Anthracite; an instance of natural resource monopoly

Front matter

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CHAPTER 1 Monopoly on Trial page

1. The Nature of Monopoly 17

2. Anthracite Ownership Means Monopoly . . .21

3. Monopoly Through Concentration of Ownership . 23

4. Competition, the Life of Trade 24

5. The Growth of Co-operation and Combination . . 26

6. Will Monopoly Work? 29

7. Ownership as Opportunity 31

8. The Fruits of Ownership 33

9. Every System Must Produce Results . . . .36 10. Has Monopoly Succeeded? 33

CHAPTER 2 The Anthracite Problem

1. The Parties at Interest 42

2. The Use of Anthracite . . . . . . .43

3. The Supply of Anthracite 46

4. The Basis for Anthracite Monopoly .... 49

5. Unsuccessful Combinations 50

6. An Effective Anthracite Combination . . .54

7. Railroad Unity . . . . . . .58

8. Coal-Mine Control 60

9. The Anthracite Problem 63

CHAPTER 3 The Consumer and Anthracite Prices

1. The Consumer's Point of View . . ... .65

2. The Status of the Consumer 66

3. The Rights of Consumers 69

4. The Obligations of Consumers 70

CONTENTS

PAGE

5. Reasonable Prices 72

6. Methods of Making Prices 74

7. Business for Profits 76

8. Business for Service 79

9. Prices and Earning Power 82

10. The Monopoly Principle and Anthracite ... 84

11. Recent Movements of Anthracite Prices ... 85

12. The Cost of Producing Anthracite . . . . 87

13. The Cost of Getting Coal to Market .... 92

14. A Better Explanation 93

15. What Should the Consumer Pay for Anthracite? . 94

CHAPTER 4 The Wages of the Anthracite Workers

1. The Economic Status of Anthracite Labor . .97

2. Anthracite Risks 103

3. Anthracite Wages and Wages in other Industries . 107

4. Anthracite Wages and the Labor Market . . .110

5. The Adequacy of Anthracite Wages . . . .112

6. The Anthracite Wage Scale 115

7. The Anthracite Wage and Physical Efficiency . .118

8. The Anthracite Wage as a Business Proposition . 128

9. The Anti-Social Nature of the Anthracite Wage . 137

10. The Anthracite Wage and the Increased Cost of

Living 141

11. A Fair Anthracite Wage 152

CHAPTER 5 The Profits of the Operators

1. The Era of Small Profits 153

2. Making Anthracite Profitable 156

3. Anthracite Profits and Railroad Profits . . .161

4. Anthracite Prosperity 167

5. Are Anthracite Profits too High? . . . .170

CONTENTS 7

CHAPTER 6 Concrete Example — The Conflict of 1912 page

1. The Apparent Advantage of the Operators . .178

2. A Typical Situation 181

3. The Consumer in 1912 184

4. The Worker in 1912 188

5. The Operators in 1912 190

6. Some Lessons From the 1912 Experience . . .194

CHAPTER 7 An Object Lesson in Monopoly

1. The Anthracite Lesson

2. The Losers and the Gainers from Monopoly

3. The Larger Menace of Monopoly

4. The Economic Effects of Monopoly

5. The Social Effects of Monopoly .

6. Monopoly Denies Opportunity

7. The Political Effects of Monopoly

8. Anthracite and the Government .

9. The Enemy Within the Gates

CHAPTER 8 The Future of Anthracite

1. The Conflicting Anthracite Interests

2. The Coal Owners Would Stand Pat

3. The Future for the Workers .

4. The Consumers and the Future .

5. Winners and Losers

227 230 231 235 241

Appendix

Shipments of Anthracite ....

Employees, Working Time and Tonnage

. 243 . 244

Preface

During these years of spectacular military conflict, it is easy to forget the increasing economic turmoil that is interwoven with present-day existence. Economic issues arise on every hand. Capital and labor, wages, the cost of living, unemployment — these things are a source j of endless social disruption.

