Trusts or competition? Both sides of the great question in business, law and politics

Front matter

Book i_^

—

Our Industrial Revolution

Preface

Since the civil war no question has so profoundly stirred the thought and interest of the American people as the now uppermost one of the Industrial Trust. With four-fifths of the great manufacturing industries of the country practically consolidated, each under a single ownership, and with competition in those industries largely eliminated, the well-nigh universal apprehension and discussion are justified. Two squarely opposite opinions are held concerning the trust movement. One regards it as a natural and probably inevitable outgrowth of modern economic conditions, and, therefore, to be welcomed and utilized as previous generations accepted, adjusted themselves to, and profited by, modern machinery and the factory system. The other holds it to be an artificial development, an economic impertinence, a forced substitution of private monopoly for open competition, rendered possible by special causes and constituting a dangerous assault upon the public welfare. One side contends that at most the trust system should be guided and regulated by law, to prevent possible a,buses and assure the greatest advantage from its advent. The other side as stoutly contends that inasmuch as private monopoly is always and everywhere a public enemy, and effective competition a necessary safeguard of the people, palliatives are either out of place or of only transient importance, while complete suppression of the trust through a prompt return to a competitive system, is the only adequate remedy.

The literature of the trust question has been mainly of a fugitive character, scattered through a wilderness of periodicals and special pamphlets, and hence inaccessible to all except the few who have had both the patience and the opportunity for

8 PBEFACE.

research. Current debate in the public press' and from the platform is necessarily disconnected and usually presents one side to the exclusion or distortion of the other. The modest aim of the writer has been, first, to gather from all sources and then present in compact form a sufficient body of authentic information regarding all aspects of the trust problem to furnish the basis for intelligent opinions and conclusions, and, second, to supply opportunely a public ' forum where each side in a great debate may be heard at its best and usually in the words of its ablest exponents and advocates.

There was a choice of two ways for presenting a summary of the argument on either side. One would have taken the usual form of a colorless and balanced memorandum, satisfactory perhaps to students, but dry and ill-adapted to the general public, for whom the book is specially designed. By the other method, which has been employed, the editor has endeavored to present for each side, with something of the realism of actual debate, the strongest summarized argument that can be honestly framed out of the material furnished by all who have publicly contributed anything of value to the discussion or to the literature of the subject— leaving each reader to draw his own conclusions. In other words, while the book is non-partisan, these arguments are fairly bi-partisan. This method also gave opportunity for putting a mass of unclaimed but valuable material through the editorial crucible and bringing it out in something like sym- • metrical shape. If it shall seem that the argument against the trust is somewhat more strenuous in style than the argument for the trust, it will be borne in mind that the former speaks for a multitude who feel that by the trust system they are wronged, ethically as well as economically— that it is not merely a matter of dollars and cents but of fair-play and manhood.

Chicago, January, 1900.

OUR ECONOMIC REVOLUTION.

We are in the midst of a sweeping change which may fitly be termed an Economic Revolution. It sharply affects the welfare of every man, woman and child in the Republic and promises to have an even greater influence on coming generations than on ourselves, for its effects are likely to be progressive and cumulative. We of the present can neither feel nor see the results in their entirety. The change is fundamental, not superficial nor incidental. It involves not simply the adoption of novel business methods, but the substitution of a new economic principle in place of that which has regulated trade, industry and nearly every form of human endeavor, since history began. The novelty, , suddenness and magnitude of this movement do not necessarily argue for or against its desirability, but they do challenge and j^ompel the most prompt and thorough scrutiny.

Since thebeginnings of civilization, and with steadily increasing urgency, competition in business has been a necessity, wholesome though irksome, confronting and environing everyone engaged in the struggle for existence. Naturally in the early history of a race and in new or pioneer communities, competition along most lines is at its minimum, because under such conditions wants are few and natural resources and opportunities abundant in proportion to the sparse population. But even at the dawn of history Abram and Lot with their somewhat pugnacious herdsmen found the grass supply insufficient for their respective flocks and herds on the slopes of Canaan, so that "the land was not able to bear them that they might dwell together." Their compromise agreement to separate and thereafter supply beef and mutton to wholly different communities, instead of waging a mutually destructive competitive warfare, was sound political economy as well as good neighborhood.

