329. ABUSE OF POWER BY THE TRUSTS.—Trusts have often abused their monopolistic powers. They have often used their wealth to corrupt legislatures and to attempt to influence even the courts, in the effort to prevent laws and court decisions from restricting their monopoly. The corruption of railway corporations and of political parties has been partly due to the evil influence of the trusts. Trusts have often crushed out independent concerns that endeavored to compete with them. This has been accomplished, partly by inducing railroads to discriminate against independent concerns and in favor of the trusts, partly by cutting prices in competitive markets until independent concerns were crushed out, and partly by the use of bribes, threats, and other unfair methods. After competition had been suppressed, the trusts took advantage of their monopoly to raise prices on their products, thus imposing a heavy burden upon the public.

330. THE SHERMAN ANTI-TRUST ACT. (1890.)—During the eighties a number of states attempted to control the trust movement. But the Federal government has exclusive jurisdiction over interstate business, and for this reason the action of the states was limited to the control of the relatively unimportant trust business lying entirely within their respective borders. The fact that an increasing proportion of trust business was interstate in character stimulated interest in Federal anti-trust legislation, and in 1890 the Sherman Anti-trust Act was passed. This Act declared illegal "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations."

331. FAILURE OF THE SHERMAN ACT.—For more than twenty years after its passage, the Sherman Act did little to curb the growth of the trusts, indeed, the most marked tendency toward trust formation occurred after 1890. Numerous suits were brought under the Act, but the lukewarm attitude of the courts rendered difficult the administration of the law. After 1911 the courts held that the restraint of trade was illegal if "unreasonable," but few juries could be found that could agree upon the difference between a "reasonable" and an "unreasonable" restraint of trade. Lastly, combinations which had been organized under the original trust plan were not disheartened by court decrees ordering them to dissolve, but reorganized under some device which was practically as effective as the trust plan, but which did not technically violate the Sherman act.

332. FURTHER LEGISLATION IN 1914.—Finally in 1911 the government succeeded in dissolving the Standard Oil Company and the American Tobacco Company, two of the largest trusts in the country. This success encouraged the Department of Justice to institute other suits, and stimulated such general interest in the trust problem that in 1914 Congress passed two new Anti-trust Acts. These were the Clayton Act and the Federal Trade Commission Act. The general effect of these laws was to strengthen anti-trust legislation by correcting some of the fundamental defects of the Sherman Act, and by still further extending the power of the Federal government over monopolistic combinations.

333. The Clayton Act of 1914.—The Clayton Act forbids "unjustifiable discriminations in the prices charged to different persons," and also prohibits the lease or sale of goods made with the understanding that the lessee or purchaser shall not patronize competing concerns. The Act specifies a number of other practices which constitute unreasonable restraints of trade. Somewhat complicated limitations are imposed upon interlocking directorates, by which is meant the practice of individuals being on the board of directors of different corporations. [FOOTNOTE: The danger of the interlocking directorate, of course, is that individuals who are directors in two or more corporations may attempt to suppress competition between those corporations. This may lead to monopoly.] The Act likewise forbids the acquisition by one corporation of stock in another corporation when the effect may be "to substantially lessen competition" between such corporations, or "to tend to create a monopoly."

334. THE FEDERAL TRADE COMMISSION ACT OF 1914.—The second of the two Acts of 1914 created a Federal Trade Commission of five members, appointed by the President. The Commission has the power to require annual or special reports from interstate corporations in such form and relating to such matters as it may prescribe. At the request of the Attorney General, the Commission must investigate and report upon any corporation alleged to be violating the anti-trust laws. The most important power of the Commission is undoubtedly that of issuing orders restraining the use of "unfair methods of competition in commerce." This clause aims at prevention rather than at punishment, and if its power is wisely used it will check monopoly in the early stages. Most authorities claim that in this regard the work of the Commission has already proved definitely helpful.

335. THE OUTLOOK.—Since 1911, and especially since the passage of the two Acts of 1914, the trust situation has materially improved. The vague and wholly inadequate powers of the old Sherman Act have been clarified and supplemented by the more specific provisions of the Clayton and Federal Trade Commission Acts. Fairly adequate machinery for the investigation and prosecution of trusts is now provided. The present laws cover not only combinations making use of the old trust device, but also combinations employing other methods of exercising monopoly control. The Federal Trade Commission Act provides for publicity, so that public opinion may have a chance to enforce the principle of fair play and open competition in business. The trust problem in the United States is not yet solved, but the careful control which we are now exercising over this type of organization justifies the belief that the trust evil will become less important as time goes on.

336. THE TRUST PROBLEM OF THE FUTURE. In connection with the matter of making anti-trust legislation more effective, a new and pressing problem is arising. This has to do with the necessity of distinguishing, first, between the legitimate and the illegitimate practices of trusts [Footnote: Large-scale combination or management allows important economies to be practiced. Plant can be used more advantageously, supervision is less costly, supplies can be purchased in large quantities and hence more cheaply, etc. The securing of these economies constitutes a legitimate feature of large-scale combination or management.]; and second, between combinations which are monopolistic and combinations in which there is no element of monopoly.

We are coming to realize a fact which in Europe has long been a matter of common knowledge, namely, that trusts are never wholly and unqualifiedly bad. The law should not aim to destroy trusts, but rather should attempt so to regulate their activities that their economical features will be preserved while their harmful practices will be suppressed. Laws should also recognize the fact that many large-scale combinations have in them no element of monopoly, and that such combinations should be exempted from anti-trust prosecution. In drawing up anti-trust legislation, prohibitions and restrictions should be as concise and as definite as possible, both in order to facilitate the execution of the law, and in order to prevent hardships being worked upon combinations which have consistently observed the rules of fair play in competitive business.

QUESTIONS ON THE TEXT

1. Why is public interest in business necessary?

2. What is the nature of public interest in business?

3. What is the nature of monopoly?

4. What are the two types of monopoly? Give an example of each.

5. Describe the origin of the trust.

6. Explain clearly the meaning of the word "trust" as it is now used.

7. During what period of our history was trust development greatest?

8. In what sense have trusts abused their power?

9. What was the purpose of the Sherman act of 1890?

10. How did the act work out in practice?

11. What important development is associated with the period 1911-1914?

12. What are the main provisions of the Clayton act?

13. What is the purpose of the Federal Trade Commission act?

14. Outline the problem of the future with respect to trusts.

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter xxvii.

Or all of the following:

2. Durand, The Trust Problem, chapter i.

3. Ely, Outlines of Economics, chapter xiii.

4. Fetter, Modern Economic Problems, chapter xxviii.

5. Seager, Principles of Economics, chapter xxv.

QUESTIONS ON THE REQUIRED READINGS

1. What are the four methods by which industrial combinations have taken place? (Fetter, pages 433-434.)

2. What are the three types of trusts? (Durand, page 9.)

3. What is a pool? (Durand, page 9.)

4. Name some of the important trusts which were formed between 1890 and 1899. (Fetter, pages 435-436.)

5. Name some of the most successful trusts. (Seager, page 456.)

6. What is the relation of trust development to the tariff? (Seager, pages 464-465.)

7. What is the evil of over-capitalization? (Seager, pages 465-466; Ely, pages 221-223.)

8. What are the chief advantages claimed for the trust? (Ely, pages 228-230; Durand, page 28.)

9. What are some of the devices used in "unfair competition"? (Ely, pages 239-240.)

10. What are the three ways of dealing with the trust evil? (Durand, pages l0-11.)

11. How has the trust evil been handled in other countries? (Ely, pages 245-246.)

12. What can be said as to the ultimate solution of the trust problem? (Durand, page 30.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. The chartering of corporations in your state

2. History of anti-trust legislation in your state.

3. Outline the present laws of your state relative to monopolistic combinations.

4. Trust development in your state, or in your section of the country.

II

5. The nature of monopoly. (Ely, Outlines of Economics, chapter xii; Seager, Principles of Economics, chapter xxiii.)

6. Causes of trust formation. (Van Hise, Concentration and Control, pages 21-25.)

7. Purposes of trust formation. (Van Hise, Concentration and Control, pages 25-31.)

8. Forms of industrial combination. (Van Hise, Concentration and Control, pages 60-72.)

9. Text of the Sherman anti-trust act. (Ripley, Trusts, Pools and Corporations, pages 484-485; Durand, The Trust Problem, appendix i.)

10. Early Supreme Court decisions relative to the Sherman act. (Ripley, Trusts, Pools and Corporations, pages 506-549.)

11. The Sherman act in actual operation. (Hamilton, Current Economic Problems, pages 433-441.)

12. The "rule of reason." (Ripley, Trusts, Pools and Corporations, pages 606-702.)

13. Difficulty of regulating trusts. (Durand, The Trust Problem, chapter in.)

14. Text of the Federal Trade Commission act. (Durand, The Trust Problem, appendix in.)

15. Relation of the Federal Trade Commission to the courts. (Annals, vol. lxiii, pages 24-36.)

16. Relation of the Federal Trade Commission to our foreign trade. (Annals, vol. lxiii, pages 67-68.)

17. Alleged advantages of trusts. (Durand, The Trust Problem, chapter iv; Van Hise, Concentration and Control, pages 8-21.)

