  322. NECESSITY OF PUBLIC INTEREST IN BUSINESS.—Although individuals carry on business primarily for their own ends, the economic activities of men affect not only themselves, but the community as well. If every individual voluntarily confined his attention to those forms of business which strengthened the community as well as adding to his own prosperity, there would be little need for laws regulating the conduct of business. But because experience has shown that some persons will seek to benefit themselves in ways that react to the injury of the community, it becomes necessary for law to adjust private and public interests. A community cannot remain indifferent to the economic activities of its citizens. Public interest in business is a fundamental necessity, if the community is to be safeguarded against the abuses of free enterprise. 323. NATURE OF PUBLIC INTEREST IN BUSINESS.—In general, the object of laws regulating business is either to encourage helpful business methods, or to discourage harmful business methods. A good deal of legislation has been designed positively to encourage helpful business methods, yet it remains true that the most significant of our industrial laws have been aimed primarily at the discouragement of harmful business. A fundamental American ideal is to insure to the individual as much freedom of action as is consistent with the public interest. Thus we believe that if harmful business is controlled or suppressed, private initiative may be trusted to develop helpful business methods, without the aid of fostering legislation. In this and the following chapter, therefore, we may confine our attention to legislation designed to suppress harmful business methods. 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. 329. ABUSE OF POWER BY THE TRUSTS.—Trusts have often abused their monopolistic powers. They have often used their wealth to corrupt legislatures and to attempt to influence even the courts, in the effort to prevent laws and court decisions from restricting their monopoly. The corruption of railway corporations and of political parties has been partly due to the evil influence of the trusts. Trusts have often crushed out independent concerns that endeavored to compete with them. This has been accomplished, partly by inducing railroads to discriminate against independent concerns and in favor of the trusts, partly by cutting prices in competitive markets until independent concerns were crushed out, and partly by the use of bribes, threats, and other unfair methods. After competition had been suppressed, the trusts took advantage of their monopoly to raise prices on their products, thus imposing a heavy burden upon the public. 330. THE SHERMAN ANTI-TRUST ACT. (1890.)—During the eighties a number of states attempted to control the trust movement. But the Federal government has exclusive jurisdiction over interstate business, and for this reason the action of the states was limited to the control of the relatively unimportant trust business lying entirely within their respective borders. The fact that an increasing proportion of trust business was interstate in character stimulated interest in Federal anti-trust legislation, and in 1890 the Sherman Anti-trust Act was passed. This Act declared illegal "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations." 331. FAILURE OF THE SHERMAN ACT.—For more than twenty years after its passage, the Sherman Act did little to curb the growth of the trusts, indeed, the most marked tendency toward trust formation occurred after 1890. Numerous suits were brought under the Act, but the lukewarm attitude of the courts rendered difficult the administration of the law. After 1911 the courts held that the restraint of trade was illegal if "unreasonable," but few juries could be found that could agree upon the difference between a "reasonable" and an "unreasonable" restraint of trade. Lastly, combinations which had been organized under the original trust plan were not disheartened by court decrees ordering them to dissolve, but reorganized under some device which was practically as effective as the trust plan, but which did not technically violate the Sherman act. 332. FURTHER LEGISLATION IN 1914.—Finally in 1911 the government succeeded in dissolving the Standard Oil Company and the American Tobacco Company, two of the largest trusts in the country. This success encouraged the Department of Justice to institute other suits, and stimulated such general interest in the trust problem that in 1914 Congress passed two new Anti-trust Acts. These were the Clayton Act and the Federal Trade Commission Act. The general effect of these laws was to strengthen anti-trust legislation by correcting some of the fundamental defects of the Sherman Act, and by still further extending the power of the Federal government over monopolistic combinations. 333. The Clayton Act of 1914.—The Clayton Act forbids "unjustifiable discriminations in the prices charged to different persons," and also prohibits the lease or sale of goods made with the understanding that the lessee or purchaser shall not patronize competing concerns. The Act specifies a number of other practices which constitute unreasonable restraints of trade. Somewhat complicated limitations are imposed upon interlocking directorates, by which is meant the practice of individuals being on the board of directors of different corporations. [FOOTNOTE: The danger of the interlocking directorate, of course, is that individuals who are directors in two or more corporations may attempt to suppress competition between those corporations. This may lead to monopoly.] The Act likewise forbids the acquisition by one corporation of stock in another corporation when the effect may be "to substantially lessen competition" between such corporations, or "to tend to create a monopoly." 