The time is not very long past when kings' favorites were often exempted from the operation of this law of life through royal grants, called monopolies, conferring the exclusive right to carry on a given business in the community. These special privileges did not stand for any economic principle. They did not constitute even an attempt to solve any problem or to promote the common welfare. They simply represented, in the passing childhood of the race, the weakness of a monarch yielding to the greed and importunity of a courtier. They rendered the general burden heavier by so much as the favored few were relieved. Then followed swarms of private monopolies for all conceivable purposes, sold by the crown or the state at auction or otherwise, to individuals or companies as a means of raising needed revenue. This policy was at times carried so far that monopolies became the rule and open competition the exception. In 1623 the Monopolies Act was passed by the English Parliament, abrogating all such grants and permanently fixing the attitude of the nation and of the English-speaking race as anti-monopolistic. Much of the odium then attaching to the term monopoly has adhered to it down to the present day. Both in the popular mind and in the eye of the law it represented and still represents the negation of economic fair play.

For a long period this reaction against special trade privileges undoubtedly hampered and retarded industrial and commercial progress by prohibiting all forms -of business association which could even theoretically restrain competition and thus threaten a return or approach to monopoly. Both the courts and the people

OUR ECONOMIC REVOLUTION. 11

were morbidly jealous of the inevitable tendency toward such association of capital and effort, and the common law, largely built up out of the judicial decisions of the time, reflected and to some extent or in some sections still reflects, this over-conservative spirit. It is only during the last half of the nineteenth century both in England and the United States that the old bondage has been thrown off and almost entire freedom of business association established. To-day in both countries, and the same is largely true of Continental Europe, any number of persons, absolutely without limit from three upward, may form themselves into a corporation for almost any lawful business purpose, frequently with no limitation as to amount of capital, and usually at slight expense and by simple legal formalities under general statutes. This new liberty and facility of association and combination of capital, skill and endeavor undoubtedly account largely for the fact that in the past fifty years the commercial nations have made more progress than during the previous ten centuries. The new economics and statesmanship recognize that within certain broad lines it is far better, both for the individual and for society, to have this freedom of contract with corresponding freedom of association and combination, even if microscopic and detailed competition be sometimes thereby incidentally restrained, than it would be io have absolutely unrestrained competition at the sacrifice of that commercial and industrial freedom.

Concurrently with the development and the enjoyment of this economic liberty has developed the marked modern tendency toward large-scale production in the interest of greater economy and efficiency. Larger and still larger manufacturing plants and proportionately increased equipments of capital have become the conspicuous feature of the industrial world, with competition raised to a higher level, somewhat humanized and rendered more scientific. From this has come great advantage to the community.

To the accuracy of the foregoing sketch most thinking persons would agree. But here we come to the parting of the ways:

(1) Intelligent advocates of the modern trust sys- • tern claim that it is only the natural and ultimate step in

that economic progress whose previous stages nearly all have observed and approved; it is the normal outworking of the principle and practice of competition; it is itself the ideal form of competition, giving to society the fruits and benefits of competition without its waste and inhumanity.

(2) Intelligent opponents of the modern trust system contend that it is unnatural; a perversion of the currents of economic advance; a violent ejectment or suspension of the principle of competition, and, in proportion to its success and prevalence, a return by another road to the odious reign of monopoly. They believe that the trust system will do one of two things, either force society forward prematurely to a crude and possibly disastrous system of state ownership, or compel society in self-defense to make a partial return upon the road, by renewing the application of common-law restraints to the freedom of contract, association and combination. They remind us that civilization means liberty with law. They hold that always and everywhere under the new civilization the law, both written and unwritten, which has accompanied and conditioned the modern freedom of contract, association and combination has said to every citizen: Your industrial freedom must be exercis^L within the lines of public welfare, which is secured by effective competition; you have broad liberty of combination for rightful ends, you have none for purposes injurious to society; you may associate and combine to compete; you shall not associate and combine to monopolize. They insist that, whatever may be the fact in England since the decision of the Mogul Steamship case, our American jurisprudence, our legislation and our uni-

XO ROOM FOR THE PESSIMIST. 13

form application of the common law unite with unbroken custom and with public sentiment to uphold this view.

