Monopolies and the People

by Charles Whiting Baker

II.
TRUSTS AND MONOPOLIES IN MANUFACTURING INDUSTRIES.

In common use the word "trust" is at present rather loosely used to denote any combination formed for the purpose of restricting or killing competition. Properly speaking, however, a trust is a combination to restrain competition among producers, formed by placing the various producing properties (mills, factories, etc.) in the hands of a board of trustees, who are empowered to direct the operations of production and sale, as if the properties were all under a single ownership and management.

The novel characteristic of the trust is not the fact that it is a monopoly, but that it is a monopoly formed by combining several competitors according to a new plan. The process of placing property in the hands of trustees is familiar to every business man. In the formation of a trust the different firms or companies who have been competing with each other in the production and sale of goods agree to place the management of all their several properties in the hands of a board of trustees. The powers of this board and its relation to the owners of the various properties are ingeniously devised to evade the common law, which declares that contracts in restraint of competition are against public policy, and illegal.

The first of the modern trusts was the Standard Oil Trust, which was a combination formed among several of the refiners of crude petroleum in the States of Pennsylvania and Ohio in the year 1869. The original combination grew out of the control of certain important patents connected with the process of refining. It pursued its course for a number of years without attracting much attention outside of the centre of its operations; but of late years so much has been published in regard to it that the very word "Standard" has come to be almost a synonym for monopoly. It is probable that certain branches of the iron and steel trade were the next to be combined by means of a trust, but as these were arrangements between private firms, not much information as to the time of their origin has reached the public. The second great trust to attract general public attention was the American Cotton Oil Trust, in which some of the same men who have so successfully engineered the Standard Oil combination are heavily interested. These two great trusts, the Cotton Oil and the Standard, have attracted widespread attention, and, to a certain extent, the public has become familiar with their organization and plan of operation; but popular feeling on the subject was not fully aroused until 1887, when the newspapers of the country made generally known the fact that the trust principle of combination was being rapidly adopted by the manufacturers of a large number of important lines of goods. The effect which these monopolies were believed to have upon the public welfare was pointed out by writers and speakers, and Congress and the State Legislatures were besought to investigate these combinations and seek to suppress them. Meanwhile it seems to be true that the popular agitation has had no effect in lessening the number of trusts, or checking their formation and growth; and they continue to increase and to gather their profits, while the public impotently wonders what it is going to do about it. Let us be careful, however, to make no assumption that the trust is injurious to the public at large. That is a matter which is before us for investigation.

It is safe to assume that the reader is somewhat familiar with the general charges which have been brought against the trusts; but even if this side of the story has not been heard, it is not unfair to look at them first from the standpoint of the men who make and manage them. In order to do this, suppose we select some particular trust which will serve as a type, and imagine that some frank, candid manufacturer, who is a member of this trust, comes before us to give an account of its formation and operations. This man comes, we suppose, not as an unwilling informant, or as one on trial. He is frank, honest, and plain-spoken. He talks as man to man, and gives us, not the specious argument of an eloquent pleader in defence of trusts, but just that view of his trust and its work that his own conscience impels him to take. Certainly, then, he deserves an impartial hearing.

A number of years ago the principal manufacturers of linseed oil in the United States formed an association. It was started largely for social ends, and was very successful. Business men are generally most interested in their own plans and operations; and those who are familiar with the same topics and have similar interests and purposes are apt to make agreeable companions for each other. We discussed many points connected with the management of our business at the meetings, and by interchanging with each other our views and experiences with different devices, methods of management, etc., we were able to get much valuable information, as well as social pleasure, from meeting one another.

Now within the past few years things have been going from bad to worse with the manufacturers of linseed oil. The long and short of it all was that the margin between the cost of the raw seed and running our mills, and what we could get for the oil cake and the linseed oil in the market, has grown exceedingly narrow. It's hard to tell just what has caused it. They say over-production; but what has caused the over-production? One thing that may have had something to do with it is the new mills they have been putting up in the Northwest. Many of the Eastern mills used to get large quantities of seed from Iowa; but they are building cities out there now, as well as raising flax-seed, and when they were booming some of those cities they would raise heavy bonuses in aid of new enterprises. Among these were some great linseed oil mills, which have loaded up the market pretty heavily of late years; so that not only has the price sagged down, but we have all had to work to get rid of our stocks. The firms which had the best mills and machinery, and were in a position to get their seed reasonably and put their goods on the market with least expense for transportation, etc., have been making a small profit over and above their expenses. But some of the works which had to bring their seed a long way, and which haven't quite as good machinery as can be had now, were in a bad way. There were some of the oldest houses in the trade among them, too, and with fine men at their head. It was too bad to have them go under. They tried to cut down expenses, but strikes and trouble with their men prevented their saving much in that way. Then there was one item of expense which they had to increase instead of cutting down: that was the cost of marketing. Competition was so fierce, that, in order to keep up their trade, they had to spend more on salaries of expensive salesmen, and in advertising and pushing their goods, than they would dream of ordinarily.