18 Trust regulation in foreign countries. (Van Hise, Concentration and Control, chapter iv.)

19. The history of some one trust, as, for example, the American Sugar Refining Company, the United States Steel Corporation, the American Tobacco Company, or the International Harvester Company. (Consult any available literature.)

FOR CLASSROOM DISCUSSION

20. What is a reasonable as opposed to an unreasonable restraint of trade?

21. How is it possible to tell when combination has resulted in monopoly?

22. To what extent is the mere size of an industrial organization an indication of monopoly?

23. Does monopoly always result in a higher price being asked for the monopolized article?



CHAPTER XXVIII

PUBLIC INTEREST IN BUSINESS: OWNERSHIP

337. BASIS OF NATURAL MONOPOLY.—The most important examples of natural monopoly are found in those industries which are known as public utilities. Public utilities include gas and electric light works, waterworks, telephone and telegraph plants, and electric and steam railways.

These industries are by their very nature unsuited to the competitive system. This is chiefly because they operate under the principle of decreasing cost, that is to say, the greater the volume of business handled by a single plant, the less the cost of production per unit. In order to serve 100,000 customers with gas, for example, it may be necessary to make an initial outlay of $90,000 in plant and supplies. With this identical plant, however, the gas works could really manufacture gas sufficient to serve more than 100,000. If, later, the city grows and the number of customers using gas doubles, the gas works, already having its basic plant, will not have to expend another $90,000, but only, say, an additional $30,000.

This principle has the double effect of virtually prohibiting competition and of encouraging combination. Since a street or a neighborhood can be served with water or gas more cheaply by a single plant than by several competing plants, competing plants tend to combine in order to secure the economies resulting from decreasing cost and large-scale production. On the other hand, the cost of duplicating a set of water mains or a network of street car tracks is so prohibitive as to render competition undesirable, both from the standpoint of the utility and from the standpoint of the public.

This natural tendency toward monopoly, together with the social importance of public utilities, has given rise to a demand that businesses of this type be publicly owned. The problem of public ownership may be considered under two heads: first, the municipal ownership of local utilities; and, second, the national ownership of steam railroads.

A. MUNICIPAL OWNERSHIP

338. REGULATION OF LOCAL UTILITIES.—In many American cities it was formerly the custom of the city council to confer valuable privileges upon public service corporations on terms that did not adequately safeguard the public interest. In making such grants, called franchises, city councils often permitted private corporations the free use of the streets and other public property for long periods of time or even in perpetuity.

The abuses growing out of the careless use of the franchise granting power have recently led to a more strict supervision of franchises to public service corporations. In most cities, franchises are no longer perpetual, but are limited to a definite and rather short period, say fifty years. To an increasing extent, franchises are drawn up by experts, so that the terms of the grant will safeguard the interests of the public. In many states there are now public service commissions that have the power to regulate privately owned utilities. The chief aim of such commissions is to keep informed as to the condition of the utilities, and to fix rates and charges which the commission considers fair and reasonable.

339. ARGUMENTS FOR MUNICIPAL OWNERSHIP.—Those favoring municipal ownership, as opposed to regulation, declare that the conditions affecting rates change so rapidly that no public service commission can fix rates fairly or promptly. Public ownership would save the cost of regulation, in many cases a considerable item. It is maintained that regulation is inevitably a failure, and that in view of the social importance of public utilities, ownership is a logical and necessary step.

Important social gains are claimed for municipal ownership. It is said that where the plan has been tried, it has promoted civic interest and has enlisted a higher type of public official. If all utilities were municipally owned, state legislatures and city councils would no longer be subjected to the danger of corruption by private corporations seeking franchises. If utilities were owned by the municipality, it is claimed, service and social welfare rather than profits would become the ideal. The public plant could afford to offer lower rates, because it would not be under the necessity of earning high profits. Finally, service could be extended into outlying or sparsely settled districts which are now neglected by privately owned companies because of the high expense and small profits that would result from such extension.

340. ARGUMENTS AGAINST MUNICIPAL OWNDERSHIP.—Other students of the problem believe that public regulation of utilities is preferable to municipal ownership. Those holding this view maintain that on the whole regulation has proved satisfactory, and that ownership is therefore unnecessary.

Rather than improving the public service by enlisting a higher type of public official, it is maintained, municipal ownership would increase political corruption by enlarging the number of positions which would become the spoils of the political party in power. The periodic political changes resulting from frequent elections in cities would demoralize the administration of the utilities. Under our present system of government, municipal ownership means a lack of centralized control, a factor which would lessen administrative responsibility and encourage inefficiency.

The opponents of municipal ownership also contend that the inefficiency resulting from this form of control would increase the cost of management. This increased cost would in turn necessitate higher rates. Moreover, municipal ownership might increase enormously the indebtedness of the municipality, since either private plants would have to be purchased, or new plants erected at public expense.

341. EXTENT OF MUNICIPAL OWNERSHIP.—Some cities have tried municipal ownership and have abandoned the scheme as unworkable. In some instances this failure has been due to the inherent difficulties of the case, in other instances the inefficiency of the city administration has prevented success. In still other cities ownership of various utilities has proved markedly successful.

Most American cities now own their own waterworks, and about one third of them own their own gas or electric light plants. A few cities own either a part or the whole of their street railways. Municipal ownership of public utilities is still in its infancy, but the movement is growing.

342. CONDITIONS OF MUNICIPAL OWNERSHIP.—Past experience indicates several mistakes to be avoided in any future consideration of the problem of municipal ownership.

The terms upon which the city purchases a utility ought not to be so severe as to discourage the future development of new utilities by private enterprise.

Public ownership is practicable only when the utility has passed the experimental stage, for governmental agencies cannot effectively carry on the experiments, nor assume the risks, so essential to the development of a new enterprise.

Any discussion of public ownership ought to include a consideration of social and political factors, as well as matters which are strictly economic.

The question of municipal ownership should be decided purely on the basis of local conditions and for particular utilities. The successful ownership of street railways in one city does not necessarily mean that a second city may be equally successful in operating this utility. Nor does the successful administration of a gas works by one city necessarily mean that the same city can effectively administer its street railways.

B. NATIONAL OWNERSHIP OF RAILROADS

343. DEVELOPMENT OF RAILROADS IN THE UNITED STATES.—The railroad history of the United States began when the Baltimore & Ohio was opened to traffic in 1830, but until the middle of the century transportation in this country was chiefly by wagon roads, rivers, and canals. After 1850 the westward expansion and the development of industry throughout the country greatly stimulated railway building. Encouraged by lavish land grants and other bounties extended by both state and Federal governments, railroad corporations flung a network of railroads across the continent. Local roads were transformed, by extension and consolidation, into great trunk lines embracing thousands of miles. From 9,021 in 1850 our railway mileage increased to 93,267 in 1880, to 193,345 in 1900, and to approximately 260,000 in 1922.

344. THE PRINCIPLE OF DECREASING COST.—While the rapid development of American railroads has had an inestimable effect upon our national prosperity, railway development has brought with it serious evils. In order to understand the nature of these evils, let us notice that with railroads, as with municipal utilities, the cost per unit of product or service declines with an increase in the number of units furnished. A railroad must maintain its roadbed, depots, and terminals whether one or an hundred trains are run, and whether freight or passenger cars run empty or full. Many of the railroad's operating expenses also go on regardless of the volume of business. Thus the cost of handling units of traffic declines as the volume of that traffic increases.

These circumstances influence rate-making in two ways. In the first place, railroads can afford to accept extra traffic at a relatively low rate because carrying extra traffic adds relatively little to the railroad's expenses. In the second place, rates in general cannot be definitely connected with the expense of carrying specific commodities, hence rates are often determined on the basis of expediency. This means that high rates are charged on valuable commodities because those commodities can pay high rates, while low rates are charged on cheap goods, because those goods cannot stand a high charge. This is called "charging what the traffic will bear."

345. EVILS ATTENDING RAILROAD DEVELOPMENT.—Since many of the expenses of the railroad go on regardless of the amount of traffic carried, railroads are constantly searching for extra business. Competition between railroads has tended to be very severe. Rate-wars have been common, because of the small cost of handling extra units of traffic. In the struggle for business, railroads once habitually offered low rates on competitive roads or lines, and then made up for this relatively unprofitable practice by charging high rates on non- competitive roads. The desire for extra business, together with the pressure exerted by trusts and other large shippers, encouraged railroads to make rates which discriminated between products, between localities, and even between individuals. The ruinous character of competition often led to monopolistic combinations which proceeded to charge the general public exorbitant rates, but which rendered poor service.

