Fate of the middle classes

Front matter

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Contents

Chapter.

Introduction I, — The misfit of industry .

II. — The lesson of the crops 1 1 1. —Origin of panics IV. — The rise and fall of prices V. — The boom and slump of stocks VI. — Imperative need of economy in

Introduction

THE effect of trusts on the mass of mankind is the phase of this great development which most vitally concerns the public and many have essayed to tell what this effect will be. It is, however, impossible to arrive at any definite conclusion on the subject until we know what is the office for which this great institution was called into existence.

No great institution has ever developed among men until there was a task for it to perform, a task for which no previously existing institution was adequate.

Taking examples from politics, the institution feudalism, hateful as it was, came in time to gather the scattered fragments of civilization under baronial chiefs, and through their warfare and the conquests of chief over chiefs, became the stepping stone to monarchy.

Monarchy, repugnant as it is to our ideas of liberty, when hard pressed by the barons, appealed to the people, and thus took the first step to arouse in them the desire for self-government. Industry is developing along the same lines and its evolution just as surely tends to elevate the masses.

Each institution serves its day and continues to serve other generations until conditions arise which require some other and different service by a new institution.

Turning to industry we find the early guilds of craftsmen serving their time well, up to the eighteenth century, when the factory system arose.

Then there was a new division of labor and its relations to capital became different from any that had been known before. Under the factory system the trades unions arose among working men ; and during the century or more of their existence, these unions have had a remarkable development.

So far as capital is concerned, the factory system affected it by intensifying competition. An incidental effect was to hasten the accumulation of surplus products in the markets.

Increased competition at length reached the point where it was destructive to those engaged in the contest for trade. Finally there came a time when the stronger competitor crowded the weaker to the wall and the big fish swallowed the little fish. So consolidation came as the result of conflict, industrial peace as the natural consequence of industrial war.

All this is well understood, but with it there was a perfectly plain fact, looming as large as a mountain, which somehow escaped general notice. The hastening accumulation of surplus goods in the markets brought about stagnation every little while, and stagnation in business caused innumerable disorders, whose existence was not generally suspected until a financial panic emphasized the danger. During the past fifty years these periodical depressions have caused civilized countries more wrecks of fortune and more human suffering than all the wars mankind has engaged in during that time.

It is worth while to observe here that the rapid accumulation of surplus, which is at the bottom of all this trouble, came about through the division of labor in the factory system, which tremendously increased the productive power of the human race. The blessing of progress, which enriched the race and multiplied commerce by eight during the life of Queen Victoria, also conferred a devil's gift of over-production, which mocked the world as it made haste to get rich. If the world can now get rid of this devil's gift and hold fast to what it has gained by the factory system, an immense stride will have been taken in the progress of civilization.

Many futile efforts have been made to deal with the evil of over-production and it is clear that no existing institution is equal to the task. There is in existence no institution which has the information or the power necessary to prevent over-production. The division of labor is so wide and so complex that no one can discover a surplus until it has accumulated and its baneful effects are unavoidable. If the thing were known, there is no single agency or set of agencies sufficiently powerful to adjust production to consumption. Until we do make such an adjustment the frightful waste will go on and woe unspeakable will continue to follow in its wake.

Long observation has convinced the author of this book that machinery is in the making to perform the great service for which the whole business world is crying out.

During the life of this generation a great institution has been born out of the wrecks of competition. Dire necessity was the mother of this invention, which we call the trust. Humanity was ever in travail at the birth of its institutions and this one is no exception to the rule. We are not therefore to conclude that it is useless because it made trouble when it came into the world. This is the rocky road of progress. The stumbling blocks of the present are the stepping-stones to the future.

In the following chapters I undertake to show how the trust is a necessary step towards the federation of industry and the eventual establishment of an industrial clearing-house, which will approximately adjust production to consumption and save the world the immense loss and in-

FATE OF THE MIDDLE CLA88E8

calculable suffering that is now caused by overproduction.

Having reached this point we have gone far, but are still distant from the end of the great problem, and well might we pray, like Milton, for strength to reach the height of this great argument. For the certainty of the trust and the further prospect of its federation make the original question of its effect upon the mass of mankind one of tremendous importance. There never was an institution with immense possibilities for good, that did not carry with it immense capacity to damage or destroy.

