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.



CHAPTER VI.

ECONOMIC POWERS OF THE TRUST.

Sec. 1. Power of a Monopoly over earlier or later Processes in Production of a Commodity. Sec. 2. Power over Actual or Potential Competitors. Sec. 3. Power over Employees of a Trust. Sec. 4. Power over Consumers. Sec. 5. Determinants of a Monopoly Price. Sec. 6. The Possibility of low Monopoly Prices. Sec. 7. Considerations of Elasticity of Demand limiting Prices. Sec. 8. Final Summary of Monopoly Prices.

Sec. 1. It remains to investigate the actual economic power which a "monopoly" possesses over the several departments of an industrial society. Although the "trust" may be taken as the representative form of monopoly of capital, the economic powers it possesses are common in different degrees to all the other weaker or more temporary forms of combination, and to the private business which, by the possession of some patent, trade secret, or other economic advantage, is in control of a market. These powers of monopoly may be placed under four heads in relation to the classes upon whose interests they operate—(a) business firms engaged in an earlier or later process of production; (b) actual and potential competitors or business rivals; (c) employees of the Trust or other monopoly; (d) the consuming public.

(a) The power possessed by a monopoly placed in the transport stage, or in one of the manufacturing or merchant stages, to "squeeze" the earlier or less organised producers, has been illustrated by the treatment of farmers by the railways and by the Elevator Companies and the Slaughtering Companies of the United States. The Standard Oil Trust, as we saw, preferred, until quite recently, to leave the oil lands and the machinery for extracting crude oil in the hands of unattached individuals or companies, trusting to their position as the largest purchasers of crude oil to enable them to dictate prices. The fall in the price paid by the company for crude oil from 9.19 cents in 1870 to 2.30 in 1881, when the Trust was formed, and the maintenance of an almost uniform lower level from 1881 to 1890, testifies to the closeness of the grip in which the company held the oil producers; for although improvements in the machinery for sinking wells and for extracting oil took place during the period, these economies in production do not at all suffice to explain the fall. Indeed, the method of the company's transactions with the oil producers, as described by their own solicitor in his defence of the Trust, is convincing testimony of their control of the situation:—"When the producer of oil puts down a well, he notifies the pipe line company (a branch of the Trust), and immediately a pipe line is laid to connect with his well. The oil is taken from the tank at the well, whenever requested, into the large storage tanks of the company, and is held for the owner as long as he desires it. A certificate is given for it, which can be turned into cash at any time; and when sold it is delivered to the purchaser at any station on the delivery lines."[138] In similar fashion the Sugar Trust, before the competition of the Spreckles refineries arose, controlled the market for raw sugar. Nor was this power exercised alone over the producers of raw sugar. It extended to dictating the price at which the wholesale grocers who took from them the refined sugar should sell to their customers.[139] This power of a monopoly is not merely extended to the control of prices in the earlier and later processes of production and distribution of the commodity. One of the most potent forms it assumes in manufactures where machinery is much used is a control over the patentees and even the manufacturers of machinery. Where a strong Trust exists, the patentee of a new invention can only sell to the Trust and at the Trust's price. Charges are even made against the Standard Oil Trust and other powerful monopolies to the effect that they are in the habit of appropriating any new invention, whether patented or not, without paying for it, trusting to their influence to avoid the legal consequences of such conduct. There is indeed strong reason to believe that the irresponsible position in which some of these corporations are placed induces them to an unscrupulous use of their great wealth for such purposes.

Sec. 2. (b) Since the prime object of a Trust is to effect sales at profitable prices, and prices are directly determined by the quantitative relation between supply and demand, it is clearly advantageous for a Trust to obtain as full a power in the regulation of the quantity of supply as is possible. In order to effect this object the Trust will pursue a double policy. It will buy up such rival businesses as it deems can be worked advantageously for the purposes of the Trust. The price at which it will compel the owners of such businesses to sell will have no precise relation to the value of the business, but will depend upon the amount of trouble which such a business can cause by refusing to come into the Trust. If the outstanding firm is in a strong position the Trust can only compel it to sell, by a prolonged process of cutting prices, which involves considerable loss. For such a business a high price will be paid. By this means a strongly-established Trust or Syndicate will bring under its control the whole of the larger and better-equipped businesses which would otherwise by their competition weaken the Trust's control of the market. A smaller business, or an important rival who persistently stands out of the Trust, is assailed by the various weapons in the hands of the Trust, and is crushed by the brute force of its stronger rival. The most common method of crushing a smaller business is by driving down prices below the margin of profit, and by the use of the superior staying power which belongs to a larger capital starving out a competitor. This mode of exterminating warfare is used not merely against actually existing rivals, as where a railway company is known to bring down rates for traffic below cost price in order to take the traffic of a rival line, but is equally effective against the potential competition of outside capital. After two or three attempts to compete with Jay Gould's telegraph line from New York to Philadelphia had been frustrated by a lowering of rates to a merely nominal price, the notoriety of this terrible weapon sufficed to check further attempts at competition. In this way each strongly-formed Trust is able to fence off securely a certain field of investment, thus narrowing the scope of use for any outside capital. This employment of brute force is sometimes spoken of as "unfair" competition, and treated as something distinct from ordinary trade competition. But the difference drawn is a purely fallacious one. In thus breaking down a competitor the Trust simply makes use of those economies which we have found to attach to large-scale businesses as compared with small. Its action, however oppressive it may seem from the point of view of a weaker rival, is merely an application of those same forces which are always operating in the evolution of modern capital. In a competitive industrial society there is nothing to distinguish this conduct of a Trust in the use of its size and staying power from the conduct of any ordinary manufacturer or shopkeeper who tries to do a bigger and more paying business than his rivals. Each uses to the full, and without scruple, all the economic advantages of size, skill in production, knowledge of markets, attractive price-lists, and methods of advertisement which he possesses. It is quite true that so long as there is competition among a number of fairly equal businesses the consuming public may gain to some extent by this competition, whereas the normal result of the successful establishment of a Trust is simply to enable its owners to take higher profits by raising prices to the consumer. But this does not constitute a difference in the mode of competition, so that in this case it deserves to be called "fair," in the other "unfair."

It is even doubtful whether such bargains as that above described between the Standard Oil Company and the Railways, whereby a discriminative rate was maintained in favour of the Company, is "unfair," though it was underhand and illegal. In the ordinary sense of the term it was a "free" contract between the Railways and the Oil Company, and in spite of its discriminative character might have been publicly maintained had the law not interfered on a technical point. The same is even true of the flagrant act of discrimination described by Mr. Baker:—"A combination among manufacturers of railway car-springs, which wished to ruin an independent competitor, not only agreed with the American Steel Association that the independent company should be charged $10 per ton more for steel than the members of the combine, but raised a fund to be used as follows: when the independent company made a bid on a contract for springs, one of the members of the Trust was authorised to under-bid at a price which would incur a loss, which was to be paid out of the fund. In this way the competing company was to be driven out of business."[140] These cases differ only in their complexity from the simpler modes of underselling a business rival. Mean, underhand, and perhaps illegal many of these tactics are, but after all they differ rather in degree than in kind from the tactics commonly practised by most businesses engaged in close commercial warfare. If they are "unfair," it is only in the sense that all coercion of the weak by the strong is "unfair," a verdict which doubtless condemns from any moral standpoint the whole of trade competition, so far as it is not confined to competing excellence of production.

