Civilization in the United States: An inquiry by thirty Americans

by Unknown

A merchant now has to lock up much less capital in merchandise, since his stocks are easily and swiftly replenished. The turn-over is much faster because people using suburban railways and street-cars go oftener to shop. And not only is it possible for these reasons to do a larger volume of business with a given amount of capital, but the merchant now borrows two-thirds, maybe three-quarters, of his capital at the bank in the form of credit. The same is true of the manufacturer. Formerly he locked up his capital, first in raw materials and then in finished products to be sold in season as the demand was; and there was great risk of loss in this way of matching supply to an estimated demand. Now he sells his goods before he makes them, borrows credit at the bank to buy his raw materials, even to pay his labour through the processes of manufacture, and when the customer pays on delivery of the goods with credit which he also has borrowed at the bank, the manufacturer settles with his bank and keeps the difference. An exporter was formerly one who bought commodities with his own money, loaded them on ship, sent them on chance to a foreign market, and waited for his capital to come back with a profit. Now he first sells the goods to a foreign customer by cable, then buys them on credit, loads them on ship, sells the bill of lading to a bank, uses the proceeds to pay for the goods, and counts his profit. All large business now is transacted in this way with phantom capital, called credit; money is employed to settle differences only.

The effect of this revolution of methods upon the morals and manners of business was tremendous. It destroyed the aristocracy of business by throwing the field open to men without capital. Traders and brokers over-ran it. The man doing business on borrowed capital could out-trade one doing business on his own. The more he borrowed, the harder he could trade. Salesmanship became a specialized, conscienceless art. There was no rule but to take all the traffic would bear: let the buyer look out. Dishonesty in business became so gross that it had to be sublimated in the national sense of humour. There are many still living who remember what shopping was like even in the largest city stores when nobody dreamed of paying the price first asked and counter-higgling was a universal custom. Indeed, so ingrained it was that when A. T. Stewart in New York announced the experiment of treating all buyers alike on a one-price basis his ruin was predicted by the whole merchant community.

As credit both increases competition and enables a larger business to be done on a small base of invested capital, the margin of profit in business tends to fall. Under conditions of intense rivalry among merchants and manufacturers operating more and more with phantom capital the margin of profit did fall until it was very thin indeed. This led to the abasement of goods by adulteration and tricks of manufacture, which became at length so great an evil that the government had to interfere with pure-food acts and laws forbidding wilful misrepresentation.

There was a limit beyond which the cost of production could not be reduced by degradation of quality. It was impossible to control prices with competition so wild and spontaneous and with cheapness the touchword of success. Therefore the wages of business were low, and things apparently had come to an impasse. Yet out of this chaos arose what now we know as big business. The idea was simple—mass production of standardized foods. The small, fierce units of business began to be amalgamated. As society is integrated by steps—clan, tribe, nation, State—so big business passed through mergers, combines, and trusts toward the goal of monopoly.

When a number of competing manufacturers unite to produce standard commodities in quantity, much duplication of effort is eliminated, time-saving methods are possible as not before, the cost of production is reduced. There are other advantages. They are stronger than they were separately, not only as buyers of labour, raw materials, and transportation, but as borrowers of capital. The individual or firm is the customer of a bank. The corporation makes a partnership with finance.

Now a curious thing happens. The corporation with its mass production restores the quality of goods. It is responsible for its products and guarantees them by brands, labels and trade-marks. Sugar and oatmeal come out of the anonymous barrel behind the grocer’s counter and go into attractive cartons on his shelf, bearing the name of the producer. Gloves, shirts, stockings, cutlery, furniture, meat products, jams, watches, fabrics, everything in fact becomes standardized by name and price and is advertised by the producer directly to the public over the retailer’s head, so that the small retailer is no longer a merchant in the old sense but a grumbling commission-man. Big business has delivered itself from the impasse; it has recovered control of its profits; but now the retailer’s margin of profit tends to become fixed. What does the retailer do? He applies the same principle to the last act of selling. Enter the chain-store. Obviously a corporation owning a chain of several hundred stores and working, like the manufacturer, with borrowed capital, is stronger than any one retailer to bargain with the powerful producers, and as the chain-store tends to displace the little retailer a balance is restored between the business of production and the business of retailing. Mass production is met by mass selling. The consumer as the last subject may resort to legislation for his protection.

Big business could not have evolved in this way without the aid of the railroads. Their dilemma was similar. Strife and competition had ruined their profits. To begin with, nobody knew what it cost to produce transportation. When a new line was opened it made rates according to circumstances. At points where it met water competition it charged very little, sometimes less than the cost of its fuel, and at points where there was no competition it charged all the traffic would stand. Then as competitive railroad-building excessively increased the high rates steadily fell. Once they got started people were obsessed to make railroads. They made them for speculative reasons, for feudal reasons, for political reasons, for any reason at all. Two men might quarrel in Wall Street, and one would build a thousand miles of railroad to spite the other—build it with the proceeds of shares sold to the public or hypothecated at the bank. Then there would be two roads to divide the business of one. Railroads under these conditions were unscientifically planned and over-built. The profit was rather in the building than in the working of them. There was scandal both ways. Quantities of fictitious capital were created and sold to the public. And when a railroad was built it became the plaything of its traffic manager, who conspired with other traffic managers to sell favours to shippers and to invent disastrous rate-wars in order to profit by the fall of shares on the stock market.

Rates could not be raised or held up, owing to the irresponsible nature of the competition. Transportation is a commodity that cannot be adulterated. How was the profit to be restored in this field of business? Why, by the same method as in industry. That is, by mass production.

Some one discovered that once you got a loaded train out of the terminal and rolling on the right-of-way it cost almost nothing to keep it moving. There was no money in hauling small lots of freight short distances at the highest rates that could be charged; but there was profit in moving large quantities of freight in full cars over long distances at very low rates. At this the railroad people went mad over the long, heavy haul. Here was industry seeking to concentrate itself in fewer places for purposes of mass production; and here were the railroads wanting masses of freight to move long distances. Their problems coincided.

Result: mass production gravitates to those far-apart long-haul points to get the benefit of low rates, there is congestion of industrial population at those points, industry at intermediate points is penalized by higher freight rates, and the railroads henceforth equip themselves with mass tonnage primarily in view. You begin now to have steel towns, meat towns, flour towns, textile towns, garment towns, and so on. That interdependence of communities and geographical sections which makes business is in full development.