TRUST-BUSTING AS A NATIONAL PASTIME
A German economist recently visiting the United States was asked to explain how Germany's policy toward industrial combinations differed from ours. He said the difference that struck him most was that Germany did not go about solving the problem through legislation in the same light-hearted way that we seemed to. Perhaps, he added, this is because the old fashioned view still prevails in Germany that laws once enacted are to be rigidly and impartially enforced. He continued, that beyond amending her corporation law to insure that actual assets should bear a constant relation to nominal capital, to impose personal liability upon promoters and directors for losses due to untrue or misleading information which they might circulate, and to punish severely all forms of unfair competition, Germany had refrained from legislating on the subject. Nothing, he pointed out, like our anti-trust act,—to say nothing of our New Jersey seven-sister laws or our pending federal five-brother bills,—was to be found in German legislation. On the contrary, he asserted, combination agreements fixing prices and controlling outputs are enforced by German courts as readily as any other contracts, and the dissolution of a combination like the Westphalian coal cartell would be regarded not as a matter for public rejoicing, but as a serious blow to national prosperity. He did not maintain that Germany had solved the trust problem, but said that her attitude was well described as one of "watchful waiting."
To American statesmen the policy of Germany must seem weak and pusillanimous to a degree. They have become so habituated to the thought that "the anti-trust act is the magna charta of our business liberties," that attorneys-general and members of Congress vie with one another in the race to add fresh victims to the list of busted trusts to the credit of the dominant political party. Presidents "point with pride" to the number of prosecutions carried to a successful conclusion during their administrations. If the zeal of the department of justice seems to flag, Congress creates special committees to investigate the steel trust or other suspected combination, and thus a healthful rivalry is maintained which not only keeps the names of the "busters" prominently before the public, but supplies an unending stream of near facts for our newspapers, ever fearless champions of truth and justice.
Exhilarating as is this national pastime of trust-busting, the latest legislative proposals in Congress may well give pause even to the most ardent. Four bills have been seriously put forward which if enacted would make criminal many of the most common practices of American business men. The climax is reached in a clause in one of these measures that specifically makes it a crime for business men "to make any agreement, enter into any arrangement, or arrive at any understanding by which they, directly or indirectly, undertake to prevent a free and unrestricted competition among themselves or among any purchasers or consumers in the sale, production or transportation of any product, article, or commodity." Under this clause California orange growers who join together for the grading, packing and marketing of their fruit would be parties to a criminal conspiracy. Milk farmers who maintain coöperative creameries would be equally culpable. Labor organizations restraining the competition of their members in the sale of their labor are condemned. This bill, if enacted and rigidly enforced would make of business a bellum omnium contra omnes, and bring us back to the atomic stage of our industrial development. That such ill-considered legislation will be enacted is highly improbable, but its serious proposal invites a sober reconsideration of our whole trust policy.
The first aspect of the present situation that must strike the impartial observer is the inconsistency of the policy we are adopting toward our railroads and other common carriers. Since 1887 these businesses have been subject to regulation through the Interstate Commerce Commission, justified on the ground that for them competition is not an adequate means of control, and that unless their monopolizing greed is subjected to rigid regulation, the interests of the public must suffer. That these businesses are natural monopolies of organization, that is, businesses that can be most efficiently and economically administered as single or closely combined organizations in each of the localities to which they minister, every economist would agree. Competition in rates among railroads is undesirable because it means costly and destructive rate wars that can only end in rate agreements, tacit or open.
The policy of empowering the Interstate Commerce Commission to fix rates, and thus secure reasonableness and stability, is thus sound public policy. Amendments to the interstate commerce act, giving the commission a similar power over express rates and telegraph and telephone rates, where competition is also absent or self-destructive, have been made or should be made.
But while we are committed to this policy of regulated combination of common carriers, we still apply to them the Sherman act prohibiting combinations! Without any attempt to decide or even discuss whether the combinations into which the railroads have entered (the lease of the Southern Pacific by the Union Pacific, for example) make for economy and efficiency, the Attorney-General feels compelled by the law which he is bound to administer, to search out such combinations and force their dissolution. No well informed railroad man would maintain that any benefit redounded either to the public or to the railroads by forcing the Southern Pacific and the Union Pacific apart. Yet the Attorney-General congratulates himself on the achievement, and public opinion approves because it is clear that the process was both costly and painful to the railroads themselves. That what is bad for the railroads must be good for the rest of us seems to be the popular logic of the matter.
