911, the Supreme Court of the United States declared the American Tobacco Company to come within the prohibition of the first Comprehen- and second sections of the Sherman antitrust act. The com- o^decision bination of itself as well as the elements composing it, both corporate and individual, were collectively and separately declared to be in restraint of trade and were found to be attempting to monopolize and monopolizing the tobacco busi- ness. In order to carry out the effect of this decision the lower court was ordered to ascertain some plan of dissolving the combination, or recreating out of the elements a new condi- tion which should be in harmony with the law. To accom- plish this a period of six months was allowed. If at the end of that time some plan had not been devised in harmony with the law for disintegrating the company, it was to be restrained from engaging in interstate business. In the meantime, the 1 Speech at Detroit, September 18, 191X. results. 184 CONCENTRATION AND CONTROL company was restrained from enlarging its powers or extend- ing its business. In accordance with this decree and order the Circuit Court of the United States for the Southern District of New York, on November 6, 1911, approved apian for disintegrating the American Tobacco Company, which, as we have seen, repre- sented a consolidation of some two hundred and fifty corpora- tions into fourteen companies. The outstanding securities, bonds, preferred and common stock, of the American Tobacco Company were found to aggregate $223,168,250. Ineffectual The tobacco business, which was by far the larger part of the business of the company, was divided among three companies, the American Tobacco Company, having a cap- italization of $53,408,499 ; Liggett & Myers Tobacco Com- pany, having a capitalization of $67,447,499 ; and the P. Lorillard Company, having a capitalization of $47,552,501. Thus these three companies together have a capitalization of 1168,408,409, which constitutes 70 per cent of the entire business of the original company and leaves but 30 per cent of the assets to be distributed among the other eleven companies. One small subsidiary company, the Amsterdam Supply Company, which was a purchasing agency, was dissolved and the assets transferred into cash and distributed to the share- holders. A number of companies, including the Conley Foil Company, the MacAndrews & Forbes Company, the Ameri- can Snuff Company, the American Stogie Company, and the American Cigar Company, each were required to divide into not less than two companies each, or to convert their assets into cash. Further the restrictive arrangements which had been made by the American Tobacco Company with foreign companies were abrogated. The fourteen companies are enjoined from cooperating in business in any way ; they must not occupy the same offices ; they cannot hold the stock of one another, or even stock in companies in which other companies hold stock. Each com- pany must do business in its owa house, and the products of each must bear the firm name. For five years they are en- THE LAWS REGARDING COOPERATION 185 joined from having common offices or directors or the same sales agents. The stock of the American Tobacco Company was, in a manner hke that of Standard Oil, distributed proportionally to his holdings to each stockholder of the fourteen com- panies. There were twentynine men who held a dominat- ing position in the old corporation, and they in like manner hold a dominating position in the three new companies into which the chief assets of the old company have been divided. It is the opinion of the Attorney-General that the disinte- gration ordered will accomplish the objects of the law, and will effectually prevent the recurrence of the agreements which, in the past, have resulted in a monopolistic situation.' He says that " the natural tendency of men to compete with one another will operate and the fact that there is community of stockholding cannot prevent that natural tendency." ^ It appears, however, from the evidence presented in this book Is competi- that the tendency for large companies to cooperate is much operation' greater than their tendency to compete. This fact has led the stronger other men to hold views in sharp contrast with those of the "'^"^ Attorney-General. In the opinion of Mr. Louis Brandeis,' one of the counsel for the independent companies, the order to disintegrate the American Tobacco Company will prove to be a farce. He says that not only was the tobacco business distributed among three companies, but the part of the busi- ness which was assigned to each company was such as to give them substantial monopoly for important lines of business assigned to them. Mr. Felix H. Levy,^ another of the attor- neys of the independent companies, says the plan of disinte- gration " is a sham and a subterfuge." Mr. Samuel Unter- meyer ^ says, " They have simply changed its clothes ; that A change of is all ; and they have not made a very complete change at " °^^'^^' that." As a matter of fact, we now have fourteen tobacco combina- tions which have the sanction of the courts instead of one that » Annual Report of the Attorney-General of the United States, p. 6. 2 Century Magazine, Vol. LXXXIII, No. 4, p. 620. = Hearing, Senate Interstate Commerce Committee, Part XVI, pp. 1165, 1166, 1215-1223. " Ibid., Part VII, pp. 287-288. * Ibid., Part V, p. 205. 186 CONCENTRATION AND CONTROL did not. It is notable that after the order was given by the Supreme Court to dissolve the corporation, the stock of the American Tobacco Company fell to 390 per share ; but that after the decision of the Circuit Court as to the kind of disin- tegration which was to take place, the common stock rose to as high a price as ever before in the history of the company, with the exception of a single day, $529 per share. ^ This is the re- sult of more than four years' litigation which cost the inde- pendent companies and the American company vast sums of money, and the government as large or larger sums, all of which will ultimately be paid by the public. There remains to be mentioned the most notable feature of the tobacco decision. The Supreme Court said : "While in many substantial respects our conclusion is in accord with that reached by the court below, and while also the relief which we think should be awarded in some respects is coincident with that which the court granted, in order to prevent any compli- cation and to clearly define the situation we think instead of affirming and modifying, our decree, in view of the broad nature of our conclusions, should be one of reversal and re- manding with directions to the court below to enter a decree in conformity with this opinion and to take such further steps as may be necessary to fully carry out the directions which we have given." The radical feature of the decision is contained in this last clause, " to take such further steps as may be necessary to The court fully carry out the directions which we have given." As undertaking ^g jj^ye already seen, the lower court in complying with this tive work, request approved a plan for the disintegration of the tobacco trust which had been proposed by the tobacco combination and had been approved by the Attorney-General. Thus this court took on the function of giving an order to the lower court to do administrative work, of a kind which has usually been done by a commission (see pp. 233-244), and for which a commission is much better adapted. When the order was executed as directed, the members of the disintegrated trust had the advantage of having the sanction of law. The admin- ' Hearing, Senate Interetate Commerce Committee, Part XVIII, p. 1368. THE LAWS REGARDING COOPERATION 187 istrative work of the court in disintegrating the American Tobacco Company, already severely criticized and generally believed to be futile, is one of the best evidences of the lack of adaptation of the courts to the handling of the complex administrative problems of great concentrations in industry. The Du Pont Powder Company. — In the case of the E. I. Du Pont de Nemours Powder Company,^ known as the powder trust, the company was dissolved and the broad prin- ciple was laid down by the Supreme Court, " that a combina- tion cannot escape the condemnation of the antitrust act merely by the form it assumes or by the dress it wears. It matters not whether the combination be 'in the form of a Form of trust or otherwise,' whether it be in the form of a trade associ- ,"^'^^81° ation or a corporation, if it arbitrarily uses its power to force weaker competitors out of business or to coerce them into a sale to or union with the combination, it puts a restraint upon interstate commerce and monopolizes or attempts to monop- olize a part of that commerce in a sense that violates the antitrust act." Dissolution by Mutual Agreement. ■ — In addition to dissolu- tion of corporations by the court, after full trial and con- viction, there is another class of cases in which as a result of complaint the company without trial has agreed with the gov- ernment as to the violation of the Sherman act, and decrees have been issued in accordance therewith with the consent of the company against which complaint was made. One of the most notable of these cases was that of the Gen- eral Electric Company. This company was charged with having a monopoly in the manufacture of incandescent elec- tric lamps. This monopoly was secured through secret com- panies, and by having the exclusive rights in this country to Unfair use tantalum and tungsten filaments. This right through methods of I n ^ competi- exclusive agreement was used to require that any firm buymg tiou. lamps of these kinds should also buy all their carbon filament lamps from the General Electric Company Through unfair methods, such as fixing prices, exclusive agreements, rebates, etc., monopoly was secured, the company having obtained 97 1 Annual Report of the Attorney-General of the United States, 1911, p. 8. 188 CONCENTRATION AND CONTROL Sweeping decree. Grocers' agreements illegal. per cent of the incandescent lamp business of the country. In consequence, excessive charges for lamps were made, be- ing seventeen cents apiece in this country, while the same lamps are sold abroad at ten cents. A most comprehensive decree was issued restraining the General Electric Company from the various unlawful acts set forth in the petition, and particularly the following were ordered : That all subsidiary companies of the General Electric Company should be known as such and should con- duct their business in the name of that company ; exclusive contracts of all kinds were forbidden, such as requiring another company to sell goods exclusively to the General Electric Company, combining with other companies to fix prices, requiring that those who purchase tantalum and tungsten lamps should also purchase from the General Electric Com- pany their carbon lamps. The company was enjoined from making a discount depending upon quantity of lamps pur- chased when the result is to combine or aggregate the discount on an impatented and a patented lamp ; it was further enj oined from making prices or terms of sale for the purpose of driving out of business any rival manufacturer; "provided that no defendant is enjoined or restrained from making any prices for incandescent electric lamps to meet, or to compete with, prices previously made by any other defendant, or by any rival manufacturer ; and provided further that nothing in this decree shall be taken in any respect to enjoin or restrain fair, free, and open competition." ^ Another interesting case is that of a business association. In October, 1911, a most sweeping decree was given by agree- ment of both the United States and Southern Wholesale Grocers' Association. The members of this association were perpetually enjoined from restraining trade by having a list of dealers to whom special privileges were granted, in- cluding selling only to members of such association. They were enjoined from making any agreement regarding prices. 1 United States of America v. General Electric Company et at, In Equity, Circuit Court of the United States for the Northern District of Ohio, Eastern Division. Petition and Final Decree. THE LAWS REGARDING COOPERATION 189 or even preparing a list of prices for the information of one anotlaer, from giving rebates or bonuses from any dealer because he is a member of the association, from boycotting any manufacturer who is not a member of the association or does not maintain Hmited selling prices. In short, the decree in most comprehensive terms enjoins the association from re- straining trade in any way by fixing prices, making exclusive agreements, or granting exclusive privileges to members of the association. Under the decree it is difficult to see how there can be any combination of the members in restraint of trade either reasonable or unreasonable.^ Other Corporations under Attack. ■ — In addition to decrees of this kind there are a number of organizations attacked by the Attorney-General. Among these are the following : — The United States Steel Corporation is attacked, both on the ground of the combination itself and of trade arrange- ments. It is charged that the American Steel Wire Company, one of the subsidiary companies of the corporation, has made combinations concerning a number of its products ; and also that there are informal price understandings between the oiEcers of the United States Steel Corporation and those of other companies.^ The United Shoe Machinery Company' is Patent under indictment for combination in restraint of trade on a ™°"°P°'y- number of counts, including both monopoly and unfair prac- tices in securing and maintaining monopoly. Similarly the National Cash Register Company * and the Keystone Watch Case Company ^ are attacked both for gaining monopoly and for unfair practices in securing the monopoly. ' The United States of America v. The Southern Wholesale Grocers' Association et al.. Circuit Court of the United States for the Northern District of Alabama. Decree of Injunction. 2 United States of America d. United States Steel Corporation and others, Circuit Court of the United States for the District of New Jersey. Petition. 'United States v. Sydney W. Winslow el al., February Term, 1911, Nos. 113 and 114, Circuit Court of the United States for the District of Massachusetts. Indictment. * The United States of America v. The National Cash Register Company and others. Circuit Court of the United States for the Southern Judicial District of Ohio, Western Division. ' The United States of America v. The Keystone Watch Case Company and others. Circuit Court of the United States for the Eastern District of Pennsylvania. 