Ethics of Democracy

Part 4, Economic Tendencies
Chap. 3, The Rage for Trusts

A great change is going on all over the civilized world similar to that infeudation which, in Europe, during the rise of the feudal system, converted free proprietors into vassals, and brought all society into subordination to a hierarchy of wealth and privilege. Whether the new aristocracy is hereditary or not makes little difference. Chance alone may determine who will get the few prizes of a lottery. But it is not the less certain that the vast majority of all who take part in it must draw blanks. The forces of the new era have not yet had time to make status hereditary, but we may clearly see that when the industrial organization compels a thousand workmen to take service under one master, the proportion of masters to men will be but as one to a thousand, though the one may come from the ranks of the thousand. "Master"! We don't like the word. It is not American! But what is the use of objecting to the word when we have the thing?

- HENRY GEORGE, in Social Problems Ch. V.

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The Ethics of Democracy

by Louis F. Post

Part 4, Economic Tendencies
Chapter 3, The Rage for Trusts

THE economic advantages of legitimate concentration in business have created a rage for concentration, regardless of whether it may be legitimate or not. For several years, consequently, the air has been laden with schemes for consolidating business competitors. The old business maxim, sound and wholesome, that "competition is the life of trade," has been discarded in industrial circles, for the theory, for which no maxim has yet gained currency, that consolidation is the condition of success. This theory is the vital principle of trusts.

The latest mode of trust organization is a vast improvement upon earlier ones. Competitors no longer enter into trust agreements in restraint of competition. That primitive mode proved to be altogether incompetent. The trust agreements were evaded and sometimes openly violated; and, as they fell under the ban of the law, there was no redress in the courts. What competitors aiming to organize a trust do now, is to form a legal corporation in which all proprietors become stockholders, paying for their stock with their respective business plants. Establishments that formerly competed for business thus become part of one great concern under the management and control of one board of directors. If the former owners continue to operate their plants they do so no longer as owners, but as corporation employes. It is the corporation, too, that determines as to each plant whether it shall be operated at all.

Or, the same end may be attained by an improved mode which has become more common. A managing corporation is formed which acquires the ownership of a majority of the stock of each of the corporations to be combined. The latter then go on, nominally as independent concerns under the nominal management of their respective boards of directors, but really as constituent or subordinate companies under the control of the blanket company.

There is no opportunity, therefore, as there was under the primitive mode of making trusts, for any party to the trust to evade his obligations to his confederates. The business is wholly in the hands of a central corporation, which has the legal attributes of a natural person; and the trust, instead of being under the ban of the law, operates under its sanction.

An effect, and one of the objects, of these combinations, is to dispense with many employes and cut down the wages of most of the others. Journeymen mechanics and unskilled laborers may escape. Whether they do or not, depends upon whether the trust reduces its production. If it does not, these employes remain; if it does, they suffer with the rest. Whether mechanics and laborers are affected or not, such employes as salesmen, bookkeepers, foremen, clerks and the like are sure to be hurt. When many establishments are consolidated, even though as many mechanics and laborers be required as before, they can be governed by fewer foremen, and the output can be disposed of and accounted for by fewer salesmen, bookkeepers and clerks. The organization of a trust, therefore, involves the discharges, more or fewer, of this class of employes; and that in turn involves the reduction of the wages of those who remain. This has been one of the notable facts in connection with the trust craze. The general public may not be aware of it, but foremen, clerks, bookkeepers and salesmen are painfully so.

Another object and effect of trusts is the destruction of competitors who are left out of the combination. Since the motive for combining is to kill competition, outsiders must be crushed or the combination fails of its purpose. Many methods of accomplishing this are resorted to. It may be done by selling certain lines of goods for a time at less than cost. The trust can stand that longer than its small competitors, and when they are out of the way can recoup by charging higher prices than ever. Even while a price war is in progress, the trust may charge excessively for goods that are not in the field of competition, while selling below cost those that are in that field. But whatever the method, the object is to crowd out all competition and secure the whole field for the trust.

Competitive business men are sharply admonished of this by diminishing custom and decreasing profits. Some even of the best of them begin to look forward to retiring from business into high-grade clerkships; and a vast number are contemplating the possibility, if they themselves fail to get into a trust, of competing with lower grades of clerks for their already precarious places.

Whether or not the trust has come to stay, is an open question. Trust magnates have no doubt of it. The ordinary business man fears it. Social agitators proclaim it. And only here and there is doubt expressed. Nevertheless it may well be that the making of many trusts is only an evanescent craze, and that the trusts are mere bubbles which must soon burst.

But any intelligent conclusion as to that point must rest upon an understanding of the differences in trusts, which we have already noted. There are trusts and trusts. It cannot, therefore, be predicated of the trust generally that it must either succeed or collapse. Some kinds of trusts may succeed if well managed, while others, no matter how well managed, may be predestined to inevitable collapse. Some analysis, then, of trusts as they confront us is necessary.

