Chapter 8

We are accustomed to think of competition as a force which always tends to keep prices down, and of a monopoly as always raising prices; but it should be understood that this is true only of the competition and monopolies among _sellers_ of goods. It must be remembered that the competition among _buyers_, is a force which acts in the opposite direction and tends to raise prices; and that it is quite possible to have combinations among buyers to restrict competition and keep prices down. Of course, where the buyer is the final consumer, this is almost impossible, for the great number of competitors forbids any permanent combination. Also where the product concerned is a manufactured article or a mineral product, the mining or manufacturing company or firm will generally have capital enough and business ability enough to defeat any attempt of the wholesale merchants to combine to reduce the prices paid for their output. This he can easily do by selling to retail dealers direct. But in the case of products gathered from the farmers the case is different, and the producer can less easily protect himself against combinations among buyers to fix the price he shall receive. The power and extent of these monopolies varies with the distance of the farmer from markets, and also, it must be said, with the intelligence and shrewdness of the farmer. In districts remote from railways and markets the farmers are often dependent on the travelling buyers for a chance to sell their cattle or produce. In a thinly settled region there may be no more than two or three times in a season when a farmer will have an opportunity to dispose of his surplus products; and, realizing his necessity, he is apt to be beaten down to a much lower price than the buyer would have given if other buyers had been competing with him to secure the goods. In the chief markets, too, there is often a combination of buyers formed to keep down prices. The combine of cattle-buyers in Kansas City and Chicago has just been noted. The New York Legislative Committee discovered that a milk trust had control of the supply of milk for New York City, fixing the price paid to the farmer at three cents per quart, and the selling price at 7 or 8 cents per quart. According to the suit brought by the Attorney-General of Louisiana against the Cotton-Seed Oil Trust, that monopoly has reduced the price paid to the planters for seed from $7 to $4 per ton. As the total amount of cotton seed which it purchases is about 700,000 tons a year, it is evident that this feature of the combination alone puts into the pockets of the owners of the Trust over two million dollars per annum, over and above the profits made through its control of the cotton-seed oil market. Evidently the combinations which lower prices by restricting competition among purchasers are not to be overlooked because of unimportance.

In the chapter on monopolies of mineral wealth it was stated that the French copper syndicate is not a "trust," but a "corner." It has not been common to consider "corners" as a species of monopoly, except as they have, like the latter, acquired a bad reputation with the general public from their effect in raising the price of the necessaries of life. But if we look at the matter carefully, it becomes plain that the aim of the maker of corners is the same exactly as that of the organizer of trusts,--to kill competition. The difference lies in the fact that the "corner" is a temporary monopoly, while the trust is a permanent one. The man who forms a corner in, let us say, wheat, first purchases or secures the control of the whole available supply of wheat, or as near the whole supply as he can. In addition to this he purchases more than is really within reach of the market, by buying "futures," or making contracts with others who agree to deliver him wheat at some future time. Of course he aims to secure the greater part of his wheat quietly, at low figures; but after he deems that the supply is nearly within his control, he spreads the news that there is a "corner" in the market, and buys openly all the wheat he can, offering larger and larger prices, until he raises the price sufficiently high to suit him. Now the men who have contracted to deliver wheat to him at this date are at his mercy. They must buy their wheat of him at whatever price he chooses to ask, and deliver it as soon as purchased, in order to fulfil their contracts. Meanwhile mills must be kept in operation, and the millers have to pay an increased price for wheat; they charge the bakers a higher price for flour, and the bakers raise the price of bread. Thus is told by the hungry mouths in the poor man's home, the last act in the tragedy of the "corner."

Fourier tells of an event in his early life which made a lasting impression on him. While in the employ of a mercantile firm at Marseilles, his employers engaged in a speculation in rice. They purchased almost all the available supply and held it at high prices during the prevalence of a famine. Some cargoes which were stored on shipboard rotted, and Fourier had to superintend the work of throwing the wasted grain, for the want of which people had been dying like dogs, into the sea. The "corners" of the present day are no less productive of discontent with the existing state of society than were those of Fourier's time.

