The Promise of American Life

by Herbert David Croly

The only alternative to such a general scheme of municipal policy in relation to public service corporations would be one of municipal operation as well as municipal ownership; and municipal operation unquestionably has certain theoretical advantages. When a corporation enjoys a tenancy for a stated term only, there is always a danger that it will seek temporarily larger profits by economizing on the quality of its service. It has not the same interest in building up a permanently profitable business that it would in case it were owner as well as operator. This divergence of interest may lead to a good deal of friction; but for the present at least the mixed system of public ownership and private operation offers the better chance of satisfactory results. As long as the municipal civil service remains in its existing disorganized and inefficient condition, the public administration should not be granted any direct responsibility which can be withheld without endangering an essential public interest. A system of public operation would be preferable to one of divided personal responsibility between public and private officials; but when a mixed system can be created which sharply distinguishes the two responsibilities one from another without in any way confusing them, it combines for the time being a maximum of merit with a minimum of friction.

Such a system carries with it, however, two results, not always appreciated. A municipality which embarks upon a policy of guaranteeing monopolies and leasing the enjoyment thereof should make all permanent improvements to the system at its own expense, and its financial organization and methods must be adapted to the necessity of raising a liberal supply of funds for such essential purposes. Its borrowing capacity must not be arbitrarily restricted as in the case of so many American cities at the present time; and, of course, any particular lease must be arranged so as to provide not only the interest on the money raised for all work of construction, but for the extinction of the debt thereby incurred. Furthermore a city adopting such a policy should push it to the limit. Wherever, as is so often the case, private companies now enjoy a complete or a substantial monopoly of any service, and do so by virtue of permanent franchises, every legal means should be taken to nullify such an intolerable appropriation of the resources of the community. Persistent and ruthless war should be declared upon these unnatural monopolies, because as long as they exist they are an absolute bar to any thoroughly democratic and constructive system of municipal economy. Measures should be taken which under other circumstances would be both unfair and unwise for the deliberate purpose of bringing them to terms, and getting them to exchange their permanent possession of these franchises for a limited tenancy. Permanent commissions should be placed over them with the right and duty of interfering officiously in their business. Taxation should be made to bear heavily upon them. Competitive services should be established wherever this could be done without any excessive loss. They should be annoyed and worried in every legal way; and all those burdens should be imposed upon them with the explicit understanding that they were measures of war. In adopting such a policy a community would be fighting for an essential condition of future economic integrity and well-being, and it need not be any more scrupulous about the means employed (always "under the law") than would an animal in his endeavor to kill some blood-sucking parasite. The corporation should plainly be told that the fight would be abandoned wherever it was ready to surrender its unlimited franchises for a limited but exclusive monopoly, which in these cases should in all fairness run for a longer term than would be ordinarily permissible.

I have lingered over the case of corporations enjoying municipal franchises, because they offer the only existing illustration of a specific economic situation—a situation in which a monopolized service is based upon exclusive and permanent economic advantages. Precisely the same situation does not exist in any other part of the economic area; but the idea is that under a policy of properly regulated recognition such a situation may come to exist in respect to those corporations which should be subject to the jurisdiction of the central government; and just in so far as it does come to exist, the policy of the central government should resemble the one suggested for the municipal governments and already occasionally adopted by them. That any corporations properly subject to the jurisdiction of the Federal government will attain to the condition of being a "natural" monopoly may be disputed; but according to the present outlook, if such is not the case, the only reason will be that the government by means of official and officious interference "regulates" them into inefficiency, and consequent inability to hold their own against smaller and less "regulated" competitors. If these corporations are left in the enjoyment of the natural advantages which wisely or unwisely they have been allowed to appropriate, some of them at any rate will gradually attain to the economic standing of "natural" monopolies.

The railroad system of the country is gradually approximating to such a condition. The process of combination which has been characteristic of American railroad development from the start has been checked recently both by government action and by anti-railroad agitation; but if the railroads were exempted from the provisions of the Anti-Trust Law and were permitted, subject to official approval, either to make agreements or to merge, according as they were competing or non-competing lines, there can be no doubt that the whole country would be gradually divided up among certain large and essentially non-competitive systems. A measure of competition would always remain, even if one corporation controlled the entire railway system, because the varying and conflicting demands of different localities and businesses for changes in rates would act as a competitive force; and in the probable system of a division of territory, this competitive force would have still more influence. But at the same time by far the larger part of the freight and passenger traffic of the country would under such a system be shared by arrangement among the several corporations. The ultimate share of each of the big corporations would not be determined until the period of building new through routes had passed. But this period is not likely to endure for more than another generation. Thereafter additional railroad construction will be almost exclusively a matter of branch extensions and connections, or of duplicating tracks already in existence; and when such a situation is reached, the gross traffic will be just as much divided among the coöperative companies as if it were distributed among different lines by a central management. Certain lines would be managed more efficiently than others and might make more money, just as certain departments of a big business might, because of peculiarly able management, earn an unusually large contribution to the total profits; but such variations could not be of any essential importance. From the point of view of the community as a whole the railroad system of the country would be a monopoly.

The monopoly, like that of a municipal street railroad, would depend upon the possession of exclusive advantages. It would depend upon the ownership of terminals in large and small cities which could no longer be duplicated save at an excessive expense. It would depend upon the possession of a right of way in relation to which the business arrangements of a particular territory had been adjusted. It would have become essentially a special franchise, even if it had not been granted as a special franchise by any competent legal authority; and, like every similar franchise, it would increase automatically in value with the growth of the community in population and business. This automatic increase in value, like that of a municipal franchise, should be secured to the community which creates it; and it can be secured only by some such means as those suggested in the case of municipal franchises. The Federal government must, that is, take possession of that share of railroad property represented by the terminals, the permanent right of way, the tracks, and the stations. It is property of this kind which enables the railroads to become a monopoly, and which, if left in private hands, would absolutely prevent the gradual construction of a national economic system.

In the existing condition of economic development and of public opinion, the man who believes in the ultimate necessity of government ownership of railroad road-beds and terminals must be content to wait and to watch. The most that he can do for the present is to use any opening, which the course of railroad development affords, for the assertion of his ideas; and if he is right, he will gradually be able to work out, in relation to the economic situation of the railroads, some practical method of realizing the ultimate purpose. Even if public opinion eventually decided that the appropriation of the railroads was necessary in the national economic interest, the end could in all probability be very slowly realized. In return, for instance, for the benefit of government credit, granted under properly regulated conditions, the railroads might submit to the operation of some gradual system of appropriation, which would operate only in the course of several generations, and the money for which would be obtained by the taxation of railroad earnings. It might, however, be possible to arrange a scheme of immediate purchase and the conversion of all railway securities, except those representing equipment and working capital, into one special class of government security. In that case the whole railroad system of the country could be organized into a certain limited number of special systems, which could be leased for a definite term of years to private corporations. These independent systems would in their mutual relations stimulate that economic rivalry among localities which is the wholesome aspect of railroad competition. Each of these companies should, of course, be free to fix such rates as were considered necessary for the proper development and distribution of traffic within its own district.

Any such specific suggestions cannot at the present time be other than fanciful; and they are offered, not because of their immediate or proximate practical value, but because of the indication they afford of the purposes which must be kept in mind in drawing up a radical plan of railroad reorganization in the ultimate national interest. All such plans of reorganization should carefully respect existing railroad property values, unless the management of those railroads obstinately and uncompromisingly opposed all concessions necessary to the realization of the national interest. In that event the nation would be as much justified in fighting for its essential interests as would under analogous circumstances a municipality. Furthermore, any such reorganization should aim at keeping the benefits of the then existing private organization—whatever they might be. It should remain true to the principle that, so far as economic authority and power is delegated in the form of terminable leases to private corporations, such power should be complete within certain defined limits. If agents of the national economic interest cannot be trusted to fulfill their responsibilities without some system of detailed censure and supervision they should be entirely dispensed with. It may be added that if the proposed or any kindred method of reorganization becomes politically and economically possible, the circumstances which account for its possibility will in all probability carry with them some practicable method of realizing the proposed object.

Wherever the conditions, obtaining in the case of railroad and public service corporations, are duplicated in that of an industrial corporation, a genuinely national economic system would demand the adoption of similar measures. How far or how often these measures would be necessarily applied to industrial corporations could be learned only after a long period of experimentation, and during this period the policy of recognition, tempered by regulation under definite conditions and graduated taxation of net profits would have to be applied. But when such a policy had been applied for a period sufficiently prolonged to test their value as national economic agents, further action might become desirable in their case as in that of the railroads. The industrial, unlike the service corporations, cannot, however, be considered as belonging to a class which must be all treated in the same way. Conditions would vary radically in different industries; and the case of each industry should be considered in relation to its special conditions. Wherever the tendency in any particular industry continued to run in the direction of combination, and wherever the increasingly centralized control of that industry was associated with a practical monopoly of some mineral, land, or water rights, the government might be confronted by another instance of a natural monopoly, which it would be impolitic and dangerous to leave in private hands. In all such cases some system of public ownership and private operation should, if possible, be introduced. On the other hand, in case the tendency to combination was strengthened in an industry, such, for instance, as that of the manufacture of tobacco, which does not depend upon the actual ownership of any American natural resources, the manner of dealing with it would be a matter of expediency, which would vary in different cases. In the case of a luxury like tobacco, either a government monopoly might be created, as has been already done so frequently abroad, or the state might be satisfied with a sufficient share of the resulting profits. No general rule can be laid down for such cases; and they will not come up for serious consideration until the more fundamental question of the railroads has been agitated to the point of compelling some kind of a definite settlement.

This sketch of a constructive national policy in relation to corporations need not be carried any further. Its purpose has been to convert to the service of a national democratic economic system the industrial organization which has gradually been built up in this country; and to make this conversion, if possible, without impairing the efficiency of the system, and without injuring individuals in any unnecessary way. The attempt will be criticised, of course, as absolutely destructive of American economic efficiency and as wickedly unjust to individuals; and there will be, from the point of view of the critics, some truth in the criticism. No such reorganization of our industrial methods could be effected without a prolonged period of agitation, which would undoubtedly injure the prosperity and unsettle the standing of the victims of the agitation; and no matter what the results of the agitation, there must be individual loss and suffering. But there is a distinction to be made between industrial efficiency and business prosperity. Americans have hitherto identified prosperity with a furious economic activity, and an ever-increasing economic product—regardless of genuine economy of production and any proper distribution of the fruits. Unquestionably, the proposed reorganization of American industrial methods would for a while make many individual Americans less prosperous. But it does not follow that the efficiency of the national economic organization need be compromised, because its fruits are differently distributed and are temporarily less abundant. It is impossible to judge at present how far that efficiency depends upon the chance, which Americans have enjoyed, of appropriating far more money than they have earned, and far more than they can spend except either by squandering it or giving it away. But in any event the dangerous lack of national economic balance involved by the existing distribution of wealth must be redressed. This object is so essential that its attainment is worth the inevitable attendant risks. In seeking to bring it about, no clear-sighted democratic economist would expect to "have it both ways." Even a very gradual displacement of the existing method of distributing economic fruits will bring with it regrettable wounds and losses. But provided they are incurred for the benefit of the American people as an economic whole, they are worth the penalty. The national economic interest demands, on the one hand, the combination of abundant individual opportunity with efficient organization, and on the other, a wholesome distribution, of the fruits; and these joint essentials will be more certainly attained under some such system as the one suggested than they are under the present system.

The genuine economic interest of the individual, like the genuine political interest, demands a distribution of economic power and responsibility, which will enable men of exceptional ability an exceptional opportunity of exercising it. Industrial leaders, like political leaders, should be content with the opportunity of doing efficient work, and with a scale of reward which permits them to live a complete human life. At present the opportunity of doing efficient industrial work is in the case of the millionaires (not in that of their equally or more efficient employees) accompanied by an excessive measure of reward, which is, in the moral interest of the individual, either meaningless or corrupting. The point at which these rewards cease to be earned is a difficult one to define; but there certainly can be no injustice in appropriating for the community those increases in value which are due merely to a general increase in population and business; and this increase in value should be taken over by the community, no matter whether it is divided among one hundred or one hundred thousand stockholders in a corporation. The essential purpose is to secure for the whole community those elements in value which are made by the community. The semi-monopolistic organization of certain American industries is little by little enabling the government to separate from the total economic product a part at least of that fraction which is created by social rather than individual activity; and a democracy which failed to take advantage of the opportunity would be blind to its fundamental interest. To be sure, the opportunity cannot be turned to the utmost public benefit until industrial leaders, like political leaders, are willing to do efficient work partly from disinterested motives; but that statement is merely a translation into economic terms of the fundamental truth that democracy, as a political and social ideal, is founded essentially upon disinterested human action. A democracy can disregard or defy that truth at its peril.