The line of cleavage is distinct. The issue is simple when stripped of rubbish, of vituperation and of irrelevant debate about details of responsibility and of remedies. The trust system is defended by the statement of this broad proposition: All are free to compete; where there is freedom to compete there can be no monopoly; where there is no monopoly there is no occasion for complaint. And this answer is made: A system of effective competition is essential to the public welfare; where there is freedom or power to combine for the purpose of monopoly, effective competition is impossible. The trust system consists of the exercise of the power to combine for the purpose of monopoly; to whatever extent it prevails or survives, effective competition is suppressed. The two things are incompatible; they cannot exist in the same field at the same time.

But in all this sharp conflict of ideas and of interests there is no standing room for the pessimist. The Anglo- Saxon race never yet encountered an economic problem which it did not solve, and this one of the trust is to be no exception,

TRUSTS OR COMPETITION?

It is true of all revolutionary changes that their results are neither so good nor so bad as optimists and pessimists respectively predict. So in the case of the trust movement the outcome will probably represent a medium between the expectations of its champions and the apprehensions of its opponents.

WHICH MOST NEEDS " PROTECTION ?"

Chapter I. The Argument For The Trust

Free Competition a Failure— Not a Permanent Economic Law— Advantages of the Trust System— Consumers, Producers and Workmen Benefited— Commercial Panics Prevented— Organized Labor and Organized Capital— Lower Prices and Better Goods— Enlargement of Foreign Trade— Trusts Not Monopolies— Certain Criticisms Answered—Legal Basis of the Trust— The Unified Industry a Permanent Institution.

The merits claimed for the trust system by those who are prominently and responsibly connected with it, and by those economists who have only a scientific or professional interest in the theme, but who have reached conclusions favorable to the new movement, can be briefly and clearly stated, for they are mostly on the surface of things. In the following summary of reasons why the trust has come and why it ought to be accepted as a good and permanent thing, the Editor has aimed to winnow from the copious literature of the subject, and then reproduce in his own words, every argument which, because of its character or its source, is entitled to place. Possibly here and there some arguments of the future have been anticipated. Not all of these reasons could properly be attributed to, nor perhaps would all be accented by, any one advocate of the new movement as a whole.

L Free Competition a Failure Under Modern Conditions. — In the process of economic development free and unregulated competition may cease to be preservative, and become destructive, of healthful business, and thus of the general welfare. Competition, from being the "life of trade" may become the destroyer of all that which makes trade most valuable to the community. Such a point has been reached in some lines of industry in the United States and elsewhere. In those industries unified ownership and management can be used to limit or prevent actual competition without destroying the competitive principle, and with benefit alike to consumers and to those engaged in production.

Except in those pursuits where there is no occasion for tense business rivalry, free competition is commercial warfare and is accompanied by practically all the evils of genuine war except the actual killing and maiming of men. And even here the parallel is not wholly wanting. Every vfctory in the competitive conflict means a defeat for the other side, and where defeat means bankruptcy and a broken spirit, physical death not only results in myriads of cases, but is often a welcome refuge from a tempest of disaster. In competition the battle is emphatically to the strong, often regardless of whether the strength be of the noble or ignoble sort. The highways of business are strown with the wrecks of fortunes, of hopes, of families, of homes and of lives. Nothing is sacred when it stands in the way of the iron law of the survival of the fittest. Whether necessarily or not, yet with absolute certainty, the Golden Kule goes out when unbridled competition comes in. Even John Stuart Mill, the unbending apostle of the Let Alone^ theory, leaves the beaten road of economic discussion long enough to paint a lurid and truthful picture of the evils of the unending competitive battle — evils for which he could suggest only the slightest alleviation.

