Concentration and control : a solution of the trust problem in the United States

Front matter

A SOLUTION OF THE TRUST PROBLEM IN THE UNITED STATES

CHARLES R.VAN HISE

CORNELL

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 development and control throw light upon the other industries.

The reader who is familiar with trust literature will recognize the influence of Ely's "Monopolies and Trusts," Jenks's " The Trust Problem," von Halle's " Trusts or Industrial Combinations of the United States," Ripley's " Trusts, Pools, and Corporations," Montague's "Trusts of To-day," Nolan's Combinations, 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 committees 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 Eepresentatives 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 Wisconsin Idea," from which I have taken material concerning the situation in that state. Professor T. K. Urdahl has prepared for insertion a summary account of the steel combinations 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 concentration 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 involved in concentration of industry, and in many cases conclusions 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-

21 21 21 22 23 24 24 24

26 27 27

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

85 35 35 36 58

60 64

71 71

72 72 74 75

76 76 76 78 83

89 89 97 97 99

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 — 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

Introduction

The history of industry in the United States may be divided 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. Similarly 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 limestone 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

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 spinning 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 carpets. 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 inhabitants, there was likely to be a small agricultural implement factory.

Not every farmstead would have all of the equipment indicated, 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-suffinot affected by the great stream of progress which has cientcommoved 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 carding 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 articles 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 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 demanded large scale operations.

THE CIVIL WAR AND CONCENTRATION

In the United States, before the Civil War, industry was dispersed, 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 million 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 communication.

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 percentages of increase per decade are shown by the following table : —

Table 1. Railway Extension by Decade3 since 1850'

Year

Miles

Peh Cent

1850-1860

306.0

1860-1870

44.4

1870-1880

76.3

1880-1890

78.7

1890-1900

16.4

1900-1909

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 passengers 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.

Decreasing

freights.

Navigable streams.

The vanishing 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, settlement and development proceeded much more rapidly along the naturally navigable waters than elsewhere. But even where the conditions were most favorable, navigable waters furnished 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 expensive ; 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 transportation 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, consequently, 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 advantages 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. '

Transportation and concentration.

My treatment of the subject of concentration and control will be divided into five chapters: I, The General Facts regarding Concentration; II, Some Important Illustrations of Concentration ; III, The Laws Regarding Cooperation; 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 purposes 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 competition.

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 important are they? Different industries differ among themselves very greatly in these respects, and any general statement will need modification when applied to a particular case. What is said will be more applicable to those groups of industries 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 manufactory the material must be there assembled. For instance, if it be an iron manufactory, and we have a primitive bloomery 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 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 advantage 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 manufacture 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 agricultural 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 speciahzation gives increased efficiency.

(4) Integration. — A further step in the development of concentration of industry is its integration; that is, a corporation handles not one stage of manufacture only, but a number or even all of the stages from the raw material to the finished product. This again gives increased economy and efficiency, because all the different units of the integrated industry 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 integrated 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 independent 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 integration 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 establishments combining the three.

(5) Parallel Consolidation and Specialization. — The concentration 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 manufactories 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 manufactories 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 comparatively 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 promotes 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 companies 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 cigarette business shall not take over any of its smoking tobacco 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 economical for those articles in which transportation is an important 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 magnitude is the use of by-products. The small manufactory

• Hearings before the Committee on Interstate Commerce United States Senate, Part VII, p. 319.

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 utilized 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 gasoline 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.