Economic issues may be considered in the large. They possess equal potency in individual cases, just as the drop of water contains the qualities of the ocean. Furthermore, the individual instance is more easily studied, its characteristics are more readily comprehended, and the proper method of treatment more safely prescribed. Moreover, it is highly probable that the deductions which may be drawn from the economic conditions surrounding one specific problem are in large measure applicable to the similar problems elsewhere.

Some satisfactory method of studying economic problems must be devised. Dogma will not stand the test of experiment. Preconceptions and tradition fall by the wayside. Meanwhile the world must know!

Knowledge is the only weapon that will ever overcome the host of difficulties arising out of the stress of modern life. Knowledge must therefore be the keynote of social endeavor.

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10 PREFACE

Knowledge must be spread through the land. At one time it will be propagated by means of a broad hypothesis like that of Darwin or Marx. At another, many persons, working each in his own field, will produce atoms of information, which, aggregated, will constitute the basis for still further advance.

This little book is not a general study. It does not aim to set forth any new hypotheses. It aims to explain some of the more important phases of modern economic life as they apply to one industry, localized in one corner of one state. It is written with the hope that the propositions that hold true for the anthracite industry may be found to hold, with equal truth, for other natural resource monopolies.

A BRIEF SUMMARY OF THE ARGUMENT

Chapter 1 . Monopoly on Trial

Monopoly is on trial in the United States. The early colonists established a system of property ownership under which the natural resources — fertile land, timber, minerals, water power, and all of the gifts of nature except harbors and navigable waterways — might be owned by private individuals. Under the system of private ownership of natural resources most of the valuable parts of the earth's surface have passed into the hands of a comparatively small number of people. The owners, by virtue of their ownership of these particularly desirable parts of the earth's surface, are enabled to collect returns for the use of their properties.

The system of private ownership of natural resources may succeed or it may fail. Its fate depends, in the long run, on the effect which it has on the well-being of the masses of mankind. Three centuries of property relations, under which any man who could buy it might place a "no trespassing' ' sign upon as much of the earth as he could afford to buy, has made a few people the owners of the earth.

Chapter 2. The Anthracite Problem

The anthracite coal fields present an excellent illustration of the ultimate effects of the private

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ownership of natural resources. The anthracite product has a broad, general market; the anthracite field is limited in extent and localized in one small area, the ownership of the field has been concentrated in a very few hands. Millions of consumers depend upon anthracite for fuel; hundreds of thousands of families depend upon the industry for a livelihood. The way in which the consumers and the workers fare at the hands of this private resource monopoly may give many a valuable hint regarding the way in which consumers and workers may expect to fare at the hands of other natural resource monopolies.

Chapter S. The Consumer and Anthracite Prices

The consumer is called upon to pay a price for coal which represents, not the cost of producing the coal, but a monopoly price based on the principle of "all that the traffic will bear." The monopolist, in other words, charges all that he can for his product, his aim being, not low prices but high profits. When the cost of producing anthracite increases, the consumer is promptly saddled with an additional burden. The facts show clearly that the consumer of anthracite pays all of the costs of production plus a handsome monopoly profit to the owners of the resource.

Chapter 4- The Wages of the Anthracite Workers

The anthracite workers fare no better than the workers in any other large American industry giving employment to men of a similar grade of skill and intelligence. Indeed, when the risks involved in mining are taken into account, the anthracite miner is often worse paid than employees doing similar work in other industries. Many of the workers in the anthracite field receive a wage which will not buy a decent living for a family of ordinary size. Furthermore, the wage of the miners in recent years has failed to rise as rapidly as the cost of living. Consequently the income will not go as far now as it did in 1903. Certainly the miners are receiving no share of the heavy monopoly toll taken from the consumer.

Chapter 5. The Profits of the Operators

Meanwhile the owners of the anthracite region have been making profits that are generous in the extreme. Measured in terms of earnings, of dividends, or of surpluses, the anthracite interests are reaping the full benefits of their monopoly control. The prosperity of the anthracite owners has been particularly noticeable since the formation of the effective combination of 1898.