But, returning to our subject, it should be said that the "corner," generally speaking, does much less injury to the public than is commonly supposed. As we have shown, the manipulators of the corner make their chief profits from other speculators who operate on the opposing side of the market; and it is but a small part of their gains which is taken from the consumers. The effect on the consumer of the abnormal rise in price caused by the corner is sometimes quite made up for by the abnormal fall which occurs when the corner breaks. Generally, however, the drop in prices will be slower to reach down to the final consumer, past the middlemen, than will the higher prices. The corner makers also are apt, if they are shrewd and successful, to make the total of their sales for the current supply yield them a profit. Thus suppose that the normal price of wheat is 70 cents per bushel, and that the syndicate secures control of five million bushels at the normal price. If while it keeps the price up it sells two million bushels at $1.20 per bushel, it can afford to get rid of the rest of its stock at an average price as low even as 50 cents per bushel, and still make four hundred thousand dollars' profit.

The operations of corner makers are confined principally to goods which are dealt in upon commercial exchanges. One evident reason for this is that the vast purchases and sales, which are necessary in the formation of a corner are impossible without the facilities afforded by an exchange. It must be said, too, that the plain truth is that our principal commercial exchanges, while they do serve certain useful purposes, are yet practically devoted chiefly to speculation. This, simmered down to its essence, means that the business of the speculators is to bet on the future prices of the articles dealt in,--a game in which the largest players are able to influence prices to accord with their bets, and hence have their "lamb" opponents at an obvious disadvantage. The evil of this sort of commercial gambling is recognized by practical men of every class; but its cure is yet to be effected.

A sort of business allied both to trade and transportation is the business of storage or warehousing, and this has recently shown some interesting cases of monopoly.

The owners of warehouses along the Brooklyn waterfront combined their business in January, 1888, and doubled their rates for storage. In the testimony of one of the members of this trust, before the New York Legislative Committee, he said: "We want to destroy competition all we can. It is a bad thing." The owners of grain elevators at Buffalo, N. Y., have long combined to exact higher prices for the transfer of grain than would have prevailed were free competition the rule. At the session of 1887 the New York Legislature took the bull by the horns and enacted a law fixing a maximum rate for elevator charges; a statute which was based on the popular demand for its enactment, but is hard to accord with the principles of a free government.

There are a number of lines of business auxiliary to trade in which competition is more or less restricted by the fact that the amount of capital controlled and the prestige of the established firms renders it a difficult and risky matter to start a new and competing firm. The insurer of property or life, if he be wise, will demand financial stability as a first requisite for the company in which he takes a policy. The companies engaged in the business of fire insurance have long been trying to agree on some uniform standard of rates and the avoidance of all competition with each other. These combinations, however, are apt to be broken, as soon as formed, by the weaker companies, whose financial condition operates to prevent them from getting their share of the business under uniform rates. Even when this rate-cutting is stopped, there is still competition to be met from the various small mutual companies, who are necessarily outside the combination.

Banks are a necessity to the carrying on of modern commerce, and they have great power over the financial affairs of the business men of the community which they serve. As a general rule, however, they are largely owned by the merchants and others who patronize them, and the instances of this power being abused are, therefore, not common. It is to be remembered, in discussing this, as in other monopolies, that the power of a monopoly depends entirely upon its degree. A bank, trust company, or real-estate guaranty company which has a great capital, an established reputation for safety and conservatism, sole control of many special facilities, and conveniences for obtaining and dispatching business, has a real monopoly, whose degree varies with the tendency people have to patronize it instead of some weaker competitor, if one exists. There is no evil effect from the monopoly upon the community, unless it takes advantage of its power to charge a sum greater than their real worth for the services it renders, or uses it to discriminate to the injury of special persons or places.

