Chapter 19

THE FORMATION OF MONOPOLIES IN CAPITAL.

Sec. 1. _Productive Economies of the Large Business._ Sec. 2. _Competitive Economies of the Large Business._ Sec. 3. _Intenser Competition of the few Large Businesses._ Sec. 4. _Restraint of Competition and Limited Monopoly._ Sec. 5. _Facilities for maintaining Price-Lists in different Industries._ Sec. 6. _Logical Outcome of Large-Scale Competition._ Sec. 7. _Different Species of "Combines."_ Sec. 8. _Legal and Economic Nature of the "Trust."_ Sec. 9. _Origin and "Modus Operandi" of the Standard Oil Trust._ Sec. 10. _The Economic Strength of other Trusts._ Sec. 11. _Industrial Conditions favourable to "Monopoly."_

Sec. 1. The forces which are operating to drive capital to group itself in larger and larger masses, and the consequent growth of the business-unit, require special study in relation to changes effected in the character of competition in the market and the establishment of monopolies. The economies which give to the large business an advantage over the small business may be divided into two classes--economies of productive power, and economies of competitive power.

In the first class will be placed those economies which arise from increased sub-division of labour and increased efficiency of productive energy, and which represent a net saving in the output of human energy in the production of a given quantity of commodities, from the standpoint of the whole productive community. These include--

(_a_) The effort saved in the purchase and transport of raw materials in large quantities as compared with small quantities, and a corresponding saving in the sale and transport of the goods, manufactured or other. Under this head would come the discovery and opening up of new markets for purchase of raw materials and sale of finished goods, and everything which increases the area of effective competition and co-operation in industry.

(_b_) The adoption of the best modern machinery. Much expensive machinery will only "save labour" when it is used to assist in producing a large output which can find a tolerably steady market. The number of known or discoverable inventions for saving labour which are waiting either for an increase in the scale of production or for a rise in the wages of the labour they might supersede, in order to become economically available, may be considered infinite. With every rise in the scale of production some of these pass from the "unpaying" into the "paying" class, and represent a net productive gain in saved labour of the community.

(_c_) The performance of minor or subsidiary processes upon the same premisses or in close organic connection with the main process, the establishment of a special workshop for repairs, various economies in storage, which attend large-scale production.

(_d_) Economies consisting in saved labour and increased efficiency of management, superintendence, clerical and other non-manual work, which follow each increase of size in a normally constructed business. These are often closely related to (_b_), as where clerical work is economised by the introduction of type-writers or telephonic communication, and to (_c_), as by the establishment of more numerous and convenient centres of distribution.

(_e_) The utilisation of waste-products, one of the most important practical economies in large-scale production.

(_f_) The capacity to make trial of new experiments in machinery and in industrial organisation.

Sec. 2. To the class Economies in Competitive Power belong those advantages which a large business enjoys in competing with smaller businesses, which enable it either to take trade away from the latter, or to obtain a higher rate of profits without in any way increasing the net productiveness of the community. This includes--

(1) A large portion of the economy in advertising, travelling, local agents, and the superiority of display and touting which a large business is able to afford. In most cases by far the greater part of this publicity and self-recommendation is no economy from the standpoint of the trade or the community, but simply represents a gain to one firm compensated by a loss to others. In not a few cases the "trade" may be advantaged to the damage of other trades or of the consumer, as when a class of useless or deleterious drugs is forced into consumption by persistent methods of self-appraisal which deceive the public.

(2) The power of a large business to secure and maintain the sole use of some patent or trade secret in machinery or method of manufacture which would otherwise have gone to another firm, or would have become public property in the trade, represents no public economy, and sometimes a public loss. Where such improvement is due solely to the skill and enterprise of a business man, and would not have passed into use unless the sole right were secured to his business, this economy belongs to the productive class.

(3) The superior ability of a large business to depress wages by the possession of a total or partial monopoly of local employment, the corresponding power to obtain raw material at low prices, or to extort higher prices from consumers than would obtain under the pressure of free competition, represent individual business economies which may enable a large business to obtain higher profits.

Sec. 3. Now all these forces operative in trades which are said to be subject to the law of increasing returns tend to increase the size and to diminish the number of businesses competing within a given area. In some industries the expanding size of the market or area of competition keeps pace with this movement, so that the total number of the larger competitors within the market may be as great as before. But in most of the markets the growing scale of the business is attended by an absolute diminution in the number of effective competitors, or at any rate by an increase which is very much smaller than the increase in the amount of trade that is done.

So long as we have merely the substitution of a smaller number of large competing businesses for a larger number of small ones, no radical change is effected in the nature of industry. So long as every purchaser is able to buy from two or more equally developed and effectively competing firms he can make them bid against one another until he obtains the full advantage of the economies of large-scale production which are common to them. So long as there remains effective competition, all the productive economies pass into the hands of the consumer in reduction of price. Nay, more than this, a competing firm cannot keep to itself the advantages of a private individual economy if its competitor has another private economy of equal importance. If A and B are two closely competing firms, A owning a special machine capable of earning for him 2 per cent. above the normal trade profit, and B owning a similar advantage by possession of "cheaper labour," these private economies will be cancelled by competition, and pass into the pocket of the consuming public.