Chapter 6. A Concrete Example — The Conflict of 1912

The anthracite situation is well illustrated by the events surrounding the strike of 1912. The workers gained a net increase of about five per cent in wages; this raised the labor costs of the coal slightly, and the operators promptly added twenty-five cents to the price of each ton. The increase in wages was used as a pretext to saddle additional burdens on the consumers. The operators made millions by the transaction. This situation brought out clearly the rule that seems to hold true of this natural resource monopoly — the workers* gains are slight, the operators' gains are immense and the consumers foot the bill.

Chapter 7. An Object Lesson in Monopoly

The extra burdens on the consumer, the indifferent position of the worker and the huge returns to those who control the monopoly, seem to represent with some degree of accuracy the situation that the American people will face with all of the natural resource monopolies. The manifold effects of the anthracite monopoly power upon the consumers, the workers, and the economic, social and political organizations of the community are due, not to the fact that the monopolists control anthracite, but to the fact that they have a monopoly. Wherever it appears, monopoly leads to certain well-defined ends that are evidently in conflict with the best interests of society.

Chapter 8. The Future of Anthracite

The consumers, the workers and the owners have an interest in the anthracite fields. So long as the private monopoly of natural resources is permitted, the consumers will be called upon to foot the bill. Under the present system of natural resource ownership they get their fuel at an unnecessarily ^ high figure. The worker need expect no better treatment from a monopolized industry than he expects from a highly competitive industry. Indeed, where a monopoly is powerful enough to control the political machinery as well as the industrial machinery, the worker may fare worse under a monopolized than he would fare under a competitive industry. The real gainers under the present system of private monopoly of natural resources are the monopolists themselves. They have nothing to lose and a very great deal to win from the continuance of the present system of resource ownership. Of the three parties at interest, the monopolists and they alone will be benefited economically by a continuance of the present system in the anthracite coal fields.

Chapter 1 Monopoly On Trial

1. The Nature of Monopoly

The owners of the anthracite coal fields are monopolists in two senses: First, they are monopolists because they own the coal-bearing land. Second, they are monopolists because they have concentrated the ownership of the important anthracite deposits in a comparatively few hands.

Economists have agreed to define monopoly as a control sufficiently great to fix a price above the competitive level. Thus, for example, if five men are spinning cotton yarn and selling their product in the same market, each one of the men will naturally try to out-do the other, either by furnishing a superior quality or by selling at a lower price. The price of the yarn under this free competition will be lowered to a point at which the spinner who is producing at the greatest cost is getting a return for —

1. The cost of running the business,

including raw materials, tools, housing and the like.

2. Wages for himself as a worker.

3. A fair profit on his investment and for

the risk which he incurs in carrying on the business.

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A price including these items is called a "cost price' ' because it represents the actual costs of production, including a fair profit.

Free competition makes cost prices. The existence of cost prices is proof of the freedom of competition.

One of the five yarn spinners, who is producing more cheaply than his fellows, may decide to lower prices. He has certain efficiency devices that enable him to do this and at the same time to secure a reasonable profit on his business. Prices go down, and the four competitors who are spinning yarn under greater costs can no longer earn profits. If the situation continues, the competitors will be forced out of business, since prices cannot exist permanently below a figure representing the cost of production.

The five spinners, instead of yielding to the pressure of competition, decide to combine in the interest of larger profits. One of them is a clever business man, who persuades his fellow producers to join with him and advance the price of yarn 20 per cent. The yarn makers now are receiving a return for —

1. The cost of running the business.

2. Wages or returns for management.

3. Profits on the investment.

4. Monopoly power.

This fourth element is the result of the agreement whereby the producers of yarn advance the price above the cost basis.

Monopoly power is the power to establish prices above a cost or competitive basis. Any advantage that enables a person to do this is a monopoly advantage or, as it has recently been called, a special privilege.

Conceived in these terms, the mere ownership of a natural resource, limited in amount and subject to a demand greater than the supply, is tantamount to monopoly, because, since there is not enough of the resource to go around, those who do hold it are able to charge an extra or monopoly price for it.