It seemed too bad to cut each other's throats in that way, for that was what it amounted to, and when the association met,—or what was left of it, for the business rivalries had grown so bitter that many of the former personal friendships between the members had become strained and one after the other had dropped out,—the situation was discussed by the few members who met together. It was discussed earnestly, too, by men who felt an interest in what they said, because unless some remedy could be devised, they had got to sit still and watch the savings of a lifetime slip through their fingers. One thing was very clear to all. Though competition was as sharp as any one could possibly wish, the public was not getting such a wonderful benefit after all. Prices were not so very much lower for oil, nor higher for seed. It was the selling expense which had run up to a ruinous figure; and on one point all the members were unanimous,—that if all the firms in the trade could only work together in harmony in marketing their goods, they could save enough in salesmen's salaries, etc., to make a great difference in the profit-and-loss account without affecting the selling prices in the market one penny.

Another very important matter, which we had to handle pretty tenderly in our discussions, was that of adulteration. I must confess that a good many firms in the trade, who used to be above any thing of the sort, have been marketing some goods in the past few years which were not exactly the "pure linseed oil" which they were labelled. It's a mean business—adulteration,—but not many of our customers ever test their purchases. The one thing they are apt to look at is price, for they are buying to sell again; and when rivals are selling a cheaper oil that seems just as good until it is laid on as the pure linseed that you are obliged to ask a higher price for, the temptation to meet them at their own game, rather than lose your old customers, is a very strong one. Certainly, when competition took this form, it hurt the public even more than it hurt us. When people wish to buy pure linseed oil they ought to have some prospect of getting it, instead of getting an adulterated mixture of various substances; but at the rate competition was running, there seemed to be small prospect that there would be any really pure linseed oil put on the market in a short time. We have often discussed the possibility of stopping these adulterations, but it was a hard matter to cure by mere mutual agreement. How do I know what my competitor in a city a hundred miles away, does with the vats in his cellar after working hours, even if he has solemnly agreed not to adulterate his goods? For I must confess that there are a few men in our trade who are as tricky as horse jockeys.

Quite a number of improvements have been patented in linseed oil machinery in the past twenty years. Nothing wonderful, but things that effect little economies in the manufacture. We could have done without them; but when a few firms took them up, of course the rest had to follow suit, or fall behind in the race of competition. We have had to pay a heavy royalty on some of these machines, and it has been rather galling to count out our hard-earned dollars to the company which has bought up most of the patents, and is making 100 per cent. a year on what it paid for them, with no risk, and without doing a stroke of work. Now if we manufacturers could work in harmony, we could make this company come down from their high horse, and they would have to ask a reasonable price for their machines. But we could do more than this. It stands to reason that a good many improvements will be made in our machinery in the future. We don't object to paying a fair price to any inventor who will work out these new ideas for us; but it does seem unjust for him to go and sell them to some outside company for a song, and have that company bleed the users of the improvement for every ounce they will stand. Now, by working together, we can refuse to pay royalties on any thing new which comes up; but require, instead, that any new patent in our line be submitted to a committee, who will examine and test it; and if they find it to be of value, will purchase it for the use of all members of the association.

Some of the members thought this was as far as we ought to go. They were opposed to "trusts" on principle. But the great majority saw so clearly where we could continue to better ourselves that they became enthusiastic over it.

Some speculators, in years of short crops, have occasionally tried to "corner" flax-seed in a small way. We could refuse to buy except directly from the growers, and that branch of speculation would be a thing of the past. We have sent out some pretty sharp men as buyers, and sometimes they have bought flax-seed in some of the backwoods districts at very low rates. At other times, two buyers from rival firms have run counter to each other, and paid prices larger than their employers could really afford. But with our combination, we cannot only fix uniform prices for seed, but we can send out only enough buyers to cover the territory; and the work of buying is reduced to simply inspecting and weighing the seed.

Now another thing: Of course, not every manufacturer in the business owns his mills. It is a fact that since the close times of the past few years the majority of the firms are carrying mortgages on their mills; and some of them in the West are paying as high as eight or ten per cent. interest. But with the combined capital of all the firms in the trade at our back, we can change all that. Either by a guaranty, or by assuming the obligations, we can bring the interest charges on every mill in the association down to four or five per cent. at most.

We have been paying enormous rates to fire insurance companies. They are not as familiar with our business as we are ourselves, and they don't know just how much risk there really is; so they charge us a rate which they make sure is high enough. We can combine together and insure ourselves on the mutual plan; and by stipulating that each firm shall establish and keep up such precautions against fire as an expert may direct, we can not only reduce the cost of our insurance to that of our actual losses, but we can make these a very small amount.