There is every reason to believe that with a diminution in the number of competitors and an increase of their size, competition grows keener and keener. Under old business conditions custom held considerable sway; the personal element played a larger part alike in determining quality of goods and good faith; purchasers did not so closely compare prices; they were not guided exclusively by figures, they did not systematically beat down prices, nor did they devote so large a proportion of their time, thought, and money to devices for taking away one another's customers.[124] From the new business this personal element and these customary scruples have almost entirely vanished, and as the net advantages of large-scale production grow, more and more attention is devoted to the direct work of competition. Hence we find that it is precisely in those trades which are most highly organised, provided with the most advanced machinery, and composed of the largest units of capital, that the fiercest and most unscrupulous competition has shown itself. The precise part which machinery, with its incalculable tendency to over-production, has played in this competition remains for later consideration. Here it is enough to place in evidence the acknowledged fact that the growing scale of the business has intensified and not diminished competition. In the great machine industries trade fluctuations are most severely felt; the smaller businesses are unable to stand before the tide of depression and collapse, or are driven in self-defence to coalesce. The borrowing of capital, the formation of joint-stock enterprise and every form of co-operation in capital has proceeded most rapidly in the textile, metal, transport, shipping, and machine-making industries, and in those minor manufactures, such as brewing and chemicals, which require large quantities of expensive plant. This joining together of small capitals to make a single large capital, this swallowing up of small by large businesses, means nothing else than the endeavour to escape the risks and dangers attending small-scale production in the tide of modern industrial changes. But since all are moving in the same direction, no one gains upon the other. Certain common economies are shared by the monster competitors, but more and more energy must be given to the work of competition, and the productive economies are partly squandered in the friction of fierce competition, and partly pass over to the body of consumers in lowered prices. Thus the endeavour to secure safety and high profits by the economies of large-scale production is rendered futile by the growing severity of the competitive process. Each big firm finds itself competent to undertake more business than it already possesses, and underbids its neighbour until the cutting of prices has sunk the weaker and driven profits to a bare subsistence point for the stronger competitors.

So long as the increased size of business brings with it a net economic advantage, the competition of ever larger competitors, whose total power of production is far ahead of sales at remunerative prices, and who are therefore constrained to devote an increased proportion of energy to taking one another's trade, must intensify this cut-throat warfare. The diminishing number of competitors in a market does not ease matters in the least, for the intensity of the strife reaches its maximum when two competing businesses are fighting a life or death struggle. As the effective competitors grow fewer, not only is the proportion of attention each devotes to the other more continuous and more highly concentrated, but the results of success are more intrinsically valuable, for the reward of victory over the last competitor is the attainment of monopoly.

Sec. 4. To keen-eyed business men engaged in the thick of large-scale competition it becomes increasingly clear that good profits can only be obtained in one of two ways. A successful firm must either be in possession of some trade secret, patent, special market, or such other private economy as places it in a position of monopoly in certain places or in certain lines of goods, or else it must make some arrangement with competing firms whereby they shall consent to abate the intensity or limit the scope of their competition. It will commonly be found that both these conditions are present where a modern firm of manufacturers or merchants succeeds in maintaining during a long period of time a prosperous or paying business. The firm, though in close competition over part of the field of industry, will have a speciality of a certain class of wares, at any rate in certain markets, and it will be fortified by a more or less firmly fixed rate of prices extending over the whole class of commodities. Both of these forces signify a restriction upon competition.

To the older economists, who regarded free competition as the only safe guarantee of industrial security and progress, it appeared natural that capitalists continually engaged in the maximum competition would yet secure a living rate of profit, for if this were not the case, they ingenuously urged, capital would cease to remain in such a trade. With the fallacy involved in this theory we shall deal in a later chapter. It is sufficient here to observe that where keen competition is operative in modern machine industries the average rate of profits obtained for capital is generally below that which would suffice to induce new capital invested with full knowledge to come into the trade.

In highly organised trades, where the natural effects of free competition have been fully manifested, we find that the hope of a profitable business is entirely based upon the possibility that a trade agreement will so mitigate competition as to allow a rate of selling prices to obtain which remains considerably higher than that which free competition would allow.

As the field of competition is narrowed to a comparatively few large competitors, there arises a double inducement to suspend or mitigate hostilities; as the competition is fiercer more is gained by a truce; as the number of combatants is smaller, a truce can be more easily formed and maintained. In most machine-using countries each branch of a staple industry endeavours to protect itself from free competition by a combination of masters to fix a scale of prices. This is the normal condition of trade in England to-day. These combinations to fix and maintain prices are not equally successful in all trades, but they are always operative to a more or less extent in modifying or retarding the effects of competition. Where trade unions of operatives are strong, well-informed, and resolute, or where outsiders have large facilities for investing capital and dividing the trade, the endeavours to maintain prices and to secure a higher than the competitive rate of profits are unsuccessful. The joint operation of both these conditions in the cotton-spinning trade explains why the Lancashire spinners have been unable to check the effects of cut-throat competition. But throughout all branches of textile, metal, pottery, engineering, and machine-making trades strong and persistent endeavours are made by co-operative action of capitalists to limit competition by fixing a scale of prices which should not be underbid.