190 CONCENTRATION AND CONTROL Knock-out men. A glooming room. The National Cash Register Company is especially charged with a number of the most objectionable of unfair practices. In the petition it is complained that this company maintains a group of agents known as "knock-out men," who are em- ployed for the special purpose of destroying competitors. They spy upon the business of the competitors, misrepresent cash registers of opposing companies, and sell registers which resemble their machines at a very low figure. It is charged that competing companies were purchased by the National Cash Register Company and this fact kept secret. It is said that at Dayton was maintained a "graveyard " or "midway" and a "glooming room." In the former were dis- played cash registers of companies that had been driven out of the business, and in the latter it was shown how these companies were driven from the business. Also, it is charged that patents covering cash register inventions have been purchased, and that inventors of other devices have been prevented from putting their inventions on the market. It is said that unwarranted and unjustifiable suits and threats of suits have been brought from time to time against competi- tors with the purpose of intimidating them. In order to make the plans of intimidation more effective, the National Cash Register Company distributed statements regarding dead cash register companies. One issued in January, 1910, stated that, during fifteen years, one hundred fiftyeight companies had been organized to compete with the National, and that of these, one hundred fiftythree had failed. With this state- ment is given a list of the defunct companies. Finally it is charged that at places where there was keen competition, prices were cut so as to prevent competitors from doing business except at a loss, the losses of the National Com- pany being recouped by large profits where competition did not exist. No opinion is expressed as to whether or not these charges against the National Cash Register Company will be proved to be well founded. Other companies which are under attack include the following : Swift, Armour, and other beef packers, several lumber dealers' associations, the wall paper combination, THE LAWS REGARDING COOPERATION 191 the American Sugar Refining Company, the Trans-Atlantic steamship pool, the Periodical Publishing Company, the Standard Wood Company, and several elevator companies. General Statements. — In recent years whenever cases have been in the court under the Sherman act, pools, combina- tions, or agreements, producing restraint of trade, have been declared to be illegal. From the tenor of the decisions the conclusion might be reached that the law had been fairly effective in producing the results which were sought when the act was passed, at least for later years ; but an examination of the situation shows the contrary to be true. All of the railways connecting any two points in the United States charge exactly the same prices for the same service, be it freight or passenger. As already pointed out, it RaUwaya is a matter of common information that competition in price "°°P'^'^^t^- between the railroads does not exist ; and this fact is tacitly accepted by the public and by the Attorney-General of the United States, although every person having common sense knows that the situation is only possible by agreements through informal understandings, traffic associations, etc. For twenty years the major effect of the decisions has been Law drives to change the forms of combination, from the informal agree- ^o™t"°^tion ment or pool to the trust, from the trust to the holding com- entrenoh- pany, and finally there is the begiiming of the transformation ™^^^*j from the holding corporation to the complete merger. At the same time this evolution has been going on for the great industries, hundreds of informal associations of exactly the same kind as those which have been declared to be illegal have arisen, such as the various retailers' and wholesalers' associa- tions, the fruit growers' associations, the butter makers' associations, etc. Indeed, a comparison of the situation in the United States with other countries, such as England and Germany, in which combination is open, shows that at the present moment combinations exist to a greater extent in the United States than in either of those countries, in which trade agreements are enforced by the courts. Could there be more positive evidence than this of the fail- ure of the law to destroy combination and cooperation? 192 CONCENTRATION AND CONTROL Impoteney of Sher- man act. Time arrived for national solution. The impoteney of the Sherman act to accomplish the results for which it was made has been admitted by all, alike by those who would have it amended so as to give greater freedom in combination and by those who would have it amended so as to give a very strict construction, with the vain hope that it might thereby destroy cooperation. Since the Sherman act was passed a child born has attained his majority. While there has been gain in the elimination of unfair practices, there has been no gain in preventing combi- nations in restraint of trade, the fundamental purpose of the law. It would seem that the time had now come for a ra- tional consideration of the principles which should apply to the situation in order to secure reasonable results both for combinations and for the public without interfering with great economic tendencies. Any attempt further to amend the law so as to make it more rigid as against cooperation cannot but be futile. The problem of combination in restraint of trade is one too large, too complex, and too irresistible to be handled by the courts. This situation has been clearly seen by Knox, by Wickersham, and by others who have attempted to secure the results aimed at by the Sherman law ; they have found themselves baffled. The constructive side of the case is presented on pp. 248-266. Section 4 STATE LEGISLATION AGAINST TRUSTS Many of the states have constitutional provisions or stat- utes which embody the same principles as the Sherman act. Among the states which have constitutional provis- ions against combination in restraint of trade or monop- oly are: Alabama, 1901; Arkansas, 1836; Idaho, 1889; Kentucky, 1891 ; Maryland, 1867 ; Mississippi, 1890 ; Mon- tana, 1889; North Carolina, 1875; North Dakota, 1889; South Carolina, 1895; South Dakota, 1896; Tennessee, 1870; Texas, 1875; Utah, 1895; Virginia, 1902; Washing- ton, 1889 ; Wyoming, 1889. The Statute Laios. — The names of some of the states THE LAWS REGARDING COOPERATION 193 and the date of the statutes against restraint of trade and monopoly are as follows : Alabama, 1907 ; Arkansas, 1897, 1899, 1905, and 1907; California, 1907; Florida, 1897; Georgia, 1896; Illinois, 1891, and 1893; Indiana, 1897, 1899, 1908 ; Iowa, 1897 ; Kansas, 1889, 1897, and 1899 ; Kentucky, 1903 ; Louisiana, 1890, 1892, and 1894 ; Maine, 1899 and 1903; Massachusetts, 1908; Michigan, 1889 and 1903; Minnesota, 1891, 1899, 1905, and 1907; Mississippi, 1890, 1906, and 1908 ; Missouri, 1891, 1899, and 1907 ; Nebraska, 1897; New Mexico, 1891, 1897, and 1907; New York, 1892, 1897, and 1899; North Carolina, 1899 and 1905; North Dakota, 1890, 1897, and 1907 ; Ohio, 1898, 1905, and 1906 ; Oklahoma, 1890 and 1908 ; South Carolina, 1897, 1899, and 1902 ; South Dakota, 1890, 1897, and 1899 ; Tennessee, 1889 1891, 1897, and 1903 ; Texas, 1895, 1899, 1903, and 1907 ; Utah, 1898 and 1907 ; Wisconsin, 1893 and 1897. It is notable that only two of the states had antitrust acts prior to 1890, the year the Sherman act was passed. The State antitrust acts were the natural response to the public demands within the states for prohibition of restraint of trade The con- in intrastate business, similar to that which had been enacted ,*^®.'°" ?* ' legislation. regarding interstate business. As would be expected, under the circumstances, while the phraseology varies, the prohi- bitions of the state laws are substantially like those of the Sherman act, except that they, of course, contain no refer- ence to trade between the states and territories or with for- eign countries. In a number of instances, trusts, pools, and holding companies which have the purposes of regulating output, dividing the market, or controlling prices are specifi- cally prohibited. In a few states there are special features which should be noted, as giving additional insight into the situation. In Georgia is a provision that the general assembly of that state shall have no power to authorize any corporation to buy shares of stock in any other corporation in that state or else- where, or to make any contract or agreement whatever, with any such corporation, which may have the effect to defeat or lessen competition in their respective businesses, or to encour- 194 CONCENTRATION AND CONTROL age monopoly; and all such contracts and agreements are declared to be illegal and void. This is the only instance in which the law specifically forbids the interholdings of stocks, a remedy which is advocated by many for interstate commerce. In the Illinois and Louisiana laws there is a clause which states " that the provisions of the act shall not apply to agri- cultural products or five stock while in the hands of the pro- ducer or raiser" ; and in the Louisiana law is the additional clause that the law shall not be construed to affect any com- bination or confederation of laborers for the purpose of increase of their wages or redress of grievances. The legis- latures of Louisiana and Illinois in passing an antitrust law apparently fully appreciated the fact, practically unnoticed in the public discussions, that the selling agencies of the farmers for marketing their produce may be as clearly a combination in restraint of trade as are similar selling agencies of manufac- turers. The exempting clause for agricultural products was declared to be void by the United States Circuit Court of Illinois as being class and special legislation. In Massachusetts it is a criminal offense to impose "the condition in a sale of goods that the purchaser shall not sell or deal in the goods of any person other than the seller." ' This law has been held to be constitutional. In Michigan is a provision of the law declaring illegal con- tracts "not to engage in any avocation, employment, pursuit, trade, profession, or business, whether reasonable or unrea- sonable, partial or general, limited or unlimited." This state law specifically goes beyond the common law principle of reasonable restraint. This law accords with the decisions of the Supreme Court of the United States which had been made up to that time. It was not until 1911 that the courts introduced, by interpretation into the Sherman act, the word "reasonable." In Oklahoma the antitrust law prohibits several imfair practices. Thus it is prohibited to discriminate by sale at a lower rate in one section than in another, "or at the same rate or price at a point away from that of production or manu- 1 191 Mass. 545. THE LAWS REGARDING COOPERATION 195 facture as at the place of production, etc., if the effect or intent is to hinder competition or restrain trade." Also, the Oklahoma law is very specific regarding trusts, hold- ing corporations, limiting output, and marketing. It is de- clared unlawful to issue or own trust certificates, or to enter into any combination, etc., for the purpose of placing the man- agement or control of such combination, or the conduct or operation of the same, or the output or produce thereof, or the marketing of the same in the hands of any trust or trus- tees, holding corporations, etc., with the intent to limit or fix prices, lessen the production or sale of any article, or the use and consmnption of the same, or to prevent or restrict, the manufacture or output of any such article. Further, in this state the following very significant provision is inserted in the law: "Whenever any business, by reason of its nature, extent, or the existence of a virtual monopoly therein, is such that the public must use the same in such a maimer as to make it of public consequence, or to affect the community at large induatriea as to supply, demand, or price thereof, or said business is ^^^^^ * conducted in violation of section 1 (6679), said business is a interest. public business and subject to be controlled by the state, by the corporation commission, or by an action in any district court of the state, as to all of its practices, prices, rates, and charges." This paragraph clearly looks toward the point of view that the great concentrations of industry become public utilities ; indeed, whenever the element of monopoly or re- straint of trade to the extent of affecting the community enters as a whole it makes them so. When this situation is reached for any bnsiness, it comes under the same princi- ples of control as the common carriers. In South Dakota the law especially protects the farmers, as follows : Any combination to prevent competition by raising the price beyond the reasonable cost of production or that tends to advance the price to the user of farm machin- ery, implements, tools, supplies, lumber, wood, and coal, imported into this state from any other state, territory, or county, beyond the reasonable cost of production and sale of same or which tends to and does induce a sale of wheat, 196 CONCENTRATION AND CONTROL corn, oats, barley, flax, cattle, sheep, hogs, or other farm or agricultural products for less than they are worth at time of sale, or for what they would sell at in open market, if such contract did not exist, is declared to be unlawful. In Utah it is seen that when professional men agree on prices the principle is the same as in other combinations, and the law says, "Any combination having for its object the control- ling of the prices of any professional services, any products of the soil, any article of manufacture or commerce, or the cost of exchange or transportation is prohibited and declared unlawful." The Nebraska antitrust law of 1897 was most sweeping in its character. It very definitely makes all combinations in restraint of trade to whatever extent a trust and declares the same to be illegal. Also it prohibits in comprehensive terms all classes of cooperation. It, however, excludes from its provisions all assemblages and associations of working- men and provides that "there is thereby reserved for them all the rights and privileges now accorded them by law." ' This act was declared to be unconstitutional by the fed- eral courts as depriving persons of their liberty in violation of the federal Constitution and also as exempting labor organizations from its provisions, thus denying equal pro- tection of the laws to persons not members of such organ- izations. In Texas, refusing to buy or sell to another any article of merchandise is declared to be conspiracy in restraint of trade. Also, agreements to boycott or threaten to refuse to buy are made illegal. The state statute prohibits all com- binations in restriction of competition or trade, but exempted agricultural products and live stock while in the hands of the producers or raisers.^ This law was declared by the federal courts to be a violation of the amendment to the Constitution of the United States, which declares that no state shall deny any person within its jurisdiction equal pro- tection under the laws. The Illinois, Nebraska, and Texas decisions seem clearly to 1 110 Fed. 816, 1901. « 79 Fed. 627, 1897. trend of state laws. THE LAWS REGARDING COOPERATION 197 show that the antitrust laws in those states which contain exemptions in favor of any class will be held to be unconsti- tutional by the Supreme Court of the United States. Decisions under the Statutes. — In this brief book there is not space to discuss in detail the decisions which have been rendered under the statute laws. In general, the statutes Restrictive regarding combinations and contracts in restraint of trade have gone much farther than the common law in imposing restrictions upon commerce. The author knows of no in- stance in which state statutes have moved in the direction of the English Parliamentary act in enlarging the scope of combination. The effort of the statute law has been to reach restraints of trade which would have escaped the ban of the common law. Pools, trusts, combinations, and monopolies have been declared not to be legal. For the most part re- straint of trade taking the form of contracts regarding division or restriction of territory, or regulation of output or prices, have been declared unlawful. Such decisions have been rendered in many states,^ although, under the common law, many of the forbidden agreements would have been allowed. It is not necessary to give the details of decisions covering these points, and only those having some special feature will be summarized. Agreements regarding the fixing of price for insurance have been held to be illegal. In Iowa this has been applied to a group of local insurance agents who agreed upon the price for each class of risk.^ In Minnesota a combination by which twenty-eight independent companies agreed to place the con- trol of their business with one company to the extent of fixing the rate was held to be in restraint of trade and a violation of the code.' In Missouri, an agreement of insurance companies regarding rates was declared illegal.* A local agreement to raise the price of beer in Kentucky 1147 Cal. 115, 1905; 107 Pao. 712, 1910; 65 lU. App. 502, 1896; 182 lU. 551, 1889; 171 111. 391, 1898; 65 Kas. 240, 1902; 112 Ky. 925, 1902; 119 Mich. 255, 1899; 134 Mich. 103, 1903; 140 Mich. 538, 1905; 187 Mo. 244, 1905; 116 N. W. 302, 1908; 177 N. Y. 473, 1904; 139 N. Y. 251, 1893; 72 Ohio State, 210, 1905; 61 Ohio State, 520, 1900; 106 Pac. 969, 1910 ; 128 S. W. 599, 1910. = 102 la. 602, 1897. 