324. THE NATURE OF MONOPOLY.—We may begin the discussion by inquiring into the nature and significance of monopoly.
Under openly competitive conditions the free play of supply and demand between a number of producers and a number of prospective consumers fixes the price of a commodity. In such cases consumers are protected against exorbitant prices by the fact that rival producers will underbid each other in the effort to sell their goods.
But if the supply of a good, say wheat, is not in the hands of several rival producers, but is under the control of a unified group of persons, competition between the owners of the wheat is suppressed sufficiently to enable this unified group more nearly to dictate the price for which wheat shall sell. In such a case a monopoly is said to exist. Complete control of the supply of a commodity is rare, even for short periods, but modern business offers many instances of enterprises which are more or less monopolistic in character.
The essential danger of monopoly is that those who have secured control of the available supply of a commodity will use that control to benefit themselves at the expense of the public. By combining their individual businesses, producers who were formerly rivals may secure the chief advantage of large-scale management. That is to say, the cost of production per unit may be decreased, because several combined plants might be operated more economically than several independent concerns. If the cost of production is decreased the combining producers can afford to lower the price of their product. But if they are practically in control of the entire supply, they will not lower the price unless it serves their interests to do so. Indeed it is more likely that they will take advantage of their monopoly to raise the price.
325. TYPES OF MONOPOLY.—Monopolies are variously classified, but for our purpose they may be called either natural or unnatural.
A natural monopoly may exist where, by the very nature of the business, competition is either impossible or socially undesirable. Examples of this type of monopoly are gas and water works, street railways, steam railways, and similar industries. These will be discussed in the next chapter.
Where an unnatural monopoly exists, it is not because the essential character of the business renders it unfit for the competitive system, but because competition has been artificially suppressed. The traditional example of an unnatural monopoly is that form of large- scale combination which is popularly known as a trust.
326. ORIGIN OF THE TRUST.—After the Civil War, rivalry in many industries was so intense as to lead to "cutthroat" competition and a consequent reduction in profits. For the purpose of securing the advantages of monopoly, many previously competing businesses combined. In 1882 John D. Rockefeller organized the Standard Oil Company, the first trust in this country. The plan drawn up by Mr. Rockefeller provided that the owners of a number of oil refineries should place their stock in the hands of a board of trustees. In exchange for this stock, the owners received trust certificates on which they were paid dividends. Having control of the stock, the trustees were enabled to manage the combining corporations as one concern, thus maintaining a unified control over supply, and opening the way to monopoly profits.
327. PRESENT MEANING OF THE TERM "TRUST."—The plan initiated by Mr. Rockefeller was so successful that other groups of industries adopted it. After 1890 the original trust device was forbidden by statute, and the trust proper declined in importance. But there continued to be a large number of industrial combinations which, under slightly different forms, have secured all of the advantages of the original trust. In some cases previously competing corporations have actually amalgamated; in still other cases, combining concerns have secured the advantages of monopoly by forming a holding company. A holding company is a corporation which is created for the express purpose of "holding" or controlling stock in several other corporations. This the holding company does by buying a sufficient amount of the stock of the combining concerns to insure unity of management and control. Since the holding company and similar devices secure the chief advantages of the original trust, the word "trust" is now used to designate any closely knit combination which has monopolistic advantages.
328. GROWTH OF THE TRUST MOVEMENT.—The trust movement developed rapidly after 1882. There were important combinations in the oil, tin, sugar, steel, tobacco, paper, and other industries. By 1898 there had been formed some eighty trusts, with a total capitalization of about $1,000,000,000. At the beginning of 1904 the number of trusts exceeded three hundred, while their combined capital totaled more than $5,000,000,000. The largest single trust was the United States Steel Corporation, which was capitalized at almost a billion and a half dollars. At the beginning of 1911, in which year the Supreme Court of the United States ordered two important trusts to dissolve, the combined capital of the trusts was probably in excess of $6,000,000,000.