It may be said that we might have done all these things without forming any trust to control prices. But the practical fact was that we could not. There was so much "bad blood" between some of the different firms in the business, from the rivalry and the sharp competition for trade, that as long as that was kept up it was impossible to get them to have any thing to do with each other in a business way. It was no small task to get these old feuds patched up; but some of the best and squarest men in the business went right into the work, and at meetings of the association, and privately, exerted all their influence to forward this coming together for mutual aid and protection. They did it conscientiously, too, I think, believing that it was necessary to save many of us from financial ruin; and that we were not bound, under any circumstances, to sacrifice ourselves for the sake of the public. The trust has been formed, as every one knows, and many of the things we planned to do have been already accomplished. We have stopped adulterations on all goods made by members of the trust; and the improvement in the quality of linseed oil which has been effected is an important benefit to the public. We are managing all the works in the trust as if it were all a single property, controlled by different managers; and the saving in expense, over the old plan of cut-throat competition, when everybody was striving to save himself and sink his rivals, is an enormous one.

One thing which has caused much hue and cry, is the fact that we have closed half a dozen mills or so. But the matter stood in this way: these mills were not favorably situated for doing business, all things considered; and all the mills in the country cannot run all the time, because there are more mills in existence than are needed to supply the market. These mills must have been closed soon, if the trust had not commenced operations, because they could not be run under the old regime and pay expenses. We knew we could make the oil at a less cost in our other mills, so we concluded to buy out the owners of these at a fair price, and shut up the works. Prices of linseed oil have been raised somewhat, we confess; but we claim that they had been forced down much too low, by the excessive competition which has prevailed for a few years past. Of course some of the most hot-headed and grasping among us, were anxious to force prices away up, when they once realized that we had an absolute monopoly of the linseed oil trade of the country; but the great majority were practically unanimous in a demand for just prices only, and the adoption of the policy of live and let live; for trust-makers are not entirely selfish.

We claim, moreover, that we are breaking no legal or moral law by this action. We are, for the most part, private parties or firms—but few corporations,—hence the attempt to abolish trusts on the ground that the corporations composing trusts have exceeded the power given by their charters will fail to reach our case. We have certainly done this: we have killed competition in the linseed oil trade; but we submit that with so many other interests and trades organized to protect themselves from outside competition, and control the prices at which their products are sold to the public, we were, in self-defence and for our own preservation, obliged to take this step.[1]

If we omit the references to the especial trade, the above view of a trust from the trust-makers' standpoint will do for almost any of the many combinations which have been formed by different manufacturers for the purpose of controlling production and prices. One thing is clearly indicated in the above, and will certainly be conceded: That the men who have formed these trusts are animated by the same motives as those that govern humanity in general. They have, in some cases at least, known what it was to be crowded close to the wall by severe competition. They all at once saw a way opening by which they could be freed from the worries and losses which had been making their business one of small and uncertain profits, and would be set squarely on their feet with a sure prospect for large and steady gains. It is using a common expression to say that they would have been more than human if they had refused to improve this opportunity. Certainly, then, in examining further the trusts, we shall do so with no feeling of personal prejudice toward the men who originated them and carry them on.

As we have given a hearing to the case from the trust-makers' standpoint, it is only fair that we should hear at equal length from the public who oppose the trusts; but to abbreviate the investigation, let us suppose that we are already familiar with the various charges which are brought against the trust monopolies, and let us proceed at once to consider the actual effect of the trusts upon the public.

Since we have heard so much in defence of the linseed oil trust, it will be well for us to inquire concerning the results, in which the public is interested, which have followed its organization. During the year 1887 (the trust was formed in January of that year) the price per gallon of linseed oil rose from thirty-eight cents to fifty-two cents; and this price was kept up or exceeded during 1888. That is to say, every purchaser of linseed oil, or every one who had occasion to have painting done, pays to the members of this trust, for every gallon of oil that he uses, about fourteen cents over and above the sum which he would pay if competition were allowed to do its usual work in keeping down prices.

What profits are the members of this trust making? Let us suppose that they were just able, at the old price of thirty-eight cents per gallon, to pay all their running expenses and four per cent. on the capital invested, making nothing for profits beyond a fair salary to the managers of the business. Then the gain of fifteen cents a gallon in the selling price is clear profit to them. Now add to this the fact, which was plainly brought out in the foregoing supposed statement by a member of the trust, that it is possible by means of the trust to greatly reduce expenses in many directions as well as to increase receipts, and we begin to form some conception of the profits which this trust is harvesting. If we wish to put the statement in figures, suppose we take the annual consumption of linseed oil in the country at thirty million gallons. Then the profits of the trust from the increased prices alone will amount to four and one half million dollars per annum.