3 75 Minn. 28, 1897. * 152 Mo. 1, 1899. 198 CONCENTRATION AND CONTROL $1 a barrel was declared to be illegal, although it had for its purpose the raising of the price of an intoxicant, the increased use of which the law does not favor.^ It is not necessary that a combination shall secure a practi- cal monopoly of the product in order to be in restraint of trade under some of the state statutes.^ Transactions creat- ing a local monopoly for a limited period (ten years) have been declared to be illegal.^ In Oklahoma this principle has been carried so far as to hold that a combination by three companies manufacturing ten per cent of a product is in restraint of trade.* Contracts for exclusive dealing have been declared to be un- lawful in a number of states. In Kansas exclusive contracts of agents to handle International Harvester machinery were declared to be in restraint of trade.' In Michigan agreements to sell all the salt manufactured to a single concern and to stop the manufacture of salt upon the payment of a certain rental was held to be illegal.' In Texas an agreement to buy oil and beer from a single firm, to sell at a fixed price, and not to sell to competing dealers, was declared to be in violation of the laws in restraint of trade.' In general, agreements made by associations by which their members would have the advantages of exclusive dealing or which discriminate against non-members regarding prices and other matters, have been held to be unlawful.' Thus produce exchanges which discriminate in prices be- tween members and non-members have been declared to be in restraint of trade.' In Michigan it has been held that a con- tract to sell lambs where the buyer agrees not to purchase any other Iambs to a fixed time is held to be void, since under the statutes all contracts designed in any manner to prevent or restrain price competition is unlawful." In Oklahoma an agreement not to enter business within one > 112 Ky. 925, 1902. ' 214 111. 421, 1905. ' 128 S. W. 599, 1910. « 59 S, W. 709, 1900. > 81 Kaa. 610, Feb., 1906. « 134 Mich. 103, 1903. ' 19 Te.xaa Civ. App. 1, 1898; 90 Texas 277, 1896. See also 119 Mich. 255, 1899, and 97 Miss. App. 280, 1902. 8 211 Mo. 181, 1908; 75 Neb. 637, 1906; 103 Tenn. 99, 1899. ' 82 Minn. 173, 1901. i« 119 Mich. 255, 1899. THE LAWS REGARDING COOPERATION 199 hundred miles of Oklahoma City was declared to be in conflict with the statute which provides for disposal of good will on an exclusive basis only to the extent of a specified county. ^ In Minnesota it has been held to be a violation of the statute to sell kerosene, as has been done by the Standard Oil Company, at different prices at various localities, with the in- tent to destroy business of competitors and create monopoly.^ Selling agencies are under the ban of the law in some states. In New York City there was created an agency for the buying and selling of milk at wholesale and retail. The majority of the stockholders in this agency were milk dealers in the city of New York. The board of directors fixed the price at which milk should be purchased by the stockholders. This price so fixed, controlled the markets and the combination was de- clared to be unlawful.' Similarly the producers of bluestone combined in an association to regulate the price and appor- tion their output under which separate companies made the sales for each participant. This arrangement was declared to be imlawful.* The above sufficiently illustrates the dominant trend of the decisions against restraint of trade. Some of the states have Restraint allowed contracts in restraint of trade to a very limited ex- ^^^'^^ *° tent. In California, when a merchant purchased a certain extent. quantity of olive oil, agreeing not to sell the same below a certain price per gallon, this agreement was held not to be in violation of the code restraining monopolies.' In New York in one case it has been held that an agreement under which wholesale dealers, manufacturing certain proprietary articles, sell their goods at a uniform jobbing price only to such dealers as would conform to the manufacturers' price list is legal. ^ Along the same line it has been held lawful for manufacturers to give jobbers rebates who would agree not to sell for less than the list price prescribed by the manufacturers.' In New York an agreement between a builders' association and a bricklayers' union, under which the association gave ' Wilson's " Review and Annals," St. Okl., 1903, sections 819-820. 2 126 N. W. 527, 1910. ^ 145 n. Y. 267, 1895. ■■ 164 N. Y. 401, 1900. ' 156 Cal. 611, 1909. ' 175 N. Y. 1, 1903. ' 40 N, Y. App. Div. 513, 1899, 200 CONCENTRATION AND CONTROL preference to the members of the union, and no member of the bricklayers' union could work for any one not complying with the regulations, was declared not to constitute a monopoly within the New York statute.^ An agreement of the Duluth board of trade providing that all members of the board shall charge uniform rates of commission for selling grain to non- members was declared not to be a violation of the Minnesota antitrust act.^ Contracts for limited exclusive agencies, and to refrain from business for a limited time and place, have been held to be legal. In Mississippi a contract for an exclusive agency for a definite territory to sell a certain article manufactured by a single company was held not to be in restraint of trade.' In Arkansas an agreement to refrain from soliciting insurance in Jefferson County for five years was held to be lawful.^ It has been held to be reasonable for shopkeepers to agree as to the hour of closing their shops. ^ General Statements. — The foregoing discussion of the situa- tion within the states shows that the statute laws have been very strictly construed regarding restraint of trade. The great majority of the decisions under the laws have been against combinations and contracts in restraint of trade, and against regulation of output, division of territory, and agree- ments in prices. However, the last set of cases cited show that contracts restraining trade to a very limited degree have been allowed. The statute laws are as strongly against combination or re- straint of intrastate trade as is the Sherman antitrust act for interstate commerce. Upon the whole the situation \%ithin the states with regard to restraint of trade under the laws and decisions is practically the same as with interstate commerce under the Sherman act. The legislation against the trusts among the states along the same lines as that of Congress shows the influence of contagion, and the willingness of legislatures to act upon a generally accepted faith such as that which prevails 1 169 Fed. 256, 1909. ' 101 Minn. 506, 1909. ' 77 Miss. 476, 1899. * 121 S. W. 293, 1909. ' 54 S. W. 969, 1900. THE LAWS REGARDING COOPERATION 201 concerning the power of competition adequately to regulate commerce. As already pointed out, combinations, in prices formal or informal, exist everywhere, from the two or three grocers at the country crossroads to the great business concerns. Just as the effect of the Sherman law has been steadily to increase the concentration of industry, so the legislation in the states regarding restraint of trade has been an influence in the same direction. The foregoing makes it clear that where a sound and power- ful economic tendency appears which appeals to the common sense of the commimity as necessary for the general welfare, a law, however drastic, cannot stand in its way. Burke said in his address upon Conciliation with America, " I do not know the method of drawing up an indictment against an whole people." If at the present time the laws against combination in this country are to be strictly enforced, it will be necessary to draw an indictment against the larger part of the business men of the country. The great combinations which have been selected for indict- ment have been those against which popular clamor has been directed. The selection of them has been largely due to this cause combined with their magnitude. Is it not a most unfor- tunate situation when tens of thousands are guilty, that here and there one is picked out for prosecution ? One of the most serious evils in connection with the situa- tion arises from this fact. The business men, knowing that cooperation is not possible under the law, are driven to secret understandings and gentlemen's agreements. In the dark, serious abuses appear in connection with cooperation which would not arise if the cooperation were legal and therefore there was no reason to hide the facts from the public. In this respect the business men of England and Germany are in an advantageous position as compared with those of the United States. In those countries they may cooperate ; in the United States they may not. It would indeed have been fortunate had we allowed the common law to stand, and instead of enacting statutes to 202 CONCENTRATION AND CONTROL prohibit cooperation, had undertaken its control through some administrative instrumentahty. While it is believed that the present campaign, by the Attorney-General, to destroy cooperation and return to competition will not be successful, yet if it should be successful for trade, manufacture and commerce will again be in the position that they were when England and America were under the old restrictions of common and statute law. If it should turn out that busi- ness is forced to this situation, we shall again be obliged to go through the same stage of development that both coun- tries have once undergone, — amelioration of the law until reasonable cooperation is again permissible. In that case we shall, by our unwise attempt through statute law to stem the tide of great economic forces, make America go through two cycles of evolution to reach, permanently, rea- sonable trade conditions, whereas one cycle has been suffi- cient for all other civilized countries. CHAPTER IV THE SITUATION IN OTHER COUNTRIES' To describe adequately the situation regarding concentra- tion in industry for other countries would involve for each a book as large or larger than this ; therefore there can be in- serted but the briefest summary of the principles which have controlled combinations and restraint of trade in several of the more important countries. Section 1 ENGLAND The situation in England is fully described by Macrosty,* and from his book this statement is mainly taken. As already pointed out, the law of England originally pre- vented combination in restraint of trade. This principle was abandoned many years ago, and the doctrine was ac- cepted that freedom in trade gave freedom to combine as well as freedom to compete, provided the combination did not result in monopoly. Under these circumstances there Federations have grown up extensive combination and cooperation in almost every line of industry in Great Britain ; but, not be- ing driven from one position to another by prohibition of combination, the movement toward giant holding companies or mergers has not been so far-reaching as in this country. To a considerable extent the combinations are through coop- erations and federations rather than mergers, although in a number of cases consolidation has gone far ; and there are ' The situation regarding industrial combinations in Europe to the year 1900 is fully described by J. W. Jenks, Report of the Industrial Commission, Vol. XVIII, pp. 343. 2 " The Trust Movement in British Industry." 203 rather than mergers. 204 CONCENTRATION AND CONTROL Large units in the iron trade. Textile com- binations. Tobacco combina- tion. a few industries in which a single combination controls more than half of the business. In the iron and steel industry amalgamation is far ad- vanced, so that at the present time the larger part of the business is controlled by a few large combinations. The greater consolidated companies are united into an associa- tion under which there are agreements or understandings re- garding prices, markets, and allotments. Says Macrosty : ' "Summing up the situation in the iron and steel industries, the conclusion forced on us seems to be that the tendency is towards the evolution of a comparatively few large units in each branch, and then that these units should combine into a loose organization for the regulation of their trade." The combinations in iron and steel include both horizontal com- bination, that is, union of plants of the same kind, and ver- tical combination, or union of the industry from its raw material to the finished product. In coal mining and cement making, consolidation and cooperation have taken place, but the process has not gone so far as in iron and steel. In the textile industries concentration has extended very far. This combination, unlike that of steel, is mainly of the horizontal kind. The first great success in amalgamation in this business was the J. & P. Coats consolidation. This business has expanded so as to become an international com- pany. The success of this combination led to similar ones for various textiles, although large combinations as yet have not extended to all lines of the business, nor for all have they been successful. In the chemical industries, combinations have extended very far. Concentration has been rapid in the grain-milling indus- try. In tobacco there is one great consolidation, the Imperial Tobacco Company, which occupies a position in Great Britain analogous to that of the former American Tobacco Company in this country. Even in the retail business, which Macrosty points out is the last stronghold of competition, combina- tion and cooperation exist upon an extensive scale. « "The Trust Movement in British Industry," p. 82. THE SITUATION IN OTHER COUNTRIES 205 While in the various consolidations of Great Britain over- capitalization and promoters manipulations have been fre- quent, these have not gone so far, nor been so widespread, as in this country, where consolidation has been stimulated by adverse laws, and where combination has had the protection Combina- of a tariff. Macrosty says: ' "The weakness of every form tariff''" of combination in the United Kingdom is due to the free admission of foreign competition." He states that if that condition can be removed, the combinations will be enor- mously strengthened. The combination which confines its operations strictly to Great Britain is at a disadvantage as compared with combinations in countries which have a pro- tective tariff, for the reason that the excess products of the British com- foreign countries can enter Great Britain without payment bi°atioDs . , . , , . not confined of duties ; whereas the reverse is not the case. This situation to United has resulted in international combinations for a number of K^edo™- the more successful of those which center in or do business in Great Britain. Such international combinations are illus- trated by the Imperial Tobacco Company with a capitali- zation of £17,500,000, the United Alkali Company with a capital of £8,200,000, the W. Cory & Sons Coal Company with a capital of £2,800,000, the J. & P. Coats Thread Com- pany (this combination includes England, America, and Belgium), the Nobel Dynamite Trust Company with a capi- tal of £3,000,000, and the international steel rail combination. Macrosty summarized the situation as follows : — " The position of the British combinations in regard to the interests of the community may be summed up as not at present dangerous but containing, like every new develop- ment, great and unknown possibilities alike for good and for Cannot go evil. Over prices their powers are not great but are growing. ^^^^ *° So far they have shown no increased power over their em- ditions. ployees, and with a strong trade union they need not have." . . . " Nothing could be more fatal than in a panic to try to turn back a great industrial movement. So far as can be seen the great amalgamations are the best instruments of • " The Trust IVIovement in British Industry," p. 342. repressive legiBlation, 206 CONCENTRATION AND CONTROL production yet devised, and to break them up into their original components would be foolish if it were not in most cases impossible. Crude methods of suppression are always wrong, nor does it seem sensible to search among legal principles relevant to a different stage of industry for weapons to hamper and