The only exercise of power by a Trust or Monopoly in its dealings with competing capital which deserves to be placed in a separate category of infamy, is the use of money to debauch the legislature into the granting of protective tariffs, special charters or concessions, or other privileges which enable a monopoly company to get the better of their rivals, to secure contracts, to check outside competition, and to tax the consuming public for the benefit of the trust-maker's pocket. Under this head we may also reckon the tampering with the administration of justice which is attributed, apparently not without good reason, to certain of the Trusts, the use of the Trust's money to purchase immunity from legal interference, or, in the last resort, to buy a judgment in the Courts.

How far the more or less definite allegations upon this subject are capable of substantiation it is beyond our scope to inquire, but certain disclosures in connection with the Tweed Ring, the Standard Oil Company, the Anthracite Coal Trust, and other syndicates induce the belief that the more unscrupulous capitalists seek to influence the Courts of Justice as well as the Houses of Legislature in the pursuance of their business interests.

Sec. 3. (c) The more or less complete control of the capital engaged in an industry, and of the market, involves an enormous power over the labour engaged in that industry. So long as competition survives, the employee or group of employees are able to obtain wages and other terms of employment determined in some measure by the conflicting interests of different employers. But when there is only one employer, the Trust, the workman who seeks employment has no option but to accept the terms offered by the Trust. His only alternative is to abandon the use of the special skill of his trade and to enter the ever-swollen unskilled labour market. This applies with special force to factory employees who have acquired great skill by incessant practice in some narrow routine of machine-tending. The average employee in a highly-elaborated modern factory is on the whole less competent than any other worker to transfer his labour-power without loss to another kind of work.[141] Now, as we have seen, it is precisely in these manufactures that many of the strongest Trusts spring up. The Standard Oil Company or the Linseed Oil Trust are the owners of their employees almost to the same extent as they are owners of their mills and machinery, so subservient has modern labour become to the fixed capital under which it works. It has been claimed as one of the advantages of a Trust that the economies attending its working enable it to pay wages higher than the market rate. There can be no question as to the ability of the stronger Trusts to pay high wages. But there is no power to compel them to do so, and it would be pure hypocrisy to pretend that the interests of the labourers formed any part of the motive which led a body of keen business men to acquire a monopoly. One of the special economies which a large capital possesses over a small, and which a Trust possesses par excellence, is the power of making advantageous bargains with its employees.

It is possible that a firm like the Standard Oil Trust may to some limited extent practise a cheap philanthropy of profit-sharing in order to deceive the public into supposing that its huge profits enrich many instead of few. But there is no evidence that the employees of a Trust have gained in any way from the economies of industrial monopoly, nor, as we see, is there any a priori likelihood they should so gain.[142]

But the practical ownership of its employees involved in the position of a monopoly is by no means the full measure of the oppressive power exercised by the Trust over labour. Since the means by which Trust prices are maintained is the regulation of production, the interests of the Trust often require that a large part of the fixed capital of the companies entering the Trust shall stand idle. "When competition has become so fierce that there is frequently in the market a supply of goods so great that all cannot be sold at remunerative prices, it is necessary that the competing establishments, in order to continue business at all (of course, under perfectly free competition many will fail), check their production. Now an ordinary pool makes provision for each establishment to run in one of the two ways suggested. Manifestly a stronger organisation like the Trust, by selecting the best establishments, and running them continuously at their full capacity, while closing the others, or selling them, and making other use of the capital thus set free, will make a great saving. The most striking example of this kind in the recent history of the Trusts is furnished by the Whisky Trust. More than eighty distilleries joined the Trust. Formerly, when organised as a pool, as has been said, each establishment ran at part capacity, one year at 40 per cent., one year at only 28 per cent. A year after the organisation of the Trust only twelve were running; but these were producing at about their full capacity, and the total output of alcohol was not at all lessened. The saving is to be reckoned by the labour and running capital which had formerly been employed in nearly sixty distilleries. It must be borne in mind that on the product of these twelve distilleries good profits were made on the capital represented in more than eighty plants. All the greater Trusts, such as the Standard Oil, the Cotton Oil, the Cotton Bagging, and the Sugar Trust, have followed this plan of closing entirely the weaker establishments and running only the stronger, thereby effecting a saving in capital and labour."[143]

Here we see a Trust exercising its economic power of regulating production. That power, as we shall see below, is not merely confined to closing the inferior mills in order that the same aggregate output may be obtained by a full working of the more efficient plant. Where over-production has occurred it is to the interest of the Trust to lessen production. With this end in view it will suddenly close half the mills, or works, or elevators in a district. The owners of these closed plants get their interest from the Trust just as if they were working. But the labour of these works suddenly, and without any compensation for disturbance, is "saved"—that is to say, the employees are deprived of the services of the only kind of plant and material to which their skilled efforts are applicable. It is probable that one result of the formation of each of these larger trusts has been to throw out of employment several thousands of workers, and to place them either in the ranks of the unemployed or in some other branch of industry where their previously acquired skill is of little service, and where their wages are correspondingly depressed. From the account given above of the changes in organisation of production under the Trust it might appear that the effect upon labour was not to reduce the net employment, but to give full, regular employment to a smaller number instead of partial and irregular employment to many, and that thus labour, considered as a whole, might be the gainer. An industrial movement which substitutes the regular employment of a few for the irregular employment of many is so far a progressive movement. But it must be borne in mind first that there is usually a net reduction of employment, a substitution not of 50 workers at full-time for 100 at half-time, but of 30 only. For not only will there be a net saving of labour in relation to the same output, the result of using exclusively the best equipped and best situated factories, but since the Trust came into existence in order to restrict production and so raise prices, the aggregate output of the business will be either reduced or its rate of increase will be less than under open competition. The chief economy of the Trust will in fact arise from the net diminution of employment of labour. As the Trust grows stronger and absorbs a larger and larger proportion of the total supply for the market, the reduction of employment will as a rule continue. Of course, if the scale of prices which the Trust finds most profitable happens to be such as induce a large increase of consumption, and therefore to permit an expansion of the machinery of production, the aggregate of employment may be maintained or even increased. But, as we shall see below, there is nothing in the nature of a Trust to guarantee such a result. The normal result of placing the ordering of an industry in the hands of a monopoly company is to give them a power which it is their interest to exercise, to narrow the scope of industry, to change its locale, to abandon certain branches and take up others, to substitute machinery for hand labour, without any regard to the welfare of the employees who have been associated with the fixed capital formerly in use. When to this we add the reflection that the ability to choose its workmen out of an artificially made over-supply of labour, rid of the competition of other employers, gives the Trust a well-nigh absolute power to fix wages, hours of work, to pay in truck, and generally to dictate terms of employment and conditions of life, we understand the feeling of distrust and antagonism with which the working classes regard the growth of these great monopolies on both sides of the Atlantic.