Every great development in industry creates a new body of laws and complicates the task of government. Witness the factory acts, corporation laws and labor legislation, with their far-reaching effects upon the lives and pursuits of the people. Industry and government are indissolubly connected and they act and react on each other with every change in their structure.

Inevitably the consolidation and the federation of industries must affect the form and spirit of the government. If there be at any time an imperial industry in a democratic government, one or the other must change. They can not continue to shape the customs, thoughts, habits and lives of the people in different directions. Either the democratic influence of the governmental form and habit of thought will make for popular control of the consolidated industries, or the imperial influence of industry operating upon the minds of men, will bring government to the same condition.

But popular control of industry does not necessarily mean government ownership. On the contrary it seems more likely to take the form of a wide diffusion of shares among the people, and, perhaps, through co-operation or profitsharing a larger participation of the employees in the earnings of industry.

There is also the interesting question whether the man behind the gun in the great industries will become a mere cog in the vast machinery, or will, by their very magnitude and complication, be lifted to a higher plane of usefulness, demanding more liberal compensation along with larger ability and more careful training.

These are some of the important phases of the great problem discussed in the following pages.

Chapter I

Our wonderful productive methods waste enough to build homes for a million families a year.

IN order to learn what trusts are for, we must study the conditions which give rise to them. Corn was burned as fuel on the plains when people went hungry in cities. Coal miners were on a strike for living wages at a time when people in a neighboring city were shivering for lack of something to burn.

One morning in the winter of 1884, when the temperature was near zero, I saw in the railroad yards of Cincinnati, a delicate girl in a calico dress and cotton stockings, with only a thin shawl thrown over her shoulders, trying with blue and benumbed fingers to pull from the frozen mud a few scattered lumps of coal which had fallen from the cars. At the same time the miners of the Hocking Valley were out because the price of coal was so low that the operators could not pay them enough to keep families comfortable.

Bread and coal were drugs in the market while people went hungry and cold.

During the depression of that winter, following the panic of May, 1884, thousands of wage-earners were idle. In many cases it was enforced idleness. In others they were idle because the product of their labor was so low in price that they were willing to starve awhile rather than take the poor wages their employers could pay.

These troubles were alleged to have resulted from over-production. How was there too much coal when people were cold ? How was there too much corn when people were hungry? The answer to this question reveals the cause of depression in prices, stagnation in business, lockouts, strikes, and panics, which in twenty years have cost this country enough to build homes for all the people.

It is, in a word, the misfit of industry, the ill-adjusted production, which makes too much of one thing and too little of another, so that the country, lacking some things, has of other things a surplus unabsorbed, which, like undigested food, throws the whole system into disorder, and if long unabsorbed causes distress, In other words, it is a case of economic indigestion that afflicts the body politic at such times.

If the task of every factory and every laborer could be so adjusted that the product approximately balanced the demand for it, the prime cause of this disorder would be removed.

At present this can not be done, because no one knows the demand accurately and no one can control the supply. We only know there is a surplus when it is too late to avoid the consequences.

The effect of surplus is cumulative. A little surplus depresses the price of the whole product and a larger surplus causes depression in still greater proportion. Sometimes a ten per cent, surplus will cut down the price twenty per cent. When prices go down, work and wages are cut short. Purchasing power is diminished and then the market for other goods begins to feel the depression, which extends from one industry to another. They fall like ninepins, under the weight of each other. But the pendulum swings to and fro. After people have suffered and starved awhile, the surplus is painfully absorbed. Then prices go up, wages go up, and work is plentiful. We have good times once more, and everybody hails the era of prosperity.

But the said era has in it the seeds of death ; for it induces the same activity which causes surplus and the distressing results that follow it.

This is so much a matter of common knowledge that the figures of speech we use unwittingly attest its truth. People speak of a "wave" of prosperity, meaning, of course, that there are troughs between the waves.

What shall we say then? Is industry the cause of the trouble ? Not at all, but the haphazard way in which it works. We work like demons, all in the dark, until some bad symptom of the times opens our eyes to the fact that we are working to bad purpose.

The division of labor has brought about a condition where no human being can tell in advance what the demand will be and how large a supply will meet it.

Consequently, there is no check on industry until the market is overstocked. Then it is too late to avoid the consequences.

If it could have been known in time that the product was larger than the demand, the excess of labor might have been turned in some other direction, so that production on the whole would not have been curtailed, but would have been better adjusted to the needs of mankind.