obstruct." . . . "Repressive legislation could only affect the outer form of combination. Amalgamation cannot be prohibited without forbidding the union of even two firms, while to make mo- Futiiity of nopoly illegal would be fruitless where no formal monopoly exists, and there is no way of determining the greater ef- fectiveness for evil of a merger including eighty per cent of the trade over one containing only fifty. No law can suppress the Gentlemen's Agreement, where there are no rules, no con- stitution, no contract, but common action is effected verbally and informally, and yet some of the most oppressive combi- nations have been of that form. Neither combination nor agitation should be driven underground, and it is significant that to-day complaints are generally raised in the United Kingdom, not against the legally recognized amalgamations hut against associations which have no existence in the eyes of the law and work in secret. To strike at the methods adopted by combinations is not easy without at the same time repressing measures blamelessly adopted by the individual trader. Boy- cotting, dumping, selling at a loss to crush competition, main- taining prices at the highest level which the market permits — these are no monopoly of combinations, but are weapons in everyday use by manufacturers, merchants, and shop- keepers. It would be indeed an extraordinary thing to strike at competition in the name of competition." '■ Section 2 GERMANY In Germany, combination has gone farther than in Eng- land. In 1897 Liefmann gave a list of 345 combinations in 1 "The Trust Movement in British Industry," pp. 343-345. THE SITUATION IN OTHER COUNTRIES 207 that country. Usually the combinations, called cartels, are contracts among independent establishments which limit output, divide markets, and control prices. Oftentimes Extent of these are accomplished through central agencies. It is clear i^°Germany that these cartels for each of the lines of business, concerning which they exist, act powerfully in restraint of trade. Many of them comprise substantially the feature of the typical trusts of the past in America which have been dissolved by the courts. But in Germany, violations of these contracts are held to be immoral. In other words, the principle is broadly accepted and enforced by the courts, that freedom in commerce involves freedom to combine as well as freedom to compete. As illustrations of these cartels, the Steel and Potash com- bines will be briefly described. The German Steel Combine. — Combinations in Germany have extended farthest in the iron industry. One of the larg- est and most successful of these combinations is that of the steel producers. This combination is especially important steel Com- because of its analogy to the United States Steel Corporation, jn'oennany the fundamental difference being that the German steel com- bination is within the pale of the law, while the United States Steel Corporation is attacked by the United States Attorney-General as being interdicted by the law. The state- ment given below is by Professor T. K. Urdahl : — " The German Steel Combine is the largest private in- dustrial undertaking in the world outside of the United States. The aggregate capital of the combined firms amounts to over 1,250,000,000 marks, and the average annual value of its Magnitude products exceeds this sum. The contracts and articles of °o^*^ing incorporation upon which this giant combination is based were signed on the 29th of February, 1904. Its duration was originally limited to three years, but in 1907 it was renewed, and to-day it stands as one of the strongest organi- zations in the industrial world, controlling, as it does, 95 per cei^t of the steel output of Germany. " The scheme was not devised at a given moment by the 208 CONCENTRATION AND CONTROL brain of a genius, but, like the modern political state, was preceded by a long series of experiments. " Each of the organizations representing the stages in the Origins. evolution of the steel combine was more complex and more perfectly adjusted to its environment than were its prede- cessors. " Instead of swallowing up and assimilating the many competing elements, as have the American trusts, the Ger- man Steel Combine represents a confederation in which the individual members retain much of their independence and autonomy. In one sense, it is a syndicate of syndicates, since it grew out of and took over the functions of six large cartels, each controlling one large line of steel products. " There were : (a) Half-manufactured Products Combine, Diisseldorf. (b) Steel Beam Combine of Lower Rheinish-Westphalian District, Diisseldorf. (c) German Steel Rail Association, Diisseldorf. (d) German Steel Tie Association, Diisseldorf. (e) South German Steel Beam Association, St. Johann a. d. Saar. (/) German Steel Beam Association, Wiesbaden. " Table 50. Showing Relations of Geeman Steel Cabtels Ohe Pig Ihon Ibon and Steel Finished Steel Pboducts Asso. for sale Armor of haH- plate manufac- tured prod- ucts, Diis- seldorf Steel Beam Asso., Lower Steel Com- bine Sheet iron Tin Sheet steel Pig Iron Syn- dicate Rhine, Diis- seldorf * THE SITUATION IN OTHER COUNTRIES 209 Orb Pig Iron Iron and Steel Finished Steel PHODUcra Diisseldorf German Steel rail Asso., Diissel- Wire nails Wire rope Kg Iron dorf Woven (Thomas South Ger- ■wire Asso. for sale of Sieger- land iron iron) Sales Bureau, Diisseldorf man Steel Beam Asso., St. Johann Steel tubes ore Asso. for sale of Sieger- German Beam Association, Weisbaden Steel Com- bine Tin cans Enameled ware land pig iron, Sie- gerland German Ry. Tie Asso- ciation, Gas pipe Upper Sili- cian Pig Iron Syn- dicate, Zabrze Diissel- dorf Upper Sili- cian Steel Combine Steel Beam Dealers' Association Hardware Manu- facturers' Associa- tion Steel Spring Manu- facturers' Associa- tion 210 CONCENTRATION AND CONTROL " Each of these was organized to handle and sell its special products in its own field, and had developed a successful organization to carry out special purposes. " In organizing the steel combine it was necessary to de- vise a scheme to do the work of the above named cartels and in addition to perform similar duties for a large variety of firms and associations, altogether thirty-six, out of which the combine was formed. Among these there were some relatively simple manufacturing plants known as 'pure roller mills,' steel mills without smelters of their own, en- gaged in transforming pig iron and steel ingots into roller mill products. There were other firms that not only com- bined smelters with roller mills, but owned and operated coal and ore mines and conducted wire nail and steel rail mills as well. " In order to carry on the marketing of this great va- riety of material the steel combine established three main A products, divisions or bureaus for handling A products : 1. half- manufactured products (ingots, pig iron, steel blocks, etc.) ; 2. heavy railroad material ; light railroad material (ties and rails). 3. structural iron; (I and U beams, etc.). Each division has separate bureaus for taking care of domestic trade and of exports. " In handling all A products the steel combine has com- plete control of the purchase and sale, and becomes the owner of the product during the brief space of time intervening be- tween the purchase from the smelter and sale to the manu- facturer. This system is an improvement upon the scheme that prevailed in the earlier syndicates whereby the syndicate acted merely as an agent for the individual members. Fur- thermore, the combine exercises the power to determine what the maximum output shall be, and apportions among the different firms their quota of the total output of all the mills. ' In handling B products, which include all other roller mill goods, the syndicate pursues an entirely different policy. B products. Here all orders are received, either directly from the con- sumer or through the members, and are distributed by the central bureau among different works according to certain THE SITUATION IN OTHER COUNTRIES 211 rules. These are : First, each member shall receive orders until its output, when compared with its allotment, is rela- tively as large as that of the other members of the combine. Second, cheapness of freight charges and avoidance of cross freight shall be considered. Third, so far as possible orders shall be so distributed as to stimulate territorial division of labor. Whenever an order is sent to a steel firm it must at once be forwarded to the central bureau, which then places the order with the firm entitled to it under the above rules. The wishes of the person placing the order are not considered unless his desires conform with what is deemed desirable from the standpoint of the combine. "All producers of B products are divided into groups. Every group has allotted to it a certain quota of output, Terms of which quota is always established by a resolution of the en- ^ ®' tire steel combine. The combine may increase or decrease the quota of any group at pleasure, but, thus far, no radical reduc- tion has been attempted. Instead, a gradual increase, amounting in ten years to nearly 33 per cent has been authorized. All goods bought from the sjnudicate must be paid for on the fifteenth of the following month, and the syndicate itself settles with the individual members on the twentieth of the following month. " The price paid to the producers is fixed by the syndicate, and is generally called the table price (Tabellen-preise), Price at which is supposed to cover roughly the cost of producing. ^°'''^^- Prices to the consumer are generally quoted free on board for railroad material at the works, — for structural iron at Diedenhofen; and for half -manufactured products at cer- tain centers for groups of producers, five of which are specified in the syndicate agreement. Freight to the center is paid by the works, and freight from the center is paid by the consumer. Should the consumer be located nearer to the works than to the center, he is still compelled to pay freight from the center. This saving in freight is given to the works enjoying the advantage. All general sales prices are fixed quarterly and apply usually for the next two quar- ters. These prices are known as standard prices, and only 212 CONCENTRATION AND CONTROL in an exceptional case is any one allowed a rebate or a lower price. For extra quality or exceptional forms of steel goods the combine establishes exceptional prices. The difference between the table price and the selling price is noted for each group of products. Careful accounts are also kept of losses and administrative expenses connected with each group of production. After these losses and expenses have been deducted from the surplus, the remainder is dis- tributed pro rata among the members of the group in quarterly payments. " Since 1902 there has been in existence, in Dtisseldorf, a bureau maintained and originally organized by the four syndicates producing half-manufactured goods, but at pres- ent jointly maintained by the coal syndicate, the raw iron syndicate, and the steel combine. When the sjoidicate exports to foreign countries, it pays the producers the regular table prices, and the loss involved, if any, is charged against profit and is thus shared by all members of the group Rules of producing the exported products. In order to promote ex- export, ports a system of export premiums has been established. These premiums amounted in 1907 to the following sums : " Marks 1.50 per ton for coal used up in the production of steel exported. " Marks 2.50 per ton for iron ore used in the production of steel exported. " Marks 15 per ton for partly manufactured steel (inclu- sive of the coal and iron ore premium). " Marks 20 per ton for steel rails of all kinds (inclusive of the premiums on coal and raw iron). " In addition to these premiums others are added by spe- cial cartels, such as the wire nail syndicate, the wire syndicate, etc. Premiums are ordinarily paid to works in proportion to the amount of raw material, coal, etc., used in the pro- duction of its exports ; but a firm which owns its coal and iron mines is not always entitled to the maximum amount authorized by the bureau. Only firms that use coal and iron included in the output authorized by the sjoidicate are allowed this privilege. The premiums granted are also THE SITUATION IN OTHER COUNTRIES 213 established by the syndicate and may change from time to time as the conditions warrant. ' The manufacturing industries claim, and apparently Effect of with good grounds, that the export policy of the steel com- ^^^y bine will in the long run prove disastrous to the exports of the German machine industries. Whenever the home market is unable to absorb the amount of steel that the producers place at the syndicate's disposal, it is generally forced to re- duce its price to foreign buyers in order to get rid of the out- put. In this way, the foreign manufacturer of machines, by obtaining his raw material from the German combine, is placed in an unduly advantageous position in competing with the German producer. In 1904, for example, pig iron was sold abroad at from 69 to 71 marks, whereas the domes- tic buyer was forced to pay from 82^ to 92^ marks. The steel combine admits this charge, but claims that its impor- tance has been greatly exaggerated by critics of the syndicate. " The combine is bound by contract to receive and pay for all the product of each individual member, provided the same does not exceed the quota allotted to the firm in ques- Fines and tion. The steel thus purchased is sold by the combine to pei^alties. industrial and other concerns at a uniform price known as standard price. Only in very exceptional cases is any steel disposed of to a domestic concern at any other price. The standard price is established by the directors of the combine at the beginning of each quarter. The quota assigned to each relates exclusively to products offered for sale. Any member of the combine may use as much steel and iron as it pleases in its own factories. " If any member violates the contract of the syndicate by selling directly A products to consmners, he is compelled to pay a fine of one hundred marks per ton for each ton of goods sold. Every other violation of the contract is pun- ished by a fine of 1000 marks for each offense. A restricting penalty of twenty marks per ton is imposed upon the firms for each ton they produce in excess of the amount of B prod- ucts allotted to their plants. If any firm produces A prod- ucts in excess of its quota, it is required to pay a fine of 214 CONCENTRATION AND CONTROL Increase in prices. Increase in profits. five marks per ton. In the same way, firms producing less than their quota are entitled to five marks per ton premium from the syndicate. No member of the combine is allowed to sell or rent his plant to an outsider without the consent of the syndicate. He is also forbidden to establish new plants or to own shares in any company outside the com- bine. All differences of opinion between members of the combine are to be settled by a Board of Arbitration, and under no circumstances are to be carried into the courts. The syndicate exercises no control whatever over the method of securing iron ore or other raw material by the individual members. It also refrains from interfering with labor strug- gles, strikes, or other disputes. " The combine has secured sufficient orders to enable all its members to increase their output about 33/4 per cent and at the same time has secured gradually increasing prices. Increased output in large scale production necessarily results in cheapening the cost per unit of production to the limit of maximum efiiciency. "As a result of the combine, the profitableness of steel works and the value of steel stocks has increased materially since the syndicate came into existence. Apparently, there- fore, the syndicate has been decidedly beneficial to the plant owner. Still it must not be forgotten that the period in which it has been in existence has been one of favorable in- dustrial conditions. The gross profits of fourteen of the largest works increased, in the year 1904-1905, 31.8 per cent, whereas the capital invested in the works in question was in- creased only 8.6 per cent. Averages, however, do not indicate