Where competing railways fix a tariff of rates for carriage, or competing manufacturers fix a scale of prices for their goods, their object is to secure to themselves in higher profits a portion or the whole of the productive and competitive economies attending large-scale production, instead of allowing them by unrestricted competition to pass into the hands of their customers. Suppose that a number of steel rail manufacturers freely competing would drive down the selling price to L1 a ton, but that by a trade agreement they maintain L1 10s. as the minimum price, 10s. per ton represents the economies of production which they divert from their customers into their own possession by a limitation of the competition. Part of the 10s. may represent the actual saving of the labour which would have been spent in competition as prices fell from L1 10s. to L1. Part may represent a taking in higher profits of some of the economies of new machinery or improved methods of production common to the competing firms, and which would inevitably have led to a fall of price if the competitive process had been allowed free play.

The prices thus fixed are monopoly prices--that is to say, they are determined by the action of a number of competing capitals which at a certain point agree to suspend their conflict and act as a single capital; when the bidding is above a certain figure they are many, when it is below that figure they are one. The condition in such a trade is one of limited monopoly. The prices fixed by such trade agreements will generally be different from those of a single firm with the absolute monopoly of a market, whose prices are arranged to yield the maximum net profit on the capital engaged. For since the economies of competition and some of the economies of production would be far greater for a single producing firm with a monopoly, the schedule of supply prices measuring the expenses of producing the different quantities of goods will be different, and this difference will be reflected in a different scale of non-competitive market prices from that which would issue from a trade agreement. Moreover, a loose voluntary compact between trade rivals yields a monopoly of a far feebler order than does the unity of a single capital. If a scale of prices were fixed which would yield a considerably higher profit than the market rate, the temptation to secure a larger share of trade by secret underbidding through commissions, drawbacks, or otherwise, or even by an open cutting of rates, is very powerful. Moreover, the ability of a number of firms with conflicting interests to secure this monopoly by quick and vigorous repression of the attempts of outside capital to come in either for the purpose of sharing the higher profits, or of being bought out, is far less than in the case of a single monopolist firm. So the scale of prices fixed by a number of competing firms will generally be nearer to the competition prices than would be the case with the prices of a single monopolist.

Sec. 5. The recognition of the advantages of limiting competition by price tariffs, and the experience of the difficulty of maintaining such tariffs, lead competing businesses to take further steps in the curtailment of competition. Where a powerful trade opinion can be focussed on an offender against the scale, where he can be boycotted or otherwise subjected to punishment, and where outsiders can be prevented from intruding into the trade, a common scale of profitable prices can often be maintained with the verbal or even the tacit consent of those concerned. This is the case in many manufactures where the fixed and well-known character of the goods makes a close price-list possible. Retail dealers in local markets are often able to keep a close adherence to a rigid scale by the pure force of _esprit de corps_. The price of bread, meat, milk, coals, and other articles sold locally by well-known measures, is seldom, if ever, regulated by free competition among the vendors. In articles where more depends upon the individual quality of wares, and where a rigid tariff is less easily fixed and less easily maintained, as in the case of vegetables, fruit, fish, and groceries, trade agreements are less easy to maintain. Still more difficult is it to maintain a tariff for articles of dress or adornment of the person or the house, and in other articles where the consumer is less confined to a narrow local market.

The general experience of manufacturing and mercantile businesses, where each firm is closely confronted by other firms of similar capacity and equipment at every point in the market, indicates an increasing difficulty in maintaining prices at a profitable level. Everywhere complaints are heard of a reckless use of the productive power of machinery, of over-stocked markets, of a cutting of prices in order to get business, and of a growing inability to make a living rate of profit.

Sec. 6. The endeavour of a number of individual businesses in a trade to fix and maintain a certain profitable scale of prices is constantly frustrated. The introduction of new machinery enabling certain firms to make a profit at prices below the tariff induces them to utilise their full productivity, cut prices, and still sell at a profitable price; others involved in the meshes of speculative production are compelled to cut prices and effect sales even at a loss; the difficulty of finding safe investments drives new capital into the hands of company-promoters, who fling it with criminal negligence into this or that branch of production, underbidding the tariff to win a footing in the market. All these forces render loose agreements to limit competition more and more inadequate to secure their purpose. Frequent experience of the impotence of these partial forms of co-operation drives trade competitors to seek ever closer forms of combination. An issue of this necessity is the Syndicate and the Trust. By raising the co-operative action so as to cover the whole, and by thus reducing the competition to zero, it is hoped that a union may be formed strong enough to maintain monopoly prices. Thus the Trust is seen as the logical culmination of the operation of economic forces which have been continually engaged in diminishing the number of effective competitors, while increasing their size and the proportion of their energy devoted to the competition.

At each stage in the process the smaller competitors are eliminated, and the larger driven to increase their size so that the whole may be illustrated by a pyramid, the base or first stage of which consists of a larger number of small units, and each higher stage of a smaller number of larger units, with a Trust or Monopoly Syndicate for its apex.

