America the Birthplace of Consolidated Corporations.—Consolidations of the kind that require vigorous treatment by the state have their special home in America. They have taken on a number of forms, but are coming more and more into the most efficient form they have ever assumed, that of the corporation. The holding company is the successor of the former trust. The method of union by which stockholders in several corporations surrendered their certificates of stock to a body of trustees and received in return for them what were called trust certificates, has been abandoned, and the readiness with which this has been done has been due to the fact that there are better modes of accomplishing the purpose in view. A new corporation can be formed, and, thanks to those small states which thrive by issuing letters of marque, it can be endowed with very extensive powers. It can, of course, buy or lease mills, furnaces, etc., but what it can most easily do is to own a controlling portion of the common stock of the companies which own the plants. The holding company has a sinister perfection in its mode of giving to a minority of capital the control over a majority. It is possible that the actual capital of the original corporation may be mainly a borrowed fund and may be represented by an issue of bonds, while the stockholders may have contributed little to the cost of their plants and their working capital; and yet this common stock may confer on its owners the control of the entire business. The corporation that buys a bare majority of this common stock may have an absolute power over the producing plants and their operations. If the holding company should secure much of its own capital by an issue of bonds, the amount which its own stockholders would have to contribute would be only a minute fraction of the capital placed in their hands, and yet it might insure to them the control of a domain that is nothing less than an industrial empire, if indeed they are not themselves obliged to surrender the government of it to an innermost circle composed of directors.
Earlier Forms of Union.—There are forms of union which are less complete than this and have been widely adopted. There was the original compact among rival producers to maintain fixed prices for their goods. It was a promise which every party in the transaction was bound in honor to keep, but impelled by interest to break; and it was morally certain to be broken. There was this same contract to maintain prices strengthened by a corresponding contract to hold the output of every plant within definite limits. If this second promise were kept, the first would be so, since the motive for cutting the price agreed upon was always the securing of large sales, and this was impossible without a correspondingly large production; but security was needed for the fulfillment of the second promise. This security was in due time afforded, and there was perfected a form of union which was a favorite one, since it did not merge and extinguish the original corporations, but allowed them to conduct their business as before, though with a restricted output and with prices dictated by the combinations. As a rule each of the companies paid a fine into the treasury of the pool if it produced more than the amount allotted to it, and received a bonus or subsidy if it produced less. This form has more of kinship with the Kartel of Germany than the other American forms, and it might have continued to prevail in our country if the law had treated it with toleration. It leaves the power of competition less impaired than does the consolidated corporation, of which the laws are more tolerant. By repressing those unions which can be easily defined and treated as monopolies we have called into being others which are far more monopolistic and dangerous. The economic principles on which the regulation of all such consolidations rests apply especially to the closer unions which take the corporate shape. To the extent that other forms of union have any monopolistic power the same principles apply also to them; but we shall see why it is that the pools which the law forbids have little of this power and the corporations have much of it.
The Condition which precludes True Monopoly.—A monopoly grows up when a company keeps such perfect guard over its economic field that new rivals cannot enter without exposing themselves to peril. As we have seen, it is not always necessary that the rival company should be formed. It is enough that it should be able to be formed and to enter the field with safety. In that case it will actually appear if an inducement is offered. Such an inducement is always afforded when the trust puts an unnaturally high price on its product—a price above that standard set by the cost of production which would rule in a normal market.
Specific Means of Repressing Competition.—In practice a condition is created in which the new competitors are reluctant to appear; for the consolidated company has dangerous weapons with which it can assail them. It can often secure specially low rates for the transportation of its products, and this is sometimes enough to make the competitor's prospect hopeless. Further, the "trust"—with or without the aid offered by the special and low freight charges—can enter the particular corner of the field where a small rival is operating, sell goods for less than they cost, and drive off the rival, while maintaining itself by the high prices it exacts everywhere else. Again, it may reduce the price of one variety of goods, which a particular competitor is making, and crush him, while it makes a profit on all other varieties of goods. Still again, it may resort to the "factor's agreement," by refusing to sell at the usual wholesalers' rate any of its own products to a merchant who handles products of its rivals. If some of its goods are of a kind that the merchant must have, this measure brings him to terms, causes him to refuse to handle independent products, and makes it difficult for the rival producer to reach the public with his tender of goods. The trust can organize special corporations for making war on competitors while itself evading responsibility. A bogus company which, in an aggravated case, is a rogue's alias for a parent corporation, may be formed for the purpose of more safely doing various kinds of predatory work.
The Economic Necessity of Doing what is legally Difficult.—From the point of view of an economic theorist it is enough to show that the practices which cut off the potential competitor from a safe entrance into the field of production so pervert the economic system as to hold in abeyance its most fundamental force, that of competition. They vitiate the action of every law which depends on competition. Value, wages, interest, profits, and the very structure of society feel the perverting effect of this repression of the force that under normal conditions serves to adjust them. From a practical point of view it is enough to show that the existence of such practices—if the monopolies that grow out of them shall continue and increase—present to the people the alternative of accepting an economic state which is unendurable, or accomplishing, in a legal way, what many already pronounce impossible. For the purpose of this treatise it suffices to point to the fact that few attempts worth mentioning have been made to suppress any of these practices except the first—that of favoritism in connection with freight charges—and that in the case of this practice only a beginning of serious effort has been made. While there is some excuse for abandoning a purpose when long and determined effort to execute it has failed, there is no possible excuse for concluding, in advance of such effort, that a systematic policy which gives a promise of saving us from an intolerable outcome is impracticable. All the props of monopoly should be taken away and not one merely, and before this shall be tried radical measures will not be in order. Socialism will not be fairly before the people's parliament till it shall come as the only escape from a condition of private monopoly. What economic law clearly shows is that monopoly will not come if the practices on which it depends shall be suppressed, and the people may be trusted to determine whether the suppression is or is not possible. That they may decide this question the issue that depends on it must be brought before them; and all that falls within the sphere of the economist is the stating of the effects of monopoly, the causes of its existence, and the public action that if taken will remove these causes. The preservation of a normal system of industry and a normal division of its products requires the suppression of all those practices of great corporations on which their monopolistic power depends.
FOOTNOTES
[1] For an early statement of this principle the reader is referred to the chapter on "The Persistence of Competition," by Professor F. H. Giddings, in a work entitled "The Modern Distributive Process," written jointly by Professor Giddings and the present writer. This chapter first appeared as an article in the Political Science Quarterly for 1887.