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STATE CONTROL OF TRUSTS.

BY H. W. MACROSTY.

PUBLISHED AND SOLD BY

THE FABIAN SOCIETY.

PRICE ONE PENNY.

LONDON : THE FABIAN SOCIETY, 3 CLEMENT'S INN, STRAND, W.C.

AUGUST, 1905.

STATE CONTROL OF TRUSTS. *

The common use of the term "Trust" is not marked by any scientific precision but rather conveys an abusive by-meaning. Here we shall use it to denote all organizations designed to control competition, whatever be their form, and whether intended to be temporary or permanent in duration. It thus includes not only the huge amalgamations of many businesses, where the original firms are replaced by one permanent company, but also the temporary syndicates, associations, or kartells, where the associated manufacturers bind themselves by private penalties for specific objects for definite periods of time, but otherwise retain their separate individuality. Whether they are simple associations to fix rates of discount and terms of delivery, or price associations, or syndicates to pool output, or associatiations to concentrate the sale of the products of the combining firms, these terminable associations are marked by the surrender of a progressively increasing share of independence, of freedom to compete. At last, with the amalgamation, we have the complete extinction of competition.

The Abolition of Trusts. Such a thorough reversal of the industrial principle, whereby the benefits of improvements passed to the consumer through the rivalry of competing producers, could hardly be received with favor ; and it is not surprising that the first impulse has been to prohibit the new development as dangerous to the community. Destructive legislation has completely failed. In Austria kartells have sometimes disguised themselves as scientific associations in order to evade the law. In the United States anti-trust legislation has been voluminous and futile ; when the original “trust" form was declared illegal it gave way to the company form, which so far has shown itself impregnable. The Sherman Act of 1890 and the supplementary Act of 1894 forbid all combinations in restraint of interstate or foreign or import trade, all attempts at monopoly of interstate or foreign commerce, and all contracts intended to restrict competition in or increase the prices of imported articles. Twentyseven States and territories have passed laws against monopolies, and fifteen have anti-monopoly articles in their constitutions, while others rely on the common law. In the Addyston Pipe case of 1899 the combination of manufacturers in different States to fix prices was declared illegal under the Sherman Act, and similar combinations within a State have been suppressed by State laws. Even then a verbal understanding, "a gentleman's agreement," remains unaffected, even though it is as tyrannous as that of the six Chicago packing-houses, the so-called "Beef Trust." The large amalgama

Reprinted, with some alterations, from the Vew Liberal Review, September, 1903

*

was

tions have escaped unscathed ; except that in Illinois in 1899, on the petition of several shareholders in the American Glucose Co., an agreement to sell out to a new corporation, the Glucose Sugar Refining Co., set aside so far as concerned the American Glucose Co.

Trusts and Railways. The direct attack having thus failed, attempts have been made to destroy trusts by removing their supposed causes. The Final Report of the Industrial Commission of the United States says : "There can be no doubt that in earlier times special favors from railroads were a prominent factor, probably the most important factor, in building up some of the largest combinations.” In order to prevent such discrimination the Inter-state Commerce Act of 1887 was passed, prohibiting the combination of railroads for the pooling of freight or to prevent through shipment of goods. It also, to quote the above report, "places upon inter-state carriers a prohibition against unjust or unreasonable rates and against unjust discrimination, but otherwise leaves them as free as they were at common law to make special contracts looking to the increase of business, to classify traffic, to adjust and apportion rates so as to meet the necessities of commerce, and generally to manage their own business in their own way. The commission appointed under the Act is not authorized to fix rates.

. . . But its powers as thus defined are not extensive, and perhaps the criticism of Mr. Justice Harlan is justified, that it has been shorn by judicial interpretation of authority to do anything of an effective character.'” President Roosevelt now proposes legislation to prevent secret rebates and unjust rates, but he has to face the vehement opposition of the millionaire party, and there is no security that the administration of the new law will be more efficient than that of the old. Preferential railway rates may favor the growth of trusts, but their absence does not prevent it, as is shown by the spread of combination in Germany where the railroads have been nationalized, and in Britain where discrimination is illegal.

Causes of Combination. The most popular view of the origin of trusts is that which declares, with Mr. Havemeyer of the Sugar 'Trust, that "the tariff is the mother of trusts.". In one sense this is true, where the industry itself has been created by a protective tariff, but as a general proposition it is incorrect. Some of the most successful American trusts, like the Standard Oil Company, owe nothing to the tariff, and our own British combinations have, of course, grown up under free trade. The truth about the tariff is that it creates the home industry, and by making high profits possible behind its protective wall attracts an unnecessary number of manufacturers into the trade, whose violent competition produces such a state of things that combination is the only outcome.

There are two main causes of combination, the attempt to escape from the consequences of excessive competition, and the desire to realize the economies of large-scale production. From their opera. tion we cannot escape, and we must, therefore, regard the limitation of competition as a natural development culminating in the production of private monopoly, either complete or partial. Such monopoly is marked by the unified control of business over the whole or a part of the industrial field, and is specially directed towards prices. Only the socialist welcomes this result, and he only because he sees himself in the position desired by the Roman tyrant who wished that all his enemies had but one neck. It is not enough to dismiss the problem with the dictum that public monopoly must supersede private monopoly. For such a conclusion the public mind is not yet prepared, nor is the State machinery at present fitted to cope with industrial administration. If we believe that in the end industry must be managed by the State, we must prepare the way by the gradual development of control ; if, on the other hand, we hold that the organization of industry must remain in private hands, we must purge it of manifest evils. In either case we must guide our action by the endeavor to maintain the advantages of the unified control of industry, and these, over and above the usual economies of a large business, are the prevention of the waste of competition, the specialization of plants, the better organization of talent, the application of all the expert knowledge in a trade to every establishment in the trade, and the better organization of sales.

Trusts and Prices. Apart from any injury which may be done to the State in its corporate capacity, there are four classes of persons who may be damaged by a trust-the rival producers, the consumers, the employees, and the investors. With the first of these we are only concerned so far as an injury to them may lead to greater loss to the consumer, or where the methods of competition offend against the public sense of honesty. Their interests and those of the consumer can be treated together in relation to the general policy of trusts with regard to prices. The common belief about trusts is that they exist for the purpose of forcing up prices, and every rise in the price of an article produced by a trust is regarded as an exercise of their malignant power. The advance which almost invariably follows the establishment of a trust is adduced in support of this belief, regardless of the fact that comparison is made with prices so low as to be unprofitable. An increase in such circumstances is quite as justifiable as one motived by a rise in the cost of raw materials. Nevertheless, it must be admitted that the hope of securing higher prices is one of the chief inducements to combination, and the extent to which this can be done requires our attention. The law of monopoly price is that the monopolist will charge not the highest price, but the price which will call forth the demand productive of the largest net revenue. The maximum profit, being thus a function of two variables, may be produced by different combinations of these, but the motive which will cause the monopolist to prefer a larger supply at a lower price to a smaller supply at a higher price is the fear of creating competition. Mr. Havemeyer

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