The recent experience of the silk industry in the United States will illustrate this point. Mr. S. H. Ditchett, Editor of the Dry Goods Economist, describes it as follows in an article published by the New York Times on January 5, 1902 :

"The state of the silk industry is in marked contrast with that prevailing a year ago. For many months prior to the close of 1900 manufacturers confined their production chiefly to one class of fabric, thus making far more than the consumption could take care of. Had they been prudent enough or possessed sufficient capital to hold this product until the demand grew, matters would have been better. But each manufacturer being in a hurry to sell, prices declined until the cost of production was reached and sometimes underpassed. Gradually, however, matters improved. Manufacturers began to diversify their product, and the prosperous condition of the country created a liberal call for silks. The demand caught up with the supply, and in the spring the very goods which a few months before had been a drug on the market were almost unobtainable."

Having apparently learned this lesson, the silk manufacturers forgot it very soon, and within the next two years the same folly was repeated.

Another illustration is the depression among cotton mills which prevailed for several years as the result of a tremendous increase of production in the Southern States. In 1890 the mills of these States spun and wove 547,000 bales of cotton. In 1900 they turned 1,621,000 bales into goods. The number of spindles, which had been 561,000 in 1880, was 6,532,000 in 1900. Most of these mills were engaged in making coarse goods, in which competition is most strenuous.

It is not surprising that the cotton goods market was in a sensitive condition in the sum-

Q FATE OF THE MIDDLE CLASSES

mer of 1900, and when the Boxer outbreak in China cut off much of the Chinese demand for the product of Southern mills, depression ensued. This depression lasted several years. Its effect is already seen in the efforts of Southern mills to diversify products and make finer goods which will avoid the competition that bears most severely on the lower grades. But the important point here is that the excessive production of cheap cotton goods was not realized until a condition had been reached which made depression for several years a certainty.

One of the most familiar examples of misdirected productive energy is seen in the large crops of cotton. Within a few years the price has varied from five to seventeen cents as the result of increase or decrease in the world's supply. The 1903 crop of 10,045,000 bales brought more than the 1904 crop of 13,584,000 bales. In three years preceding the panic of 1893 the loss from low prices below the average of the preceding decade was $200,000,000.

This immense shrinkage in the value of the leading export product of the United States curtailed the purchasing power of the farming classes in the South, and affected the demand for goods made in other sections and sold in the Cotton States.

Thus we see how ill-adjusted production in one part of the country affects others.

That the same effects spread from nation to nation is equally apparent. The depression in Germany cut off so many customers for American goods that our exports perceptibly diminished. Dullness in Manchester mills affects the American cotton-grower.

Every publicist warns agricultural communities against the single-crop system, because it leads rapidly to the production of more than the market will take at remunerative prices. The Irish potato, for this reason, is called Sir Walter Raleigh's fatal gift to the Emerald Isle. Likewise the all-cotton system, for a while the rule with Southern planters, has been described as the cause of their difficulties. They have been constantly urged to diversify their crops in order to prevent over-production of cotton, with its consequent ruinous depression of price.

The cotton planter's experience illustrates clearly the idea of ill-adjusted production, which I have called the misfit of industry.

Here is a case typical of thousands : Farmer Jones has been planting corn, wheat, and other necessary supplies, including the provender for horses and mules. His crop of cotton brings a cash surplus for the purchase of such articles as he can not produce. He has made a corn crop at a cost of about 40 cents per bushel and has no transportation charges to pay on it except the cost of hauling from field to crib.

Other food crops are produced with equal economy.

His cotton sells for ten cents and he concludes it will pay to put most of his land in cotton, and if necessary, buy corn.

To force his land he buys fertilizer and mules on credit. The high price of cotton induces a majority of Southern farmers to increase acreage at the same time and the result is an immense crop. The next fall the price of cotton falls to six cents or even five cents. All at once Farmer Jones wakes up to the fact that his cotton will barely bring enough to pay his fertilizer notes and the notes he gave for horses and mules. He is lucky if he does not have to give up the live stock.

In the meantime little corn has been planted ; there is not enough to feed the people and the farm animals. The same is true of other food crops. That winter the farmer must buy corn and provisions to tide him over until he can make another crop. His heavy loss on cotton has wiped out his cash capital and he has to buy Western corn on credit, after it has been hauled a thousand miles and freight has been paid in proportion. It costs him $1.00 a bushel and he must haul it from town. He has a similar experience with hay and pork.