346. EARLY STATE LEGISLATION.—During the early stages of railroad development, the railroads were generally regarded as public benefactors for the reason that they aided materially in the settlement of the West. But after about 1870 the railroads began to be accused of abusing their position. A greater degree of legal control over the roads was demanded.

The first attempts at the regulation of railroad corporations were made by several of the states. For fifteen years various commonwealths tried to control the railroads through state railway commissions armed with extensive powers. These commissions eliminated some of the more glaring abuses of railroad combination, but for several reasons state regulation was relatively ineffective. The states had, of course, no authority over interstate business, and most railroad revenues were derived from this type of business. State laws regulating railroads were often declared unconstitutional by the courts. Lastly, powerful railroad corporations often succeeded in bribing state legislatures to refrain from taking action against them. Due to these influences, state regulation was generally conceded to be a failure.

347. FEDERAL LEGISLATION.—The failure of state laws effectively to control the railroads led to the enactment by Congress of the Interstate Commerce Act of 1887. This Federal act created an Interstate Commerce Commission of seven members, appointed by the President, and charged with the enforcement of the Act. The Act also prohibited discriminations, and forbade unjust and unreasonable rates. It required that railroads should make rates public, and that they should not change rates without due notice. Pooling was forbidden, that is to say, railroads apparently competing with one another were no longer to merge or pool their combined business with the understanding that each was to get a previously determined share of the joint profits. The objection to pooling was that it suppressed competition and encouraged monopoly.

In the years that followed, however, the Interstate Commerce Act checked railroad abuses very little. The machinery of the Act was so defective as to render difficult the successful prosecution of offenders. Railroad interests exerted an evil influence upon government officials who were attempting to enforce the Act. The administration of the law was also markedly impeded by the fact that the courts tended to interpret the Act of 1887 in such a way as to limit the powers of the Commission.

To a considerable extent discriminations and unnecessarily high rates continued until after the opening of the twentieth century. Then in 1903 the Elkins Act revived some of the waning powers of the Commission. Three years later (1906) the Hepburn Law increased the membership of the Commission, improved its machinery, and extended and reinforced its control over rates. In 1910 the Mann-Elkins Act strengthened the position of the Commission in several particulars.

In spite of this additional legislation, however, the rather sorry record of railroad regulation up to the time of the World War repeatedly raised the question of national ownership of railroads.

348. ARGUMENTS IN FAVOR OF NATIONAL OWNERSHIP OF RAILROADS.—The arguments in favor of national ownership of railroads are similar to those advanced in behalf of the municipal ownership of local utilities.

The failure of regulation, coupled with the social importance of the railroads, is said to render ownership imperative. Government ownership of railroads is said to have succeeded in several of the countries of Europe, notably in Prussia.

It is believed by many that government ownership would attract a high grade of public official. It is also thought that with the change to public ownership the corruption of state legislatures by railroads would cease. Since the roads would be taken out of private hands and administered as a unit by the Federal government, discriminations and other unfair practices would cease.

It is also held that under public ownership service rather than profits would become the ideal. Since profits would no longer be necessary, lower rates could be offered. Government ownership would allow the elimination of duplicating lines in competitive areas, and would permit the extension of new lines into areas not immediately profitable. Thus railroads now operated solely for private gain would become instruments of social as well as industrial progress.

349. ARGUMENTS AGAINST NATIONAL OWNERSHIP OF RAILROADS.—Opponents of national ownership maintain that the experience of Prussia and other European countries is no guide to railroad management in this country. Differences in political organization between this and European countries, for example, render unreliable the results of public ownership in Prussia and other parts of Europe.

Many opponents of government ownership contend that the elimination of private control would increase, rather than decrease, political corruption. Various political interests, they say, would bring pressure to bear in favor of low rates for their particular sections of the country.

It is often maintained that the substitution of public for private ownership would discourage personal initiative because public officials would take little genuine interest in the railroads. It is said that government administration of railroads would be marked by waste and inefficiency. This would necessitate higher rates instead of permitting rates to be reduced. The large initial cost of acquiring the roads is urged against public ownership, as is the gigantic task of administering so vast an industry.

A last important objection to public ownership is that it would cause rates to be rigid. Rates would be fixed for relatively long periods and by a supervisory agency, rather than automatically changing with business conditions as under private ownership. This rigidity would force business to adapt itself to rates, instead of allowing rates to adapt themselves to business needs.

350. GOVERNMENT CONTROL OF RAILROADS, 1917-1920.—Shortly after our entry into the World War, the congested condition of the railroads, together with the urgent need for a unified transportation system, led to a temporary abandonment of private control. On December 28, 1917, President Wilson took over the nation's railroads under powers conferred upon him by Congress. The roads were centralized under Director-General McAdoo, assisted by seven regional directors who administered the railroads in the different sections of the country.

The Act empowering the President to take over the railroads provided that such control should not extend beyond twenty-one months after the conclusion of the treaty of peace with Germany. But there has never been a well-organized movement for government ownership of railroads in this country, and when after the signing of the armistice in November, 1918, the immediate return of the roads to private control was demanded, there was little opposition. A number of plans proposing various combinations of public and private control were rejected, and on March 1, 1920, the roads were returned to their former owners.

351. RESULTS OF GOVERNMENT CONTROL DURING THE WORLD WAR.—Government control of the nation's railroads between 1917 and 1920 resulted in a number of important economies. Repair shops were cordinated so as to be used more systematically and hence more economically. The consolidation of ticket offices in cities effected a substantial saving. The cordination of terminals allowed a more economical use of equipment than had been possible under private control. The unification of the various railroad systems allowed a more direct routing of freight than would otherwise have been possible. There was also a reduction in some unnecessarily large managerial salaries.

On the other hand, the quality of railroad service declined under government control. The personal efficiency of many types of railroad employees also decreased. Most important of all, there was a sharp increase in both freight and passenger rates.

The period of war-time control was abnormal, hence the record of the roads under government control during this period cannot be taken as wholly indicative of what would happen under permanent government control in peace time. But it should be noted that, on the whole, the record of the Railroad Administration between 1917 and 1920 was good. That the above-mentioned economies were effected cannot be denied. Moreover, the decline in service and efficiency, as well as the increase in rates, is at least partially explained by abnormal conditions over which the Railroad Administration had no control. The winter of 1917-1918 was the most rigorous in railroad history. This circumstance, combined with the unusually heavy demands for the transportation of war equipment, helped to demoralize the service from the very beginning of the period of government control. For a number of years previous to 1917 there had been an acute shortage of box cars and other equipment, which also helps to explain the poor quality of service furnished during the war. The labor force was demoralized by the drafting for war service of many trained railroad employees. (It is claimed that certain railroad officials sought to discredit government control by hampering the administration of the roads, but this charge cannot be proved.)

352. THE TRANSPORTATION ACT OF 1920.—Government control in war time revealed the true status of the railroads as nothing else could. It was seen that up to the period of the World War Federal legislation on railroads had in some cases been too indulgent, but in other cases so severe as to work a hardship upon the roads. To pave the way for a fairer and more effective regulation of the nation's railroads, the Transportation Act of 1920 was passed. At present the railroads are privately owned, but publicly regulated by the Interstate Commerce Commission, according to the provisions of the Interstate Commerce Act of 1887, the Elkins Act of 1903, the Hepburn Law of 1906, the Mann- Elkins Act of 1910, and the Transportation Act of 1920.

353. SUMMARY OF PRESENT LEGISLATION ON RAILROADS.—At the present time all unfair discriminations are generally forbidden. But it is now recognized that under certain conditions a discrimination may be economically justified. Therefore, when the inability to levy a discriminatory rate would work a hardship upon a railroad, the Commission is authorized to suspend the rule. Pooling is likewise generally forbidden, but here again the Commission may authorize the practice at its discretion. Limitations are placed upon the power of railroads to transport commodities in which they are interested as producers.

All interstate rates are to be just and reasonable, and the Commission is empowered to say what constitutes just and reasonable rates. In order to prevent rate wars, the Commission is now empowered to fix minimum as well as maximum rates. The Act of 1920 also gives the Commission the power to establish intra-state rates, where such rates unjustly discriminate against interstate or foreign commerce. An intra-state rate, of course, is one which has to do only with freight or passenger movements which begin and end within the borders of a single state.

The Act of 1920 extended government control over the railroads in a number of important particulars. To check certain financial abuses, the Commission now has supervision over the issue of railroad securities. For the purpose of increasing the social value of the nation's railroads, the Act of 1920 instructs the Commission to plan the consolidation of existing roads into a limited number of systems. Another clause in the Act of 1920 provides that no railroad may abandon lines, build new lines, or extend old ones, without the consent of the Commission. In times of national emergency, moreover, the Commission may direct the routing of the nation's freight, without regard to the ownership of the lines involved. Lastly, the Act of 1920 made provision for a permanent arbitration board for the settlement of labor disputes in the railroad industry.

