Chapter 20
As regards works for water supply, there can be little doubt that almost invariably the municipality should operate as well as own the works, for the administration of the works requires but a small amount of labor, and that of such a class that the city can safely carry it on. But gas or electric-light plants, both for street and resident lighting, should be operated by private companies.
These industries are making such rapid progress in the way of new processes, effecting both economy and improvement, that it is somewhat difficult to say what steps should be taken. Many are of the opinion that gas is destined to be entirely replaced by the electric light; but while this may eventually prove true, it will probably be a very long time before the existing gas-works cease to supply consumers. Thus the true solution of the problem seems to be that when a growing town nowadays wishes to establish a new lighting plant of its own, it should adopt electricity. But in the case of a town having gas-works already established, the municipality is safe in assuming their ownership.
As regards the operation of lighting plants in small towns, it would doubtless be best to lease the plant for short terms of years to the highest bidder, making sure that the call for proposals is widely circulated. Great cities, however, would find this policy unsatisfactory. If a ten-year lease of the Philadelphia gas-works, for instance, were advertised for sale to the highest bidder, there would be but few really close bidders upon it, and the danger of "a combination to defeat competition" would be great. It is at least worth considering whether such a plan as we proposed for railways could not be made feasible here. Let a corporation be chartered to operate the lighting plant of the city, and let the charter of the corporation provide that its rates shall be such as to pay an annual dividend upon its capital stock (fixed by law and not changeable) equal to the legal rate of interest in the State. Provided, that in no case should the rates be lowered unless the net profits in one year were more than 2 per cent. in excess of this rate, and that the excess for two consecutive years was more than 1½ per cent. in excess of this rate. Provided also, that in no case should the rates be raised unless the deficit exceeded 1½ per cent. in any year, and 1 per cent. for two consecutive years, and that it should be proven by the company that it had exercised all reasonable diligence, care, and economy in the management and operation of its business.
A certain proportion of the stock--less than a majority--should be held by the city; and the mayor should appoint directors to represent the city, at least one of whom should be personally conversant with the industry carried on by the company.
Although not often so considered, the matter of passenger transportation is a much more important matter in our greatest cities than either lighting or water supply. The laboring man, who has to pay perhaps twelve cents for the necessary ride back and forth to his work every day, feels this tax most severely. Suppose that under such an arrangement for street railways as we have outlined for gas and electric lighting companies the fare would be reduced to three cents. His savings from this source would amount to at least $18 per year. Counting the extra rides and those which his wife and children have to take, the annual saving would probably reach $25, a sum which to the average laboring man with a family dependent upon him means a great deal.
Our municipal monopolies are now taxing us that they may pay swollen dividends on millions of dollars of fictitious capital. It is quite time that the public recovered possession of the valuable franchises which are its rightful property, and managed them for its own benefit. The legal difficulties in regaining the title to these franchises are certainly not insuperable, and the readjustment of capitalization can be made on the principle outlined in the case of steam railways. To illustrate: The city of "Polis" purchases the works which supply it with water from the private company owning them, paying the average market value of the stock and bonds during five years past, which amounts, perhaps, to one and one half times the cost of the works. The revenue from the works has been sufficient, probably, to pay 8 per cent. on these securities. The city issues 3 per cent. ten-year bonds to raise funds for the purchase, and it then operates the works so as to gain a yearly revenue of 6 per cent., or 2 per cent. less than that gained by the private company. At the end of ten years the surplus income from the works is enough to pay more than one third the bonded indebtedness; and, if desired, the rest may be reissued as new bonds to run for a long period.
The three classes of monopolies just discussed--railways, mineral wealth, and municipal works--include practically all the monopolies which are generally acknowledged to be subject to the public control by virtue of their use of natural agents or the exercise of franchises granted by the public.