As already suggested, we can conceive of a trust having for its sole object and effect economy in production. Consolidation of business plants might lessen the cost of supplying goods to consumers. It might do this in part by reducing the number of managers, clerks, bookkeepers, and so on, necessary to supply a given demand; and in part through those innumerable other economies which, in favorable conditions, flow from operations upon a large scale. That kind of trust would be analogous to labor-saving inventions. Indeed, it would be a laborsaving invention itself. Familiar examples are offered by the department store, by farming on a large scale, by manufacturing combinations, by any business consolidation, however vast, which is neither directly nor indirectly buttressed by legal privileges.

Such a trust would, in the absence of legal privileges, be compelled, by fears of engendering competition if not by competition itself, to give to consumers the benefit of its economies. And though this trust would displace employes and independent employers, just as laborsaving machines do, just as all economies must, there would be nothing to deplore in that, if opportunities to work for others or to do independent business in other and related lines were inviting and insistent. The displacement would then be a simple and easily adopted change of occupation; not exile from the whole industrial field.

Trusts of that character are not essentially bad. On the contrary, like labor-saving machines, they are essentially good. If they operate prejudicially in actual practice, it is not because they are injurious in themselves, but because they exist in conditions which operate, in greater or less degree, to bar out from other employments the workers and business men whom they displace.

Moreover, these trusts cannot carry organization to the point of perpetually monopolizing a business. The notion that they can and do, proceeds from the mistaken supposition that business combination is progressively economical without limit; which in turn proceeds from the fact that business combination is economical up to a certain point. In truth the economies of organization are limited. As soon as organization reaches the point of highest economy in a given case it becomes progressively uneconomical. To overcome this tendency, business combinations must combine monopoly interests as distinguished from competitive interests. Good-will serves to a degree; trade-marks, a species of good-will, also serve; the buying habits of the public can be monopolized by these means even for inferior goods for a time and to a degree. But no permanent trust can be founded upon those personal advantages. Permanent trusts require primary monopolies - monopolies that are created by law and control the necessary conditions of profitable production, transportation and trade.

Of primary monopolies, patent privileges are comparalively weak and count for little, because their power is temporary. The tariff and other taxation on production and trade serve only to limit the field of competition, and, although powerful, are not supreme. This may also be true of highway privileges when segregated; of terminal point monopolies considered individually; of particular monopolies of sources of original supply; of particular monopolies of superior trading sites, and of other monopolies of location, each considered by itself. But some of these privileges are of gigantic power, and when all are combined they are irresistible. Trusts which rest upon or are buttressed by any of those privileges are essentially bad and dangerous.

The harmful power of a railroad trust is the ownership of great public highways and terminal points which it brings under a single control. That is true, also, of street car combinations, of telephone and telegraph monopolies, of gas and electric light and power trusts; in a word, of all consolidations of those business interests that spring out of the law instead of being evolved by individual initiative and regulated by unobstructed competition.

Mining trusts are in the same category. They are essentially oppressive because they consolidate titles to mining opportunities, and thereby enable the trusts to dictate to all industries that depend upon the mineral deposits of the globe. And as with mining trusts, so with all other trusts which, so to speak, have their feet upon the ground.

Closely akin to highway and landed trusts are the trusts that bring under common ownership important patent rights. By virtue of these parchments those trusts arbitrarily and effectually prohibit the unprivileged, as a distinguished patent law writer puts it, "from using some of the laws of God," just as railroad trusts by franchises, and mining trusts by deeds, arbitrarily and effectually prohibit the unprivileged from using some of God's common wealth.

All these trusts, though differing in power, are in character one. They are grounded in legal privilege.

Subordinate to the privileged trusts, are trusts of still another class. These have the characteristics externally of those of the first class described above - those which we have likened to labor-saving machines. They appear to have the benefit of no monopoly whatever, but to be simple unprivileged business combinations. In fact, however, they derive legal privileges at second-hand and secretly from trusts that are founded in privilege. Of this type was the Standard Oil trust at its inception. Under secret arrangements with railroads, which enjoyed highway privileges, the Standard Oil trust secured rates of transportation so much lower than its competitors were required by the same railroads to pay, that it thereby drove its competitors to the wall. Subsequently it acquired highway privileges of its own. Other trusts that flourish now, doubtless also depend for their power upon discriminative freight rates.

To one or the other of the three classes of trusts mentioned above, all the trusts now organized, or in process or expectation or possibility of being organized, may be assigned. And according to the class into which a trust falls, will the probabilities of its success or collapse be determined.

The weakest of all the trusts are those of the first class - trusts which possess no legal privileges. If capitalized at the true value of their plants, and conducted merely with a view to economy and not to keeping prices above the competitive level, they may succeed. But which of those trusts is so organized and so conducted? It is safe to say, none. In capitalizing, each plant is inventoried at double its value or more; and the consolidated business is conducted with a view to paying good dividends on the stock so watered.

The trust which does this, without the aid of some kind of monopoly - land, highway, patent, or the like - can no more succeed in business than a boy can succeed in lifting himself by his boot straps. All such trusts are fated from their inception to perish. