The Promise of American Life

by Herbert David Croly

The powers bestowed upon those commissions are based upon the assumption that the corporations under their jurisdiction cannot be trusted to take any important decision in respect to their business without official approval. All such acts must be known to the commission, and be either expressly or tacitly approved, and the official body has the power of ordering their wards to make any changes in their service or rates which in the opinion of the commission are desirable in the public interest. Thus the commission is required not only to approve all agreements among corporations, all mergers, all issues of securities, but they are in general responsible for the manner in which the corporations are operated. The grant of such huge powers can be explained only on the ground that the private interest of these corporations is radically opposed to the interest of their patrons. Public opinion must have decided that if left to themselves, the corporations will behave, on the whole, in a manner inimical to the public welfare; and their business must consequently be actually or tacitly "regulated" in every important detail.

One may well hesitate wholly to condemn this government by commission, because it is the first emphatic recognition in American political and economic organization of a manifest public responsibility. In the past the public interests involved in the growth of an extensive and highly organized industrial system have been neither recognized nor promoted. They have not been promoted by the states, partly because the states neither wanted to do so, nor when they had the will, did they have the power. They have not been promoted by the central government because irresponsibility in relation to national economic interest was, the tariff apart, supposed to be an attribute of the central authority. Any legislation which seeks to promote this neglected public interest is consequently to be welcomed; but the welcome accorded to these commissions should not be very enthusiastic. It should not be any more enthusiastic than the welcome accorded by the citizens of a kingdom to the birth of a first child to the reigning monarchs,—a child who turns out to be a girl, incapable under the law of inheriting the crown. A female heir is under such circumstances merely the promise of better things; and so these commissions are merely an evidence of good will and the promise of something better. As initial experiments in the attempt to redeem a neglected responsibility, they may be tolerated; but if they are tolerated for too long, they may well work more harm than good.

The constructive idea behind a policy of the recognition of semi-monopolistic corporations, is, of course, the idea that they can be converted into economic agents which will make unequivocally for the national economic interest; and it is natural that in the beginning legislators should propose to accomplish this result by rigid and comprehensive official supervision. But such supervision, while it would eradicate many actual and possible abuses, would be just as likely to damage the efficiency which has been no less characteristic of these corporate operations. The only reason for recognizing the large corporations as desirable economic institutions is just their supposed economic efficiency; and if the means taken to regulate them impair that efficiency, the government is merely adopting in a roundabout way a policy of destruction. Now, hitherto, their efficiency has been partly the product of the unusual freedom they have enjoyed. Unquestionably they cannot continue to enjoy any similar freedom hereafter; but in restricting it care should be taken not to destroy with the freedom the essential condition of the efficiency. The essential condition of efficiency is always concentration of responsibility; and the decisive objection to government by commission as any sufficient solution of the corporation problem is the implied substitution of a system of divided for a system of concentrated responsibility.

This objection will seem fanciful and far-fetched to the enthusiastic advocates of reform by commission. They like to believe that under a system of administrative regulation abuses can be extirpated without any diminution of the advantages hitherto enjoyed under private management; but if such proves to be the case, American regulative commissions will establish a wholly new record of official good management. Such commissions, responsible as they are to an insistent and uninformed public opinion, and possessed as they inevitably become of the peculiar official point of view, inevitably drift or are driven to incessant, vexatious, and finally harmful interference. The efficient conduct of any complicated business, be it manufacturing, transportation, or political, always involves the constant sacrifice of an occasional or a local interest for the benefit of the economic operation of the whole organization. But it is just such sacrifices of local and occasional to a comprehensive interest which official commissions are not allowed by public opinion to approve. Under their control rates will be made chiefly for the benefit of clamorous local interests; and little by little the economic organization of the country, so far as affected by the action of commission government, would become the increasing rigid victim of routine management. The flexibility and enterprise, characteristic of our existing national economic organization, would slowly disappear; and American industrial leaders would lose the initiative and energy which has contributed so much to the efficiency of the national economic system. Such a result would, of course, only take place gradually; but it would none the less be the eventual result of any complete adoption of such a method of supervision. The friends of commission government who expect to discipline the big corporations severely without injuring their efficiency are merely the victims of an error as old as the human will. They "want it both ways." They want to eat their cake and to have it. They want to obtain from a system of minute official regulation and divided responsibility the same economic results as have been obtained from a system of almost complete freedom and absolutely concentrated responsibility.

The reader must not, however, misinterpret the real meaning of the objection just made to corporation reform by means of commissions. I can see no ground for necessarily opposing the granting of increased power and responsibility to an official or a commission of officials, merely because such officials are paid by the government rather than by a private employer. But when such a grant is considered necessary, the attempt should be to make the opportunity for good work comprehensive and commensurate with the responsibility. The sort of officialism of which the excavations at Panama or the reclamation service is a sample has as much chance of being efficient under suitable conditions as has the work of a private corporation. The government assumes complete charge of a job, and pushes it to a successful or unsuccessful conclusion, according to the extent with which its tradition or organization enables it to perform efficient work. Moreover, there is a certain kind of official supervision of a private business which does not bring with it any divided responsibility. Perhaps the best illustration thereof is the regulation to which the national banks are obliged to submit. In this case the bank examiners and the Controller do not interfere in the management of the bank, except when the management is violating certain conditions of safe banking—which have been carefully defined in the statute. So long as the banks obey the law, they need have no fear of the Treasury Department. But in commission government the official authority, in a sense, both makes and administers the law. The commission is empowered to use its own discretion about many matters, such as rates, service, equipment, and the like, in relation to which the law places the corporation absolutely in its hands. Such official interference is of a kind which can hardly fail in the long run to go wrong. It is based on a false principle, and interferes with individual liberty, not necessarily in an unjustifiable way, but in a way that can hardly be liberating in spirit or constructive in result.

The need for regulation should not be made the excuse for bestowing upon officials a responsibility which they cannot in the long run properly redeem. In so far as the functions of such commissions are really regulative, like the functions of the bank examiners, they may for the present perform a useful public service. These commissions should be constituted partly as bureaus of information and publicity, and partly as an administrative agency to secure the effective enforcement of the law. In case the Sherman Anti-Trust Law were repealed, the law substituted therefor should define the kind of combination among corporations and the kind of agreements among railroads which were permissible, and the commission should be empowered to apply the law to any particular consolidation or contract. Similar provision should be made in respect to railroad mergers, and the purchases by one railroad of the stock of another. The purposes for which new securities might be legitimately issued should also be defined in the statute, and the commission allowed merely to enforce the definitions. Common carriers should be obliged, as at present, to place on record their schedules of rates, and when a special or a new rate was made, notification should be required to the commission, together with a statement of reasons. Finally the commission should have the completest possible power of investigating any aspect of railway and corporation management or finance the knowledge of which might be useful to Congress. The unflinching use of powers, vaguely sketched above, would be sufficient to prevent mere abuses, and they could be granted without making any body of officials personally responsible for any of the essential details of corporation management.

If the commission is granted the power to promulgate rates, to control the service granted to the public, or to order the purchase of new equipment, it has become more than a regulative official body. It has become responsible for the business management of the corporation committed to its charge; and again it must be asserted that mixed control of this kind is bound to take the energy and initiative out of such business organizations. Neither has any necessity for reducing public service corporations to the level of industrial minors been sufficiently demonstrated. In the matter of service and rates the interest of a common carrier is not at bottom and in the long run antagonistic to the interest of its patrons. The fundamental interest of a common carrier is to develop traffic, and this interest coincides with the interest in general of the communities it serves. This interest can best be satisfied by allowing the carrier freedom in the making of its schedules—subject only to review in particular cases. Special instances may always exist of unnecessarily high or excessively discriminatory rates; and provisions should be made for the consideration of such cases, perhaps, by some court specially organized for the purpose; but the assumption should be, on the whole, that the matter of rates and service can be left to the interest of the corporation itself. In no other way can the American economic system retain that flexibility with which its past efficiency has been associated. In no other way can the policy of these corporations continue to be, as it has so often been in the past, in an economic sense genuinely constructive. This flexibility frequently requires readjustments in the conditions of local industry which cause grave losses to individuals or even communities; but it is just such readjustments which are necessary to continued economic efficiency; and it is just such readjustments which would tend to be prevented by an official rate-making authority. An official rate-making power would necessarily prefer certain rigid rules, favorable to the existing distribution of population and business. Every tendency to a new and more efficient distribution of trade would be checked, because of its unfairness to those who suffer from it. Thus the American industrial system would gradually become petrified, and the national organization of American industry would be sacrificed for the benefit of an indiscriminate collection of local interests.

If the interest of a corporation is so essentially hostile to the public interest as to require the sort of official supervision provided by the New York Public Service Commission Law, the logical inference therefrom is not a system of semi-official and semi-private management, but a system of exclusively public management. The logical inference therefrom is public ownership, if not actual public operation. Public ownership is not open to the same theoretical objections as is government by commission. It is not a system of divided responsibility. Political conditions and the organization of the American civil service being what they are, the attempt of the authorities to assume such a responsibility might not be very successful; but the fault would in that case reside in the general political and administrative organization. The community could not redeem the particular responsibility of owning and operating a railroad, because it was not organized for the really efficient conduct of any practical business. The rejection of a system of divided personal responsibility between public and private officials does not consequently bring with it necessarily the rejection of a system of public ownership, if not public operation; and if it can be demonstrated in the case of any particular class of corporations that its interest has become in any essential respect hostile to the public interest, a constructive industrial policy demands, not a partial, but a much more complete, shifting of the responsibility.

That cases exist in which public ownership can be justified on the foregoing grounds, I do not doubt; but before coming to the consideration of such cases it must be remarked that this new phase of the discussion postulates the existence of hitherto neglected conditions and objects of a constructive industrial policy. Such a policy started with the decision, which may be called the official decision, of the American electorate, to recognize the existing corporate economic organization; and we have been inquiring into the implications of this decision. Those implications include, according to the results of the foregoing discussion, not only a repeal of the Sherman Anti-Trust Law, but the tempering of the recognition with certain statutory regulations. It by no means follows that such regulation satisfies all the objects of a constructive national economic policy. In fact it does not satisfy the needs of a national economic policy at all, just in so far as such a policy is concerned not merely with the organization of industry, but with the distribution of wealth. But inasmuch as the decision has already been reached in preceding chapters that the national interest of a democratic state is essentially concerned with the distribution of wealth, the corporation problem must be considered quite as much in its relation to the social problem as to the problem of economic efficiency.

The American corporation problem will never be understood in its proper relations and full consequences until it is conceived as a sort of an advanced attack on the breastworks of our national economic system by this essential problem of the distribution of wealth. The current experiments in the direction of corporate "regulation" are prompted by a curious mixture of divergent motives. They endeavor to evade a fundamental responsibility by meeting a superficial one. They endeavor to solve the corporation problem merely by eradicating abuses, the implication being that as soon as the abuses are supervised out of existence, the old harmony between public and private interest in the American economic system will be restored, and no more "socialistic" legislation will be required. But the extent to which this very regulation is being carried betrays the futility of the expectation. And as we have seen, the intention of the industrial reformers is to introduce public management into the heart of the American industrial system; that is, into the operation of railroads and public service corporations, and in this way to bring about by incessant official interference that harmony between public and private interest which must be the object of a national economic system. But this proposed remedy is simply one more way of shirking the ultimate problem; and it is the logical consequence of the persistent misinterpretation of our unwholesome economic inequalities as the result merely of the abuse, instead of the legal use, of the opportunities provided by the existing economic system.