The following is a short summary of the findings of a Committee of Congress with reference to the relations existing between the railroad and coal companies which control the anthracite coal-fields in Pennsylvania and the coal-miners:—"Congress has found (Document No. 4) that the coal companies in the anthracite regions keep thousands of surplus labourers in hand to underbid each other for employment and for submission to all exactions; hold them purposely ignorant when the mines are to be worked and when closed, so that they cannot seek employment elsewhere; bind them as tenants by compulsion in the companies' houses, so that the rent shall run against them whether wages run or not, and under leases by which they can be turned out with their wives and children on the mountain-side in mid-winter if they strike; compel them to fill cars of larger capacity than agreed upon; make them buy their powder and other working outfit of the companies at an enormous advance on the cost; compel them to buy coal of the company at the company's price, and in many cases to buy a fixed quantity more than they need; compel them to employ the doctor named by the company and to pay him whether sick or well; 'pluck' them at the company's store, so that when pay-day comes round the company owes the men nothing, there being authentic cases where 'sober, hard-working miners toiled for years, or even a lifetime, without having been able to draw a single dollar, or but few dollars in actual cash,' in 'debt until the day they died;' refuse to fix the wages in advance, but pay them upon some hocus-pocus sliding-scale, varying with the selling price in New York, which the railway slides to suit itself; and most extraordinary of all, refuse to let the miners know the prices on which their living slides, a 'fraud,'" says the report of Congress, "on its face" (pp. 71 and 72). The companies dock the miners' output arbitrarily for slate and other impurities, and so can take from their men 5 to 50 tons more in every 100 than they pay for (p. 76). In order to keep the miners disciplined and the coal market under supplied, the railroads restrict work, so that the miners often have to live for a month on what they can earn in six or eight days, and these restrictions are enforced upon their miners by holding cars from them to fill, as upon competitors by withholding cars to go to market. (Document No. 4, p. 77.)

Labour organisations are forbidden, and the men intentionally provoked to strike to affect the coal market. The labouring population of the local regions, finally, is kept "down" by special policemen, enrolled under special laws, and often in violation of law, by the railroads and coal and iron companies, practically when and in what number they choose, and practically without responsibility to any one but their employers, armed as the Corporation see fit with army revolvers or Winchester rifles, or both; made detectives by statute, and not required to wear their shields, provoking the public to riot (pp. 9 and 93-98), and then shooting them legally. "By the percentage of wages," says the report of Congress, "by false measurements, by rents, stores, and other methods the workman is virtually a chattel of the operator."[144]

Sec. 4. (d) Those who admit that a Trust is in its essence a monopoly, and that it is able, by virtue of its position, to sell commodities at high prices, sometimes affirm that it is not to the interest of a Trust to maintain high prices, and that in fact Trusts have generally lowered prices. We have here a question of fact and a question of theory. Of these the former presents the greater difficulty. It seems a simple matter to compare prices before and after the formation of the Trust, and to observe the tendencies to rise or fall. This comparison has been made in a good many cases, with the result that some Trusts seem to lower prices, others to raise them. The growth of the Standard Oil Company and the strengthening of its power was attended, as we saw, by a considerable fall of price. So also we are told respecting the Cotton Seed Oil Trust, formed in 1883, that "during these four years the price of cotton seed oil fell more than eight times as much as it did during the five years before the Trust was formed."[145] The rates of the most absolute monopoly, the Western Union Telegraph Company, are very little higher than those which prevail in England, where the Government works the telegraph system at a considerable loss each year. The Sugar Trust, on the other hand, directly it was formed, raised prices considerably. The same is true of several of the other most conspicuous combinations.

Now, it is argued, if it be admitted that prices have in fact fallen under the administration of some of the strongest Trusts, it cannot be maintained that Trusts have a tendency to raise prices. In reply, it is pointed out that in almost all highly-organised modern industries improved methods of production are rapidly lowering the expenses of production and prices, and that therefore the statement that Trusts tend to maintain high prices is quite consistent with the fact of an absolute fall, the question at issue being whether the fall of prices under the Trust was as great as it would have been under free competition. Moreover, a comparison of dates appears to indicate that the Trust's prices, as we saw in the Standard Oil Company, fluctuate with the degree of their monopoly, falling rapidly under the pressure of actual or threatened competition, rising when the danger is past. Finally, opponents of the Trust allude to certain Trusts which, in spite of the greater economies of production they possess, have raised prices.

Excepting by the inverse and questionable method of arguing that the high profits distributed by a Trust are themselves proof that prices have not fallen as they would have fallen under free competition, it is not possible to build a very convincing condemnation of the Trust from statistics of price. And even when profits are high it is open to the defenders of the Trust to maintain that they only represent the saving of the cost of competition, and that if competition were introduced the profits would be squandered in the struggle instead of passing into the consumer's pocket.

It is only from a deductive treatment of the subject that we are able to clearly convict the Trust of possessing a power over prices antagonistic to the interests of the consuming public.

A Trust, or other company, or a single individual who has a complete monopoly of a class of goods for which there is a demand, will strive to fix that price which shall give him the largest net profit on his capital. The question with him will be simply this, "How many articles shall I offer for sale?" If he offers only a small number the competition of more urgent wants among the consumers will enable him to sell the small number at a high price. Assuming, for the moment, that the production of these articles was subject to the law of constant returns—i.e., that a few things were produced relatively as cheaply as many, this small sale would give the highest rate of profit on each sale, for the "marginal utility" of the supply would be high and would enable a high price to be obtained for the whole supply. But if he possesses large facilities of production it may pay him better to sell a larger number of articles at a lower price with a lower rate of profit on each sale, because the aggregate of a larger number of small profits may yield a larger net profit on his whole capital. How far it will pay him to go on increasing the supply and selling a larger number of articles at a lower price will entirely depend upon the effect each increment of supply exercises upon demand, and so upon prices and profits. Everything will hinge upon the "elasticity of demand" in the particular case. If the object of the monopoly satisfies a keen, widely-felt want, or stimulates a craving for increased consumption among those who take off the earlier supply, a large increase in supply may be attended by a comparatively small fall in prices. Sometimes a large increase of supply at a lowered price will, by reaching a new social stratum, or by forcing the substitution of this article for another in consumption, so enlarge the sale that though the margin of profit on each sale is small, the net profit on the whole capital is very large. In all such cases of great elasticity it may pay a monopolist to sell a large number of articles at a low price.