And this warfare has grown more severe and more destructive of wealth, of happiness and of life with the advance of civilization. With the ever-progressive invention and application of novel methods and machinery,

FREE COMPETITION A FAILURE. 17

larger and larger plants and greater and greater capital have become necessary in the manufacturing industries. Year by year it has been found that the smaller establishments cannot successfully compete with the larger ones. The latter by mere reason of greater capacity and output can accomplish economies which alone equal a fair profit and which leave the smaller competitors out of the race. Hence the necessity for the smaller to enlarge by consolidation and adopt the best modern methods or go to the wall. And this process goes on in an ever ascending scale. The factories which yesterday were largest and led the trade are to-day distanced by new concerns of still greater proportions and capital, capable of introducing still greater economies and cutting cost of production to still lower figures. The industrial giants of ten years ago have been dwarfed by the greatef giants of the present, and they must themselves enlarge, consolidate with each other, or sink investment and go out of business through the gateway of insolvency. Obviously all this could have but one ending, and it has come in the form of a massing of all important competitors in a single corporation, with a general truce to warfare. The individual manufacturer in an unorganized industry where competition is keen, often finds himself between the upper and nether millstone — the labor-union forcing wages up, without regard to profits of the business, and bull-headed competition among manufacturers, usually approved by an ill-informed public sentiment, forcing prices dow T n. Between these two opposite and converging forces the manufacturer stands, like the fabled prisoner, the walls of whose cell slowly but steadily moved inward upon their waiting and uncomfortable victim. From such a predicament it is not strange that the proposal to join a trust should prove a welcome escape.

Waste Through Competition. — While the main elements of waste through competition are set forth elsewhere in this argument under the sub-title, "Reduction in Cost of Producing/ 7 etc., reference to one aspect of this fact is in place here. Under free competition, when failure is threatened to a defeated competitor, the invested capital cannot be withdrawn and applied elsewhere. A modern manufacturing plant is almost absolutely worthless for any purpose except the special one for which it was built and equipped. If it cannot be run at a profit in that specialty, it ceases to be an asset and becomes junk. The investment is a total loss. Hence the tenacity with which beaten manufacturers cling to a lost cause, hoping against hope, continuing a battle that has already gone against them, struggling with increased desperation the nearer the final catastrophe. The waste of wealth due to unrestrained competition would, if saved, go far to enrich the community every year. And this waste finally falls for the most part on the general body of consumers — the much enduring public. Disaster to any industry usually means misfortune to society, and conversely the steady prosperity of the manufacturing industries of a people is both the index and a leading cause of good times for all classes.

Free competition is not a permanent and universal economic law, as gravitation is a permanent and universal physical law. Old-time economists so regarded it, as the ancients believed the sun moved round the earth, but in both respects the world is wiser at the dawning of the 20th century. Absolutely free competition is desirable wherever and wiienever it will produce results which are better than those that any t)ther policy would produce. At other times and under other conditions it should and does give place, first to restraint and regulation and then by mutual agreement among competitors, if need be, to varying forms and degrees of monopoly. Natural monopolies, or monopolies of situation, are familiar to all and complained of by few — street railways, gas and water works, telegraph, telephone, etc.