354. THE OUTLOOK.—In view of the defective character of regulatory legislation previous to 1900, government ownership of railroads did not seem unlikely. But since the acts of 1903, 1906, and 1910, and especially since the passage of the Transportation Act of 1920, there has been such high promise of efficient regulation as to minimize the movement toward government ownership. Not only are old abuses now more likely to be remedied, but the Interstate Commerce Commission is now empowered to relieve the roads of many undeserved burdens. Especially is the Commission keenly appreciative of the necessity of stabilizing the credit of the railroads. Until this is done the investing public will have little confidence in the railroad business, and the roads will continue to be inadequately financed.

Perhaps the greatest problem now before the Commission is to complete the "physical valuation" of the railroads begun in 1913. This valuation aims to discover, by investigations conducted by expert appraisers, the actual value of all railroad property in the United States at the present time. On the basis of this valuation the Commission believes that it can estimate the probable amount of invested capital which the railroads represent. After this has been done, the Commission can calculate what rates the railroads must charge in order to earn a fair dividend on their money. The completion of this physical valuation is, therefore, necessary if the Interstate Commerce Commission is to fix rates which are just and reasonable from the standpoint of the public on the one hand, and from the standpoint of the railroads on the other.

QUESTIONS ON THE TEXT

1. What is the economic basis of natural monopoly?

2. Describe the regulation of local utilities.

3. Give the chief arguments in favor of municipal ownership.

4. What arguments are advanced against municipal ownership?

5. What is the extent of municipal ownership in this country?

6. Name some of the fundamental conditions of municipal ownership.

7. Outline briefly the development of railroads in this country.

8. How does the principle of decreasing cost apply to railroads?

9. Discuss the evils resulting from railroad development.

10. Why did State regulation fail to eliminate these evils?

11. Discuss the nature and effect of the Interstate Commerce Act.

12. Give the chief arguments in favor of national ownership of railroads.

13. What are the chief arguments against this step?

14. When and why were the railroads taken over by the Government?

15. Explain clearly the nature of the results of government control of railroads.

16. Enumerate the laws under which the Interstate Commerce Commission now administers the railroads.

17. Summarize present railroad legislation with regard to

(a) discriminations,

(b) rates, and

(c) the extension of Federal control authorized under the Act of 1920.

18. What is the greatest problem now before the Commission?

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter xxviii.

Or all of the following:

2. Ely, Outlines of Economics, chapter xxvii.

3. Fetter, Modern Economic Problems, chapters xxvii and xxx.

4. King, Regulation of Municipal Utilities, chapter i.

5. Seager, Principles of Economics, pages 419-431, and chapter xxiv.

QUESTIONS ON THE REQUIRED READINGS

1. What is meant by Transportation Economics? (Ely, page 557.)

2. Explain clearly why public utilities are natural monopolies. (Seager, pages 419-426.)

3. What is the origin of the right to regulate public utilities in the public interest? (King, page 4.)

4. Why must municipal utilities be regulated or controlled? (King, pages 11-16.)

5. What is the relation of unregulated municipal utilities to bad politics? (King, pages 17-19.)

6. What are the legal duties of corporations controlling municipal utilities? (King, page 10.)

7. What forms may municipal ownership take? (Fetter, pages 461-462.)

8. How does uniformity of product favor monopoly? (Fetter, page 463.)

9. Why did the railroads receive liberal help from state and Federal governments during the period of railroad development? (Fetter, page 413.)

10. Distinguish between local and personal discriminations. (Fetter, pages 416-417.)

11. Discuss the nature of the early state railroad commissions.(Fetter, pages 420-422.)

12. In what respects was the Interstate Commerce act amended by the legislation of 1903, 1906 and 1910? (Seager, pages 442-443.)

13. What was the nature of the Commerce Court? (Seager, page 444.)

14. What is the most convincing argument against the public ownership of the telegraph and the telephone? (Seager, page 445.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. Make a list of the natural monopolies in your locality.

2. To what extent are the public utilities in your locality controlled by the (a) municipality, the (b) state, the (c) Federal government?

3. The franchise-granting power in your state.

4. The regulation of local utilities in your municipality.

5. Extent of municipal ownership in your section. If possible, visit a municipally owned utility and report upon it.

6. Interview an official of some local utility upon the desirability of municipal ownership of that utility.

7. The history of railroad development in your section.

8. Outline the more important laws enacted by your state legislature relative to railroads.

9. Service and rates in your locality during the period of government control, 1917-1920.

II

10. Regulation of local utilities through the franchise. (King, Regulation of Municipal Utilities, part ii.)

11. Regulation of local utilities through the utility commission. (King, Regulation of Municipal Utilities, part iii.)

12. Standards of service for local utilities. (Annals, vol. liii, pages 292-306.)

13. The case for municipal ownership. (King, Regulation of Municipal Utilities; Thompson, Municipal Ownership)

14. The case against municipal ownership. (King, Regulation of Municipal Utilities; Porter, Dangers of Municipal Ownership.)

15. Early development of railroads in the United States. (Coman, Industrial History of the United States, pages 232-248; Bogart, Economic History of the United States, chapters xxiv and xxv; Lessons in Community and National Life, Series C, pages 217-233.)

16. Geographical distribution of railroads. (Semple, American History and its Geographic Conditions, chapter xvii.)

17. Combinations in the railroad industry. (Lessons in Community and National Life, Series A, pages 219-224; Bogart, Economic History of the United States, chapter xxix; Johnson, American Railway Transportation, chapter iii.)

18. Rate-making. (Johnson, American Railway Transportation, chapter xx; Bullock, Elements of Economics, pages 212-217.)

19. Physical valuation of the railroads. (Annals, vol. lxiii, pages 182-190.)

20. Railroad regulation and the courts. (Johnson, American Railway Transportation, chapter xxvii.)

21. War-time control of railroads in the United States. (Annals, vol. lxxxvi, all; Dixon, War Administration of the Railways in the United States and Great Britain, part i.)

22. Report of the Interstate Commerce Commission upon the desirability of government ownership of railroads in the United States. (Cleveland and Schafer, Democracy in Reconstruction, pages 382-396.)

23. War-time control of railroads in Great Britain. (Dixon, War Administration of the Railways in the United States and Great Britain, part ii.)

24. Railroad management in England and France. (Johnson, American Railway Transportation, chapter xxiii.)

25. Railroad management in Italy and Germany. (Johnson, American Railway Transportation, chapter xxiv.)

FOR CLASSROOM DISCUSSION

26. The success with which public utilities in your community have been regulated.

27. Should the franchise-granting power in your state be still further restricted?

28. The success of municipal ownership in your locality.

29. The relation of "stock watering" or "overcapitalization" to high profits. (See Taussig, Principles of Economics, vol ii, page 385.)

30. Is public ownership of railroads more practicable under a democratic or under an autocratic form of government?



CHAPTER XXIX

THE TARIFF

355. THE PRINCIPLE OF EXCHANGE.—In Chapters VII and VIII it was pointed out that when individuals divide up their labor so that each becomes a highly specialized workman there is a resultant increase in the community's productivity. Similarly, when one section of the country is adapted primarily to manufacturing, while another section is peculiarly suited to farming, there is a gain in national productivity when each of these areas specializes in those activities which it can carry on most effectively, and is content to resort to trade in order to secure the benefit of industries specialized in elsewhere. So far as the economic principle is concerned, there is likewise a gain when different countries specialize in those forms of production at which their citizens are most effective, and are content to secure through international trade the products of specialization in other countries.

356. NATURE OF THE TARIFF.—But though all civilized nations allow and even encourage the division of labor among their individual citizens and among the various areas within their own boundaries, many countries restrict the degree to which their citizens may exchange their surplus products for the surplus products of foreign producers. In the United States, for example, Congress has the power to levy a duty or tariff on foreign-made goods which are brought into this country for sale.

This tariff may be levied primarily to increase national revenue, in which case the rate of duty is generally too low to keep foreign goods out of our markets. When the tariff is purely a revenue measure, "free trade" is said to exist. On the other hand, a tariff may be so high that domestic goods will be protected in our markets against competition from foreign-made goods of a similar grade. In this case a protective tariff is said to exist, though such a measure also brings in revenue. Most tariff measures, indeed, contain both "revenue" and "protective" elements, and it is only when a tariff act is primarily a protective measure that we speak of it as a protective tariff.