We will next consider the monopolies in trade, in manufacturing, and in the purchase and sale of labor, to see what steps should be taken to protect them from encroaching on the rights of the people. In exercising the right of the people at large to take control of these purely private industries from the hands of their owners, we are assuming a power which, like a strong medicine, may be as potent for evil as for good. Only extreme necessity should sanction its use, and its abuse must be carefully guarded against. It is not saying too much to assert that the abuse of this power has already become an evil. We have become so used to legislation for the benefit of special industries, that legislation for their injury does not seem to be regarded as the exercise of a dangerous prerogative. Thus we are threatened with a flood of laws to fix the prices in various industries now subject to monopoly, or to crush them out altogether by enacting some restrictive measure,--legislation which, by its directness, is apt to strike the average lawmaker very favorably, but which, it needs little wisdom to see, is the sure forerunner of abuses. The author trusts that nothing in this book may be construed as advocating or defending some of the crude and ill-considered attempts at anti-monopoly legislation already made, or that may be made in the future.
We have proven in the preceding chapters that, from the character of modern concentrated industry, a very large number of our manufactures must either exist as monopolies or else must engage in intense and wasteful competition. If the monopoly can be so managed that it shall carry on the industry economically, adopt improvements, keep up the character of its product, and keep the prices therefor so low as to make no more than ordinary profits, it would be for the public advantage that monopolies rather than competition should exist. Can we regulate monopolies to secure such results? If so, our problem will be solved.
The author has proposed for the first class of monopolies--those obtaining the benefit of natural agents and public franchises--government ownership of fixed capital and regulation of prices, with private operation and general management. But he is far from believing that such a plan would now be wise for regulating trusts. It may indeed be that, at some time in the future, many of the great staple manufactures will be formally established by the government as monopolies, and controlled in a similar way to that which we have outlined for the railway system; but it is so far in the future that we need not consider it in detail now. Under our present political organization it would be practically impossible for the government to undertake to regulate justly and equitably such an industry, for instance, as the steel-rail manufacture. We have set our State, national, and municipal governments a hard enough task in the preceding pages of this chapter, in bringing under public control our monopolies of transportation and communication and our productive mines; and although it is a work possible of accomplishment, it will need good statesmanship to carry it out. By the time that task is accomplished, a similar plan, improved as experience will then suggest, may perhaps be found available for the regulation of the important manufacturing industries.
We decide, then, that it is for the public advantage at present that both the ownership and operation of manufacturing industries and of trade must remain in private hands. The next question is, will the greatest advantage to the public be secured by starting a crusade to re-establish competition and break up all existing monopolies in manufacturing and trade; or by taking the opposite course, legalizing monopolies and so regulating them by law that they shall be prevented from making undue profits by laying an exorbitant tax upon the public?
Practically all the efforts made or proposed thus far for remedying the evils of monopolies in manufacturing and trade have had for their purpose the re-establishment of competition. The investigation to which the first part of this book was devoted shows the wide extent of the movement to restrict competition. Is it possible to wholly counteract this? All our study of the laws of competition seems to show that the tendency of modern competition is to destroy itself by its own intensity. Certainly all the strenuous efforts to keep it alive by the force of legal enactment and public opinion have thus far proved unavailing. There are now, probably, at least a million persons in the United States who are directly or indirectly interested in unlawful contracts in restraint of competition; and among them are included many of the best financiers and most enterprising business men of the country. Certainly those who propose to drive these men into a renewal of competitive strife contrary to their will have set themselves a very difficult task.
Let us consider the opposite alternative. It cannot be a good thing to have such a great proportion of the active business men of the country, who bear the highest personal character, engaged in illegal contracts. Let us therefore take them within the pale of the law. They seem to be determined to make contracts with each other in restraint of competition; and believe, indeed, that they are forced to do it by modern conditions of trade. Suppose we were to legalize these contracts and permit the establishment of monopolies. What can we then do to protect the public from extortion in prices and adulteration in its products on the part of the monopoly?
In the first place, now that we have legalized monopolies there is no more excuse for secrecy. To work in darkness and privacy befits law-breakers, but is needless for legitimate enterprises. Let the law provide that every contract for the restriction of competition shall be in writing, and that a copy shall be filed, as a deed for real estate is filed now, with the proper city or town officer where the property affected is situate, and also with the Secretary of State where the contract is made. Certainly no honest man will object to this provision. The contention has been made that contracts to restrict competition were necessarily kept secret because they were "without the pale of the law." Very well; we have legalized them. There can be no further defense of secrecy. If any now refuse to make public their contracts to restrict competition, the refusal is evidence that the contract is for the injury of the public or some competitor and therefore properly punishable. We shall now know just what monopolies exist; just what is their strength, and for just how long a time their members are bound. Let us next see what measures we can adopt to prevent these legalized monopolies from practising extortion upon the public and abusing the power they have gained by the combination.
