Part 5

The causes of this rapid industrial development are enumerated by the census report as five in number: the agricultural resources of the country, the mineral resources, the highly developed transportation facilities, the freedom of trade between states and territories, and the absence of inherited and over-conservative ideas We have already considered the wonderful agricultural and mineral resources of the country, and have seen how greatly the American people are indebted for their industrial prosperity to the bounty of nature. The 31 magnificent system of inland waterways, comprising over 18,000 miles of navigable rivers, and the railroad system, with over 200,000 miles of track, facilitate a rapid and cheap exchange of products. The enormous domestic market afforded the American manufacturer, larger in consuming capacity than that in any other country in the world, has permitted the economic production of goods on a large scale and a consequent reduction in cost. Foreigners have often asked the question why, if freedom from tariffs and trade restraints has been a good thing within the United States, freedom of trade with other countries would not prove equally advantageous. In answer to this, James G. Blaine, formerly Secretary of State, wrote, “It is the enjoyment of free trade and protection at the same time which has contributed to the unexampled development and marvelous prosperity of the United States.” Finally, the absence of tradition and of over-conservative ideas handed down from a former and more primitive system of industry has been a great boon. There have been developed traits of energy, inventiveness, and ingenuity, which, aided by a universal system of compulsory free education, have contributed greatly to the material progress of the people.

The system under which the production of wealth in a modern industrial nation is carried on is usually called the factory system, and to this we must now turn, for it is in the factory that the utilization of machinery and capital finds its greatest development. The term is not easily defined, but we may adopt the description given by the late Carroll D. Wright: “A factory is an establishment where several workmen are collected for the purpose of obtaining greater and cheaper conveniences of labor than they could procure in their own homes, for producing results by their combined efforts which they could not accomplish separately, and for preventing the loss occasioned by carrying articles from place to place during the several necessary 32 processes to complete their manufacture.” The essential elements in such a system are the minute division of labor, the large use of labor-saving machinery, the increasing specialization and localization of industry, and the concentration of production in fewer and larger establishments with consequent increase of product and reduction of cost.

The division of labor may mean either the separation of occupation or the division of a process into minute parts. An illustration of separation of occupations may be found in the manufacture of a carriage: one factory produces hubs, another wheels, a third axles, a fourth the body, a fifth manufactures upholstery, a sixth the hardware, and a seventh (the carriage factory, so-called) assembles the parts and places the completed product on the market in the form of a carriage.

As an example of an extreme division of labor the slaughtering and meat-packing industry offers a classical example, though in this case the use of complex machinery is not involved. “It would be difficult,” writes Professor Commons,[2] “to find another industry where division of labor has been so ingeniously and microscopically worked out. The animal has been surveyed and laid off like a map; and the men have been classified in over thirty specialties and twenty rates of pay, from 16 cents to 50 cents an hour. The 50-cent man is restricted to using the knife on the most delicate parts of the hide (floorman) or to using the axe in splitting the backbone (splitter) and, wherever a less skilled man can be slipped in at 18 cents, 18½ cents, 20 cents, 21 cents, 22½ cents, 24 cents, 25 cents, and so on, a place is made for him, and an occupation mapped out. In working on the hide alone there are nine positions, at eight different rates of pay. A 20-cent man pulls off the tail, a 22½-cent man pounds off another part where the hide separates readily, and the knife of the 40-cent man cuts a different texture and has a different ‘feel’ from that of 33 the 50-cent man. Skill has become specialized to fit the anatomy.”

Usually, however, when the division of labor becomes as minute as that described, the routine-like process is handed over to a machine. Indeed Mr. John A. Hobson states as a law of machine industry the fact that as soon as a process becomes perfectly automatic and mechanical a machine is invented which can do the work better and more rapidly than human hands. Hand in hand, therefore, with the subdivision of labor goes the extension of labor-saving machinery. Labor becomes relatively of less importance than capital in the new methods of production, and man becomes a machine tender rather than an independent producer. There are practical benefits and disadvantages connected with this system. Many writers insist that the effect on the worker is narrowing in the extreme, but Professor Marshall points out that his labor as tender of a machine demands a higher order of intellectual development than that of a handicraftsman, and that he has more leisure, while the product of the present system is immeasurably greater than under the old hand methods. The manufacture of products by machinery has in turn required the making of machines by machinery, as the complex machines of today could not be turned out by hand methods. A characteristic feature of the modern factory system therefore has been the growth of the machine trades, which supply the equipment of the new industry.