Sec. 7. The motive which induces a number of businesses hitherto separate, or associated merely for certain specific actions, such as the fixing of prices or wages, to amalgamate so that they form a single capital on which a single rate of interest is paid, is a double-edged one. There is, on the one hand, the desire to protect themselves against excessive competition and cutting of rates, and on the other hand a desire to secure the advantages which arise from monopoly. The way in which Syndicates and Trusts are regarded depends very much from which of these two aspects they are regarded. Those who consider these business "combines" as arbitrary and high-handed interferences with freedom of commerce, undertaken in order to place in the hands of a few persons a power to rob and oppress the consuming public by legalised extortion, regard the motive of combination to be monopoly. On the other hand, the combining firms represent themselves as the victims of circumstances, bound in self-protection to combine. Our analysis of the operations of commercial competition enables us to see that these two forces are not really separate, but are only two ways of looking at the same action. Every avoidance of so-called "excessive" competition is _ipso facto_ an establishment of a monopoly. The tariff of prices established a weak and partial monopoly. The "combine," whether it takes the name of "ring," "syndicate," or "trust," succeeds, in so far as it establishes a stronger and more absolute monopoly.

In their economic aspect these terms are somewhat vague, the vagueness arising in some degree from the changing and secret shapes these combinations often find it convenient to adopt in order to preserve the appearance of competition, or to avoid public obloquy or legal interference. "Combine" is probably the generic term which covers all these operations. A syndicate of capitalists are said to form a "combine" with the view of controlling prices so as to pay a profitable interest. If they apply their capital not to the acquisition of the plant and machinery of manufacture with the view of regulating production, but directly and mainly to the planning of some speculative stroke or series of strokes in the produce market, obtaining temporary control of sufficient goods of a particular kind to enable them to manipulate prices, they are said to form a "corner" or "ring." Such forms of combined action are generally of short duration. Technically they consist in an artificial diversion[125] of a particular class of goods from the ordinary channel of a number of competing owners into a single ownership, so that they may be held and placed upon the supply market at such times and in such ways as to enable the owner to obtain a famine price. The following description of a wheat "corner" will serve to exemplify this method of "combine":--

"The man who forms a corner in 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 whole supply is nearly in his control, he spreads the news that there is a 'corner' in the market, and buys openly all the wheat he can, offering higher and higher 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 higher prices 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."[126]

These "corners," of which in various forms and degrees the speculative business on the stock and produce markets largely consists, are attempts to substitute for a time a high monopoly price for a competitive price by "rigging the market." Since the calculations upon which these "corners" are based are essentially hazardous, attempted corners frequently break down. One of the most special examples of the collapse of a powerful corner in recent years is that of "La Societe Industrielle Commerciale des Metaux," commonly known as the "Copper Syndicate." A body of French capitalists, for the most part not owners of mines or metal merchandise, but speculators pure and simple, placed a sum of money with the intention of cornering the supply of "tin." Before completing this design they were induced to undertake a larger speculation in the "copper market." In 1887 they entered into contracts with the largest copper-producing companies in various countries, agreeing to buy all the copper produced for the next three years at a fixed price of 13 cents per pound, with an added bonus equivalent to half the profit from their sale of the same. In 1888 the Syndicate sought to extend its contracts with chief mining companies to cover a period of twelve years, arranging with them also to limit the output of copper. For some time they held the market in their grip, and prices advanced considerably. But partly owing to a failure to complete their contracts securing a restriction in production, and partly from inability to meet their current liabilities, the "corner" was broken down in 1889, and the artificially inflated prices fell. Not only are the makers of "corners" liable to these miscalculations, but they are liable to be overthrown by counter combinations of capitalists or of operatives. The breakdown of a formidable attempt to "corner" cotton in Lancashire in 1889 was due to the prompt action of the Trades Unions, who undertook to unite with their employers in a stoppage of work for such length of time as was requisite to force the collapse of the "ring."

In the same year a formidable flour syndicate broke down before the firm attitude of the co-operative flour mills.[127]

But though the speculative character of modern commerce, assisted by the abundant use of credit, has lent special facilities to the formation of "corners" and "rings," it is hardly necessary to say that commerce has never been free from them. The celebrated "corner" in grain which Joseph organised on behalf of the King of Egypt was one of the largest and most successful. The commercial law of the Middle Ages is full of provisions against engrossers, forestallers, and regrators, all of whom were engaged in artificially raising prices to the consumer by obtaining some sort of monopoly. Organised rings to secure a monopoly of the food supply of some great city have been frequent throughout history. Cicero informs us of the celebrated ring of capitalists under Crassus to raise food prices at Rome. A closely-formed combination of northern coalowners continued to restrict output and impose monopoly prices upon London consumers for a considerable time in the middle of the eighteenth century.[128]

In modern times these "corners" are essentially of brief duration so far as they consist in narrowing the stream of commerce at a particular point so as to check its free flow. Most of them are confined to goods which are dealt with upon commercial exchanges, and are amenable to the operations of skilled speculators. The "deal" must be upon a scale large enough to enable a big net profit to be secured in a short time. The stimulation which artificially inflated prices apply to the early productive processes, the activity of other speculators, and the check given to consumption by high prices, generally preclude the possibility of a "corner" lasting long. The strength of the copper "corner," had it succeeded, would have lain in the hold it would have obtained over the early extractive stage, preventing the operation of the natural stimulus of high prices to increase production. If the Copper Syndicate had established its hold upon the mining companies, it would have been able to hold the market for an indefinite period, passing from the state of a "corner" into the more durable and established position of the Trust.