357. THE MEANING OF "PROTECTION."—Let us be sure that we understand exactly what is meant by "protection." Suppose that in the absence of a protective tariff an English-made shoe can be produced and brought to this country at a total cost of $3.00. Let us assume that this shoe competes in the American market with an American-made shoe which is of similar grade, but which, for various reasons, it costs $3.50 to produce. Suppose, further, that both English and American producer must make a profit of $0.50 per pair of shoes, or go out of business. In the resulting rivalry, the English shoe can sell for $3.50 and make a profit. Competition would force the American producer to sell his shoe for $3.50 also, but since this would give him no profit, he would be forced out of business. In such a case the American manufacturer might secure the passage of a protective tariff on this type of shoe, so that the English shoe would be charged $0.75 to enter this country for sale here. This would bring the total cost of the English shoe up to $3.75, and to make a profit the shoe would have to sell for $4.25. But since the American shoe can be sold for $4.00, the English shoe is forced out of the market. [Footnote: If, in this example, the duty were, say, $.25, the foreign shoe could continue to enter our markets and compete with the American shoe. In this case the tariff would be a revenue, and not a protective measure.]

The tariff question arises primarily in connection with the matter of protection, and may be stated as follows: Ought Congress to interfere with international trade by levying protective duties on imports; and, if so, just how and to what extent should such duties be levied?

358. TARIFF HISTORY OF THE UNITED STATES.—The first tariff measure in our national history was the Act of 1789. This was a revenue measure, though it gave some degree of protection to American industries. Down to the close of the War of 1812 our tariff was mainly for revenue purposes. After the close of that war a heavy duty on foreign iron and textile products was imposed for the purpose of protecting domestic producers against the cheaply-selling English goods which were flooding our markets. After 1816 it became our policy to combine in the same tariff act high protective duties with revenue duties. In 1824 the general level of duties was raised. In 1828 Congress endeavored to lay a tariff which would suit all sections of the country, but the attempt failed.

Between 1828 and 1842 the tariff was gradually lowered. Between 1842 and 1861 our tariff policy was unsettled, but in the latter year the domestic disturbances brought on by the Civil War resulted in the passage of a tariff which turned out to be highly protective. In the period immediately following the Civil War the tariff continued to be very high, due chiefly to pressure from industrial interests which had secured protection from the war rates. In spite of attempted reform in 1870, 1873, and 1883, the tariff continued to be highly protective.

In 1894 the Democrats reduced the tariff somewhat, and in 1909 the Republicans attempted to satisfy a popular demand for lower rates by the passage of the Payne-Aldrich Act. This measure reduced some rates, but not enough to satisfy the popular mind. In 1912 the Democrats returned to power, and the following year passed the Underwood-Simmons Act, lowering the rates on many classes of commodities, and placing a number of important articles on the free list. In 1920 the Republican party again secured control of the government, and the tariff was raised. At present our tariff is highly protective.

359. COMPROMISE CHARACTER OF TARIFF.—Our tariff history is full of inconsistencies. The pendulum has swung first to low duties and then to severely high duties. No tariff has satisfied all the interests involved; indeed, no other issue, with the possible exception of slavery, has provoked as much political strife as the tariff. Every tariff is essentially a compromise, for a duty upon practically any commodity which we might select will benefit some of our citizens, while it will either prove of no use to other individuals or will actually injure them. Animated by self-interest, the farmer, the lumberman, the miner, or the manufacturer, each desires a protective duty on the commodity which he produces, and a low rate, or no duty at all, upon commodities which he consumes. As a result, the tariff has become a sectional problem, in the solving of which Congressmen have too often considered as paramount the economic interests of the particular locality which they represent.

360. NATURE OF THE TARIFF ARGUMENT.—The tariff question generally divides men into two camps, those favoring "free trade," and those demanding duties that are highly protective. From the standpoint of economics, the most vital argument against protection is that there is no fundamental reason why there should not be free trade between nations. Protection is economically wasteful because it diverts capital and labor from industries in which we are relatively effective to industries in which our productivity is relatively low. High protection is thus said to decrease national productivity, and to impose a burden upon the consumer by preventing him from purchasing cheaper foreign-made goods.

In view of these facts, the free trader claims that to the extent that the tariff is an economic proposition, the burden of proof rests upon the protectionist. If this assertion is accepted, the tariff argument consists of the attempts of the protectionist to outweigh the above economic argument for free trade by putting forth economic arguments for protection, and by developing social and political reasons for a protective tariff.

361. AN EARLIER TARIFF ARGUMENT.—Formerly one of the most important arguments for protection was the home market theory. This theory was advanced in 1824 by Henry Clay. In the effort to win the agricultural interests to protection, Clay maintained that a protective tariff on manufactures would develop urban centers, and that this would increase the purchasing power of the city dwellers. This increased purchasing power, Clay declared, would assure the farmer of a steady domestic market, not only for his staples, but also for perishable goods which could not be shipped to foreign countries.

Though still heard in tariff discussions, this argument now exerts less influence than formerly. Perfected means of transportation have tended to place domestic and foreign markets on an equal footing. Moreover, the population of our cities has increased so much more rapidly than has the productivity of our farms, that it is unnecessary artificially to create a home market for the farmer's produce.

362. THE WAGES ARGUMENT.—At the present time one of the most important arguments in favor of a protective tariff is that it either creates or maintains a relatively high level of wages for workmen engaged in the protected industries. Those advancing this argument believe that free trade would lower wages and depress the standard of living for large groups of workmen.

The free trader maintains that high wages do not depend upon protection, and this for three reasons: First, equally high wages are often paid in protected and unprotected industries alike; second, high wages do exist in a number of protected industries, but many of these industries also paid high wages before protection had been secured; third, there is nothing in a protective tariff to force employers to pay more than the current wage. Rather than raising wages, Professor Taussig maintains, "protection restricts the geographical division of labor, causes industry to turn to less advantageous channels, lessens the productivity of labor, and so tends to lower the general rate of wages."

363. THE VESTED INTERESTS ARGUMENT.—An important argument in favor of continued protection is that the introduction of free trade would ruin valuable manufacturing businesses which have been built up under protection, and which are unprepared or unable to maintain themselves against foreign competition. In the case of such industries, it is maintained, the removal of protection might result in economic disaster. Factories would have to close, investments would depreciate, and numerous laborers would be thrown out of employment.

There is great force in this argument. Even the most ardent free trader will admit that a sudden removal of tariff duties might be demoralizing to industries long used to protection. Nevertheless, the vested interests argument is not so much an argument for continued protection as it is a reason why there should be a gradual rather than a sudden removal of protective duties. If protection were to be scaled down gradually and wisely, there is no reason why capital invested in industries unable to stand foreign competition could not be gradually transferred to industries unaffected by foreign competition.

364. TARIFF ARGUMENTS ACCENTUATED BY THE WORLD WAR.—Three arguments in favor of protection have taken on greater importance because of the World War.

One of these is the anti-dumping argument. From the standpoint of the American tariff, dumping is the practice which some foreign producers have of temporarily selling their surplus goods in this country at an abnormally low price. [Footnote: Some American producers in turn "dump" in foreign markets, but with this practice we are not here concerned.] If dumping were permanent, we would gain because we would be getting goods at a much lower price than we could manufacture them. The evil of dumping grows out of the fact that it tends to force domestic producers out of business. Then later the foreign supply may diminish, in which case we suffer from a shortage of goods. If foreign producers do continue to supply the American market they may take advantage of the fact that American competitors have been forced out of business, and demand monopoly prices. The free trader admits the force of the anti-dumping argument, and concedes that the intense economic rivalry growing out of the World War rendered desirable tariff rates which would protect domestic producers against dumping.

Another protectionist argument which has gained in strength because of the War is the "infant industries" argument. Protectionists claim that industries really adapted to this country may be prevented from arising here because of their inability, while still in the experimental stage, to meet strong competition from well-established foreign producers. When an industry is in the experimental stage the cost of production is relatively high, and the price will be correspondingly high. Well established and economically-conducted businesses can undersell these experimental or "infant" industries. Protection for such "infant" industries is therefore sought until such time as they will be able to stand foreign competition. The free trader has generally replied that such protection may be desirable in some cases, but maintains that care should be taken to make such protection both moderate and temporary, otherwise protection will perpetuate industries for which we are really unsuited. During the World War American producers began to manufacture dyes and chemicals formerly imported from Germany. The industrial importance of these products gave weight to the belief that the new industries which sprang up in this country during the War were entitled to protection against foreign competition.

A third protectionist argument which was strengthened by the World War is the military or self-sufficiency argument. It has long been the claim of the protectionist that high tariff duties encourage the development in this country of all industries producing the necessities of life, as well as all supplies which are vital in war time. High protection was thus defended on the grounds that it permitted the United States to be nationally self-sufficing, thus allowing us to be relatively independent of other countries, especially in war time. Previous to the World War many free traders scoffed at this argument as resting upon an unjustified fear of war, but this attitude was changed by the dangers to which we were subjected by the interruption of our foreign trade during the war. At present the military or self-sufficiency argument is of great importance.