The first important means to secure this which the author would suggest is simply an extension of the common-law principle of non-discrimination. A man in conducting certain sorts of business is permitted to do as he chooses. He may sell to one person and refuse to sell to another; he may give to one and withhold from another. But if he enters business as the keeper of an inn or as a common carrier of passengers or freight, he can no longer exercise partiality. He has _elected to become a necessary servant of the public_, and as such he is bound to serve impartially all who apply. In the same way a manufacturer while he engages in business under the usual laws of competition, may sell to whom he pleases and exercise such preference as he chooses. But when he combines with all other manufacturers of the same sort in a combination to restrict competition, he and his allies voluntarily change their relation to the public. Is it not true that they do actually _elect to become necessary servants of the public_--far more necessary, indeed, than the inn-keeper or the stage-coach driver,--and ought they not therefore to be placed under similar legal restrictions?
In every case where combination or consolidation restricts competition in an industry, one effect produced is an increase in the power over the public which the industry possesses. But this increased power over the public, thus voluntarily assumed, must inevitably carry with it increased responsibility to the public. It is the duty of the government to see that this responsibility is legally enforced.
This first principle, then, should be embodied in a law providing, in substance, that every person or firm entering into a contract to restrict competition should, so long as that contract was in force, be debarred from showing any preference in his or its purchases and sales, by giving more or less favorable prices to any person or firm than those quoted to any other person or firm. To enforce this requirement and prevent its evasion it is necessary to provide also that prices shall be public and that they shall not be altered without due notice. The requirement of publicity might be best effected by providing that the contract restricting competition should contain a schedule of prices, which would usually be the case in any event.
While this may seem like quite an assumption of authority on the part of the State, it is exactly what trusts and trade associations are striving to effect, though with the important qualification that when occasion, in the shape of an obnoxious competitor, requires, they wish to be at liberty to put prices up or down at short notice and exercise their preferences as they choose.
Let us now see what we would effect by the enforcement of this principle of non-discrimination. We have explained in the chapter on combinations in trade how one monopoly gains strength by alliance with another; as when the firms belonging to the car-spring combination made a contract with the steel combination by which that monopoly agreed to sell to them at a reduced price and to make an extra rate to their competitors. Under this law it would be impossible to found one monopoly upon the favors of another in this manner.
The obnoxious trade boycott, too, which is now becoming so common, would be effectually checked. And the scheme for crushing out a rival by giving all his customers specially favorable rates would no longer be practicable. The fact is that if we can stop the discriminations which the monopolies have practised, we shall cure a large share of the evils they have caused. It may be said that the courts will already punish many conspiracies of this sort; but a monopoly which is already breaking the law by its contracts of combination, finds in its methods of doing business plenty of chances to evade the laws against conspiracy. Certainly with a properly drawn law with reference to the publicity and stability of prices, it should be possible to practically wipe out the evil of discrimination by monopolies. It is also to be noted that the requirement of non-discrimination and of public and stable prices would bring profit in doing away with the waste of competition.
We have now to inquire what means it is possible to take to ensure that the prices charged by the monopoly shall not only be the same to all, but that they shall not in themselves be so exorbitant that the monopoly will reap large profits at the public expense. How can we keep the prices charged by the monopoly from rising far above the point where they would stand if free competition were in force? Two methods are open to us. We may keep down the monopoly's rates by what we will call _potential_ competition, or we may reduce them directly by legislative enactment.
The right of the public to take this latter course may be defended on the ground that the monopoly has voluntarily made itself a necessary public servant, and in that capacity offers to the public its goods. While it is true that the people permit the monopoly to become a necessary public servant and protect it in the contracts by which it restricts competition, it is also true that the monopoly cannot justly make merchandise of the necessities of the people. The public may allow a combination to obtain control of all the sugar refineries, for instance, and protect the combination in its formation. But suppose the owners of the combination then say: "The people are obliged to have sugar and we control the supply. We will set a high price on sugar, therefore, because we know that they will pay it rather than go without." They are then making the necessity of the public a source of gain, and it cannot be believed that this will be permanently suffered.