With the growing specialization of industry there has gone on an increasing localization in some favored spot or locality. Thus most of the collars and cuffs (85 per cent) manufactured in the United States are made in Troy, N. Y.; 64 per cent of the oyster canning is carried on in Baltimore; 54 per cent of the gloves are made in Gloversville, N. Y.; 48 per cent of the coke in Connellsville, Pa.; 48 per cent of 34 the brassware in Waterbury, Conn.; and 46 per cent of the carpets in Philadelphia. While there are undoubted advantages in such localization and specialization in a particular industry, such as reputation, growth of special skill, etc., there are also offsetting disadvantages, as the complete prostration of the whole community if the particular trade upon which it depends is disastrously affected by trade depression or by a shifting of the industry to some other locality.

More striking than the concentration of manufactures in particular places has been its concentration in a few large establishments and under the control of fewer individuals. Without entering into the discussion, as yet, of the trust problem, we may at this time take up the earlier and important tendency of industry to be conducted on a large scale. This concentration into a relatively smaller number of establishments has been going on pretty steadily since 1850 and shows no signs of abatement at this time. In the case of the iron and steel industries, cotton manufactures, and leather goods, the movement is positively startling, an actual decrease in the number of establishments having occurred in the half century. This is most marked in the monopolized industries. At the same time there has gone on an enormous increase in the size of the individual plant, in the capital employed, the number of men employed, and the value of the product. Almost the only industries which have not yet displayed this tendency are those which are essentially local in their nature, as grist mills, cheese and butter factories, etc. But in general it is characteristic of manufactures in the United States. The same tendency has been manifest in the countries of Europe, though there a system of well-developed and fairly vigorous hand trades has resisted the movement and made the development in this respect much less rapid than in this country.

Large-scale production is more profitable than production on a small 35 scale in all industries which are subject to increasing returns. By this is meant that the return in product for each additional dollar’s worth of labor and capital employed grows greater the larger the scale on which the enterprise is conducted. When this is true the big enterprise will be able to undersell the little enterprises and eventually to drive them out of business. This is true not only in the competitive industries, but also in those which enjoy a legal or a natural monopoly, as street railways, gas and water plants, etc., all of which show an irresistible tendency to consolidation. Before drawing any conclusions as to the desirability of such a movement, let us examine some of the economies of large-scale production. The most striking and the most important is the economy in fixed capital. Concentration is a result of machine production. As machinery becomes more expensive, the breaking up of the processes of manufacture into small parts requires more complex and detailed machinery; a larger outlay is requisite for an up-to-date plant. Thus the average amount of capital invested in each iron and steel establishment in the United States increased from $47,000 in 1850 to $858,000 in 1900. The head of a steel company in Pittsburg recently testified before the Industrial Commission that to build and equip a plant for the manufacture of iron and steel under modern conditions would call for an investment of from $20,000,000 to $30,000,000. It is clear that under such conditions of expensive machine methods a small plant would have little chance of existence. Steam railways afford another good illustration of an industry in which enormous economies are effected by the concentration of a number of small, independent lines under one unified control. Every machine is utilized to the utmost; there is no needless duplication of machinery such as would occur if several small plants divided up the business, while expensive machines to carry on 36 relatively small processes can be profitably installed.

But other economies than those in the use of capital are present in large-scale production. A large concern can hire more expensive and better managers, can afford to experiment with new methods, can effect a more minute and economical division of labor, as for example in the slaughtering business above referred to. A striking economy can also be effected in the utilization of what were formerly waste products, and still are in small concerns. This has been carried furthest in the oil-refining and meat-packing industries; a recent statement of Swift and Co., for instance, alleged that the dividends on the stock were paid out of the by-products, such as neatsfoot oil, land fertilizer, glue, fats, etc. Owing, however, to the generally wasteful methods prevailing in the United States not so much attention has been given to this point as in England and Germany. A final economy may be mentioned that can be secured by a large business, namely, carrying on allied or subsidiary processes. Thus the Standard Oil Company builds its own pipe lines, makes its own barrels, tin cans, pumps, tanks, sulphuric acid, etc.