Where the article belongs to that class in which the law of increasing returns is strongly operative—i.e., where great economies in expenses of production attend a larger scale of production, this increase of supply and fall of prices may continue with no assignable limit. On the other hand, where there is little elasticity of demand, where an increase of supply can be taken off only at a considerable fall of price, it will probably pay a monopolist to restrict production and sell a small number of articles at a high price. It is this motive which often induces the destruction of tons of fish and fruit in the London markets for fear of spoiling the market. These goods could be sold at a sufficiently low price, but it pays the companies owning them to destroy them, and to sell a smaller number which satisfies the wants of a limited class of people who "can afford to pay." Now, when free competition exists among sellers, as among buyers, this can never happen. It will always be to the interest of a competing producer or dealer to lower his price below that which would yield him the largest net profit on his capital were he a monopolist. If he is a monopolist he will only lower his prices provided the elasticity of demand in the commodity in question is so great that the increased consumption will be so considerable as to yield him a larger net profit. But if he is a competing dealer he does not look chiefly to the consumption of the community, but to the proportion of that consumption which he himself shall supply. The elasticity of demand, so far as his individual business is concerned, is not limited to the amount of the increased consumption of the community stimulated by a lowering of prices, but includes that portion of the custom of his rivals which he may be able to divert to himself. Hence it arises that under free competition it will be the tendency of the several competitors to drive down the prices to the point at which the most advantageously placed competitors make the minimum profit on their capital.

Sec. 5. It is all important to an understanding of the subject to recognise that a monopoly price and a competitive price are determined by the operation of an entirely different set of economic forces. The loose opinion that it must be to the interest of a Trust or other monopoly to sell at the same price as would be fixed by competition is quite groundless.

Let us look more closely at the determinants of a monopoly price. Suppose we are dealing with a Trust owning a large amount of fixed capital, some of it more and some less favourably ordered for production, and having an absolute monopoly in the market for steel rails, cotton bagging, or other manufactured articles. First look at expenses of production. A very small output, though produced by the exclusive use of the very best machinery and labour, would not be produced very cheaply, because the economies attending large-scale production would be sacrificed. Each successive increment in output would involve a decreased expense per unit of production so long as the most favourably situated plant was employed. If the output grew so large that worse material or works fitted with inferior plant, or less favourably placed, were called into requisition, the economies of an increased scale of production would be encroached upon by this lowering of the margin of production. Taking the Trust's capital at a fixed amount, there would necessarily come an increment of output which it would not pay to produce even if sold at the price fetched by the previous increment. The ton of steel or of cotton bagging which would only yield a bare margin of profit, if sold at the price fetched by the last ton, limits the maximum output of the business. Under the pressure of free competition this marginal ton will be actually produced. But though, considered by itself, it yields a margin of profit, it will rarely if ever be produced as part of the actual output of a Trust. The actual output of a Trust, we shall find, will be determined at any point between the first unit of output and this marginal increment. The expenses of production will not increase in any close correspondence with the growth of the output, but will represent the fluctuating resultant of the several economies of production at the several points.



In the figures A and B the perpendicular line ai represents a number of increments of production. The expense of producing a supply of 100 will be measured by the line bb', that of producing 200 by cc', and so on. But never in actual industry will the lines of growing expense be regular in their relation to the increase of production, as would be the case in the figure A; they will always be irregular, as in the figure B. The curve of expense ai' in the figure B will be determined by the resultant of the various forces which make for increasing and diminishing returns for each new increment of the requisites of production required to produce the new portion of output. When the increased scale of production makes some new application of machinery economically possible, or where recourse must be had to some decidedly inferior land for the raw material, a large sudden irregularity may show itself in the curve of expense.

When we turn from expenses of production to the aggregate takings from the sale of the several quantities of supply, we shall find a similar irregularity of increase. Elasticity in demand, as tested by the stimulus given to consumption by a fall of price, differs not merely in different commodities, but at different points in a falling scale of prices. A number of equal decrements in price, according as they stimulate the satisfaction of weaker wants of earlier consumers, or strike into new classes of consumers, or supply new kinds of wants, will have widely different effects in increasing the aggregate takings.

We have then two widely fluctuating and highly irregular gradations of money terms, representing expenses of production and the aggregate price of the various quantities of supply, each determined by a wholly different class of considerations. But the interest of a Trust, as we see, lies in fixing supply at the highest net profits. Now the net profits of producing and selling any specified quantity of supply are ascertained by deducting the expenses of production from the aggregate takings. The relation between the growth of expenses of production and of aggregate takings will yield a different net amount of profit at each increment of supply. The diagram opposite will illustrate the nature of these relations.

AL is the line indicating at the several points, B, C, D, etc., proportional increments in supply. If the monopoly be a steel rail trust, B marks the millionth ton, C the two millionth ton of output, and so on. A'L' is a curve indicating, by its diminishing distance from AL, the diminishing expense of producing each unit of the increased output, so that the expense of producing the first ton, if only one is produced, is AA', that of the millionth ton, if one million are produced, BB', and so on. The expenses of producing one million tons will thus be represented by the figure ABB'A', those of two millions by the figure ACC'A'. Further, let the curve al represent, by its diminishing distance from AL, the diminishing price at which the several additions to supply can be sold, so that the first ton sells at Aa, the millionth at Bb, and so on, the aggregate price of the first million tons being ABba, that of the first two millions being ACca.



Assuming that the Trust is planning a new business and determining the most profitable output, it will limit that output not necessarily at the point where the selling price gives the widest margin of profit upon the expenses of production, as might be the case at the point B in the diagram, but at the point F, where the margin of profit bears the largest proportion to the expenses of production, or in other words, where the area of absolute takings shows the largest surplus over the area of aggregate expenses. Thus it will here be to the interest of the Trust to produce and sell six millions (limiting production at F) with an aggregate expense AFF'A' and an aggregate takings AFfa, yielding an aggregate net profit A'F'fa. They will not produce five millions because the figure AEea bears a smaller proportion to AEE'A' than does AFfa' to AFF'A'. For a similar reason they will not produce seven millions.

Since the fluctuations in the curve of expenses and in that of selling price or "demand" are determined by an entirely different set of forces, it will be evident that there may be several points in AL where the proportions between the area of expenses and that of profits may be the same. So there may be several maxima at which Trust prices may be indifferently fixed. The figure upon F'f may have the same quantitative relation to the figure upon FF', as that upon H'h to that upon HH'. In such a case it will be a matter of indifference to the Trust whether it sells five million tons at a price 100s. per ton, or seven millions at 90s.

We have seen that the causes which determine expenses at the several points in A'L' have no relation to the causes which determine the selling price at the various points, except to furnish a minimum below which the price cannot fall. Above this limit expenses of production in no sense help to determine monopoly prices; the true determinants are entirely in the region of demand, and are measured by the marginal utility or satisfaction afforded to consumers by the several quantities which constitute supply at any given time.