Sec. 8. A Trust may be regarded from an economic aspect, or from a legal aspect. Economically, the term Trust is applied to a class of syndicates which have established a partial or total monopoly in certain productive industries by securing the ownership of a sufficient proportion of the instruments of production to enable them to control prices. Legally, a Trust is a form of business association--"a trust of corporate stocks by means of which a body of men united in interest are enabled to carry on business through separate corporate agencies."[129] It is a company of companies, under which, while the formal structure of the original companies is maintained, they are incorporated as single cells in the larger organism which directs their activity. The constitution of the Trust is best explained by a description of its origin in the industry of the United States. The owners of a majority of the shares in a number of corporations hitherto separate in their constitution (though they may have been acting in agreement with one another, or have been largely owned by the same persons) agree to place their shares of stock in the full control of a body of persons called trustees. These trustees may or may not be shareholders or directors of the several corporations. They "act under an agreement that they will cast the votes represented by the stock so held for the perpetuation of the trust during the time agreed upon, and in furtherance of its purposes: will elect the officers provided for by law in each of the corporations, and in behalf of all of them manage the business of all, except, it may be, in small matters of detail." "Each shareholder, upon surrendering his corporate stock to the board of trustees, receives a certificate entitling him to an interest in all the property and earnings of all the corporations of the trust."[130]

These certificates are believed in many cases to certify a money value far in excess of the real value of the stock surrendered at the time when the Trust was formed. The Report of the New York Chamber of Commerce for 1887-88 estimates the "certificates" given by the Sugar Trust to the shareholders of its constituent corporations as bearing "water" to the amount of 200 per cent., so that the nominal dividend of 10-1/2 per cent. paid during the year represented a real net profit of 31-1/2 per cent. Such statements cannot, however, be verified, since it is the interest of the only persons who actually know to keep secret such an arrangement.

It is asserted by many, and several State courts have sustained the position, that a Trust is in America an illegal association, because it implies on the part of its constituent corporations a violation of the conditions under which they received the powers and privileges conferred in their charters by the government of the several States. Their illegality consists, it is held--

(1) In surrendering the power to manage and control their business to some persons other than those legally authorised.

(2) In engaging, through the Trust, in kinds of business not authorised by the charter.

Sec. 9. It is, however, the economic character and powers of the Trust, and not its legal position, which concern us here.

The following short history of the origin and _modus operandi_ of the Standard Oil Trust, the largest and in some respects the strongest of these organisations, will serve to give distinctiveness to the idea of the Trust:--

Petroleum began to be an article of extensive commerce about the year 1862. The wells from which the crude petroleum oil was drawn were in Pennsylvania, and the work of boring the wells with machinery and extracting the oil grew to be a considerable business. The crude oil was sold to various refiners, who set up factories in Cleveland (Ohio), in Pittsburg, and in several other cities. By 1865 these factories had become pretty numerous, and in that year a private refinery at Cleveland, owned by a few partners, obtained a charter forming it into a corporation entitled the Standard Oil Company, with a capital of $100,000. Until 1870 the progress of the company was comparatively slow. In order to increase their hold upon the sources of production in Pennsylvania, and to expand their trade, they began to purchase stock in corporations already existing in that State, and succeeded in establishing others, with which they worked in close alliance. A Standard Oil Company was organised at Pittsburg, the stock of which passed into the hands of the owners of the Cleveland Company. They then proceeded to establish agencies in other States, primarily for the sale of their goods, but when these businesses were firmly planted they obtained for them from the several States charters incorporating them as companies for refining oil. In 1872 the shareholders of the Standard Oil Companies at Cleveland, Pittsburg, and Philadelphia organised another corporation called the South Improvement Company, obtaining a charter from the State of Pennsylvania. This corporation, which was in fact though not in legal form the "Standard Oil Companies," then entered into contracts with the New York Central and Hudson River Railroad Company, the Erie Railway Company, and several other lines which traversed the oil-producing country, for the shipment of petroleum. The South Improvement Company agreed to ship over these railways all the petroleum products. In return the railway companies agreed to carry their goods, not upon the terms open to other customers, but with a system of rebates, paid not only upon the oil shipped by the company, but upon that shipped by any other competing companies. "In one locality the railroad companies were to charge oil shippers as freight not exceeding $1.50 per barrel, and pay a rebate to the South Improvement Company of $1.06 per barrel, whether it was the shipper of the oil or not, so that under these contracts the Standard Oil Company members would pay no more than 44 cents per barrel as freight to the carrier, while their competitors would pay $1.50, and of this last sum the railways were to pay back to the combination $1.06 per barrel."[131]

Though this monstrous conspiracy was quickly unmasked, and the South Improvement Company lost its charter, secret negotiations with the railway companies enabled the Standard Oil Companies to strengthen themselves by this system of rebates paid out of the pockets of their business rivals. Chiefly by means of these and other discriminating contracts they were enabled to enlarge their sphere of activity, and making full use of their growing capital, succeeded in destroying or absorbing their competitors, until, as early as 1875, they held a practical monopoly of the refineries of the interior. No fewer than seventy-four refineries are stated to have been bought up, leased, or bankrupted by the Standard Oil Company in Pennsylvania alone in the course of its career.