365. THE TREND TOWARD PROTECTION.—Of late years, therefore, there has been a distinct trend toward protection in this country. The fear of dumping, the desire to protect infant industries established during the World War, and the increased importance of the military or self- sufficiency argument have been factors in this trend. Another factor has been that the Republican party, traditionally committed to a policy of high protection, returned to power in 1920. A last important influence has been an increased need for Federal revenue. The World War not only increased our indebtedness, but the advent of national prohibition in 1919 cut off a source of Federal revenue formerly very important.

366. TARIFF NEEDS.—From the standpoint of practical politics, one of the greatest needs of our time is for an intelligent and public- spirited handling of tariff problems. The tariff is a technical and highly complex question, upon which politicians have heretofore had too much to say, and trained economists too little. Too often, vague claims and political propaganda have carried more weight than have facts.

It is asserted by many that the tariff can never be taken out of politics, but this is perhaps too strong a statement. In this connection an interesting development was the establishment in 1916 of the United States Tariff Commission. This Commission consists of six members appointed by the President for twelve years. Not more than three of the members may belong to the same political party. It is the duty of the Commission to investigate conditions bearing upon the tariff and to report its findings to Congress. It is hoped that this plan will place at the disposal of Congress scientific data on which to base tariff legislation. So far the Commission has not materially reduced the influence of politics upon tariff legislation, though it is perhaps too soon to expect results.

It is sometimes said that our tariff policy ought to be less changeable. Certain it is that our tariff history is full of inconsistencies and irrational fluctuations. But the question of a tariff policy is a thorny one. Manifestly, business should not be forced to accommodate itself to a purely political manipulation of the tariff; on the contrary, the tariff ought to vary with changes in business conditions at home and abroad. Whatever may be implied by a tariff "policy," it is also certain that the tariff should somewhat accommodate itself to revenue needs. Beyond these somewhat general statements, however, it is hardly safe to say what should be the basic elements in a national tariff policy.

QUESTIONS ON THE TEXT

1. Explain the gain from exchange.

2. What is meant by the tariff? Distinguish between a revenue and a protective tariff.

3. State the tariff problem.

4. Outline briefly the tariff history of the United States.

5. Why is tariff practically always a compromise?

6. Discuss the home market argument.

7. What can be said for and against the wages argument?

8. What is the vested interests argument?

9. What effect did the World War have upon the anti-dumping argument?

10. What is the military or self-sufficiency argument?

11. How did the war affect the infant industries argument?

12. Why was there a trend toward protection after the World War?

13. What is the nature and purpose of the United States Tariff Commission?

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter xxix.

Or all of the following:

2. Carver, Elementary Economics, chapter xxvii.

3. Fetter, Modern Economic Problems, chapter xv.

4. Seager, Principles of Economics, chapter xxii.

5. Thompson, Elementary Economics, chapter xix.

QUESTIONS ON THE REQUIRED READINGS

1. What is the extent of the protective tariff throughout the world? (Fetter, page 218.)

2. Distinguish between a specific and an ad valorem duty. (Fetter, pages 219-220.)

3. What is meant by a free list? (Fetter, pages 220-221.)

4. What is the fundamental proposition of the free trader? (Carver, page 244; Thompson, pages 262-263.)

5. What is the "no buying no selling" argument? (Thompson, page 263.)

6. What is the balance-of-trade argument? (Carver, page 245.)

7. What is the origin of the present tariff system? (Seager, pages 394-395.)

8. What is the political argument in tariff discussions? (Seager, page 397.)

9. What is the relation of tariff to political corruption? (Seager, page 405.)

10. What was the character of the Payne-Aldrich tariff of 1909? (Fetter, pages 233-234.)

11. What was the character of the Underwood tariff of 1913? (Fetter, pages 234-236.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. The home market argument with reference to conditions in your section.

2. The infant industries argument with reference to conditions in your section.

3. Commodities essential to the prosperity of your community which are imported from abroad.

4. The attitude of your section of the country toward the tariff. Has this attitude changed in the past fifty years?

5. Write to your Representative in Congress for his opinion on the need of a "fixed tariff policy."

6. Interview several friendly business men on their attitude toward the tariff.

7. Interview a member of the Democratic party upon the attitude of his party toward the tariff.

8. Interview a member of the Republican party upon the attitude of his party toward the tariff.

II

9. The principle of international trade. (Taussig, Principles of Economics, vol. 1, chapter xxxiv; Fetter, Modern Economic Problems, chapter xiii.)

10. The gain from international trade. (Taussig, Principles of Economics, vol. 1, chapter xxxv.)

11. The infant industries argument as applied to American industries. (Taussig, Tariff History of the United States, Part 1, chapter i.)

12. The Civil War tariff. (Taussig, Tariff History of the United States. Consult also any economic history of the United States, or any standard text on economics.)

13. Tariff administration. (Cyclopedia of American Government.)

14. Political aspects of the tariff. (Tarbell, The Tariff in Our Times, chapter xii.)

15. The history of any important tariff since the Civil War. (Consult Taussig, Tariff History of the United States; Fetter, Modern Economic Problems, chapter xv; any standard work on the economic history of the United States; or any encyclopedia under "Tariff.")

16. The tariff in Germany. (Ashley, Modern Tariff History, part i.)

17. The tariff in France. (Ashley, Modern Tariff History, part iii.)

FOR CLASSROOM DISCUSSION

18. Why has the wages argument increased in importance within the last half century?

19. How could our protective tariff be abolished without endangering present investments in protected industries?

20. The question of a national tariff policy.

21. To what extent should the formulation of our tariff acts take into consideration the wishes of foreign producers who desire to sell their goods in this country?



CHAPTER XXX

CONSERVATION

367. ATTITUDE OF THE EARLY SETTLER TOWARD NATURAL RESOURCES.—The chief concern of the early American settler was to turn a virgin continent into homes as quickly and as easily as possible. During the seventeenth, eighteenth, and most of the nineteenth century, our natural resources were very abundant, while labor and capital were relatively scarce. As the settlers spread across the Appalachians and into the great West, it was to be expected, therefore, that the home- maker should use labor and capital as carefully as possible and that he should use generously such resources as forests, water power, and soil fertility. Little blame attaches to the early settler for this attitude, indeed he acted in accordance with sound economic law. This economic law declares that under any particular set of circumstances factors of production should be carefully used in proportion as they are scarce, and generously used in proportion as they are abundant.

368. RESULT: GROWING SCARCITY OF NATURAL RESOURCES.—The rapid settlement of the West was essential to our national unity and development. Nevertheless, the extensive and even lavish use of natural wealth since colonial times has lately called attention to the scarcity of resources formerly considered overabundant.

More than three fourths of our original forest area has been culled, cut over, or burned, since colonial times. Wholesale logging methods have swept vast areas bare of valuable timber. Careless cutting has wasted a quarter of our timber supply. In the lumber mill about 40 per cent of the entire volume of the logs is lost by wasteful methods of work. Since 1870 forest fires have annually destroyed more than $50,000,000 worth of timber. Altogether our timber supply is diminishing three or four times as fast as we are replenishing it.

By holding sod in place, forests furnish a sponge-like reservoir which absorbs rainfall and then retains it sufficiently to insure that it will be paid out only gradually. The process of cutting down forests, called deforestation, destroys the sod, so that streams formerly fed from forested areas by a steady process become dangerously swollen in certain seasons and greatly reduced in size at other times. One effect of this alternation of freshets with abnormally dry periods is a loss of steady and dependable water power.

Deforestation has also an injurious effect upon agriculture. When heavy rains wash valuable surface soil from the tops and sides of hills these denuded areas are rendered less valuable for grazing, while the overabundance of top soil in the valleys retards effective cultivation. Agriculture also suffers from the fact that streams which would ordinarily furnish a steady supply of irrigation water are often either in a state of flood or practically dried up.

Despite the excellent work done by the Department of Agriculture, American farming methods are in many sections of the country both careless and wasteful. The abundance of land in past years seemed to justify our free use of it, nevertheless such use has in many cases resulted in a serious loss of fertility. Careless tillage and a failure to rotate crops have resulted in a heavy loss of nitrogen, potassium, phosphorus, and other essential soil elements.

Heretofore we have used coal very lavishly. Often as much coal has been wasted as has been mined. Mining corporations have often neglected low grade coal deposits, and have abandoned mines without having first removed all of the accessible high grade coal. Imperfect combustion, both in dwellings and in industrial establishments, is said to waste more than a third of our coal, as well as creating a costly and injurious smoke nuisance. Our consumption of coal is doubling every ten years. In view of the fact that our coal deposits are limited, this increasing consumption is a serious development.