Since expenses of production always enter into the determination of competition-prices, which are fixed by the interaction of expenses and money estimates of utility—i.e., by supply and demand, it is evident that the curve of monopoly prices has no assignable relation whatever to the curve of competition prices, and that the most profitable output and prices of Trust-made goods are in no way identified with the most profitable output and prices in a competitive trade. In competition the curve of selling prices tends to follow closely the curve of expenses, and consequently the areas of profits and expenses tend to bear the same proportion to each other at different points of increment in the trade. For if at any point great increases in economy of production are achieved, while the large elasticity of demand maintains a price nearly the same as before, the wide margin of profit which might fix the actual price at that point for a monopolist only serves to stimulate such increased output on the part of trade competitors as will continue until the flexibility of demand weakens, and prices are lowered to such a point as will yield the normal margin or market rate of profit.

There is, therefore, nothing in common between competition prices and monopoly prices for different quantities of supply, nor anything to secure that the actual quantity of supply and the price shall be the same in the two cases.

Sec. 6. It is, however, conceivable that in a certain commodity where a genuine monopoly holds the market, the price should be as low as under free competition. This may be illustrated by the following curves of expense and price:—



where the economies of increased production continue to be very great, while the flexibility of demand is also high. In other words, it may pay the Trust better to make very large sales at a low price when the expenses of production are low, than to sell a smaller quantity at a higher price and with a higher expense of production. In this case the consumer may get a part of the advantage of large-scale production along with the saving of expense of competition. There is, however, no guarantee to society that low prices will be fixed. In the vast majority of cases it will probably pay the Trust better to limit production and sell at higher prices.

In the illustration above we have assumed that a monopoly was starting de novo. Where a Trust is formed, as is commonly the case, by an amalgamation of existing capitals largely embodied in plant and machinery of production, it will probably not pay to limit production to a very small output, even though the largest proportionate margin of profit might seem to stand there. For the interest upon the closed mills and other idle capital should be reckoned among the expenses of production for the purposes of determining the profitable price. Thus where large means of production are owned by a monopoly it will seldom pay to sell a very small supply at a very high price.

So far we have treated of absolute monopolies, eliminating all consideration of competition. We have found that the supply and the price of an article of absolute monopoly is determined by the relation between expenses of production and flexibility of demand. Although a new invention or a wide expansion of market may alter so considerably the expenses of production of the several quantities of supply as to materially affect monopoly-supply and prices, it is the latter influence, that of flexibility of demand, that directly in each specific case determines whether a Trust's prices shall be high or low. When we find the Standard Oil Trust maintaining a low level of prices, or the Western Union Telegraph Company charging low rates, we shall find the explanation in the character of the public demand for oil and telegraphic messages.

Sec. 7. A number of considerations relating to "demand" limit the economic power of monopolies to charge high prices.

A monopoly price, as we have seen, exactly measures the marginal utility of the supply, as indicated by the quantity of money which the purchaser of the last increment of supply is just willing to pay for it. When this marginal utility sinks fast with an increase of supply the monopoly price will be high for it, and it will pay the monopolist better to restrict the output and sell the limited supply at a high price, because a large reduction of price will not stimulate a proportionably large increase of consumption. So where the marginal utility sinks slowly, it will pay to increase the supply and lower the price, for each fall of price will stimulate a large increase of consumption.

Since the marginal utility of a number of increments of supply will not be the same in the case of any two commodities, it is evident that the determination of monopoly prices is a very delicate operation.

It is not possible to present even an approximately accurate classification of commodities in relation to the powers of a Trust or Monopoly. But the following considerations will assist us to understand why in some cases a Trust appears to raise prices, in others to keep them as they were, and in others even to lower them:—

(a) The urgency of the need which a commodity satisfies enables the monopolist to charge high prices. Where a community is dependent for life upon some single commodity, as the Chinese on rice, the monopolist is able to obtain a high price for the whole of a supply which does not exceed what is necessary to keep alive the whole population. Thus a monopolist of corn or rice in a famine can get an exorbitant price for a considerable supply. But after the supply is large enough to enable every one to satisfy the most urgent need for sustenance, the urgency of the need satisfied by any further supply falls rapidly, for there is no comparison between the demand of famine and the demand induced by the pleasures of eating.

A monopoly of a necessity of life is therefore more dangerous than any other monopoly, because it not merely places the lives of the people at the mercy of private traders, but because it will generally be the interest of such monopolists to limit supply to the satisfaction of the barest necessaries of life.

Next to a necessary in this respect will come what is termed a "conventional necessary," something which by custom has been firmly implanted as an integral portion of the standard of comfort. This differs, of course, in different classes of a community. Boots may now be regarded as a "conventional necessary" of almost all grades of English society, and a monopolist could probably raise the price of boots considerably without greatly diminishing the consumption. Half a century ago, however, when boots were not firmly established as part of the standard of comfort of the great mass of the working classes, the power of a monopolist to raise prices would have been far smaller.

As we descend in the urgency of wants supplied we find that the comforts and luxuries form a part of the standard of life of a smaller and smaller number of persons, and satisfying intrinsically weaker needs, are more liable to be affected by a rise of price.

(b) Closely related to this consideration, and working in with it at every point, is the question of the possibility of substituting another commodity for the one monopolised. This everywhere tempers the urgency of the need attaching to a commodity. There are few, if any, even among the commodities on which we habitually rely for food, shelter, clothing, which we could not and would not dispense with if prices rose very high. The incessant competition which is going on between different commodities which claim to satisfy some particular class of need cannot be got rid of by the monopoly of one of them. This is probably the chief explanation of the low prices of the Standard Oil. As an illuminant, oil is competing with gas, candles, electricity, and unless the monopoly were extended laterally so as to include these and any other possible illuminants, the Trust's prices cannot be determined merely by the pressure of the need for artificial light. Though to a modern society artificial light is probably even more important than sugar, a Sugar Trust may have a stronger monopoly and be able to raise prices higher than an Oil Trust, because the substitutes for sugar, such as molasses and beetroot, are less effective competitors than gas, candles, and electricity with oil.

The power of railway monopolies largely depends upon the degree in which their services are indispensable, and no alternative mode of transport is open. Sometimes, however, they miscalculate the extent of their power. The high railway rates in England have recently led in several quarters to a substitution of road and canal traffic in the case of goods where rapidity of conveyance was not essential. So also in other cases sea-transport has been substituted.

The stronger monopoly of American railways consists partly in the fact that distances are so great, and the sea-board or other water conveyance so remote, that over a large part of the Continent the monopoly is untempered by alternative possibilities of transport.

The reverse consideration, the possibility of substituting the article of monopoly for other articles of consumption, and so securing a wider market, has quite as important an influence on prices. The possibility of substituting oil for coal in cooking and certain other operations has probably a good deal to do with the low price of oil. A Trust will often keep prices low for a season in order to enable their article to undersell and drive out a rival article, a competition closely akin to the competition with a rival producer of the same article. When natural gas was discovered in the neighbourhood of Pittsburg, the price was lowered sufficiently to induce a large number of factories and private houses to give up coal and to burn gas. After expensive fittings had been put in, and the habit of using gas established, the Gas Company, without any warning, proceeded to raise the rates to the tune of 100 per cent. When we ascend to the higher luxuries, the competition between different commodities to satisfy the same generic taste, or even to divert taste or fashion from one class of consumption to another class, is highly complicated, and tempers considerably the control of a Trust over prices.