There we have a clear case of ill-adjusted production by one individual. Any one can see

TEE MISFIT OF INDUSTRY 9

what is the cause of his trouble. This has been the experience of a million farmers at one time in the Cotton States. Indeed, it may almost be said to have been the experience of all, for the cotton craze has many times taken a very large majority of Southern farmers in its toils, and the low price affected all, the few who planted little as well as the many who planted much.

Exactly the same experience has come to wheat growers. It is the experience of all one-crop farmers sooner or later.

When the individual farmer is in distress, the whole agricultural population (the sum of of the distressed units) is in equal trouble. The aggregate loss and the total suffering produce a condition of depression which can be imagined better than described. Suffice it to say that in wide reaches of Southern territory the farming masses, in the year following such an experience, have been forced to do without meat and live on bread and syrup until they could make another crop.

When the agricultural class, constituting three- fourths of the population, is in this condition, trade languishes in the Cotton States. All industries which depend upon the farmer to purchase their goods must temporarily reduce sales or sell on long credit, either of which alternatives will impair the financial strength and reduce the purchasing power of the people engaged in these dependent industries. In the years 1900 to 1903 the crops of cotton were not greater than the world's demand, prices were good, and food crops on the same farms were not neglected. Consequently Southern farmers have been more prosperous than ever before. But over-production in 1904 made a large crop sell for less than the small crop of 1903.

What is so clearly seen in the farmer's case is equally true of the manufacturer. Instances already mentioned show that it is true in the silk and cotton industries.

The difficulty in avoiding this ill-adjusted production is in the multiplicity of competing establishments, no one of which knows just what the other is doing.

An amusing instance of this occurs when the farmers meet in convention and solemnly resolve to plant less cotton. Then Farmer Jones, returning to his home, goes into executive session with himself and resolves that as the acreage is to be cut down, the crop will be small and the price high. Consequently, he decides that now is the time to plant cotton. The majority of the farmers, who can not go to the convention, read about it in the newspapers and come to the same conclusion. The result is that an im-

THE MISFIT OF INDUSTRY n

mense crop is planted. In 1905 the farmers were better organized and the cotton acreage was considerably reduced, but not to the extent the resolutions called for.

Human nature works in the same way among manufacturers, except that production is stimulated to even greater excesses by the more strenuous competition which causes the manufacturer to strain his resources in the effort to outdo competitors. Still other pressure moves him. He must keep his machinery in motion or it will deteriorate. He must also keep his labor together. To accomplish these objects he often runs at a loss.

Conditions are different where all the establishments of an industry are under common control. In the first place, the controlling parties know what all the mills are doing and know something about the extent of the demand. If certain grades and styles are overdone, they will quickly change to other fabrics or articles.

Attention is here called to the fact that the farmer, by growing too much cotton, was prevented from growing the quantity of breadstuffs he needed. He suffered from two effects of that policy, one effect being the depression in the price of cotton and the other a corresponding scarcity of food and an increase of its price. There we see the cause of the situation described at the beginning of this chapter.

PIG IRON

In 1890 the production of pig iron increased from 7,603,642 to 9,202,703 tons and for two years remained considerably above that of 1889. The price, which was $18.40 in 1890, dropped to $17.52 in 1891, $15.75 in 1892, and $14.52 in 1893. The average was about $2.50 per ton below that of 1890 and the difference on the production of the United States in these years amounted in round numbers to $60,000,000. To that extent the purchasing power of the iron makers was reduced.

COAL

The course of production and price in the bituminous coal industry is a striking illustration of the manner in Which the unregulated energies of production outdo themselves and work their own hurt.

In 1880 and 1881 in good times the price of coal was $3.75. In those two years the production rose from 33 million to 48 million tons. Then the price dropped to $3.50. Production grew to 60 millions in 1883, 68 millions in 1884, and 73 millions in 1885. The price dropped and kept on dropping. By 1886 it was $2.10. That year production dropped off 12^ per cent., and with the revival of business the price bounded back to $3.45.

This sensational rise in price had the same effect on mine operators that ten cent cotton has on planters. They pushed production to the limit of their ability, and the next year, 1888, it went up to 79 millions. The price dropped from $3.45 to $2.60, where it remained for three years, held there by enormously increasing production, which eventually reduced it to $2.00 in 1895 and $1.60 in 1898. It did not get back to $2.50 until 1900.