Iron, too, has been used wastefully. The bog iron deposits of the Atlantic coast were used up before 1800, and as the result of an intense industrial development since 1850, the supply of high grade ores is being speedily diminished. Oil and gas have been used lavishly, and even, in some cases, deliberately wasted.

369. HIGH PRICES.—The lavish use of natural resources which has characterized the American people since colonial times has been an important factor in the cost of living. In early days there was an abundance of resources and few people to use them; at present the supply of many of our resources is greatly diminished, and there is a much larger population seeking to use them. In the case of every natural resource the supply is either limited or is failing to increase as rapidly as are the demands upon it. The result is higher prices for coal, wood, iron, oil, gas, and similar commodities. It is at least partly due to the heavy drain upon our resources that the cost of building homes, heating them, feeding the population, and carrying on the varied activities of American industry is steadily increasing.

370. MONOPOLY.—Throughout the history of our natural resources there has been a strong tendency toward monopoly. Natural resources should be safeguarded for the benefit of the people as a whole, yet much of our natural wealth has been monopolized by individuals. Four fifths of our timber lands are privately owned, and of that four fifths about half is controlled by 250 companies. Two thirds of the developed water power in this country is controlled by a small group of power interests. Defective land laws, the lax administration of good laws, and extravagant land grants to railroads have allowed private fortunes to be built up without a proportionate advantage to the public. Coal and petroleum deposits are controlled largely by a few corporations, while a heavy percentage of our copper and iron deposits is in private hands.

371. THE CONSERVATION MOVEMENT.—After the middle of the nineteenth century the growing scarcity of many natural resources called attention to the need of conserving them. Conservation means to utilize economically, rather than to hoard. It means, furthermore, that resources should be used so that both the present and future generations will reap a proper benefit from America's great natural gifts. Thus conservation seeks, Mr. Van Hise once said, "the greatest good to the greatest number, and for the longest time." The dawn of the conservation idea stimulated a reaction against the careless administration of natural resources. Toward the end of the 19th century, there was an increasing amount of legislation encouraging the legitimate use of natural resources on the one hand, and repressing monopoly on the other. After the opening of the twentieth century interest in conservation increased. In 1908 President Roosevelt called a conference of the governors of the various states for the purpose of considering this vital problem, and from that meeting dates a definite and nationwide conservation policy in this country.

Some of the effects of this changing attitude toward natural resources may now be noted.

372. FORESTS AND WATER POWER.—In 1891 a Federal law provided for a system of national forest reservations. These reservations now include a substantial proportion of our forests, and are steadily extending their limits. Since 1897 there has been a Bureau of Forestry which has performed invaluable services. Forest fires have been reduced, denuded areas have been reforested, forest cutting has been controlled, and a constructive program of forest culture developed. Forest reserves under the control of the individual states now total more than 10,000,000 acres. Of late years there has been an increasing use of dams and reservoirs for the storage of flood waters and the development of water power. This regulation of streams gives a uniform flow of water both for navigation and for irrigation purposes.

373. THE LAND.—The desire to encourage the home-maker has long been the motive power behind our public land policy, but unfortunately many of our earlier land laws did not prevent peculators and large corporations from fraudulently securing control of land intended for the bona fide or genuine settler. Within the last quarter of a century our land laws have been reorganized, with the double aim of doing justice to this type of settler, and of suppressing speculation and monopoly. As the result of Land Office investigations in 1913, more than 800,000 acres were returned to the public domain, on the ground that they had been secured through fraud.

The Department of Agriculture has steadily extended its scope. Better methods of cultivation, lessons in soil chemistry, and experiments with new and special crops have helped conserve the resources of the land. An elaborate system of experiment stations has been built up since 1887. The Weather Bureau in the Department of Agriculture saves millions of dollars' worth of property annually by sending out warnings of frost, storm, and flood.

Reclamation is increasingly important. New crops are being developed for the semi-arid areas of the West. Swamp lands in the East and South are being drained. Levees and breakwaters along the Mississippi are helping to prevent the loss of arable land through the river's changes in course.

Even more important is the irrigation movement. In 1894 the Carey Act gave Federal encouragement to several western states in irrigation projects, and in 1902 the Reclamation Act provided for the construction of irrigation works under the direction of the Secretary of the Interior. The plan provided by the Act of 1902 is self- supporting, the expense of the construction and improvement of the irrigation system being met from the sale of public lands. The administration of the Reclamation Act has already resulted in millions of acres being brought under cultivation.

374. MINERALS.—Until 1873 coal lands were disposed of on practically the same terms as agricultural lands. But after that date laws restricting the purchase of coal lands began to be increasingly severe. In 1910 Congress withdrew from public sale nearly 100,000,000 acres of coal, petroleum, and phosphate lands. At the present time the discovery of coal on land secured by settlers for purely farming purposes entitles the government to dispose of the coal deposits under special conditions. There is also a tendency for the government to demand higher prices of individuals buying public coal lands.

In some quarters there is a demand that all coal lands be leased rather than sold. The Federal government has not yet yielded to this demand, but Colorado and Wyoming now lease rather than sell their coal lands. Under the lease system in these states, the state retains ownership, but allows private individuals a definite commission per ton of coal mined. The lease system is also advocated in the case of lands containing iron, oil, and gas deposits, on the grounds that it safeguards the interests of the public and at the same time allows the mining corporations a fair profit.

375. REASONS FOR OPTIMISM.—In spite of the appalling waste which has been characteristic of our administration of natural resources, the outlook is distinctly encouraging. Resources used by past generations are gone forever, but at last we are making rapid strides in conserving what is left. Not only this, but we are perfecting plans for an increased supply of those resources which can be replenished.

The admirable work of our Forest Service promises not only to reduce the present waste of wood products, but actually to increase the supply of timber. The Service deserves high praise both for its work in saving and replenishing forests, and for its wise handling of forest problems involving other resources. "By reasonable thrift," runs a report of the Forest Service, "we can produce a constant timber supply beyond our present need, and with it conserve the usefulness of our streams for irrigation, water supply, navigation, and power."

We now appear thoroughly awake not only to the necessity of safeguarding what is left of the public domain, but also to the necessity of increasing the productivity of inferior lands. There are still in this country more than 300,000,000 acres of unappropriated and unreserved land. Three fourths of this area is at present fit only for grazing, but the rapid development of kaffir corn, durum wheat, Persian clover, and other crops suitable for dry soils bids fair greatly to increase the productivity of this land.

The irreplaceable character of our mineral deposits, together with the tendency for large industrial interests to monopolize minerals. has greatly stimulated the conservation of these resources. A valuable step forward has been the reclassification of public lands to allow of special treatment of lands containing mineral deposits. Coal is still used lavishly, but nine tenths of our original deposits are still in existence. Furthermore, water power, electricity, and other substitutes for coal are being developed. Our high grade iron ores will be exhausted in a few decades, but an iron shortage may be prevented by more careful mining, the use of low grade ores, and the use of substitutes.

376. DIFFERENT RESOURCES CALL FOR DIFFERENT TREATMENT.—A wise conservation policy will take note of the fact that different resources call for different types of treatment. Coal, petroleum, oil, and gas are limited in extent and are practically irreplaceable. These should be taken from the earth and utilized as economically as possible. The same is true of the metallic minerals, such as iron and copper, though here the use of substitutes is of greater importance than in the case of non-metallic minerals.

Water can best be conserved by the wise development of water power sites, and by the careful utilization of streams.

Forests may be renewed, but slowly. Their conservation requires the prevention of fires, the reduction of waste in cutting and milling, the use of by-products, and scientific reforestation.

Soil elements may also be renewed, though slowly and with difficulty. Reforestation prevents erosion and thus conserves soil fertility. Systems of crop rotation designed to retain nitrogen, potassium, and phosphorus are valuable.

377. SOME CONSERVATION NEEDS.—The above considerations indicate some of our conservation needs. It is believed by most students of conservation that the Federal forest holdings should be extended and consolidated. There is need for more stringent forest fire regulations, especially in the case of private forests. In order to reforest the denuded areas and to grow timber scientifically some such plan as the German system of forest culture might be adopted. There is urgent need of a systematic development of our inland Waterways. The construction of more dams and reservoirs, the dredging of rivers and harbors, the cordination of canals and inland waterways, and the improvement of the Mississippi-Great Lakes system, all these would be helpful measures. Irrigation and other reclamation projects, including the drainage of swamp lands, should be developed systematically. American farming methods ought still further to be improved. We are in need of laws penalizing wasteful methods of mining and prohibiting uneconomical methods of combustion. Probably the system of leasing rather than selling mineral lands should be extended.