The power of a company which holds the patent for a particular kind of corkscrew is qualified very largely not only by competition of other corkscrews, but by screw-stoppers and various other devices for securing the contents of bottles. The ability to dispense with the object of a monopoly, though it does not prevent the monopolist from charging prices so much higher than competition prices as to extract all the "consumer's rent," of the marginal consumer, forms a practical limit to monopoly prices.

(c) Lastly, there is the influence of existing or potential competition of other producers upon monopoly prices. Where prices and profits are very high a Trust is liable to more effective competition on the part of any surviving independent firms, and likewise to the establishment of new competitors. This ability of outside capital to enter into competition will of course differ in different trades. Where the monopoly is protected by a tariff the possibility of new competition from outside is lessened. When the monopoly is connected with some natural advantage or the exclusive possession of some special convenience, as in mining or railways, direct competition of outsiders on equal terms is prohibited. Where the combination of large capital and capable administration is indispensable to the possibility of success in a rival producer, the power of a monopoly is stronger than where a small capital can produce upon fairly equal terms and compete. If the monopoly is linked with close personal qualities and with special opportunities of knowledge, as in banking, it is most difficult for outside capital to effectively compete.

Sec. 8. These considerations show that the power of a Trust or other monopoly over prices is determined by a number of intricate forces which react upon one another with varying degrees of pressure, according as the quantity of supply is increased or diminished. But a Trust is always able to charge prices in excess of competitive prices, and it is generally its interest to do so. It will commonly be to the interest of a Trust or other monopoly to maintain a lower scale of prices in those commodities which are luxuries or satisfy some less urgent and more capricious taste, and to maintain high prices where the article of monopoly is a common comfort or a prime necessary of life for which there is no easily available substitute.

FOOTNOTES:

[138] S.C.T. Dodd, The Forum, May 1892.

[139] "Trusts in the United States," Economic Journal, p. 86.

[140] Baker, Monopolies and the People, p. 85.

[141] Cf. Chapter ix.

[142] Mr. George Gunton, in writing upon "The Economic Aspect of Trusts" (Political Science Quarterly, Sept. 1888), claims a rise in wages as one of the advantages of Trusts, but Mr. Gunton throughout his argument assumes that a Trust is a large competing capital and not a monopoly. If a Trust were a competing capital its formation would be an economic and social advantage, tending, as he says, "to increase production, to lower prices, and to raise wages." But as a Trust is not a competing capital it does none of these things.

[143] J.W. Jenks, "Trusts in the United States," Economic Journal, vol. ii. p. 80.

[144] H.D. Lloyd, Essay on "Trusts," reprinted in Boston Daily Traveller (June 16, 1893).

[145] G. Gunton, Political Science Quarterly, Sept. 1888. This statement, however, appears in contradiction to the "Report of the Committee on Investigations relative to Trusts in the State of New York," p. 12.



CHAPTER VII.

MACHINERY AND INDUSTRIAL DEPRESSION.

Sec. 1. The external phenomena of Trade Depression. Sec. 2. Correctly described as Under-production and Over-production. Sec. 3. Testimony to a general excess of Productive Power over the requirement for Consumption. Sec. 4. The connection of modern Machine-production and Depression shown by statistics of price. Sec. 5. Changing forms in which Over-supply of Capital is embodied. Sec. 6. Summary of economic relation of Machinery to Depression. Sec. 7. Under-consumption as the root-evil. Sec. 8. Economic analysis of "Saving." Sec. 9. Saving requires increased Consumption in the future. Sec. 10. Quantitative relation of parts in the organism of Industry. Sec. 11. Quantitative relation of Capital and Consumption. Sec. 12. Economic limits of Saving for a Community. Sec. 13. No limits to the possibility of individual Saving—Clash of individual and social interests in Saving. Sec. 14. Objection that excess in forms of Capital would drive interest to zero not valid. Sec. 15. Excess is in embodiments of Capital, not in real Capital. Sec. 16. Uncontrolled Machinery a source of fluctuation.

Sec. 1. The leading symptom of the disease called Depression of Trade is a general fall of wholesale prices, accompanied by a less than corresponding fall of retail prices. Whatever may be the ultimate causes of a trade depression, the direct and immediate cause of every fall of price must be a failure of demand to keep pace with supply at the earlier price. So long as those who have goods to sell can sell all these goods at the price they have been getting, they will not lower the price. The efficient cause then of any fall of price is an actual condition of over-supply at earlier prices. A very small quantity of over-supply will bring down prices in a business, or in a whole market, provided the competition between the businesses is keen. Where such a fall of prices quickly stimulates demand so that the over-supply is carried off and the rate of demand is equated to the rate of supply at the lower price level, the condition is commonly described as a "tendency to over-supply." But it is important to bear in mind that in strictness it was not a "tendency" but an actually existing quantity of over-supply which brought down the price.

Where any fall of price thus brought about quickly stimulates a corresponding increase of demand, stability of prices follows, and there will be a full, healthy production at the lower prices.

The mere fact then that prices are generally lower than they were five or ten years ago is no evidence of depressed trade. Depressed trade signifies not merely low prices but relaxed production: more has been produced than can be sold at the lowest profitable prices, and markets are congested with stock, but less is being produced than could be produced with existing means of production. The fact which faces us in a period of depression is an apparent excess of productive power. If this excess were of labour alone it might be explained with some plausibility as due to the displacement of labour by machinery. For it has been admitted that the first and immediate effect of introducing labour-saving or labour-aiding machines may be a diminution in the demand for labour, even when the labour of making and repairing the machines and of distributing the increased product which finds a sale is taken into consideration. The simultaneous application of a number of new forms of machinery attended by other general economies in the organisation of industry might seem to explain why for a time there should be a general redundancy of labour in all or most of the chief industries of a country. Such an over-supply of labour would result from the accumulated action of "first effects." When the cheapening influences of machinery had time to exercise their full natural influence in stimulating consumption the labour temporarily displaced would be again fully utilised; for the moment, past labour saved and stored in forms of fixed capital would do a great deal of the work which would otherwise be done by present living labour. But such an explanation is wholly negatived by the fact that in a depressed condition of trade there is an excess of forms of capital as well as of labour. There exists simultaneously a redundancy of both factors in production. Labourers are out of work or are in irregular employment, mills and factories are closed or working short time, the output of coal and metals is reduced, and yet with this relaxed production the markets are glutted with unsold goods unable to find purchasers at a price which will yield a minimum profit to their owners. To this must be added, in the case of the extractive industries, agriculture, mining, etc., the exclusion from productive use of land which had formerly found a profitable employment.