Between the price level of the prosperous year

1887 and the average prices of the period from

1888 to 1893, there was an average difference of 90 cents a ton, which on the average product amounted to about 500 million dollars.

The tendency to over-production is increased by progress and invention. Every new labor-saving machine turns into the labor market a large number of workers liberated from their former drudgery and ready to compete with other laborers in new occupations of a kindred nature, where their experience will be of most value.

This constantly augmented supply of labor, increasing the intensity of competition, is met by a constantly augmented supply of capital, ready to join it in new enterprises. As the rate of interest on old securities is constantly falling, there is every inducement to capital to seek new employment.

The new enterprise, so set on foot by labor and capital released from other industries, is better equipped with up-to-date machinery than those which were built in preceding years, and other things being equal, has an advantage in economy of production. Thus the tendency is to make new competition constantly more formidable to established enterprises. It becomes necessary for the manufacturer to charge off annually, in addition to the usual percentage for wear and tear of machinery and equipment, a percentage to meet the expense of the inevitable displacement of old machines with new ones of a better type, often before the machine has been much worn by use. The old loom can not compete with the automatic, self-tending loom, which reduces the labor cost so materially.

So there is strong temptation to bring into existence more factories than the consumption will support. The new may do well, while the old run on at a loss rather than abandon the investment. This increases surplus and demoralizes the market.

The ill-adjusted production by which so much of the world's energy has been wasted is the inevitable result of the division of labor.

The difference between the blind energy of numerous and widely separated competitors and the same units organized and combined for concerted action is the difference between a mob and an army.

The effectiveness and economy of energy in the army is no greater than it is in the army of industry, which combines in a few compact organizations all the establishments of that line. For example, we have the army of iron and steel producers, composed of several great combinations which correspond to army corps.

The early history of consolidated industries is not altogether peaceful. Their path is not strewn with roses. Until some kind of federation takes place, destructive warfare is always a possibility for them.

In proportion as the conflict of armies is more deadly and destructive than the incoherent out^ break of mobs, so the conflict of industrial combinations is more destructive than ordinary competition. When the conflicts become international, they will be embittered by national antipathies and sustained by governmental policy.

The contemplation of industrial warfare under these conditions will tend to make less frequent such destructive conflicts. But when they do come the waste of wealth will be frightful, and will by its consequent suffering provoke such a protest from the toilers of the earth that eventually a truce will be declared.

It is to that ultimate stage of industrial de-

IQ FATE OF THE MIDDLE CLASSES

velopment that we must look for the best results of consolidation, for when industrial warfare in nations has been succeeded by worse conflicts between them, and these in turn have given place to international co-operation, with a free and fair exchange of the best fruits of earth and the best products of toil, we shall have reached an era in which the murder of men by wholesale will be no longer tolerated and the unspeakable horrors of war will give place to generous emulation in the helpful works of industry.

At present this great end seems very far in the future. The great combinations are at present, as a whole, unfit for the great office their successors are destined to perform for the human race. Overcapitalization, fraud, mismanagement, extortion, and oppression are so common among them that they do not enjoy or deserve the confidence of the consumer or the investing public. But time will cure these evils, and when the new machinery of production has been perfected by experience and adversity, the world will use it well — as well as it has used other machinery in the past.

Chapter II THE LESSON OF THE CROPS

Let us pay close attention where we find nature teaching by example.

TN this spirit let us look at two of the great- * est facts in the world, corn and cotton.

Very frequently it happens, as in the cotton industry, that large and small crops bring approximately the same, and the extra outlay of energy and capital in making the large crop is entirely wasted.

It was a common saying in the South that the world had just so much to pay for American cotton and the farmer got the same whether he produced six, seven, or nine million bales. This, of course, is not an exact truth, for the consumption and the purchasing power of the world are constantly changing, and the price itself, to some extent affects the possible consumption. Nevertheless it is obvious that when the crop of 1904, being about a third greater than the crop of 1903, brought actually a smaller aggregate sum, the world did not need the quantity tiiat was produced in 1904 and a large proportion of the labor and capital expended on its production was wasted. The same is true of the crop of 1894.

First we will study the evidence of corn :

CORN CROPS OF 25 YEARS.

Crops in

Value in

Year

Millions of

Millions of

Bnshels

Dollars

1,717

1,194

1,617

1,551

1,795

1,936

1,665

1,456

1,987

2,112

1,489