fully the influence of the steel trust upon each individual member. Generally the larger and more powerful members have benefited more than the weaker ones through its activ- ity, and in some cases the condition of the weaker members has deteriorated rather than improved. While some com- panies have undoubtedly been able to remain in existence as a result of the syndicate's activity, that would under the competitive system have been forced to the wall, others that might have developed under the competitive system have THE SITUATION IN OTHER COUNTRIES 215 apparently been held back by the cartel's policy of com- bination. If the combine had not been created, the smaller works would probably have been swallowed up, one after another, until the steel industry of Germany developed into a trust- like consolidation resembling the United States Steel Corpo- ration. This tendency has been restrained rather than eliminated, since mmierous consolidations have been made within the combine during the period in which the steel syndicate has existed. The most important advantage which the steel sjmdi- cate has secured for its members is a diminution in the costs of handling and sale of steel. The average per ton Lowered cost has amounted to only 25 pfennig, whereas it is claimed ''°°*^" that the cost for the same service in the American steel combination is $2 per ton. The comparison is not correct, however, since the $2 per ton in the latter includes a large number of overhead charges, which in the German works are borne by the individual firms. " Costs of production have also been cheapened by the steel combine as a result of the increased division of labor made possible by its creation. Under the cartel contract it has been possible for one mill to exchange orders for cer- tain kinds of goods for which its equipment was inadequate with another mill whose facilities for making this class of goods were more up-to-date. In this way it has been possible for some mills to produce on a large scale relatively few kinds of steel products, such as steel rails, beams, etc. " Another advantage obtained by the members from the existence of the cartel is in dealing with strikes and labor Advantages difficulties. Whenever a strike threatens, the concern can "^ stnkes. transfer its quota to some other mill where there are no labor difficulties. Furthermore, the syndicate contract contains a provision releasing the mill from obligation to deliver goods whenever a strike is on. Such an arrange- ment would have been impossible under the competitive system, and losses growing out of strikes would undoubtedly have been much greater if the syndicate had not existed. 216 CONCENTRATION AND CONTROL Quality of steel. Stability. Harsh sale conditions. " In general it is feared that the organization of the steel industry in the form of the steel combine will result in a gradual deterioration in the quality of steel products and that the chief object of the combine will become quantity rather than quality. On the other hand, it is also clear that the steel works will be able to specialize much more successfully under the cartel regime than has been possible under the competitive system. The steel producers are now able to devote themselves solely to the problem of production, since the cartel takes over the entire distri- bution of the products. In addition to this tendency, the owners of smelters are not forced to devote so much time to the problem of the purchase of raw materials, since this side of the business has also been systematized so that purchases are made on a large scale by joint agreements between iron ore owners and steel producers. "It is also asserted that the steel combine has secured much greater stability in the iron and steel market than was possible before it came into existence. This stability has made it practicable for manufacturers to avoid losses which formerly were almost inevitable. It has been pos- sible for the cartel to shift the burden more and more upon the less organized manufacturers who use steel products as raw material. Consequently the last and unorganized stages of steel product manufacture, e.g. machine making, etc., have been forced to bear the greater proportion of the burdens caused by a gradual increase in prices. These manufacturers will undoubtedly be able to shift a part of the burden upon the final consumer. As yet, this process has not been entirely completed in a great many lines. " In times of business prosperity the steel combine fulfills its contracts only partially and this also constitutes ground for complaint on the part of purchasers of steel goods. " Many complaints are also directed against the strict conditions of sale imposed by the combine. It is main- tained that the wishes of customers are not given due con- sideration, that they are compelled to take the quality of steel which the combine sees fit to give them, regardless THE SITUATION IN OTHER COUNTRIES 217 of the special needs of their business. Furthermore, it is asserted that the combine delivers steel to certain firms, from different plants, which makes it difficult for the manufacturer to secure as uniform a grade of goods as he had been able to obtain when he bought all his steel from the same firm. The steel syndicate claims that most of these complaints are based upon prejudice and imaginary- differences in quality. "A comparison of the total output of steel in Germany with the total steel output of the United States during the last ten years demonstrates the fact that for some reason Effect on or other the steel production has been much more stable steel output. in Germany than in America. The crises of 1903 and of 1907 resulted in a violent slump in the production of Amer- ica. These crises had relatively little effect upon the work of the steel mills. Whether the absence of fluctuation in Germany can be traced back to the steel cartels, or whether it is due to the fact that German industrial conditions are more stable than they are in America, is a question which cannot be easily answered. It is probable, however, that the German cartels have solved the problem of adjusting the supply to probable demands about as successfully, if not more successfully, than the American steel combine." For the great German steel combine, thus described by Professor Urdahl, controlling ninety-five per cent of the industry of the country, it is clear that cooperation is allowed Surplus to proceed to the extent of monopoly, and that without ^° j^^ ^"^ any administrative control by the government or attempt prices. to prevent the combination from fixing prices which the markets will stand. It is notable that the combination sells steel abroad lower than at home; in some cases as much as twenty per cent cheaper, in this respect following the same policy as the United States Steel Corporation. This is possible because Germany, like the United States, has a protective tariff; and therefore the foreign producer can- not enter the domestic trade of these countries. This is reserved for the home corporations. If it were not for the fact of Germany's tariff, it is plain that it would not be 218 CONCENTRATION AND CONTROL possible to keep the level of prices for iron and steel higher at home than they are in the world's markets. The same is of course true for the United States. The Potash Industry.^ — One of the most interesting of the combinations in Germany is that of the potash industry. In the Stassfurt district are the greatest potash mines of the world. A comprehensive law concerning potash was passed in 1910 creating a board of apportionment. This board fixes the amount which is to be sold during any year ; it determines the proportion that each producer — and they are some fifty in number — shall be allowed to mine. Any producer may exceed his allotment by ten per cent ; but if he does, the excess is deducted from his next year's allow- ance. If a company exceeds this maximum it must pay a Allotments greatly increased tax upon the excess. The companies and prices g^j-g forbidden to lower grades. The maximum price is fixed for each grade of the product ; and not only this, but freight rates are adjusted, so that the prices are equalized at different commercial centers, just as the anthracite combination fixes the price of that article at Boston and Buffalo. The law also provides that the price of potash in Germany shall not be greater than it is abroad. The taxes on the potash companies are reserved for the adminis- tration of the govermnental machinery necessary to con- trol the industry. Each company must give a full report of all its transactions. The books are open to the board of apportionment. There is an appeal from the board of apportionment to a commission, just as in the proposed plan allowing cooperation in America there is appeal from the commission to the courts. (See pp. 242-243.) Before the above law was passed there was a syndicate which controlled the potash industry. When this syndi- cate agreement terminated, two companies broke away and made contracts for large sales of potash in America. This situation led to the above law, which embodies many of the regulations previously contained in the sjoidicate • Tbe full text of the potash law is given Hearings, Senate Interstate Com- merce Committee, Part IX, pp. 489-497. THE SITUATION IN OTHER COUNTRIES 219 agreements. The law was therefore a direct outgrowth of previous experience under the pressure of an emergency. Combina- One reason which was strongly urged for its passage was of°devdop- that it would result in the conservation of the potash re- ment. sources in Germany. Before combination, the potash industry had all the difficulties of many competing con- cerns with regard to a natural resource limited in extent. Prices were too high or too low. The plan of controlling the potash industry in Germany promises to work to the satisfaction of the producer, and to the satisfaction of the government, which is a part owner in the potash mines. It is notable that for the potash industry, in which com- plete monopoly is allowed, restrictions are introduced which are not regularly applied to the cartel in Germany. The Complete board of apportionment has authority to control prices; Xmed^ not only so, but to prohibit the selling of material abroad cheaper than in Germany. In both of these respects the policy of the government is an advance over that which applies to the steel combination. That combination, while not a complete monopoly, controls 95 per cent of the out- put of the country ; and there is no government regulation of prices either at home or abroad. In consequence of this, as we have seen, prices are kept up at home and re- duced abroad sufficiently to sell the surplus product. While in Germany cooperation is permitted to an almost unlimited extent, the laws are there very severe against unfair competition. The types of unfair competition are closely defined, and a party who is injured through their violation may recover damages. Section 3 AUSTRIA In Austria the laws make illegal all agreements to raise prices and other contracts to the detriment of the pubhc. There are exceptions to the extent that agreements which maintain prices in times of crises, reduce prices, and secure 220 CONCENTRATION AND CONTROL more favorable conditions of production, such as lowering of freight rates, large scale purchases, etc., are lawful. Law against While, upon the whole, the law of Austria is against cartels, cartels. ^j^g industrial situation is similar to, but not identical with, that of Germany. Combinations extensively exist. Some of the more successful ones are those in iron, sugar, and petroleum. Ordinarily these combinations control outputs and prices. This may be accomplished through selling bureaus and by division of markets. The courts, acting under the laws stated, have been less favorable to the combinations in their decisions than the courts of Germany. While, in some cases, contracts for the division of the market, fixing of prices, etc., have been Combina- declared illegal, these decisions have not been any more suc- ^^°^.. cessful in checking the tendency toward combination than continues. ° '' have similar decisions in this country ; indeed, they have somewhat accelerated mergers in Austria as they have greatly in this country. According to Jenks ^ the tendency to com- bination has been retarded to some extent by the regulation requiring publicity in business, and because of the fact that taxes are heavier on corporations than on private firms. Looking toward the future in Austria, a government commission has recommended the recognition of combina- tions by law and their supervision and regulation by gov- ernment authority. Section 4 FRANCE In France the laws provide heavy penalties against price agreements for food products. The courts have held that Law against combinations which do not have the purpose of raising tion^'°^" prices, but to prevent prices from falling and to regulate their fall, are lawful. Also combinations which do not strive to raise prices but only to secure a market so as to put them in a position to compete with their rivals have been held to be lawful. i"Enoy. Brit.,"37, 338. THE SITUATION IN OTHER COUNTRIES 221 One of the effects of the laws against combinations and agreements in France has been to drive them to secrecy, the same as in this comitry. It is therefore difficult to ascertain the extent to which combinations exist, but it is certain that they are widespread. Selling bureaus have been established which receive Cooperation orders and fix prices for the establishments concerned. ^""^ °°' This form of organization has not been successfully attacked in the courts. These agreements and selling agencies affect many industries, including sugar, petroleum, and porcelain.^ Section 5 GENERAL STATEMENTS Belgium has many cartels which are very similar to those of Germany, and often the cartels in the two coun- tries are closely related. Some other countries having cartels for various products are : Bulgaria, Egypt, Italy, Portugal, Roumania, Spain, Scandinavia, Switzerland, and Russia. From the foregoing summary regarding the situation in foreign countries it appears that the premises with which Great Britain and Germany start concerning combination The faith of in restraint of trade is just the reverse of our own. Our Bntam and faith is m competition ; their laith is m cooperation. Clearly cooperation, the theory of the United States or that of Great Britain and Germany is wrong. In this country there exists a popular distrust and fear of combination and the desire to strike it wherever it appears; in Germany and Great Britain combination is accepted as a necessary step in com- mercial progress. The expanding trade of Great Britain and Germany gives strong evidence of the merit of their point of view. Those who have watched the develop- ment of Germany since the Franco-Prussian war have been amazed at the rise of that country to a position in com- merce at home and abroad second to no country in the world. In many lines of manufacture, for instance, steel, 1 " Enoy. Brit.," 37, 338-389. 222 CONCENTRATION AND. CONTROL the foreign trade of Germany and Great Britain vastly exceeds our own ; not only so, but it is more rapidly ex- panding. It, of course, cannot be held that the astonishing advance of Germany in commerce and the increase in for- eign trade of Germany and Great Britain are due exclusively to freedom to cooperate in business as well as freedom to compete ; but it may be safely asserted that this was one of the essential conditions to their great success. Wide extent of inter- national combina- tion. The steel rail syndi- cate. Section 6 INTERNATIONAL COMBINATIONS Combinations not only exist in the European countries and in the United States, but for many industries inter- national cooperation has begun between the great com- panies in different countries. Macrosty ^ says that "rails, tubes, nails, screws, sewing thread, bleaching powder, borax, nitrates, and tobacco are to a greater or less degree brought under international control, while, at least till lately, dynamite was so controlled, and repeated efforts have been made similarly to syndicate the whole steel trade.'' The forces which have produced such interna- tional combinations are the same as those which have resulted in those confined to one country, the maintenance of prices, division of territories, and limitation of production. Perhaps the most important of these combinations is the International Rail Sj-ndicatc, which was formed in 1883 between Great Britain, Germany, and Belgium. -Under this agreement England was awarded 66 per cent of the business, afterwards reduced to 63 J^ per cent ; Germany, 27, afterwards 29 per cent; and Belgium 7, afterwards 7)2 per cent. Later this pool was broken up with a fall of prices, but in 1904 it got together again on a different basis, that of division of territory. In 1905 the United States was taken into the arrangement. Also, there have been international combinations for a number of other iron and steel products. 