334. THE FEDERAL TRADE COMMISSION ACT OF 1914.—The second of the two Acts of 1914 created a Federal Trade Commission of five members, appointed by the President. The Commission has the power to require annual or special reports from interstate corporations in such form and relating to such matters as it may prescribe. At the request of the Attorney General, the Commission must investigate and report upon any corporation alleged to be violating the anti-trust laws. The most important power of the Commission is undoubtedly that of issuing orders restraining the use of "unfair methods of competition in commerce." This clause aims at prevention rather than at punishment, and if its power is wisely used it will check monopoly in the early stages. Most authorities claim that in this regard the work of the Commission has already proved definitely helpful. 335. THE OUTLOOK.—Since 1911, and especially since the passage of the two Acts of 1914, the trust situation has materially improved. The vague and wholly inadequate powers of the old Sherman Act have been clarified and supplemented by the more specific provisions of the Clayton and Federal Trade Commission Acts. Fairly adequate machinery for the investigation and prosecution of trusts is now provided. The present laws cover not only combinations making use of the old trust device, but also combinations employing other methods of exercising monopoly control. The Federal Trade Commission Act provides for publicity, so that public opinion may have a chance to enforce the principle of fair play and open competition in business. The trust problem in the United States is not yet solved, but the careful control which we are now exercising over this type of organization justifies the belief that the trust evil will become less important as time goes on. 336. THE TRUST PROBLEM OF THE FUTURE. In connection with the matter of making anti-trust legislation more effective, a new and pressing problem is arising. This has to do with the necessity of distinguishing, first, between the legitimate and the illegitimate practices of trusts [Footnote: Large-scale combination or management allows important economies to be practiced. Plant can be used more advantageously, supervision is less costly, supplies can be purchased in large quantities and hence more cheaply, etc. The securing of these economies constitutes a legitimate feature of large-scale combination or management.]; and second, between combinations which are monopolistic and combinations in which there is no element of monopoly. We are coming to realize a fact which in Europe has long been a matter of common knowledge, namely, that trusts are never wholly and unqualifiedly bad. The law should not aim to destroy trusts, but rather should attempt so to regulate their activities that their economical features will be preserved while their harmful practices will be suppressed. Laws should also recognize the fact that many large-scale combinations have in them no element of monopoly, and that such combinations should be exempted from anti-trust prosecution. In drawing up anti-trust legislation, prohibitions and restrictions should be as concise and as definite as possible, both in order to facilitate the execution of the law, and in order to prevent hardships being worked upon combinations which have consistently observed the rules of fair play in competitive business. QUESTIONS ON THE TEXT1. Why is public interest in business necessary? 2. What is the nature of public interest in business? 3. What is the nature of monopoly? 4. What are the two types of monopoly? Give an example of each. 5. Describe the origin of the trust. 6. Explain clearly the meaning of the word "trust" as it is now used. 7. During what period of our history was trust development greatest? 8. In what sense have trusts abused their power? 9. What was the purpose of the Sherman act of 1890? 10. How did the act work out in practice? 11. What important development is associated with the period 1911-1914? 12. What are the main provisions of the Clayton act? 13. What is the purpose of the Federal Trade Commission act? 14. Outline the problem of the future with respect to trusts. REQUIRED READINGS1. Williamson, Readings in American Democracy, chapter xxvii. Or all of the following: 2. Durand, The Trust Problem, chapter i. 3. Ely, Outlines of Economics, chapter xiii. 4. Fetter, Modern Economic Problems, chapter xxviii. 5. Seager, Principles of Economics, chapter xxv. QUESTIONS ON THE REQUIRED READINGS1. What are the four methods by which industrial combinations have taken place? (Fetter, pages 433-434.) 2. What are the three types of trusts? (Durand, page 9.) 3. What is a pool? (Durand, page 9.) 4. Name some of the important trusts which were formed between 1890 and 1899. (Fetter, pages 435-436.) 5. Name some of the most successful trusts. (Seager, page 456.) 6. What is the relation of trust development to the tariff? (Seager, pages 464-465.) 7. What is the evil of over-capitalization? (Seager, pages 465-466; Ely, pages 221-223.) 8. What are the chief advantages claimed for the trust? (Ely, pages 228-230; Durand, page 28.) 9. What are some of the devices used in "unfair competition"? (Ely, pages 239-240.) 10. What are the three ways of dealing with the trust evil? (Durand, pages l0-11.) 11. How has the trust evil been handled in other countries? (Ely, pages 245-246.) 12. What can be said as to the ultimate solution of the trust problem? (Durand, page 30.) TOPICS FOR INVESTIGATION AND REPORTI |
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