Land ownership is perhaps the greatest single monopoly with which society must deal. There is no sense of the word in which the private ownership of land is not monopolistic.

Were there enough land for everyone, and some to spare, land ownership would be in no sense a monopoly. Other natural gifts like air and sunshine exist in such quantities that all people have an ample supply of them. Could air or sunlight be privately owned and limited in amount, they would afford a monopoly power as great as that of land. The owners would be able to collect huge profits from those who wished to enjoy air and sunshine. The monopoly of air and sunshine has proved impossible hitherto. No one has yet devised a scheme for fencing them in and putting a price on them.

Land can be fenced in. Unlike air and sunshine, there is no difficulty in fixing the boundaries of land ownership.

Every community in the world, except a newly settled wilderness like central Canada today, faces the land problem. In every community there are more people who want a piece of land than there are pieces of land to go around. Hence, the mere title to a piece of land enables the owner to put a price on it. He may own a sand bar near a growing summer resort, or a farm in a section which has been tapped by a railroad line. He need never have seen the land, much less improved it. His ownership gives him monopoly power.

There is no cost attached to a piece of unimproved land. The owner has done no work upon it. He has taken it just as nature gave it. Nevertheless, after he becomes the owner, if he finds that the land contains some mineral or is in some other way desirable, he may secure a very high price for the land, because he is the owner.

The monopoly power of land ownership may be seen in a growing city. Near the commercial center lies a vacant lot. Each year the owner of that lot learns, from the assessor's books and from the sales of neighboring properties, that his land has increased $100 in value. His taxes and the interest on his investment are but $50 a year, so that the rise in value gives him a clear $50 monopoly profit. One day a storekeeper offers to rent this lot for twenty years and put a store on it. The owner consents, and for the granting of that privilege, he receives $1,000 a year. From this

$1,000 he deducts interest and taxes. The remainder is monopoly profits.

2. Anthracite Ownership Means Monopoly

All returns which come from land, because of its location or because of its natural fertility in soil, minerals or other resources, are monopoly returns. Much of the return on anthracite coal falls in this class.

The supply of anthracite coal in the United States is very limited. The demand for it is widespread. The owner of anthracite coal land can set a price that will represent the difference between competitive conditions and the consolidated ownership of the anthracite coal field.

So absolute is the monopoly power that is inherent in the ownership of a natural resource, limited in supply, that the owner of a piece of anthracite coal land may receive, for his bare ownership, a price in proportion to the amount of coal that his land contains. This is true without any reference to the conditions under which the land was obtained.

Thus, for example, a man has gone into the mountains and bought a tract of cleared land. The timber has been cut off; the hills are rugged and precipitous; the valleys narrow and unfertile. Some day the land will be reforested. Meanwhile it lies fallow, a prey to the periodic forest fires that sweep off the undergrowth and prevent the development of a good growth of timber. This land sells for 20 cents an acre.

The owner feels that he has a bargain — $1,000 for 5,000 acres of land. He builds a hunting lodge, posts "No trespassing' ' signs, and spends a few days winter and summer hunting and fishing. To him the land would have been cheap at twice the price.

A geologist, in making a survey of the region, discovers anthracite on the tract. There are two veins — one thick and fine; the other thin and poor. They are both workable, however.

The nearest railroad is four miles from the 5,000 acre tract. The land has not changed in its makeup for a million years, and yet, no sooner is the discovery of this coal made known than the owner of the hunting lodge is asking $100 an acre for land that was cheap at 20 cents only yesterday.

What is the explanation? Under this land there lies a vein of coal. People want it. They are willing to pay well for it, and the land owner, because he is the owner, is able to sell for $500,000 a tract that cost him $1,000. The difference in value represents the monopoly power that attaches to the ownership of a resource, limited in amount|and generally desired by the community.