1 "The Trust Movement in British Industry," pp. 63-64, 342. THE SITUATION IN OTHER COUNTRIES 223 One of the most important of the international combina- tions is that of the marine interests. In 1902 the Inter- national Mercantile Marine Company was organized under the laws of New Jersey, with a capital of 1120,000,000, The marine one half common and one half preferred stock. The com- ^^ '^^*'®" bination included the following lines : Leyland (49 vessels, 295,000 tons) ; White Star (29 vessels, 181,000 tons) ; Atlan- tic transports (23 vessels, 183,000 tons) ; American and Red Star (24 vessels, 181,000 tons) ; Dominion (14 vessels, 110,000 tons). Without being a member of the International Mercantile Marine Company, the Hamburg American and North Ger- man Lloyd Companies, with 190 vessels and 1,093,000 tons, have entered into a working agreement with it by which a committee composed of four representatives, two of which are named by the International Mercantile Marine Company and two by the German company, are authorized to fix rates, dis- tribute steerage passengers, etc. Table 51. Showing Conbtitotion of Shipping Combine a. International Mercantile Marine Combina- Company tion North German Lloyd 1 Hamburg-American Company Cartel 6. Belgian Red Star Line. c. Holland-American Line. d. Compagnie Trans-Atlantique. e. Cunard Line. Cartel, known as Shipping Combine Another shipping combine is said to control the freight business between New York and the Far East. Both of these marine companies are under attack for violation of the Sherman antitrust law.^ 1 United States v. Hamburg-Amerikanische Paoketfahrt-Actien-Gesell- schaft, and others, U. S. Circuit Court, Southern District N. Y. 2d Dist. ; United States v. American-Asiatic Steamship Company, and others, District Court of the United States for Southern District of N. Y. 224 CONCENTRATION AND CONTROL At Jena there is a central bureau. Each member of the cartel sends a statement to the bureau, giving the freight and passenger business of the company. If a member of the combination has carried more than his share, he pays the surplus into the treasury or pool, which in turn reim- burses the companies whose businesses have been curtailed. Oil is one of the businesses in which the international combination and cooperation have gone far, in some places there being union, in others division of territory. As we have already seen the American Tobacco Com- pany made an agreement with the Imperial Tobacco Com- pany under which each was to respect the home territory of the other, and a combination company was created, the British-American Tobacco Company, through which the two handled their foreign business. The nitrate combination regulates prices and output. Some businesses have become international by one of the great companies buying other companies in the same busi- ness, or establishing branches in foreign countries. The latter applies to a nmnber of the greater companies of the United States, illustrated by the Westinghouse Company. It is not the intention to give a detailed description of Combina- international combinations, since this would unduly ex- pand this book. That international combination has gone so far shows the world-wdde extent of the tendency for cooperation in business. The United States cannot successfully compete in the world's markets without large industrial units. When com- bination and cooperation are permitted not only in foreign countries but as between foreign countries, if the manufac- turers of the United States are excluded from uniting and from taking part in international co5perations, they will not be important factors in the world's markets. No nation can walk by itself in the world's trade. If the Sherman act is rigidly enforced in its present form, and the administration apparently regards this duty as resting upon it, American manufacturers must look mainly to their home markets. tion world- wide. CHAPTER V REMEDIES Section 1 SPECIFICATIONS TO BE MET Befoee presenting a constructive plan to meet the existing situation in trade, it will be well to give specifications regard- ing the things that are to be accomplished and the things that are to be avoided, the same being based upon the statement of facts contained in the previous chapters. In making these specifications, the aim will be to present a consensus of opinion, not personal views. 1. While the existence of a non-competitive field, that of the public utilities, is admitted, and in many cases for such, monopoly must exist, outside of public utilities there is still a large field for competition. Competitive conditions should be retained in the industries. Certainly there should re- Competi- main competition for business ; there should remain competi- tion for quality; there should remain competition in prices so far as this is consistent with other specifications. A con- dition should not be allowed to arise such as to render com- petition in prices, quality, or service impossible. In order to retain freedom of competition it will be necessary to pre- vent monopoly. In those industries in which freedom of competition does not now exist, the facts regarding individ- ual industries (given pp. 104-150) show that this condition has arisen and has been maintained very largely through unfair practices or by monopoly. 2. Unfair practices must be prohibited and unfair advan- tages must not be permitted. Only so will it be possible to Q 225 tion to be retained. 226 CONCENTRATION AND CONTROL Unfair retain competition. ' Some of the more important regula- practices. tions should be as follows : — (a) All corporations should be placed upon the same basis with reference to common carriers. Discrimination, rebates, drawbacks, and exceptional services should not be allowed. (b) Business should not be allowed to be carried on by se- cret companies or combinations. The complete organiza- tion of any corporation should be open. No company should appear to be independent which is not so. (c) The grosser forms of unfair competition, such as es- pionage of business competitors, bribing of men in the em- ploy of competitors, etc., should be prohibited. (d) No agreement should be allowed requiring exclusive dealing ; nor should any rebate or advantage be gained from exclusive dealing. (e) Local selling at or below cost to kill competition should be prohibited. 3. Reasonable cooperation between corporations should be permitted. It is believed that in business under modern conditions, cooperation not competition should be the con- Cooperation trolling word. Sufficient cooperation should be allowed to mitted"''^' prevent fierce and unrestrained competition which goes to the extent of reducing prices below a reasonable amount. Only by cooperation can the enormous wastes of competi- tion be avoided. In this connection the form of the solution which may be adopted to secure cooperation may depend very largely upon the definition of reasonable and imreason- fable. If all restraints of trade are reasonable which do not I produce monopoly, then we may accept the common law I principle that unreasonable restraint of trade is not to be al- I lowed, and under this principle secure cooperation. But if unreasonable restraint is to be narrowly construed, so as to interdict all combinations which divide territories, regulate outputs and make price agreements, then unreasonable re- straint of trade must be redefined by statute in order to secure the benefits of cooperation. Much of the confusion in ' Details as to the kinds of unfair practices which have arisen in business may be found by reference to Chapter II. REMEDIES 227 the thinking and discussion concerning concentration is at this point, some persons having in their minds that all re- straints of trade are reasonable which do not go to the ex- tent of monopoly, and others holding that almost any form of cooperation in business is unreasonable restraint of trade. Just as cooperation of capital should be allowed, so cooperation of laborers should be permitted. The laborers find themselves prevented from cooperation by the Sherman law precisely as have the industrial combinations. ^ It is clear that unless laborers may unite in trade unions, in joint bargaining, and in all legitimate matters which concern them, they will be helpless. Not only should coopera- tion between capitalists and cooperation of laborers be al- lowed, but cooperation of the two groups should be per- mitted. In short, it is advocated that the principle of cooperation should control in commerce, including both laborer and capitalist. 4. Corporations should be allowed to be of sufficient mag- nitude to give the highest economic efficiency in order that (a) they may be able to supply the needs of our own people at the lowest practicable rate, and (b) to secure an increased proportion of foreign trade. As to magnitude which may be Sufficient allowed without the presumption that in consequence of this ^^ effi-" there is unreasonable restraint of trade, it may be suggested ciency as a working basis that no one corporation, including all its subsidiary companies, should be permitted to control more than 50 per cent of any hne of business of the country. There is no sanctity in the number 50, and this may be re- duced to 40 per cent or increased to 60 per cent if either be more acceptable to the public. This rule is not only to apply to a corporation as a whole but to each of the different lines of business which may be covered by it. If this principle be accepted, it is natural to say that any corporation which has more than 50 per cent of the business of the country is a monopoly, and that monopoly is unreasonable restraint of trade. 1 Hearings, Part XX, pp. 1727-1778, 228 CONCENTRATION AND CONTROL 5. It must be possible to secure the freedom of competition defined under 1 and the prohibition of the unfair practices under 2 practically without cost to the complainant. It is the Justice theory that all are equal before the law, but everybody knows t"c^m*iain- *^^® theory is unsound. Under modern conditions, in which ant. there are giant corporations with substantially unlimited funds, the man who has a small business is not equal to such organizations before the law because of his inability to bear the expense of the contest. If concentrations of industry be allowed to exist, some machinery must be devised under which the weak man may be sure of fair practices and an open field. 6. For all businesses in which there is any restraint of trade, reasonable or unreasonable, through cooperation, there Full pub- should be full publicity. As soon as cooperation is permitted, '°^ ^' the business as a matter of fact is invested with a public in- terest ; and even if not declared to be a public utility, if any privileges are given for cooperation, or for magnitude, which involves restraint of trade to the extent of controlling the market, all the operations of the company, including the profits, should be matters of public knowledge. 7. Corporations should be required so to conduct their businesses as to conserve the natural resources. This will involve the restraint of competition so as to prohibit waste. With reference to the future, this specification is one of Conserve paramount importance. The difficulties regarding produc- resources. ^j^^ ^^^ distribution of wealth we are sure to solve. In the meantime there may be loss and waste and unjust distribu- tion. There is not of necessity permanent loss. If, how- ever, natural resources of great value are allowed to be wasted or destroyed, this is a perpetual loss to the race. Thus, as has already been pointed out (pp. 89-94), if a large per- centage of coal be wasted under severely competitive condi- tions of mining, if there be waste in the mining of our metals so that a considerable part of the deposits are left in the ground in such a condition that they cannot in the future be recovered, — this is an irreparable loss which permanently impoverishes our people. REMEDIES 229 8. Cooperating corporations should give just rewards to Just re- wards labor. labor. The wages paid should be fair ; and fair wages for a '^'"''^^ *° man means wages such that he can support a family under decent conditions so that his children may have open before them the avenues of opportunity. 9. The business of the great corporations should be con- ducted imder good social conditions. It has been charged that some of the great corporations require too long hours of labor, and that the work is carried on imder very imfavorable conditions. On the contrary, with regard to other great cor- Good social porations, it is claimed that in these respects the larger or- conditions, ganizations are in a better position than the smaller ones. Both of these statements appear to be true. So far as large businesses are allowed to exist, because of their magni- tude, these social factors become of special importance ; and the great concentrations which have exceptional strength or magnitude should not be allowed to take advantage of labor in hours, service, sanitation, or other social factors. 10. Fair prices should be obtainable by individuals or groups selling to the great corporations. Corporations should Fair prices. no more be allowed unduly to depress prices for materials necessary for their manufactories than they should be allowed unduly to depress prices of labor. 11. Corporations should not be allowed to charge excessive prices to the consumer. So far as the public in general is concerned, the greatest complaint with respect to the concen- trations of industry has been the excessive prices; that is, the stockholders of the great corporations rather than the public have gained the major part of the advantages of their exceptional efficiency. If great organizations are allowed to The public exist and to cooperate, it is clear that they cannot remain j^^^^'^gj" without restraint in fixing prices. Some way must be found to prevent excessive charges and thus guard the interests of the public. In order that fair prices may be secured, it is necessary that certain other things be prohibited; among which are the following : — (a) If great concentrations of industry be permitted to exist, there must be some method of guarding the capitali- 230 CONCENTRATION AND CONTROL Overcapi- talization. Promoters' charges. Speculative manage- ment. zation of the mergers and consolidations in order to protect the pubhc against the ill-advised purchase of watered stock, and against the payment of dividends upon watered stock. It is fully appreciated that this matter of overcapitalization is one of extraordinary difficulty concerning which it is not easy to formulate definite rules. This will be appreciated if the report of the Railroad Securities Commission of 1911, on public utilities, be examined. In some cases it is fair to a certain extent to capitalize good will, trade marks, and pat- ents. Also in passing from the competitive system to the cooperative system, it may be necessary to take into an or- ganization some plants which cannot be utilized but which must be paid for. In such cases there is loss in either method, by operating under the competitive system or by capitalizing under the cooperative method. This is well illustrated by the whisky combination. When this consolidation was formed, it was found economical not to utilize a considerable number of plants taken into the combination. So far as such plants could not be used for some other purpose than that of dis- tilling they became a complete loss. Thus, while some capi- talization of unproductive property and good will is allow- able, this should be on a conservative basis. Capitalization of hoped for earning power may not be legitimate. (b) Excessive costs of organization and manipulation by promoters should not be allowed. It is clear that while fair charges for promotion, including underwriting, are permis- sible and should be included in the capitalization, one of the great evils of the recent era of consolidations has been exces- sive charges in these particulars. (c) Speculative management should be guarded against and payment of unearned dividends prevented. While these evils are not peculiar to the great corporations, as an organi- zation increases in size it becomes of increasing public in- terest, and therefore should be considered in an exceptional way in proportion to the magnitude of the enterprise. 