Such an extension in the size of the single establishment would of course not have been possible if improvements in the arts of communication and transportation had not at the same time immensely widened the market. As long as the market was local, and a factory could afford to send its goods over only a limited territory there was of course a fixed limit to the expansion of that industry. Now, however, when markets are often world-wide and the demand for goods has so enormously increased, while the modern railway and steamship can transport goods cheaply and quickly half around the globe, enterprises can be expanded and carried on on a scale commensurate with the expanded market and improved methods. It is clear then that the tendency to production on a large scale is the logical result of 37 machine methods, that it secures great economies, and that in industries of increasing returns it is absolutely inevitable.

But not only in manufacturing is this movement observable. More recently concentration in large establishments has revolutionized the retail trade. Department stores have supplanted the small shops because they can buy on better terms, get transportation cheaper, offer a greater variety to the customer at a lower price, and save time and trouble to the customer. The growing ease of communication with central shopping districts, the rapid changes in fashion with the consequent large variety which only a large establishment could afford to carry--all these factors have helped along the movement. There are limits to such a movement, for small tradesmen will always hold the repairing trades, and the sale of perishable goods; thus there are no businesses so scattered as the small stores of the “butchers and grocers.” But on the whole we may safely conclude that the small storekeeper is doomed now just as the small manufacturer was two or three decades ago. In the carrying trade country carriers and a few cabmen in the cities are the only survivals of the small independent business; the steam railroad and the electric railway have driven the small carrier out of business. In agriculture alone, where concentration is strictly limited by the necessity for intensive cultivation, and in professional and personal service, where the very nature of the business prevents it, is there little or no development in the direction of large-scale methods.

The industrial and social effects of this development have been marked in all countries. In the United States the main attention has been given to the organization and development of machinery, and a wonderful industrial advance has followed the movement. The economic readjustments have consequently been made with comparative ease, and the labor set free by the invention of new machines has been 38 reabsorbed in the same or other industries. Consequently the social effects have not been so marked as to call for special emphasis; as the same question presents itself, however, in connection with the more recent trust movement we may profitably defer its discussion to the next section.

There is one other characteristic feature of modern capitalistic machine industry which deserves special mention, especially as its development has been carried furthest in the United States. Reference is made to the system of standardization and of interchangeable parts. In no single feature is the contrast between modern machine methods and those of the old hand trades greater. By standardization is meant the production of so-called “standard products” according to some acceptable size, form, or shape. In the manufacture of screws or iron beams, or even ready-made clothing, for example, certain dimensions and sizes which are best adapted for general use, are selected as standard sizes and these are then turned out in large quantities by automatic machinery. The advantages of such a system, in cheapness, quickness of delivery, ability to replace a single broken part, etc., are numerous and manifest. “The possibilities of standardization are strikingly shown in a recent international incident. The Egyptian Government desired a bridge for the Atbara at the earliest possible moment; inquiry was made of the English bridgemakers, but no promise of prompt delivery could be secured. Within twenty-seven days after the tender of the contract was made to an American firm the bridge was ready for shipment. The feat, not a remarkable one, was due to the standardization of bridge material. This in itself was a guarantee of quick delivery and construction.”[3]

Standardization was followed by the system of interchangeable parts, according to which each part of an intricate machine or product is 39 made exactly like the same part in every other machine. The parts can thus be turned out in large quantities and “assembled” at a single operation. From the standpoint of the consumer or user of the machines thus made, the great merit of the system lies in the fact that he can quickly and at small expense duplicate any broken part. It is today applied to almost every product of large consumption, from agricultural implements and steam engines to watches and nails. By producing machinery on this plan it has been possible for American manufacturers to extend their trade very materially in foreign lands. It was recently reported in the newspapers that Mr. E. H. Harriman had expended $65,000,000 in standardizing the equipment on his railroad systems; while this sum is enormous, it will undoubtedly be justified by the increased economy of repairs and operation.