Until about 1878 the chief source of power of the company seems to have been the alliance with the railroads and the local monopolies obtained by buying up or crushing rival businesses. But the president, Mr. Rockefeller, and his associates were men of keen business ability, who understood how to make use of the inventive genius of the abler employees who passed into their service, and of the improvements in method of production and distribution of oil which were suggested. In the next few years the company were enabled to effect enormous economies in the storage and conveyance of oil. Pipe lines were laid down connecting New York, Philadelphia, Baltimore, Buffalo, Pittsburg, Cleveland, and Chicago, and a network of feeding lines joining the sources of supply. Thousands of huge tanks were erected for holding surplus stores; a large number of agencies were established along the sea-shore with storage attached. Further considerable economies were effected by the undertaking of the manufacture of barrels and cans and other subsidiary articles required in the trade. At the close of 1881 the owners of the entire capital of fifteen corporations and parts of the stock of a number of others, the latter chiefly trading companies, established the Trust. The number of shareholders thus associated was forty, and they placed their stocks in the hands of nine of their number as trustees, who continued to administer the whole business, paying interest upon the certificates which represented the stock of the several shareholders until March 1892, when the Trust was legally dissolved. The legal dissolution of the Trust has not, however, materially impaired its economic unity and power; on the contrary, it has extended in the United States its monopolic control of the market, and has already established a strong control over several European markets for the sale of oil, and over the chief natural sources of supply. Although a practical monopoly in many parts of the interior had been acquired at a tolerably early date, there continued to be active competition in all branches of the petroleum business until 1884, when the war of rates, which had been waged for some time with a formidable Canadian competitor, the Tidewater Company, ceased, an alliance being formed between the rivals. From that time the Standard Oil Trust has held a practical monopoly over the greater part of the country. It has introduced new economies in the machinery of refining, has found profitable uses for naphtha and other waste products, and has vastly increased its output and the machinery of distribution. Not content with controlling the market for crude oil, it has during the last few years obtained the possession of larger and larger portions of the oil-producing country, forming companies to acquire mining rights, sink wells, and oust the private producers from whom it had previously been content to purchase the raw material at their own prices.

Bearing in mind the fact that the actual unification of businesses took place a good many years before the formation of the Trust, there is nothing in the account given above inherently inconsistent with the following explanation afforded by the Standard Oil Trust of their proceedings:--

"The Standard Oil Trust offers to prove by various witnesses that the disastrous condition of the refining business, and the numerous failures of refiners prior to 1875, arose from imperfect methods of refining, want of co-operation among refiners, the prevalence of speculative methods in the purchase and sale of both crude and refined petroleum, sudden and great reductions in price of crude, and excessive rates of freight; that these disasters led to co-operation and association among the refiners, and that such association and co-operation, resulting eventually in the Standard Oil Trust, has enabled the refiners so co-operating to reduce the price of petroleum products, and thus benefit the public to a very marked degree."[132]

So far as this furnishes an explanation of the motives leading to the earlier growth of the Company, the consolidation of rival companies, no doubt it contains a considerable element of truth. The Standard Oil Trust, however, differs from most others in that it was not directly formed by the union of a number of leading rival businesses, but was merely a reorganisation upon a firmer basis of a single complex business. The motive of self-protection, though it might be operative in the early history of the Company, cannot be adduced as the true motive of the formation of the Trust.

Since the claim of the Standard Oil Trust to be a public benefit rests upon the fall of price to the customer, resulting from the various economies and improvements adopted by the Trust, it may be well to append a diagram showing the actual fall of prices during the twenty years 1870 to 1890.

In this diagram we note that from 1870 to 1875 there was a rapid reduction of price in consequence of the fact that these were years of keen competition with other Pennsylvanian businesses. 1875, which marks the establishment of a monopoly of the interior trade in the hands of the Standard Oil Trust, also marks a sharp rise of prices. The expansion of their business brought them into contact with new and more distant competitors, and a fall of price continued until 1879, while prices continued to oscillate until 1881, the year of the formation of the Trust. From the time of the formation of the Trust the fall of price has been only half a cent. The moral is obvious. So long as there is competition, in spite of the expense of conducting the strife, prices fall; when the competition is suspended, and there is a saving of friction, the public gains no further reduction.

The reason why, even after the complete monopoly had been attained, the price of oil was not put up again will be apparent when we come to examine the economic limits of the power of a Trust.