The owner of the 5,000 acre tract may decide not to sell his land. Instead, he may make a stipulation that for each ton of coal dug from the mine he is to receive 10 cents. From that time on, and as long as the property is producing coal, this owner of 20-cent hunting lands will be receiving an income greater or less in proportion to the amount of coal mined, so long as the property is productive. This royalty privilege is another phase of the monopoly power of ownership.

The owner, for no reason other than his ownership, is able to share in the products of the land to which he holds title.

The point is emphasized because of its profound significance. In all economic discussions the place of ownership must be clearly understood. Wherever there are two pieces of land wanted by three men, the owner of each piece of land will be able to put a price on his piece.

Anthracite coal land falls in this monopoly class. There are only a few acres of such land. These few acres are wanted by a large number of people. The excess of demand over supply enables the owners of the anthracite coal land to set a price on it and receive a monopoly return for their ownership.

3. Monopoly through Concentration of Ownership

Anthracite land owners have monopoly power because they own the anthracite land. They have clinched this monopoly power by concentrating the ownership of the many acres of anthracite land in the hands of a very few people. 1

The continent is so arranged geologically that for every acre of anthracite land there are 4,000,- 000 acres of land that do not contain anthracite. This geologic fact places great monopoly power in the hands of every anthracite owner. Add to th is the successful business ventures that

1 A statement of the extent of this monopoly will be found in Chapter 2.

have culminated in the concentration of the anthracite acres under the control of a very small group of interests, and the monopoly picture is complete.

The fact that there is only one acre of anthracite land for each 4,000,000 acres of other land means that the chances for competition are comparatively small. Concentrate the ownership of all the anthracite acres in a few hands, and the possibility of competition vanishes.

4- Competition, the Life of Trade

At this point the reader will infer very readily that the complete monopoly of a natural resource is bad. But is it ?

The people of the United States are very eager to conclude that a thing is either "good" or "bad." In the case of monopoly, they have been even more than anxious to attach words of opprobrium and reproach to any business organization which displayed monopoly characteristics. A long line of anti-trust statutes which have been passed during thirty years furnish abundant evidence of the popular conviction that the trust was "bad" and "wrong." Farmers and small business men united their influences, and state and national legislatures alike loaded the statute books with laws directed against certain forms of monopoly power.

The trust was fought from all angles. Rival businesses were organized. There was, on the one hand, the trust ; on the other hand, the anti-trust

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organization, which in its turn became virtually a trust. Yet, strangely enough, a certain amount of public approval attached to the anti-trust trust because it was in a position of opposition to the original trust. Both might be, and probably were, charging similar prices. Both organizations might be reaping huge returns through their ownership of natural resources, patents or other special privileges. Yet the mere fact that the first organization represented the trust, while the second organization opposed it, gave some color to the demand of the second organization for public confidence and patronage.

The opposition to the trust was founded on the axiom that competition is the life of trade. The phrase is an old one. In the eighteenth century it was revived and given widespread currency by the Physiocrats and their followers.

The axiom that ' ' competition is the life of trade ' ' was accepted as the great and universal law of the economic world. Economists promulgated it and business men did their best to live up to it. For generations competition was venerated with a childlike confidence by the commercial intelligence of the Western World.

Finally a change came. Experience is an effective teacher. Men learned by degrees that competition did not pay. Producers waged cut-throat wars with one another, until experience taught them two things : First, competition may ruin the successful as well as the unsuccessful competitor. Second, whoever won, the consumer, and not the producer, derived the benefits under the competitive regime.

Experience finally convinced the business world that competition was dangerous in the extreme — almost as dangerous to the successful as to the unsuccessful competitor. Many a successful man, at the end of a price war, has gazed around him at the havoc wrought by the struggle, has estimated the cost in health and effort, and has then wondered whether, after all, it really paid. Certainly it did not pay, in business returns, even for him. It had ruined the man who lost.

The consumer liked competition because it did pay. A price war meant cheap goods. Competition spelled plenty for the housewife. Therefore the consuming public was an ardent supporter of the competitive regime.