In closing our discussion of the monopolies in trade, there is an important point to be noted. In the lines of industry considered in the preceding chapter, the monopoly was easy of maintenance because it held full control of the source of production, or of some necessary channel through which commerce must pass. No gift of nature assists to maintain a monopoly in trade. It must be wholly artificial, and it relies for its strength simply on the adherence of its members to their agreement to maintain prices. Its degree of power can never be great, compared with monopolies which control the original sources of production; for if it is attempted to put up prices inordinately, competition will start up outside of the combination, or the consumer will be led to deal directly with the producer.

Because of this weakness, the temptation is great for these monopolies to strengthen themselves in ways quite indefensible on any score. The alliance of trade monopolies with trusts, in order to strengthen themselves, we have already considered. But the trust which makes such an alliance must plead guilty to the charge of _discrimination_ as well as _monopoly_. It is bad enough to raise the prices of the necessaries of life, and force the whole community to pay the tax; but it is worse to add to this the crime of discrimination against certain persons in the community, at the instance of a minor monopoly.

But the trade monopoly does not confine its sins to tempting the stronger monopoly to practise discriminations. It practises discrimination itself in some very ugly forms. A combination among manufacturers of railway car-springs, which wished to ruin an independent competitor, not only agreed with the American Steel Association that the independent company should be charged $10 per ton more for steel than the members of the combine, but raised a fund to be used as follows: When the independent company made a bid on a contract for springs, one of the members of the trust was authorized to underbid at a price which would incur a loss, which was to be paid for out of the fund. In this way the competing company was to be driven out of business. It is often argued that combinations to advance prices can never exist long, because of the premium which the advanced price puts upon the entrance to the field of new competitors; but the weapons which this trust used to ruin an old and strong competitor are even more effectual against a new-comer; and the knowledge that they are to meet such a warfare is apt to deter new competitors from entering the field.

The boycott was once deemed rather a degrading weapon of warfare; but now the term has grown to be a familiar one in trade circles. Even the great railway companies do not scruple to use the boycott in fighting their battles. One might imagine that both the thing and the name filled a long felt want.

VII.

MONOPOLIES DEPENDING ON THE GOVERNMENT.

The fact has been already referred to that the principal monopolies which existed previous to the present century were those created by government. In the days when governments were less strong than now, and less able to raise money by such taxes as they chose to assess, it was a very convenient way to replenish the king's exchequer to sell the monopoly of a certain trade to some rich merchant. Nor was the establishment of these monopolies entirely without just reason. In those days of scarce and timid capital, inducements had to be held out to encourage the establishment of new enterprises. An instance of this, familiar to every one, was the grant to the owners of the first steamboat of the sole right to navigate the Hudson River by steam for a term of years. In the early history of the nation and in colonial days, government grants to establish local monopolies were very common. In this, however, we only followed the example of the mother country, which had long granted limited monopolies in trade and transportation as a means of encouraging new enterprises and the investment of capital.

The monopolies of the present day which are properly considered as government monopolies are of two classes. The essential principle on which all are based is that their establishment is for the common benefit, real or supposed; but the first class--to which belong the patents and copyrights--are also justified on the ground that the brain worker should be protected in his right to reap the just profits from his labor.

The effect of a copyright is simply to make it possible for an author to receive some recompense from his work. He can only do this by selling it in printed form to those who may wish to buy; but if there were no copyright, any printer might sell duplicates of the book as soon as it was issued, and could sell them at a much less price than the original edition, as the book would have cost him nothing to prepare. The practical result would thus be that few could afford to spend study and research in writing books, and the volumes which would be printed would be apt to be only those of so cheap and worthless a sort that no one would take the trouble to copy them. The monopoly produced by a copyright takes nothing from the public which it previously enjoyed. The writer of a book creates something which did not before exist; and if people do not wish to buy that which he has created, they are at perfect liberty not to do so. The monopoly relates only to the production and sale of that particular book. Others are at liberty to write similar books upon the same subject, which will compete with the first; and the same information may be given in different words without infringing the copyright.