Sec. 10. A large number of these Trusts, similar in their constitution to the Standard Oil Trust, and with the same object of maintaining a scale of prices based upon monopoly, have been founded in the United States. Some have undoubtedly owed their establishment to the prevalence of low profits in a trade where close competition has led to a constant cutting of prices, and their foundation has been leniently regarded as an act of self-defence. To this order belong the Whisky Trust, the Cotton Oil Trust, the Cotton Bagging Trust, and others. Indeed, one well-informed writer upon the subject holds that this is the normal origin of the Trust. "With the exception of the Standard Oil Trust, and perhaps one or two others that rose somewhat earlier, it may be fairly said, I think, that not merely competition, but competition that was proving ruinous to many establishments, was the cause of the combinations."[133]

This condition of ruinous competition must be recognised as the normal condition of all highly-organised businesses where modern machinery is applied, and which are not sheltered by some private economy in the shape of special facilities in producing or in disposing of their goods. Even the Standard Oil Company, as we saw, claimed that a policy of consolidation was forced upon it by the conditions of the market. But this claim is not a refutation, but an admission of the statement that the object of a Trust is to obtain monopoly prices; for these ruinously low prices and profits are the result of free competition, and the only alternative to this free competition is monopoly. Hence it is a legitimate conclusion that the economic object of a Trust is to substitute monopoly for competitive prices, and to do this more effectively than can be done by the mere acceptance of a common price-list by the separate firms engaged in a branch of production. In order to attain this object it is not necessary that the Trust shall comprise all the capital engaged in an industry. Even when the Standard Oil Trust was firmly established, and was, according to its own admission, paying 12-1/2 or 13 per cent. on its highly-watered stock, there appears to have existed no fewer than 111 smaller independent companies competing with it directly or indirectly at some point within the area of its market.[134] But the Standard Oil Trust was able to control prices, as the producer of some 75 per cent. of the total product, and the practical monopolist over the main area of its market. Similarly the Sugar Refineries Trust in 1888 had a firm grip over prices by its possession of 80 per cent. of the sugar refining capacity of the Atlantic Coast, or 65 per cent. of the sugar consumed in the United States.[135] There are other cases where a formally constructed Trust is for a time engaged in close effective competition, either with another Trust, as was the position of the Standard Oil Trust over a portion of its markets in the period 1881 to 1884, or with powerful companies not organised as Trusts. This is what Mr. Gunton appears to consider the normal condition of a Trust, one in which competition takes place between a few large bodies of capital instead of between many smaller bodies.[136] Certain Trusts have certainly been compelled to struggle for the retention of their monopoly power over the market. A notorious example is that of the Sugar Trust, which, after a most successful start in 1888, found itself in 1890 face to face with a new and formidable competitor in the shape of the Claus Spreckles refineries of Philadelphia and San Francisco, and was compelled to forego the high profits it had been making and fight for its existence under terms of keenest competition.

But in so far as a Trust stands in this position it has failed to achieve its industrial end of checking "ruinous competition" and the "cutting of prices." It is not in the possession of the chief economies of a Trust so long as it remains at warfare, for it is compelled to expend all that it gains from the enlarged scale of business and from the cessation of competition among its constituent companies upon the strife with its single antagonist. A Trust in this inchoate condition has no special economic character distinguishing it from other large aggregates of competing capital. It is with fully-formed trusts which are able to control prices and regulate to some degree production and profits that we are concerned. An economic Trust has its _raison d'etre_ in monopoly. It may not have eliminated all actual competitors, and is generally limited in its power by the possibility of outside opposition, but so far as its power extends it must be able to regulate prices upon non-competitive lines.

Sec. 11. A large number of different articles have at some stage in their production fallen under the monopoly of a Trust.[137]

As is the case with "corners" and "rings" in the produce market, certain classes of commodities lend themselves more readily than others to the monopoly of Trusts.

There are three classes of industry which more easily than others permit the formation of effective trusts.

(1) Industries connected with, or closely dependent on, the nature and properties of land. When the whole or a large proportion of the raw material required for producing any class of goods is confined within a restricted area, the possession of that land by a single body of owners will give a strong monopoly. It was not essential to the Standard Oil Trust in its earlier years to own the sources of the oil provided they could possess themselves of the stream after it had left the source. But they have strengthened this monopoly lately by securing the ownership of the oil lands in Pennsylvania. The most striking example, however, is the monopoly of the anthracite coal region in Pennsylvania by the shareholders of the Pennsylvania and Reading Railway. The tendency of a Trust to strengthen its industrial position and at the same time to find a profitable investment for its surplus profits by fastening upon an earlier process of production or a contiguous industry, and drawing it under the control of its monopoly, is one of the most important evidences of the rapid growth of the system in America. The rapidity with which the whole railway system is passing into the hands of the two great monopolist syndicates with the necessary result of stifling competition is in some respects the most momentous economic movement in the United States at the present time. The magnificent distances which separate the great mass of the producers of agricultural and other raw products from their market makes the railway their only high-road, and the fact that except between a few large centres of population there is no competition of rival railways, places the producer entirely at the mercy of a single carrier, who regulates his rates so as to secure his maximum profit. Indeed, so fast is the amalgamation of railway capital proceeding that even between large cities there is little genuine competition. The same is true of the telegraph and the supply of such things as water and gas, which, by reason of their relation to land, and the power thus conferred upon the owner of the first and most convenient means of supply, are "natural" monopolies. Where such industries are left, as in most cities of America, to private enterprise, they form the objects of a monopoly which is commonly so strong as to crush with ease attempts at competition where such are legally permissible. Jay Gould's Western Union Telegraph Company is an example of an absolute monopoly maintained for many years without the possibility of effective competition. The purchase of Western lands in order to hold them for monopoly prices has been a favoured form of syndicate investment during the last forty years.