A last vital need in conservation is coperation between state and Federal authorities, and between private individuals and public agencies. This is of great importance. Where rivers course through several states, and where forest fires in one section threaten adjacent forest areas, coperation must be secured. The Governors' Conference of 1908 stimulated coperation between the states and the Federal government, and since 1909 the National Conservation Association has been a means of cordinating the work of all persons and agencies interested in conservation. There is still, however, little coperation between state or Federal governments on the one hand, and private owners on the other. It is a matter of special regret that although four fifths of our forests are privately owned, both fire prevention and scientific forestry are little developed on private estates.

378. THE QUESTION OF ADMINISTRATION.—Though it is conceded on all sides that our natural resources ought to be utilized economically, there is much discussion as to whether the states or the Federal government ought to dominate the conservation movement.

Those favoring the extension of Federal control over conservation point out that forest control, irrigation, conservation of water power, and similar projects are distinctly interstate in character, and are thus properly a Federal function. Federal administration is said to be necessary in order to insure fair treatment of different localities. Finally, it is maintained, the states have either neglected the question of conservation, or have handled it in their own interests rather than with regard to the national welfare.

A strong party maintains, on the other hand, that conservation is primarily a state function. The movement is said to be too large for the Federal government to handle. It is contended that there is no specific warrant in the Constitution for the Federal control of conservation. It is also claimed that Federal administration of natural resources has been accompanied by waste and inefficiency. Conservation is said to be a local question, best administered by those most interested in the problem, and, by reason of their proximity to it, most familiar with it.

The problem of administration is a difficult one. In a number of cases the claims for and against Federal control are obviously sound. But from the standpoint of the public the whole matter is of secondary importance: the problem of administration ought to be decided on the basis of what is best under particular circumstances. Some phases of conservation are probably best looked after by the states, others by the Federal government, still others by the state and Federal governments jointly. The problem of conflicting authority ought somehow to be solved. Conservation is too vital a matter to be hampered by the question of method or means.

QUESTIONS ON THE TEXT

1. What was the attitude of the early settler toward natural resources?

2. Discuss the growing scarcity of natural resources.

3. What is the relation of lavish use of natural resources to the cost of living?

4. What part has monopoly played in the history of our natural resources?

5. Describe the origin and early development of the conservation movement.

6. Outline the conservation of forests and water power.

7. How is land being conserved?

8. What is the purpose of the Reclamation Act of 1902?

9. What measures have recently been taken to safeguard our mineral deposits?

10. Why may the present outlook for conservation be said to be optimistic?

11. Outline our conservation needs.

12. Why is coperation essential to the conservation movement?

13. Give the chief arguments for and against Federal administration of conservation.

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter xxx.

Or all of the following:

2. Coman, Industrial History of the United States, chapter xi.

3. Reed, Form and Functions of American Government, chapter xxxiii.

4. Van Hise, Conservation of Natural Resources in the United States, Introduction.

QUESTIONS ON THE REQUIRED READINGS

1. Into what two classes may natural resources be divided? (Van Hise, page 1.)

2. Discuss the sale of the public domain under the early land acts. (Reed, page 382.)

3. Outline the destruction of fur-bearing animals by the early settlers. (Coman, page 377.)

4. Explain the effects of depleted pasturage in the West. (Coman, pages 381-382.)

5. What are the aims of the Inland Waterways movement? (Coman, page 394.)

6. What part did Gifford Pinchot play in the Conservation movement? (Van Hise, pages 4-5.)

7. What is the origin of the National Conservation Commission? (Van Hise, pages 7-8.)

8. What is the nature of the North American Conservation Conference? (Van Hise, page 9.)

9. Describe the character of the National Conservation Association. (Van Hise, pages 12-13.)

10. Why should the Conservation movement be carried forward as rapidly as possible? (Van Hise, page 14.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. Interview an old resident with regard to the relative abundance of forests, cheap land, and wild game in your locality a half century ago.

2. Extent and utilization of forests in your state.

3. Draw up a comprehensive plan for the prevention of forest fires.

4. Extent of unused land in your state. What is being done to make this land more productive?

5. Classify the mineral deposits of your state. By whom are they controlled?

6. List the water-power sites in your locality. Draw up a plan for reforestation which would include constructive measures for the conservation of land and water power as well as forests.

7. If possible, visit a lumber camp or a mine, and observe the methods of work.

8. Outline a plan for a local conservation club, to be affiliated with the National Conservation Association.

II

9. The principles of conservation. (Van Hise, Conservation of Natural Resources, pages 359-362.)

10. Relation of population to conservation. (Van Hise, Conservation of Natural Resources, pages 375-380.)

11. The use of our forests. (Van Hise, Conservation of Natural Resources, pages 218-260.)

12. Water power. (Van Hise, Conservation of Natural Resources, pages 106-185; Huntington and Gushing, Principles of Human Geography, chapter ix.)

13. Irrigation. (Van Hise, Conservation of Natural Resources, pages 185-202; Huntington and Gushing, Principles of Human Geography, chapter xvii.)

14. Inland waterways. (Huntington and Gushing, Principles of Human Geography, chapter vi.)

15. Federal control of water in Switzerland: (Annals, vol. xxxiii, No. 3, pages 113-121.)

16. Land laws of the United States. (Van Hise, Conservation of Natural Resources, pages 279-297.)

17. Legal problems of reclamation. (Annals, vol. xxxiii, No. 3, pages 180-192.)

18. The work of Gifford Pinchot. (Consult an encyclopedia.)

19. The Congress of Governors, 1908. (Van Hise, Conservation of Natural Resources, appendix i.)

20. The North American Conservation Conference. (Van Hise, Conservation of Natural Resources, appendix ii.)

21. The National Conservation Association. (Van Hise, Conservation of Natural Resources, appendix iii.)

FOR CLASSROOM DISCUSSION

22. To what extent should state governments regulate private forests? (Consult Annals, vol. xxxiii, No. 3, pages 26-37.)

23. Should all mineral lands be leased rather than sold?

24. Is the adoption of a program of scientific forest culture at this time economically justified?

25. Under our present laws is it possible effectively to cordinate the conservation work of state and Federal governments?

26. Are higher prices an effective check to the excessive use of forest and mineral products?

27. State versus Federal administration of conservation. (Consult the Debaters Handbook Series.)



CHAPTER XXXI

CREDIT AND BANKING

379. SOME PRELIMINARY DEFINITIONS.—Money may be defined as anything that passes freely from hand to hand as a medium of exchange. Money is of two types: first, coin, including gold, silver, nickel, and copper coins; and second, paper money, including several kinds of certificates and notes. Both types of money, coin and paper, are called "cash." Credit refers to a promise to pay money or its equivalent at a future date. A bank is an institution which makes it its special business to deal in money and credit. A check is a written order directing a bank to pay a certain sum of money to a designated person. A bank note is a piece of paper money or currency which constitutes the bank's promise to pay in coin and on demand without interest, the sum named on the face of the note. A reserve fund is an amount of money or securities which a bank habitually keeps on hand as a partial guarantee that it will be able to meet its obligations.

380. TYPES OF BANKS.—Of the several types of banks, the savings bank is perhaps the most familiar to young people. A savings bank will receive deposits of one dollar or more, and will pay interest on these amounts. But the savings bank does not pay out money on checks drawn against deposits. Indeed, it may require a formal notice of several days before deposits can be withdrawn.

In many states there are trust companies. In addition to performing the function of a commercial bank, trust companies take care of valuable papers, execute trusts and wills, and sometimes guarantee titles to land.

The investment bank is usually a private institution, conducted chiefly in the interests of certain large industrial organizations.

A fourth type of bank is the commercial bank, with which this chapter is chiefly concerned. The commercial bank derives its name from the fact that it deals largely with business men. If classified on the basis of their charters, rather than on the basis of function, commercial banks may be either National, State, or private banks.

381. PRIMARY FUNCTION OF THE COMMERCIAL BANK. [Footnote: Throughout the remainder of this chapter the word "bank" should be taken as referring to the commercial bank.]—The primary function of a commercial bank is to receive the deposits of persons who have saved sums of money for which they have no immediate use, and to make loans to persons who desire them. Of course, those who have deposited sums with a bank may draw on their accounts at any time, either themselves demanding sums of the bank, or directing the bank, by means of checks, to pay specified sums to others. But experience has taught the bank that if it keeps on hand a reserve fund equal to from five to about thirty-five per cent of the sums for which it is liable to depositors, it will ordinarily be able to meet all the demands for cash which depositors will be likely to make upon it. The bank may then loan out to business men the remainder of the money deposited with it. This not only encourages production, but it allows the bank to secure a reward for its services. This reward is in the form of interest paid by those who borrow of the bank.

382. THE NATURE OF BANK CREDIT.—When an individual actually deposits with a bank $100 in cash, the bank becomes owner of the $100, and in turn writes down on its books the promise to pay to the depositor, as he shall direct, amounts totaling $100. The depositor receives a check book, and may draw part or all of the $100, as he likes.