The serious difficulty in fixing by direct government action the prices which a monopoly of this sort shall charge, is that we cannot stop at that point. When once the government steps in to do so radical a thing as to fix the price which a monopoly shall charge, it becomes in equity responsible to the owners of that monopoly for the maintenance of their incomes from their capital invested. If their profits have been so reduced by this action as to seriously injure the value of their property, they have a legal right to claim compensation from the state for the injury it has done them. And in almost every case they would set up the claim that their property had been thus injured. To determine the point at which reasonable prices and reasonable profits become extortionate prices and unjust profits is a task requiring expert knowledge and the most comprehensive judgment, aided by the most accurate statistics. To impose this task on our already overburdened courts would permanently block the wheels of justice, and would give to the judicial department of government a work which its machinery is wholly unsuited to carry on.
It seems evident, therefore, that when it becomes necessary for the state to directly fix prices to be charged by monopolies, a more radical step should be taken. The monopoly should be established on a permanent basis, and the state should have some part in its direct control.
Discarding, therefore, direct action by the state to fix prices as inexpedient, for the present, at least, let us see what we can effect by means of "potential" competition, which term we will use to signify that competition which may be established in any monopolized industry if the inducements offered are sufficiently great. It must be remembered that nowadays men of capital and enterprise are always on the look-out for every opportunity to invest money and expend their industry where it will bring the greatest returns. If any monopoly seems to be making large returns, people are generally ready to believe that it is making twice as great profits as it really is; and some one is quite likely to start in as a competitor, if there is a prospect of large profits. Now we wish to do two things. We wish to make it so easy for new competitors to enter the field against a monopoly that its managers will keep their profits down in order not to call in any new competitors. We also wish to so modify the intensity of competition between the monopoly and the new competitor that the latter may have a chance at least of being repaid for its expenditure in entering the field. The simplest and best of the legal provisions which we may enforce to this end is the one already stated of non-discrimination. The monopoly can no longer reduce its price to apply to only the limited field in which the new competitor works, but must reduce its prices everywhere to meet those made by the rival. In the case of monopolies in trade and all monopolies in manufacturing in which the fixed capital required is but small, this is all that would be needed to encourage the establishment of new competitors and discourage the monopoly from grasping after undue profits from the public.
In the case of those manufacturing monopolies in which a large fixed capital must be invested at the start by any new competitor, we have a much more difficult problem. It is true that in this case the monopoly itself has more at stake; and this may induce the starting up of new competitors simply to be bought out by the trust,--a sort of blackmailing operation which is certainly repugnant in its character. It might be possible to provide that rates charged by the monopoly must be so stable that a competitor would have a chance to establish itself before the monopoly could bring its own rates down. It might be possible to force the monopoly to keep all its factories in operation, and thus oblige it to keep down its price in order to dispose of its products; but there are evident practical difficulties in the way of enforcing such laws. It seems a great pity that just now, when to find some employment of prison convicts in some manner that will not "compete with free labor," and thus displease the labor interests, seems an impossibility, we cannot set the convicts at work to compete with the trusts and bring down their profits to a reasonable point. Surely the labor party would find no fault with this use of convict competition.
There is one step, however, which we can take, and whose effect would certainly be very great; in its desirability, apart from questions of monopoly, all honest men are practically united. We can reform our laws regarding corporate management. It is a mild arraignment compared to what is deserved, to say that our present laws regarding the formation and management of corporations, taking the country as a whole, are a shame to the people and a disgrace to the men who made them. They seem designed to place a premium on fraud and knavery, and to assist the professional projector and stock manipulator in reaping gains from innocent--generally very innocent--stockholders. Now a real reform in our corporation laws would greatly simplify our work in controlling monopolies. Let us have no more stock-watering of any sort at any time in a corporation's life. Let us have no more "income bonds" which yield no income, and "preferred stock" in which another is preferred after all. Two classes of securities are enough for an honest corporation, and the public interest requires the charter of no other class of companies. Let us have done, too, with the iniquitous custom of one corporation holding another's stock or bonds. With a few such simple reforms as these effected, the holders of stock in our corporations would have some idea where they stand and what their securities represent, and would take some interest in the control of their property.