ECONOMY OF LARGE-SCALE PRODUCTION. 19

Now comes, through the orderly evolution of economic forces, an additional form of so-called monopoly, under which several competitive establishments, asking no special privileges from any source, are merged into one corporation or concern under a single ownership and management, and for the frankly avow r ed purpose of getting the maximum of advantage from the largest possible aggregation of capital, talent and influence; adjusting supply to demand, and of eliminating competition as completely as practicable, thus assuring continuous prosperity to the consolidated industry, satisfactory profits and dividends to its allied owners, and incidental but inevitable benefit to employes and the general public. II. Reduction of Cost of Producing and Marketing Commodities. — The magnitude of this economy in production and distribution under the trust system of associated capital with competent management, is scarcely realized by the general public. Thus: (1) The unified industry will presumably be directed by the ablest men previously identified with its several units, and this fact is the main guaranty of success for the new organization. It is safe to assume that sentiment and favoritism will seldom have influence in selecting managers and highclass employes from the assortment of trained talent at the disposal of each trust. A purpose to secure the greatest possible efficiency of organization and direction will govern, except in those ill-born combinations which the folly of their projectors has doomed to short and malodorous careers. (2) Each manufacturing plant will be utilized for producing only the kind and grade of goods for w r hich, by its capacity, equipment and location it is best adapted.

It is a leading weakness of the competitive system that in many industries each separate company feels bound to manufacture several grades of goods, and then to market them throughout the entire country. (3) The business and mechanical methods, including patented features, of the most modern and suecessful establishments will be applied to all. (4) Raw material, being purchased on the largest possible scale by the most expert buyers and by a concern having ample capital and high credit will be obtained at lowest possible prices, of better uniform quality and with assurance of timely supply. (5) There will be little or no temptation to adulteration of goods, or the doing of inferior work, both of which damage the offending concern in the long run, and uniform standards of commodities can be adopted and maintained, to the equal advantage of the manufacturer and the public. (6) The aggregate of stocks of goods necessarily kept on hand will be greatly diminished with proportionate reduction of interest, storage charges, insurance and deterioration from shop wear, etc. (7) Losses from bad credits will be practically eliminated through the absence of undue pressure to sell, and a more thorough system of scrutinizing the financial condition of customers. (8) An enormous economy will result from the reduction in marketing expenses. Under the new system the large item for traveling salesmen and for various forms of advertising can usually be reduced by 90 per cent. Duplicated and overlapping effort in this wide field is done away with. (9) Great saving results from the shipping of goods from the factory situated nearest to the customer, instead of shipping from a single center to all parts of the country. (10) The best brain, energy and skill of all the factories will be utilized in harmonious and systematic work to a common profit-producing end, instead of being largely wasted and worse in a campaign of mutual circumvention, if not of mutual destruction.

III. Advantages to Employes. — Reason and experience lead to the conclusion that many important benefits must accrue from the trust system to the workmen employed in the industries affected.

(a) Steadiness of employment and certainty of pay. — It would be a very stupidly managed corporation which,

BENEFIT TO WAGE-EARNERS. 21

having practical control of an industry for the whole country, could not and would not so conduct its affairs as to keep its various plants in operation with a degree of constancy not approachable under conditions of free competition, and observation shows that this is in fact accomplished. Every well-informed person knows that the shutting down of a plant even for a short period causes a serious loss and manufacturers avoid such a step except under compulsion. Under trust methods production can be seasonably regulated to suit probable trade requirements, instead of alternately glutting the market with unneeded w T ares at unprofitable competitive prices, and then closing down factories and laying off the force to await consumption and renewed demand. If improved methods and the readjustments made necessary by the change to the trust system tend at first to displace a small percentage of w 7 age-earners, this tendency is offset by the increased demand for labor to supply the goods for new foreign markets opened by these great combinations of capital and aggressive energy.

(b) Better Wages. — Starvation wages to artisans are almost invariably due to low profits or no profits for proprietors. Mill owners who are prospering fairly well are, as a rule, glad to share that prosperity with the workmen who contribute to produce it. And this need not be mainly from humane motives, but simply because it is "good business." It is a chief indictment against the old system of free competition that it always and everywhere crowds down wages by abnormally crowding down prices and profits; and, what is still worse, that system creates a sort of chronic "submerged tenth" among manufacturers w 7 ho are always cutting prices to forces sales and realize needed cash, and is ever driving a certain percentage of employers into insolvency or enforced retirement from business through liquidation, which means in each case throwing the factory hands

22 l TRUSTS OR COMPETITION t

into idleness and their families into distress. Industrial history proves that the leading trades controlled by trusts have paid better and steadier wages than most others conducted under the system of free competition.