The most recent triumph of the department of justice, in this field, is the forcing apart of the telephone and telegraph monopolies. That these businesses can best be operated in combination, is obvious to anyone who has given any thought to the character of the services they render. Receiving and delivering telegrams by telephone add greatly to the efficiency of the system, not only because of the saving of time, but because of the multiplication of offices from which either telephone calls or telegrams may be despatched. In many localities the same poles may be used for stringing both kinds of wires. Finally, on the administrative side, the opportunity for saving through concentration of management is considerable. At the same time that the Attorney-General was effecting this divorce, the Postmaster General was urging the advantages not only of having these two businesses combined, but of having both managed by the government in connection with the postal service. As has been well said, if the Postmaster General is right in advocating the operation of both the telegraph and long-distance telephone businesses by the post-office, the Attorney-General cannot be right in thinking the dismemberment of the telegraph-telephone combination was in the line of wise public policy.
It has long been clear to thoughtful citizens that as the policy of regulating natural monopolies is perfected, the policy of prohibiting combination in this field of enterprise should be abandoned. No such amendment of the anti-trust act is, however, included among the trust bills now before Congress! They continue to ignore the distinction between natural monopolies and ordinary businesses, and to force upon both the form of competition; although, as regards the former, the reality has long been notoriously absent. Under the law as applied by the Supreme Court, it is still criminal for the railroads to enter into rate agreements. That they do enter into such agreements, however, is tacitly recognized even by the Interstate Commerce Commission, in entertaining from them a collective demand for a five per cent increase in rates. No wonder a German visitor is led to remark upon the contrast his country presents, where the old fashioned view still prevails that laws should be enforced!
As combination in the railroad, telegraph and telephone businesses is a perfectly normal economic development, conducing to the public interest rather than opposed to it, so it is far from proven that combinations among manufacturers, such as are freely permitted in Germany, are not often advantageous. The steel industry may be used to illustrate the argument. Here is a branch of business in which concentration and large scale production make for economy, until a scale of operations is attained calling for millions of dollars of capital and thousands of employees. The Carnegie Steel Company, the Jones-Laughlin Steel Company, the Illinois Steel Company, all grew up under highly competitive conditions, and each attained a gigantic size without passing the point where enlarging the scale of operations continued to make for economy in production. But when an industry is of such a character that success necessitates the investment of millions of dollars in each competing aggregation of producing units, a situation is presented where the losses due to unrestrained competition are correspondingly enormous. In times of prosperity, each producing organization expands to realize more fully the economies of large scale production. Iron and coke properties are secured to insure uninterrupted supply of raw materials; transportation facilities are acquired, since the business is so large as to require for its exclusive use fleets of vessels and special railroad carriers; blast furnaces and rolling mills are built in convenient proximity, to permit the conversion of raw materials into finished products with least expenditure of time and effort. This development is in obedience to the laws of expanding trade. If the industry is to be economically conducted, it must occur, and the public interest demands that it shall occur.
A period of depression now ensues. If each of the competing units pursues its own interest blindly, disregardful of the general good of the trade, each will compete desperately to secure the largest share of the diminished trade. Prices will be recklessly cut. It is better to operate mines and mills at low profits, at no profits, or even at a loss, than to have mines and mills shut down, the properties deteriorate, and the skilled labor force that has been slowly drawn together dispersed far and wide over the country. There is thus no limit short of actual bankruptcy to which the competitors will not find it to their interest to go so long as they remain competitors. But why should they carry their competition to such reckless lengths? Will it not be better for each and for all to produce moderately at low profits until the depression has passed, and conserve all the producing machinery for the time when business will revive, as it surely will revive, and all will again be needed? Is such combination to restrain competition opposed to the interest of the whole community? What useful purpose, after all, is served by forcing large numbers of steel plants into bankruptcy in every period of depression, with the result that the machinery for production becomes quite inadequate to meet the demand when prosperity returns, and prices are forced to levels as unreasonably high as they were unreasonably low during the depression? Instead of having steel either prince or pauper, is it not better to have steel a contented and moderately prosperous citizen at all times? It is contended that this life and death competition makes for more rapid improvement in productive methods, but does it? Under a regime of regulated combination, each producing unit is still under strong pressure to cut down its expenses of production, and to make its profits by that much larger. Is there any real evidence that improvements in methods have not been introduced as rapidly since the steel trust was organized in 1901, as they were before? In that period the open hearth process has been substituted on a vast scale for the Bessemer process. The Steel Corporation has spent millions of dollars in developing its plants at Gary to the highest efficiency yet known in the industry. Its smaller rivals have been equally active. Although in many lines prices have been steadied, and run-away markets in either direction prevented, there have been as eager efforts to improve on existing methods, and to concentrate production at the points best fitted for it, as there ever were before.