5. The Growth of Co-operation and Combination

The manifold experiences of business triumphs and failures combined with a number of other factors to convince the producer that while competition might be the life of low prices, it was the death of profits. He sat down with a fellow manufacturer at a quiet luncheon and whispered this idea to him across the table. The other nodded intelligently. He, too, had reached the same conclusion, though he had never dared to breathe a word concerning it. The little luncheon gave place to a larger one, out of which grew a manufacturers' association, a gentlemen's agreement, a trust or a combination. The idea spread like wildfire and producers began to take care of themselves through the sure channels of trade co-operation and organization.

The different forms of co-operation were variously effective. The association with its dinners and conventions gave men in the same line of business a chance to form speaking acquaintances with each other. The gentlemen's agreement bound producers loosely together. They agreed to fix prices ; to sell only certain lines of goods ; to sell only within a certain territory or only under certain conditions. The gentlemen's agreement was unenforceable at law, but the erstwhile competitors had seen a great light. They realized the superiority of co-operation over competition and kept well in line.

The trust and the combination were formal and legal. Great funds of capital were aggregated under the direction of one group of men. Entire industries were brought under the control of one corporation. Even though there was no monopoly in theory, there was no longer active competition in practice. Thus, through a series of " get-together' ' devices, the era of competition gave place to the era of co-operation and combination.

With the cessation of competition, the consumers came face to face with the pressing necessity of taking care of themselves. Prices were no longer fixed on a competitive basis. Some prices rose mightily. Others failed to decrease in proportion to the greater efficiency of production. The consumers had depended for price regulation on a competitive war between producers, and the producers had declared a more or less permanent peace.

The transition from competition to combination led to a new definition of monopoly profits. They could be estimated no longer on the basis of a competitive price level, because there was no competitive price level. Some substitute for the competitive price level was necessary. The one most easy to apply was the "cost of production.' ' Therefore, at the present time a monopoly profit is defined as a profit in excess of a fair return on the actual costs of conducting the business.

The difference between a competitive price level and a cost price level is theoretically very small. Competitors were supposed, by their competition, to reduce prices to a point where they yielded only a fair or reasonable profit. Those who advocate the fixing of prices on the basis of cost insist that the theory behind competition be made the basis for regulation. Whenever a price is maintained at a point that yields more than a fair return in the actual cost of conducting a business, then a monopoly profit exists. This definition does not allow a business to first capitalize its earnings and then allege the charges on this capitalization as one of the costs of its business. Cost prices are figured on the physical valuation or cost of replacement of the physical property of the business.

Whatever their form, industries which exact more than a fair profit on the cost of production are in possession of monopoly advantage. Whereever monopoly power is being exercised there is an opportunity for a reduction of the cost of living through a reduction of monopoly prices to a cost level.

6. Will Monopoly Work?

Whatever may be the theory regarding the desirability of competition and the menace of monopoly, the fact is that the business world is being rapidly transformed from a competitive to a co-operative basis. Though this co-operation does not always involve monopoly, it does involve a considerable decrease in the amount of free competition.

Furthermore, in a scientific age men are not content to accept any dogmatic formula without inquiring into its validity. Our forefathers said, 1 ' Competition is the life of trade. ' ' Their descendants added, "Monopoly is a public menace/ ' The students of the present generation, surveying the competitive regime of the early nineteenth century and the monopolistic regime of the late nineteenth century, may well ask a different kind of a question. Monopoly is not a matter of figures, but of economics. It is neither good nor bad. The sole question that must be raised in regard to monopoly is its practicability or its impracticability. In short, "Will monopoly work?"

In 1850, before any man had witnessed the remarkable industrial developments of the last forty years, the ordinary student, as well as the ordinary business man, would have said unreservedly that competition is a good thing. He might have added, "It is a good thing because it works." The experiences of the later nineteenth century showed that however good a thing competition might be, there was a better thing, namely, co-operation. The business world did not work this statement out theoretically. It had tried competition. It had grown accustomed to competition. With this background of experience, the business world experimented with co-operation. The latter form of organization appeared more advantageous than the former, and the business world cried: "Competition is dead — -long live co-operation and combination."