Sec. 2. To this condition of industry the antithetical terms, over-production and under-production, may be both correctly applied, according as one regards production as a state or as a process. The state of trade in a depression is one of over-production—the industrial body is congested with goods which are not drawn out for consumption fast enough. This plethora debilitates the industrial body, its functional activities are weakened. The slackness of trade thus induced is rightly described as under-production.

It is commonly said by English writers upon economics that the state of over-production, the redundancy of capital and labour, though found in one or two or several trades at the same time, cannot be of general application. If too much capital and labour is engaged in one industry there is, they argue, too little in another, there cannot be at the same time a general state of over-production. Now if by general over-production is meant not that every single industry is supplied with an excess of capital, but that there exists a net over-supply, taking into account the plethora in some trades and the deficiency in others, this assertion of English economists is not in accordance with ascertained facts or with the authority of economists outside of England.

Sec. 3. If a depression of trade signified a misapplication of capital and labour, so that too much was applied in some industries, too little in others, there would be a rise of prices in as many cases as there was a fall of prices, and the admitted symptom of depression, the simultaneous fall of price in all or nearly all the staple industries, would not occur. The most careful students of the phenomena of depressed trade agree in describing the condition as one of general or net excess of the forms of capital. They are also agreed in regarding the enormous growth of modern machinery as the embodiment of a general excess of producing power over that required to maintain current consumption.

Lord Playfair, writing on this subject in 1888, says, "It matters not whether the countries were devastated by war or remained in the enjoyment of peace; whether they were isolated by barriers of Protection or conducted these industries under Free Trade; whether they abounded in the raw materials of industry or had to import them from other lands; under all these varying conditions the machine-using countries of the world have felt the fifteen years of depression in the same way, though with varying degrees of intensity." His conclusion is "that the improvements of machinery used in production have increased the supply of commodities beyond the immediate demands of the world."[146] In support of this position he adduces the authority of continental writers such as Dr. A. von Studnitz, Piermez, Jules Duckerts, Laveleye, Trasenster, Annecke, and Engel. In the United States, Carroll Wright, David Wells, and Atkinson are foremost in upholding this to be the explanation of depression of trade. Mr. Carroll D. Wright, Commissioner of Labour at Washington, is emphatic in his assertion of the fact. "So far as the factories and the operatives of the countries concerned are to be taken into consideration (England, the United States, France, Belgium, Germany), there does exist a positive and emphatic over-production, and this over-production could not exist without the introduction of power-machinery at a rate greater than the consuming power of the nations involved, and of those dependent upon them, demand; in other words, the over-production of power-machinery logically results in the over-production of goods made with the aid of such machinery, and this represents the condition of those countries depending largely upon mechanical industries for their prosperity."[147] The Reports of the English "Commission on the Depression of Trade and Industry" make similar admissions of an excess of producing power as distinct from a mere miscalculation in the application of capital and labour. The Majority Report, defining "over-production" as "the production of commodities, or even the existence of a capacity for production at a time when the demand is not sufficiently brisk to maintain a remunerative price to the producer," affirms "that such an over-production has been one of the prominent features of the course of trade during recent years, and that the depression under which we are now suffering may be partially explained by this fact...."[148] The Minority Report lays still stronger stress upon "systematic over-production," alleging "that the demand for commodities does not increase at the same rate as formerly, and that our capacity for production is consequently in excess of our home and export demand, and could, moreover, be considerably increased at short notice by the fuller employment of labour and appliances now partially idle."[149]

The most abundant information regarding the excess of the machinery of production in the several branches of industry has been given by Mr. D.A. Wells, who regards machinery as the direct cause of depressed trade, operating in three ways—(1) increased capacity of production, (2) improved methods of distribution, (3) the opening up of new abundant supplies of raw material. Thus production grows faster than consumption. "In this way only is it possible to account for the circumstances that the supply of the great articles and instrumentalities of the world's use and commerce have increased during the last twelve or fifteen years in a far greater ratio than the contemporaneous increase of the world's population or of its immediate consuming capacity."[150]

The earlier inventions in the textile industries, and the general application of steam to manufacture and to the transport services, have played the most dramatic part in the industrial revolution of the last hundred years. But it should be borne in mind that it is far from being true that the great forces of invention have spent themselves, and that we have come to an era of small increments in the growth of productive power. On the contrary, within this last generation a number of discoveries have taken place in almost all the chief industrial arts, in the opening up of new supplies of raw material, and in the improvement of industrial organisation, which have registered enormous advances of productive power. In the United States, where the advance has been most marked, it is estimated that in the fifteen or twenty years preceding 1886 the gain of machinery, as measured by "displacement of the muscular labour," amounts to more than one-third, taking the aggregate of manufactures into account. In many manufactures the introduction of steam-driven machinery and the factory system belongs to this generation. The substitution of machinery for hand labour in boot-making signifies a gain of 80 per cent. for some classes of goods, 50 per cent. for others. In the silk manufacture there has been a gain of 50 per cent., in furniture some 30 per cent., while in many minor processes, such as wood-planing, tin cans, wall-papers, soap, patent leather, etc., the improvement of mechanical productiveness per labourer is measured as a rise of from 50 to 300 per cent. or more. The gain is, however, by no means confined to an extension of "power" into processes formerly performed by human muscle and skill. Still more significant is the increased mechanical efficiency in the foundational industries. In the manufacture of agricultural implements the increase is put down at from 50 to 70 per cent., in the manufacture of machines and machinery from 25 to 40 per cent., while "in the production of metals and metallic goods long-established firms testify that machinery has decreased manual labour 33-1/3 per cent." The increase in the productive power of cotton mills is far greater than this. From 1870 to 1884 the make of pig-iron rose 131 per cent. in Great Britain and 237 per cent. in the rest of the world.[151] "In building vessels an approximate idea of the relative labour displacement is given as 4 or 5 to 1—that is, four or five times the amount of labour can be performed to-day by the use of machinery in a given time that could be done under old hand methods."[152]

In England the rise in productiveness of machinery is roughly estimated at 40 per cent. in the period 1850 to 1885, and there is no reason to suppose this is an excessive estimate. In the shipping industry, where more exact statistics are available, the advance is even greater. The diminution of manual labour required to do a given quantity of work in 1884 as compared with 1870 is put down at no less than 70 per cent., owing in large measure to the introduction and increased application of steam-hoisting machines and grain elevators, and the employment of steam power in steering, raising the sails and anchors, pumping, and discharging cargoes.[153] In the construction of ships enormous economies have taken place. A ship which in 1883 cost L24,000 can now be built for L14,000. In the working of vessels the economy of fuel, due to the introduction of compound-engines, has been very large. A ton of wheat can now be hauled by sea at less than a farthing per mile. Similarly with land haulage the economy of fuel has made immense reductions in cost. "In an experiment lately made on the London and North Western Railway, a compound locomotive dragged a ton of goods for one mile by the combustion of two ounces of coal."[154] The quickening of voyages by steam motor, and by the abandonment of the old Cape route in favour of the Suez Canal, enormously facilitated commerce. The last arrangement is calculated to have practically destroyed a tonnage of two millions. The still greater facilitation of intelligence by electricity did away with the vast system of warehousing required by the conditions of former commerce. These economies of the foundational transport industries have deeply affected the whole commerce and manufacture of the country, and have played no inconsiderable part in bringing about the general fall of prices by lowering the expenses of production and stimulating an increased output.