(2) Articles which for economy of transport and distribution require to be massed together in large quantities are specially amenable to monopoly. Grains produced over a wide area have often to be collected in large quantities to be re-assorted according to quality, and to be warehoused before being placed in the market. So the produce of thousands of competing farmers passes into the hands of a syndicate of owners of grain elevators at Chicago or elsewhere. The same is true of meat, fish, fruit, vegetables, dairy produce. All these things, raised under circumstances which render effective co-operation for purposes of sale well-nigh impossible, flow from innumerable diverse places into a common centre, where they fall into the hands of a small group of middlemen, merchants, and exporters. Even the retail merchants, as we have seen, are able to make effective combinations to maintain prices in the case of more perishable goods.

In England the combination of retail merchants commonly takes the form of a trade regulation of prices restricting competition. But in the United States regular Trusts have been in some cases established in retail trade. The Legislative Committee of New York State, in its investigations, discovered a milk trust which had control of the retail distribution in New York City, fixing a price of three cents per quart to be paid to the farmer, and a selling price of seven or eight cents for the consuming public.

Hence it arises that the prices paid by the consumer for farm produce are picked pretty clean by various groups of monopolists or restricted competitors before any of them get back to the farmers or first producers.

The farmer, from his position in the industrial machine, is more at the mercy of Trusts and other combinations than any other body of producers. In the United States he is helpless under the double sway of the railway and the syndicate of grain elevators and of slaughterers in Chicago, Kansas City, and elsewhere. In England, in France, and in all countries where the farmer is at a long distance from his market, farm produce is subject to this natural process of concentration, and we hear the same complaints of the oppressive rates of the railway and the monopoly of the groups of middlemen who form close combinations where the stream of produce narrows to a neck on its flow to the consumer. The position of the American farmer, crushed between the upper and the nether mill-stone of monopoly, is one of pathetic impotence.

(3) In those industries to which the most elaborate and expensive machinery is applied, and where, in consequence, the proportion of fixed capital to labour is largest, the economies of large-scale production are greatest. Here, as we have seen, the growing strain of the fiercer competition of ever larger and ever fewer capitals drives towards the culminating concentration of the Trust. Where, owing either to natural advantages, as in the case of oil and coal, or to other social and industrial reasons, a manufacture is confined within a certain district, and is in the hands of a limited number of firms in fairly close commercial touch with one another, we have conditions favouring the formation of a Trust. In most of the successful manufacturing Trusts some natural economy of easy access to the best raw material, special facilities of transport, the possession of some state or municipal monopoly of market, are added to the normal advantages of large-scale production. The artificial barriers in the shape of tariff, by which foreign competition has been eliminated from many leading manufactures in the United States, have greatly facilitated the successful operation of Trusts. Where the political, natural, and industrial forces are strongly combined, we have the most favourable soil for the Trust. Where a manufacture can be carried on in any part of the country, and in any country with equal facility, it is difficult to maintain a Trust, even though machinery is largely used and the individual units of capital are big.

Each kind of commodity, as it passes through the many processes from the earth to the consumer, may be looked upon as a stream whose channel is broader at some points and narrower at others. Different streams of commodities narrow at different places. Some are narrowest and in fewest hands at the transport stage, when the raw material is being concentrated for production, others in one of the processes of manufacture, others in the hands of export merchants. Just as a number of German barons planted their castles along the banks of the Rhine, in order to tax the commerce between East and West which was obliged to make use of this highway, so it is with these economic "narrows." Wherever they are found, monopolies plant themselves in the shape of "rings," "corners," "pools," "syndicates," or "trusts."

FOOTNOTES:

[124] There still survive in certain old-fashioned trades firms which do business without formal written contracts, and which would be ashamed to take a lower price than they had at first asked, or to seek to beat down another's price.

[125] There need, of course, be no actual diversion of goods into the possession of the Ring: the essence of the monopoly consists in the control, not in the possession of goods.

[126] Baker, _Monopolies and the People_, p. 81.

[127] Cf. Miss Potter, _The Co-operative Movement_, p. 199.

[128] Porter, _Progress of the Nation_, pp. 283-285.

[129] C.S.T. Dodd, "Ten Years of the Standard Oil Trust," _Forum_, May 1892.

[130] "The Standard Oil Trust," Roger Sherman, _Forum_, July 1892.

[131] Roger Sherman, "The Standard Oil Trust," _The Forum_, July 1892.

[132] Argument of Standard Oil Trust before the House Committee on Manufactures, 1888 (quoted Baker, _Monopolies and the People_, p. 21).

[133] J.W. Jenks, _Economic Journal_, vol. ii. p. 73.

[134] _Report to the Commission of the Senate of New York State_, p. 440.

[135] _Economic Journal_, vol. ii. p. 83.

[136] "The Economic and Social Aspect of Trusts," _Political Science Quarterly_, Sept. 1888.

[137] Baker, writing 1890, names fifty-nine articles which have at various times formed the material of Trusts, ranging in importance from sugar and iron rails to castor-oil, school slates, coffins, and lead pencils.