There are, of course, considerations to be urged on the other side. If allowed to combine to prevent disastrously low prices, steel manufacturers will be under temptation to take advantage of the situation by imposing unreasonably high prices. "When producers reach for one another's hands, let consumers guard their throats!" If such combination is to be tolerated, it must be under the restraining influence of a strong federal commission that will enforce publicity, will prevent unfair and oppressive methods toward non-members of the combination, and will be prepared as a last resort to ask Congress for authority to prescribe reasonable prices in exceptional cases, just as the Interstate Commerce Commission has been given authority to regulate in the public interest the charges of common carriers.
The objection most strongly urged against such a policy in high quarters is that it means "regulated monopoly" and that monopoly is intolerable. There are three possible policies which government may apply to business: that of enforced competition, that of regulated competition, and that of regulated monopoly. The bill that we have criticized would enforce competition by penalizing every slightest departure from it in the direction of coöperation. This is so obviously not in harmony with the coöperative spirit of the day, that the latest pronunciamento from Washington declares in favor not of "enforced" competition but of "regulated" competition. Regulated competition is a policy on which all may seemingly unite, but there is wide difference of opinion as to what it will ultimately lead to. Those who consider regulated monopoly intolerable believe that in all lines of business, provided that small business men are protected from unfair and oppressive methods of competition on the part of their larger rivals, that a reasonable amount of publicity is required, and that artificial methods of bringing about monopoly are prevented, competition will remain a dominant force. They make light of the alleged economies of combination and view the whole trust movement as the offspring of monopolistic greed and the profit-hunger of the promoter and high financier. Those who believe that in other lines of business than the recognized natural monopolies, all embracing combinations would be able to produce more efficiently and therefore sell more cheaply than smaller producing units, think that regulated competition, at least for these lines, must develop in the long run into regulated monopoly. Instead of regarding regulated monopoly as intolerable they view it as natural and inevitable. While they admit that the superiority of large combinations cannot be proved from American experience, since regulated competition is only just beginning to have a fair trial here, they point confidently, in support of their theory, to what is going on in Germany. In view of this diversity of expert opinion, it would seem to be the part of prudence to give regulated competition a fuller trial before going in either for enforced competition, on the one hand, or regulated monopoly, on the other.
As a step toward a wiser solution of the combination problem, than the blind condemnation and prohibition of all combinations, which has thus far dominated American legislation, the proposal to create an Interstate Trade Commission now before Congress merits the support of all classes. Such a commission could aid materially in the enforcement of the anti-trust act, and should therefore be favored by the trust-busters. It could pass on the plans of business men before they enter upon them, and thus give at least negative aid in avoiding arrangements that might be held unlawful. Finally, it could collect the information necessary to a wise decision between our present policy of prohibiting combinations and the German policy of permitting them, subject to a policy of "watchful waiting" on the part of the government.
It is indicative of the present state of mind of our public men that the very committees of Congress which are considering the creation of such a commission, are considering at the same time measures that would largely prevent it from accomplishing the good that is to be expected from it. It is earnestly to be hoped that Congress may be induced to content itself at this time with creating a competent trade commission. If it is not prepared expressly to exempt from the operation of the anti-trust act the common carriers subject to regulation by the Interstate Commerce Commission, may it at least refrain from making that act odious as well as ridiculous, and leave to the Supreme Court the task, on which it is so well advanced, of giving it an interpretation that is at once clear and reasonable!