Excessive production of transport-machinery, especially of railways, has played an important part as an immediate cause of modern trade depression. The depression beginning in 1873 and culminating in 1878 is described as having its origin "in the excessive lock-up of capital in the construction of railways, especially in America and Germany, many of which, when built, had neither population to use them nor traffic to carry; in the wild speculation that followed the German assertion of supremacy on the Continent; in the exaggerated armaments, which withdrew an inordinate amount of labour from productive industry, and over-weighed the taxpayers of the great European nations; and in over-production in the principal trades in all European countries."[155]

Mr. Bowley points out that "after each of the great railway booms of the century, for instance in England about 1847, in America before 1857 and 1873, in India in 1878, and on the Continent in 1873, the collapse has been very violent; for the materials are bought at exaggerated prices; the weekly wage during construction is enormous; no return is obtained till the whole scheme, whose carrying out probably lasts many years, is complete."

A great deal of this railway enterprise meant over-production of forms of transport-capital and a corresponding withholding of current consumption. In other words, a large part of the "savings" of England, Germany, America, etc., invested in these new railways, were sterilised; they were not economically needed to assist in the work of transport, and many of them remain almost useless, as the quoted value of the shares testifies. It is not true, as is sometimes suggested, that after a great effort in setting on foot such gigantic enterprises, a collapse is economically necessary. If the large incomes and high wages earned in the period prior to 1873, when capital and labour found full employment in these great enterprises, had been fully applied in increased demand for commodities and an elevated standard of consumption, much of the new machinery of transport, which long stood useless, would have been required to assist in forwarding goods to maintain the raised standard of consumption. This argument, of course, assumes that ignorance or fraud have not caused a misdirection of investment. There is no evidence to indicate that the vast sums invested in 1869-72 in railway enterprise could have found any safer or more remunerative investment. It is the overflow of "savings," after all capital economically needed to carry on the work of production to supply steady current wants has been secured, that flows into the hands of speculative company-promoters. Such savings are not diverted from safe and useful forms of investment, they are "savings" which ought never to have been attempted, for they have no economic justification in the needs of commerce, as is proved by results.

Sec. 4. The direct causal connection between the increased productive power of modern machinery and trade depression clearly emerges from a comparison of the fluctuations in the several departments of industry in different industrial countries. As modern machinery and modern methods of commerce are more highly developed and are applied more generally, trade fluctuations are deeper and more lasting. A comparison between more backward countries largely engaged in raising food and raw materials of manufacture for the great manufacturing countries is sometimes adduced in support of the contention that highly-evolved industry is steadier. But though Mr. Giffen is undoubtedly correct in holding that depressions are often worse in countries producing raw materials than in manufacturing countries,[156] this is only true of raw-material producing countries which produce for export, and which are therefore dependent for their trade upon fluctuations in demand for commodities in distant markets whose movements they are least able to calculate or control. Irregularity of climate, disease, and other natural causes must be a constant source of fluctuation in the productivity of agriculture. But those non-manufacturing countries which are little dependent upon commerce with manufacturing nations, and which are chiefly self-supporting, will of necessity retain a larger variety of agriculture and of other primitive industries, and will therefore be less at the mercy of some climatic or other injury than a country more specialised in some single crop or other industry. The specialisation impressed upon a backward country by commerce with advanced industrial countries, confining it to growing cotton or wheat or sheep or wine, exaggerates the irregularity imposed by nature upon its productivity, by making it subservient to the fluctuating demands of distant and wholly incalculable markets. The fluctuations brought about by irregular consumption and uncontrolled production in highly-evolved industrial countries are thus reflected with terrible force upon the more primitively-ordered parts of the industrial world. Thus does the character of modern machine-industry impress itself on the countries which feed it with raw materials.

If we turn to investigate the several departments of industry in the more highly-evolved communities, where statistics yield more accurate information, we have most distinct evidence that so far as the world-market is concerned, the fluctuations are far more extreme in the industries to which machine-production and high organisation have been applied. An investigation of changes of wholesale prices indicates that the most rapid and extreme fluctuations are found in the prices of textile and mineral materials which form the foundation of our leading manufactures. A comparison of the price changes of food as a whole, and of corn prices with textiles and minerals, shows that especially during the last thirty years the fluctuations of the latter have been much more rapid and pronounced. (See following diagrams.)





Sec. 5. It ought to be clearly understood that the real congestion with which we are concerned, the over-supply, does not chiefly consist of goods in their raw or finished state passing through the machine on their way to the consumer. The economic diagnosis is sometimes confused upon this point, speaking of the increased productive power of machinery as if it continued to pour forth an unchecked flood of goods in excess of possible consumption. This shows a deep misunderstanding of the malady. Only in its early stages does it take this form. When in any trade the producing power of machinery is in excess of the demand at a remunerative price, the series of processes through which the raw material passes on its way to the consumer soon become congested with an over-supply. This, however, need not be very large, nor does it long continue to grow. So long as the production of these excessive wares continues, though we have a growing glut of them, the worst features of industrial disease do not appear; profits are low, perhaps business is carried on at a loss, but factories, workshops, mines, railways, etc., are in active operation; wages may be reduced, but there is plenty of employment. It is when this congestion of goods has clogged the wheels of the industrial machine, retarded the rate of production, when the weaker manufacturers can no longer get credit at the bank, can no longer meet their engagements, and collapse, when the stronger firms are forced to close some of their mills, to shut down the less productive mines, to work short hours, to economise in every form of labour, that depression of trade assumes its more enduring and injurious shape. The condition now is not that of an increasing glut of goods; the existing glut continues to block the avenues of commerce and to check further production, but it does not represent the real burden of over-supply. The true excess now shows itself in the shape of idle machinery, closed factories, unworked mines, unused ships and railway trucks. It is the auxiliary capital that represents the bulk of over-supply, and whose idleness signifies the enforced unemployment of large masses of labour. It is machinery, made and designed to increase the flow of productive goods, that has multiplied too fast for the growth of consumption. This machinery does not continue in full use, a large proportion of it is not required to assist in producing the quantity of consumptive goods which can find a market, and must of necessity stand idle; it represents a quantity of useless forms of capital, over-supply, and its unused productive power represents an incomparably larger amount of potential over-supply of goods. Economic forces are at work preventing the continuation of the use of this excessive machinery; if it were used in defiance of these forces, if its owners could afford to keep it working, there would be no market for the goods it would turn out, and these too would swell the mass of over-supply.