V. TRUSTS AND MONOPOLIES.

We have already seen how production upon a large scale has superseded production upon a small scale in most important branches of manufactures. We have now to inquire whether production upon a large scale is in turn to be supplanted by single consolidated enterprises, by those combinations of capital known as trusts. Under one of these three conditions industry must be carried on; few people wish to revert to the stage when production was carried on in small establishments, but warm controversy and difference of opinion still exist as to whether centralized management by a single company or combination offers superior advantages to production by independent competing establishments. The concentration of production in a few large establishments has been followed by the consolidation of these larger units into a single whole. Since the days of Adam Smith capital has tended to combine for the purpose of fixing prices, and these 40 combinations have passed through several phases. The earliest form is the agreement of independent concerns to fix prices, as was done by the American railroads in their early traffic agreements. The next step was to divide the field, as has been done by the French railways and the American express companies. A third phase of combination was the pool, which attempted to regulate the output rather than to fix the price or divide the field. Railway, whisky, beam, and other pools were organized for this purpose, but all broke down because of the difficulty of enforcing the agreement and the temptations to each member to break it secretly for the sake of the large profits obtainable. By this time it had become clear that if a real permanent consolidation of interests was to be secured by the competing enterprises some closer form of combination must be devised which could not be broken at will by any member. An industrial union and not a loose confederation must be attained. Accordingly the next step was taken in 1882 by the formation of the Standard Oil Trust, so called because the constituent concerns handed over their business to the complete control of a central board of trustees, receiving in return trust certificates which entitled them to dividends. Similar “trusts” were formed in the whisky, sugar, and other industries, but were speedily declared illegal by the federal Supreme Court. By this decision the form of combination was changed, but the movement was not at all checked. The next phase and the last was the establishment of holding corporations, which are organized to buy up and hold the stock of a number of individual corporations, which still retain their corporate existence. In this way unity of control is secured, to which is added a certain flexibility; but it is really the trust under another legal form. Where pooling and combination by means of holding companies have been forbidden by law, as in the case of railroad companies, actual consolidation has often taken place, though when 41 trusts are spoken of the other form of combination is more often meant. From the point of view of business organization the holding company is simply an extension of the principle of the corporation, and to a consideration of this we must therefore turn.

There are three classes of establishments by which industry is carried on--those that are the property of an individual, those which belong to partnerships or firms of unlimited liability, and those belonging to corporations of limited liability. The usefulness of the individual system is of course limited to small undertakings, where but little capital and credit are necessary; this form of organization still dominates the field in agriculture, in the small retail trade, and in the repairing industries. The partnership is a joint undertaking by two or more individuals, and makes larger enterprises possible, but as each individual is liable for all obligations of the firm or his partners his personal liability is greatly increased. While it is well adapted to certain undertakings, as moderate mercantile establishments and professional firms, owing to a certain elasticity in the contractual relations of its members, it is not suited to large industrial ventures, both because of the excessive personal liability, and because of the necessity of dissolving the partnership upon the death, withdrawal, or insolvency of any member. The advantage of the corporation lies in the fact that it has a continuous existence, and that the liability of the shareholders is limited to the amount of capital actually contributed by each; it is well adapted to modern enterprise because it permits the summation of large amounts of capital from a number of small savers and centralizes the use of this capital in the most economical manner. There may thus be concentration of management without concentration of ownership. The federal census of manufactures in 1905 showed that, although less than one-quarter of the manufacturing establishments were organized as corporations, yet they produced three-quarters of the total manufactures in money 42 value. In the field of transportation, corporations are in almost exclusive control, most banks and insurance companies are organized under this form, while mercantile and industrial undertakings are being more and more generally organized as corporations. Not merely are most of our business enterprises being conducted under corporate form and organization, but most recently, as has been already pointed out, there has been a movement to combine individual corporations into larger concerns, or trusts. The trust is usually thought of as a monopoly and, while not necessarily so, it usually does exercise monopoly control; but for the present we shall consider the trust problem from the standpoint of business organization, deferring to the end of the section the discussion of monopoly.