(c) Better Relations Between Labor and Capital. — Higher wages with steady employment will naturally remove nine-tenths of the usual causes of friction between employer and employed. But other influences are at work which make for peace and a good understanding under the new system of unified industries. Jealousies and rivalries between competing companies, which oftenspread to the men of each concern, are done away. Substantially all who work in a given line are under one employer, and will naturally feel a sense of solidarity, which is not possible where several employers are at swords-points with each other. Then in case of questions arising which need adjustment, committees of the workingmen have but one authority to confer with instead of a dozen or fifty, a fact which tends to assure prompt and reasonable action. One concern will not be tempted to hire away the best men of another or to tamper with the loyalty of expert employes. In one great and permanent organization, covering an entire industry, systems of insurance, profit-sharing, old age pensions, and other beneficial aids for workingmen are possible and probable, which would be wholly impracticable in smaller, weaker and scattered establishments.

As to apprentices. — This vexed problem can be more easily solved under the new system than under the old. Uniformity of practice and requirements can be applied which shall be just to each trade and fair to the lads who wish to enter the ranks of skilled labor.

IV. — Benefits to the Public. — If it were to be shown that the trust, or the system of unified industries, is necessarily and on the whole hostile to the public welfare, by that fact its doom would be sealed and a limit fixed to its duration. No important economic movement

AN INDUSTRIAL BALANCE WHEEL. 23

can be long-lived which plainly runs counter to the best interests of mankind. From this elemental fact springs the assurance that even if the worst fears of pessimists prove well-grounded, our present retrograde industrial revolution will be set aside like any other spurious reform and the normal order restored. But following are the reasons urged by advocates of the new departure for believing that it will bring to the masses of the people, as they say it cfearly does to the manufacturers and their workmen, advantage and not injury:

1. Banishment of War Methods. — If the evils of unrestrained competitive warfare heretofore outlined approach in magnitude the estimate given even by the stoutest defenders of that system, and if the trust movement will materially modify those evils without generating greater ones, then, to that extent, it stands justified as a change beneficial to society at large. To whatever extent industrial and commercial peace is made to supplant industrial and commercial w;ar, good and not evil is done. The accusers of the trust system concede that it does bring, coextensively with its scope, mitigation and often termination of competitive strife; but they charge that it produces countervailing wrongs which leave as a net result general injury and not benefit. This is denied, and will be considered further on.

2. A > T eeded Industrial Balance Wheel. — Besides harmonizing by unifying a given industry, the trust system, in proportion to its adoption and prevalence, provides a regulating and steadying force in the business life of the country which nothing else, not even the banking system, has been able to furnish, and which has incalculable value. Without its balance-wheel and governor the steam engine would tend to run away with itself and produce disaster. The industrial community under the reign of free competition is an engine without any regulating element. In prosperous times or periods of active demand manufacturing establishments multi-

U TRUSTS OR COMPETITION?

ply, built on the hopes and overconfldence of sanguine and often inexperienced men; producing capacity is increased absurdly beyond any possible average consumption; then comes the inevitable glut and depression; the aggregate demand is not sufficient to keep one-half the plants running, yet each holds out as long as possible rather than face the loss of closing down, thus aggravating by still further overproduction a trade condition already dangerous. The end comes in unprofitable prices, starvation wages, then failures of the weaker concerns, stress and strain for the stronger ones, loss of employment for workmen and extinguishment of their purchasing power, and last, if other conditions favor a crisis, the industrial breakdown sets the pace, gives the signal, and the community finds itself in the midst of that periodic insanity — a financial panic, with its terror and widespread ruin. This, in substance, is the undulating history of nearly every manufacturing community, though, of course, the circumstances infinitely vary and a dozen minor causes may contribute to the untoward result.