12. Finally the scope of the powers of the United States and the several states should be clearly defined in the control of commerce. Mr. Bryan said at the White House in 1908 : REMEDIES 231 "There is no twilight zone between the nation and the state, The twilight in which exploiting interests can take refuge from both." ^ ^°°®' If this phrase were changed from "there is" to "there should be" it would precisely express the situation. Nothing is plainer than that there is a twilight zone between the nation and the states where the great corporations have taken ref- uge from both. This has clearly appeared in the prosecu- tions carried on by the Attorney-General of the United States in attempting to enforce the Sherman act. Minimum Specifications. — It cannot be expected that at once a scheme will be enacted into legislation to meet all of the above specifications. It may be doubt- ful, indeed, if it be advisable to present a complete plan to meet them, since any such plan would be sure to be profoundly modified in all but its essential features before the time was reached for the enactment of the more remote parts of it. It will be the work of many years to se- cure a system of legislation, state and national, which will meet the specifications made in regard to which there seems to be a consensus of opinion. It must be remembered that the temper of our people is such that in handling any complex Conserva- situation by legislation, advance is made step by step, each ^^^ temper one being very short. This is very well illustrated by the people, legislation for handling public utilities to be subsequently spoken of. It is therefore essential, if possible, that we select the fun- damental points among the specifications upon which a con- sensus of opinion can be reached, and propose a program which deals definitely only with those points, leaving the other specifications to be handled by later amendments. Of the specifications given it appears to me that two are fundamental and paramount to the others. The first is that the weak and the strong shall alike have full opportunity to secure justice from the great corporations. That this is the situation at the present time no one would claim. There have been a few recoveries of damages by important companies or combinations against greater com- ' Conference of the Governors of the United States, Washington, 1908, p. 201. 232 CONCENTRATION AND CONTROL The weak and strong to be equal. < Reasonable cooperation. binations which have been in restraint of trade ; but so far as the general pubhc is concerned, the individual who has been overcharged, the small company that has been weakened or destroyed by unfair practices, has had substantially no redress. The law may have been such that if the individual or the small company had unlimited money, and the courts proceeded with ten times the expedition that they now do, an approximation to justice might be reached ; but these are not the facts ; they never will be the facts. No sane man can deny that the existing laws or any other possible ones, hov/- ever severe they might be made against the great concen- trations of industry, would be of no avail to the workman who is overcharged for an article of daily consumption, or to the small producer. If we are to retain the essentials of a democ- racy, and are not to become a plutocracy, some plan must be devised under which the weak as well as the strong has redress for wrongs, has his rights respected. If the most ar- dent advocate of court method of procedure against corpora- tions in restraint of trade through amendments of existing laws to be enforced by the courts believes that there is any possibility of redressing the wrongs of the individual and securing the rights of the weak, he must indeed be blind to the experience of the past fifty years of development and be content with faith without works. Second if the arguments in the earlier chapters of this book are approximately sound, we must now accept for this coun- try the principle of cooperation in business. Even the most ardent defender of the competitive system says that com- petition must be regulated ; and he says that the alternative is between regulated competition and regulated monopoly.^ The writer holds that there is no cuch alternative. We should not accept competition as the controlling principle on one side, nor monopoly as the controlling principle on the other side. We should accept the broad principle that reasonable cooperation should be allowed in business as it is allowed everywhere else in our social structure. ' Brandeia says : "The real issue is regulate competition or regulate mo- nopoly." Hearings, Part XVI, p. 1162. REMEDIES 233 We have seen that the laws against great concentration of industry have been without avail to give justice to the individual. Similarly, they have been without avail in pre- venting cooperation. The Sherman law and some of the state antitrust laws are now over a score years old. At the time the Sherman law was enacted it was supposed that the courts would be competent to regulate the trusts so as to produce reasonable rather than unreasonable cooperation. That this would not be the case Professor Richard T. Ely ' clearly Failure of foresaw a dozen years ago. He says: "If there is any <'°"''*^- serious student of our economic life who believes that any- thing substantial has been gained by all the laws passed against trusts, by all the newspaper editorials which have thus far been penned, by all the sermons which have been preached against them, this authority has yet to be heard from. Forms and names have been changed in many in- stances, but the dreaded work of vast aggregation of capital has gone on practically as heretofore. The writer does not hesitate to affirm it as his opinion that efforts along lines which have been followed in the past will be equally fruitless in the future." As has been clearly developed in the earlier parts of this book, the views which Professor Ely held at that time have been fully justified. The laws against trusts and the actions of the courts in their enforcement not only have not pre- vented the existence of concentrations and the enlargement of the trusts, but have greatly accelerated their develop- ment. Section 2 COMMISSION CONTROL OF PUBLIC UTILITIES In marked contrast with the situation for industry during the past score of years, there has been sound development in control of one great line of concentration, that to which the term public utility applies. For many years it was an accepted faith that the wrongs to individuals perpetrated > "Monopolies and Trusts," p. 243 (1899). 234 CONCENTRATION AND CONTROL Wrongs un- redressed. "The public be damned." by the great public utilities corporations were to be redressed through the courts of law and that competition was to regu- late prices. Under this faith, millions of wrongs went unre- dressed ; and competition led to unnecessary duplication, great loss to the public, destruction to the weak, and finally, complete dominance of the great public utilities and especially the railroads. The well-recognized maxim upon which the traf&c managers worked under the old regime was to impose all the traffic would bear, to make the kind of service rest exclusively upon the returns. In short, the theory originally enunciated, it is alleged, by Commodore Vanderbilt, "The pubhc be damned," if not always announced openly, was the real feeling which was dominant in many of these corporations. They were regarded as private properties to be run for those who owned the stocks and bonds and not for the advantage of the public. All the laws made against the public utilities corporations and their enforcement through the courts by action for dam- ages or by state's attorneys to protect the public rights ac- complished practically nothing. But the fact that these organizations were public utilities in law and therefore did have an exceptional relation to the public led step by step to another method of control, — that by commission. Early Commission. — As early as 1869, the state of Mas- sachusetts created a railroad commission, upon which was im- posed the duty of supervising all the railroads of the state, "whether operated by steam, horse, or other motive power." It rested upon the commission to ascertain whether the rail- road company complied with the laws of the state and to con- sider the complaints of citizens. However, the commission had only the right of suggestion. It might inform the rail- road company that the rates charged were too high ; it had no authority to enforce a lower rate. California, in 1876, established a railroad commission called Commissioners of Transportation, the powers of which went far beyond those of the Massachusetts commission. They included the establishment of stations, the prohibition of discrimination, and the power of examination of books. REMEDIES 235 New York established a state railroad commission in 1882. This commission had power to investigate accidents result- ing in injury or loss of life, had the power of examining the books, had imposed upon it the duty of calling to the attention of the company any violation of the law, unfair practices, excessive rates, inadequate facilities, etc., with recommendations. If these recommendations were not com- plied with by the railroads, the commission could present the facts to the attorney-general, who was to secure redress through the law. These cases illustrate the beginnings of commission con- trol of public utilities in this country. In this brief state- ment, it is not possible to give a history of the application of commissions to public utilities, for adequate consideration of the commission laws would involve a book much larger than the present one. In general, however, it may be said -^ that these early commissions had the power to investigate and make suggestions and reconunendations to the railroads. If these recommendations were not complied with, they might be presented to the Attorney-General for prosecution in the Power courts. While the early commissions accomplished some- '™it<=dto .... recommen- thmg, there was no fundamental change m the situation, dation. The railroad company need do no more than it desired to do in any of the matters recommended, except as compelled by action of a court of law ; and, as we have already seen, this method of procedure has been a failure for the control of concentration of industry from the outset. From these beginnings, the commission idea of control of railroads extended to many other states; and there was a gradual expansion of their power imtil finally in some states rate-making authority was given. The first state to pass a comprehensive law including this power was Iowa. In 1897 a law was passed in that state which gave to a commission of three members general super- vision over all the common carriers of the state. The in- lowa fixed hibitions of the act and the powers of the commission were ''^*''^- substantially the same as those contained in the interstate commerce act of 1887 (see pp. 238-239), and the latter law 236 CONCENTRATION AND CONTROL undoubtedly served as the model for Iowa. If the railroad companies failed to obey the order of the commission, the com- mission could petition the district court to enforce the order. The Iowa law went farther than the interstate commerce law in that it gave the commission the power to prescribe maximum rates. After hearing the evidence in a case "the board shall prescribe a reasonable maximum rate. Such find- ing of the board shall in a judicial proceeding against the rail- road company be considered as -prima facie evidence of the unreasonableness of a rate higher than that prescribed by the board." The Wisconsin Commission. — It was in Wisconsin, when U. S. Senator R. M. La Follette was governor, that the full solution was first reached. In that state, in 1905, W. H. Hatton was chairman of the committee on transportation in the state senate. He laid down the principle "that it was as much the duty of the state to furnish transportation facilities as it ever had been to make roads or build bridges, and that if the function was delegated to any one, it was the duty of the state to regulate it so that the agent should be required to furnish adequate service, reasonable rates, and practice no discrimination." ^ Senator Hatton further said regarding the proposed bill to accomplish the above : "I want this procedure so simple that a man can write his complaint on the back of a postal card, and if it is a just one, the state will take it up for him." ^ We have here enunciated the two principles now generally recognized as applying to public utilities, regulation so as to get reasonable rates and no discrimination, and machinery so simple as to give justice to all. The act passed by the Wisconsin legislation gave the com- mission the power of regulation regarding rates, service, and discrimination, for railroads and correlated organizations, such as refrigerator lines, sleeping car, and dispatch com- panies. In the regulation of service the power of various state commissions had been gradually extended, and the Wisconsin bill merely carried this phase of the matter to its 1 "The Wiaconain Idea," Charles McCarthy, p. 39. ^Ihid., 41. REMEDIES 237 logical conclusion. The first fundamental new point of the Power to law was that while the onus of fixing the rates rested upon ^"^^""^ ^^^^ the railroads, the commission could investigate by its own initiative or by complaint any rate or charge; and if the same was found to be unreasonable, the commission could order a new rate, which new rate must be substituted for the old one. Thus, the commission was given a possible task. It was not assigned the task of at once fixing all rates, but the task of readjusting unreasonable rates. The second fundamental principle of the law was that the < alterations of service and rates were accomplished by the commission without cost to the complainant ; and thus justice was as certainly obtainable by the man who had imposed The power upon him an excessive charge for shipping a single article as °^}^^ ''°^' by a great corporation. There was no escape from the secures decision of the commission by the railroad except by an J"^*''^^- appeal to the court ; and the appeal was against the commis- sion, not against the individual who made the complaint. As a matter of course both complainant and defendant had full opportunity to present their cases in public hearing be- fore the commission in advance of action. The third important principle introduced into the law >C was that, in case of appeal, the burden of proof that the order of the commission was unreasonable was upon the ap- pealing railroad. Still further, if evidence was introduced into court which did not come before the commission, the New evi- court was obliged to stay its proceedings and remand the case '^®°°®- to the commission for a rehearing, thus preventing the hold- ing back of evidence by the corporations to discredit the commission. All the provisions of the bill were such as to make the powers given the commission lie within those which may be delegated by a legislature. The legislature is to make the law ; is to lay down the rules which control ; the commission Regulation does nothing but administer the law ; the commission can- "^[^^^ "^^ ^^ not legislate, but it can make regulations under the rules of law