It seems clear enough, then, that the monopoly which occurs in the use of a copyright, is of an entirely different sort from the monopolies which we have previously considered. Competition is not destroyed by it, and its only effect upon the public relates to an entirely new production, which is not a necessity, and which the public could not have had an opportunity to enjoy if the copyright law had not made it possible for the author to write the book with the prospect of being repaid for his labor by the sale of the printed volume.

As already stated, the granting of patents is based on the same principle as the granting of copyrights. A clause of the Constitution empowers the general government to grant to authors and inventors for limited periods the exclusive right to their respective writings and discoveries.

If we judge the granting of patents by the aims and intentions which are held in the theory of the law, we must conclude that it is a highly wise, just, and beneficial act. The man who invents a new machine or device which benefits the public by making easier or cheaper some industrial operation, performs a valuable service to the world. But he can receive no reward for this service, if any one is at liberty to make and sell the new machine he has invented; and unless the patent laws gave him the power to repay himself for the labor and expense of planning and designing his new device, it is altogether probable that he would not spend his time in inventing.

The wealth which a valuable patent promises has been a great incentive to the work of inventors, and has undoubtedly been a chief cause of the great mechanical advancement of the last half century. But the state of mechanical science has greatly changed from what it was when the clause of the Constitution was penned which speaks of inventions as "discoveries." The trained mechanical designer now perfects a machine to do a given work, with almost the same certainty that it will be successful in its operation that he would feel if the machine were an old and familiar one. The successful inventor is no longer an alchemist groping in the dark. His task is simply to accomplish certain results with certain known means at his disposal and certain well-understood scientific principles to guide him in his work. But this statement, too, must be qualified. There are still inventions made which are the result of a happy inspiration as well as of direct design. Not all the principles of mechanical science and the modes of reaching desired ends are yet known or appreciated by even the best mechanical engineers. There is still room for inventors whose rights should be protected. The interpreters of our patent laws have always held the theory that the use of a natural agent or principle could not be the subject of a patent. This is undoubtedly wise and just. The distinction should always be sharply drawn between those existing forces of nature which are as truly common property as air and sunlight, and the tool or device invented to aid in their use.

Again, it is a notorious fact that the great multiplicity of inventions has made the search to determine the novelty of any article submitted for a patent for the most part a farce. No one is competent nowadays to say surely of any ordinary mechanical device that it is absolutely new. The bulky volumes of Patent-Office reports are for the most part a hodge-podge of crude ideas, repeated over and over again under different names, with just enough valuable matter, in the shape of the inventions of practical mechanical designers and educated inventors, to save the volumes from being an entire waste of paper and ink. Space, however, will not permit us to discuss at length the faults of our patent system. The important point for us to notice is that the patent system establishes certain monopolies, and that these monopolies are not always harmless. Patents are given to "promote the useful arts," but the inventor whom they are supposed to encourage reaps but a small share of the profits of his inventions. Valuable improvements soon fall into the hands of large companies, who are able to defend them in the courts, and reap all possible profits by their use.

Again, patents sometimes aid in the formation of trusts and combinations. Two or three firms may control all the valuable patents in connection with some important industry. If they agree to combine their interests and work in harmony, they are far stronger than an ordinary trust, because the patents they hold prevent outside competition. It was pointed out in the opening chapter how the control of patents was sometimes a feature helping to induce the formation of trusts. The Standard Oil Trust had its origin in the superiority which one firm gained over its competitors through the control of an important patent. The envelope trust, which, at this date, has raised the price of envelopes about twenty per cent., owes its chief strength to its control of patents on the machines for making the envelopes. Instances innumerable could be given where a few manufacturers, who by their ownership of patents controlled the whole field, have ended a fierce competition by consolidating or agreeing to work together harmoniously in the matter of selling-prices. Very many of these are monopolies in trade or monopolies in manufacturing, and as such have already been considered in the preceding chapters; but it is proper here to point out the part which our patent system has taken in their formation, and the fact that it is due to their control of patents that many of the existing combinations owe their security against outside competition.