formulated by the legislature. In this Wisconsin bill we have fully fledged the administrative commission. Its 238 CONCENTRATION AND CONTROL regulations are sometimes called administrative law as op- posed to legislative law. Following from the powers and duties of the commission, there have come many corollaries. In order to determine just rates, it has been necessary to make a physical valua- tion of the public utilities. In the valuation of the prop- erties, both physical and good will, it has been necessary to use trained experts, both in engineering and in economics. The powers of the railroad commission of Wisconsin were by three laws in 1907 extended to apply to all public utilities within the state. In the same year a comprehensive public utilities law along somewhat different lines was passed in New York, that state being divided into two districts, one includ- ing New York City and the other the remainder of the state. This principle of control of public utilities through com- missions, first put into full force in Wisconsin and New York, has been accepted by a number of other states. The Interstate Commerce Commission. — Just as the states have undertaken the control of public utilities for intra- state business, the United States, by the interstate com- merce act of 1887, has instituted a system of control for interstate commerce. This act creates a commission of five members, later increased to seven, appointed by the Pres- ident, who hold office for six years. The original act applies to railways and to boats engaged in the transportation of passengers or property when the same is interstate. Viola- tions of the act are made a misdemeanor punishable by a heavy fine for each offense. Unreasonable charges, unjust Charges to discrimination, and unjust or undue preference to some particular person are all illegal. Railroads must afford all reasonable and proper facilities for the interchange of traffic, and discrimination in the rates through such connection is prohibited. The law provides for the posting of schedules and requires advances of the same to be preceded by ten days' notice. No variation from published rates are to be permitted. All schedules are to be filled with the commission. The commission has power to inquire into the manage- be reason- able. REMEDIES 239 ment of the business of common carriers and to obtain full information concerning them. Any person sustaining dam- age may make complaint to the commission or bring a suit in his own behalf in the District Court or Circuit Court of the United States ; but he cannot do both. If complaint is made to the commission, this organization will investigate ; and if the complaint is well founded the commission will recommend that reparation be made. The chief defect of the law of 1887 was that the commis- sion was a purely advisory body. Further, the conunission was not given sufficient appropriations to make investiga- tions upon which to determine whether charges were reason- able. Notwithstanding these limitations, the rebate evil was reduced, and a great number of cases were satisfactorily adjusted without going into court. In 1906 and 1910 the interstate commerce law was amended. It now applies to all common carriers engaged in interstate commerce and also to companies engaged in communication, such as telephone, telegraph, and cable. In All public 1906 was given the power to fix maximum rates, and in 1910 "^'^^'f^ to suspend increase of rates pending investigation. The charges both in transportation and communication are to be just and reasonable; unjust and unreasonable charges are declared to be illegal. A charge for a short haul shall not exceed the charge for a longer distance over the same road, provided that the Interstate Commerce Commission may grant relief in special cases. Whenever the charges are found unjust or unreasonable the commission is authorized and empowered to determine and prescribe what will be a just and reasonable rate. In- Power to creases in rates must first be passed upon by the commission, regulate and the burden of proof is upon the carrier to show the rea- sonableness of the advanced rate. If the carrier fails to comply with an order of the commission, the complainant may sue the carrier in the Circuit Court, where the finding of the commission shall be prima facie evidence against the carrier. Also the Interstate Commerce Commission may ap- peal to the Commerce Court for the enforcement of its order. 240 CONCENTRATION AND CONTROL Effective- ness of law. Commerce Court. The amendments adopted gave the commission the neces- sary authority to make the interstate commerce law effec- tive ; and many decisions have been rendered declaring rates to be unreasonable, and reasonable rates have been fixed. In many cases railways have been found guilty of discrimina- tion, orders have been given for such discriminations to cease, and proper damages have been awarded. In numerous cases where the joint rates exceeded a combination of the different local rates, the joint rates have been reduced so as not to exceed the combined local rates. Special rates have been declared to be unlawful ; and unfair regulations, the effect of which is to favor some shipper (in one case the Standard Oil Company), have been abated. At the same time the last amendment was passed giving the Interstate Commerce Commission power to regulate rates, a Commerce Court was created. This court has exclusive jurisdiction of all cases arising under the interstate commerce act "otherwise than by adjudication and collection of a forfeiture or penalty or by infliction of criminal punish- ment, or any order of the Interstate Commerce Commis- sion than the payment of money.'' The pendency of a suit in the Commerce Court does not in itself stay or suspend the operation of an order of the Interstate Commerce Commission ; but the Commerce Court may at its discretion suspend such order pending final hearing or determination of the suit. There may be appeal from the Commerce Court to the Su- preme Court of the United States, and such cases are to have priority except over criminal cases. Complainants in- terested in a case before the Commerce Court have the right to appear and may be made parties thereto. Of the cases of appeal from the Interstate Commerce Com- mission to the Commerce Court, there have been many affirmations and also many in which the orders of the Inter- state Commerce Commission have been temporarily sus- pended or reversed. In some instances, charges which the commission declared to be unreasonable have been declared to be reasonable by the court. In other instances where charges have been de- REMEDIES 241 clared to be unreasonable by the commission, the court has declared that the order was based upon insufficient evidence. In one case a through railway rate had been lowered until it met a combined rail and water rate. This resulted in the railway getting the major part of the business, so that the water competition was eliminated. The higher rate was then resumed. In this case the commission condemned the advance in the rates as unjust and unreasonable; but the Commerce Court held that there was not sufficient evidence to sustain this finding. This decision is of great consequence, Decision since the method that the railway pursued is that which H'^^'y *P •' ^ eliminate has been frequently followed to drive out water competi- water com- tion, — viz., lowering rates until water competition is de- P6*'it»°"- stroyed, then raising the rates and taking increased profits. In another case the Commerce Court held that the commis- sion exceeded its authority when it laid down a hard and fast rule to apply to a large part of the United States in regard to the long and short haul clause. Finally, the Com- merce Court has held that its jurisdiction extends to those cases in which orders are for the payment of money only. In one class of cases the court has gone farther than the commis- sion. It was held by the commission that the complainant could not recover the excess charges exacted by unreason- able rates previous to his complaint to the commission; whereas the court held that the complainant could recover from the time the unreasonable rate was inaugurated. Some of the chief differences between the commission and Right of the court are as follows : The commission holds that the court '^^"'^■"- has no right to review the orders of the commission concern- ing charges, except such orders as are confiscatory ; whereas the court holds that it may review the action of the commis- sion as to the reasonableness or unreasonableness of charges. The Commerce Court held that the commission has no right to require information concerning intrastate business, since the same is not interstate commerce. Probably this is Commission the decision of the court that has most hampered the commis- I'^'^P^red. sion in that it made it impossible for the commission to ob- tain information concerning intrastate business. Without 242 CONCENTRATION AND CONTROL this knowledge the commission found it very difficult to de- termine the reasonableness or unreasonableness of interstate rates, since the reasonableness of a charge for a given class of business is dependent as one factor upon the entire business done by the road. Fortunately this decision of the Commerce Court has been reversed by the United States Supreme Court. At this writing the other important differences between the commission and Commerce Court is still pending in the Supreme Court. General Statements. ■ — From the early public utilities commission of the sixties almost every proposal to create a commission or to extend its powers has been de- nounced as wildly radical, as socialistic. It has been said that if the laws proposed were passed, we might as well at once go to the socialistic doctrine and have business carried on by the government. The officers of the Resistance public Service corporations clearly foresaw that the commis- to regula- gions meant sooner or later the destruction of the principles tion. of imposing rates that the traffic would bear and the attitude, "the public be damned." Also with this appreciation by them there was undoubtedly an honest fear on the part of many that their properties would be unjustly raided; but the old situation was intolerable. The public service cor- pOT^a/tion^anxljthe people were at war ; and under conditions of wa r th ere was ranc o r and distrust on both sides, an ob- stinate determination on the part of the railroad companies to resist every encroachment in the matter of control and determination on the part of many of the people to find a weapon by which they might smash the corporations. In a half dozen years this state of mind both on the part of the owners of the public utilities and upon the part of the people has largely disappeared. Where before we had war, we now have peace. Those who have studied the orders of the commissions to the public utility corporations know that commission rule, upon the whole, results in reasonable requirements regarding service and rates. If an unreasonable rate be imposed, there REMEDIES 243 is appeal to the courts ; and if the corporation can show that Protection the rate imposed is confiscatory under the 14th amendment of rights^^'^ ^ the United States Constitution, the order of the commission will be reversed by the courts. To bring a suit in court im- poses no especial hardship upon the railroads, since these great corporations have the money to carry their cases to the highest courts of the land. In consequence of the adequate, indeed unique, protection which property possesses in this country under the 14th amendment, as compared with any other country, some orders of the commissions have been reversed and property has been completely protected. The commissions, as a matter of pride, desire to avoid hav- ing their orders found unreasonable, desire not to have them found to be of a kind which confiscate property ; and thus the commissions upon the whole have been conservative in their actions in the lowering of rates. If there be any advantage upon either side through com- mission rule, it is with the corporations. Notwithstanding this, the people know that the weakest one of them is no longer subject to unjust discrimination which would ruin his business ; he is certain that his stronger competitors are not directly receiving rebates and drawbacks ; he is certain that his rates are not exorbitant ; he accepts the situation even if he thinks the rates are somewhat high. In making the above statement it is not meant to say that everything is all that could be desired. This state of affairs never will be reached in a progressive, industrial democracy. So long as the conditions are dynamic rather than static, no one will ever be completely satisfied. Many of the more important railroad men, in private, make complaint of some Complete of the orders of the commissions, both state and interstate, u„*attain-°° because of what they regard as their too theoretical character able, due to lack of knowledge of practical difficulties involved in executing the orders. There are complaints as to divisions of cost between freight and passenger trafiic; there are com- plaints of orders regarding stations, frequency of service, etc. Upon the other hand some of the people complain that, be- cause of the protection of property under the 14th amendment, 244 CONCENTRATION AND CONTROL the commissions have been too conservative and that the rates have not been sufficiently reduced ; that adequate ser- vice has not been secured. That each side should unduly stress its own point of view and not see with perfect fair- ness the point of view of the other side is natural, indeed inevitable. But neither side would go back to the old condi- tion of affairs. The wiser railroad men would far prefer to be under commissions than to be under blackmail through holdup bills at every session of many state legislatures. The pressure of these holdup bills was so great that many a railroad man in high position and of unquestioned business standing has felt it necessary in the past to bribe legislatures. No longer does this extremely distasteful, disgraceful, and un- lawful performance generally exist. On the other hand, while the people may not be completely satisfied, they realize that they are far better off than when rebates and drawbacks existed, when there was discrimination between men and discrimination between different localities. Perfect contentment we shall never have ; but the results achieved in the control of public utilities by the administrative commissions are so great that we may be sure that from this time on the steps will be forward rather than backward in commission control of public utilities. The fundamental principle of regulation of the public utilities by commissions is Movement Substantially sound. It remains only to extend the principle forward. worked out to the remaining states of the country and develop details necessary for the perfection of the method of control. So satisfactory upon the whole is the situation that, as already pointed out, the people accept with equanimity the principle of cooperation among the pubhc utihties. Every- Cooperation where the latter cooperate in fixing rates so as to prevent de- aocepted. structive competition. No officer of any state or of the United States thinks of bringing suit against the public utility cor- porations for violation of the antitrust acts, although they are as flagrant violators of these laws as any in the United States. In short, the administrative commission has secured for the public utilities reasonable justice to all and by common con- sent has permitted cooperation. REMEDIES 245 Section 3 PURE FOOD AND DRUGS LAWS At the same time that one class of commissions has arisen to control charges and service of public utilities, an- other class of administrative body has arisen to control the quality of commodities. As we have seen (pp. 74-78), the dogma of competition is that it is to control quality and price. For the industries, we have further seen that in con- Failure of trolling quality competition has been an imquahfied failure ; ^p™P^ti- indeed, so disastrous was the failure and so menacing to cure public welfare, especially with reference to health, that the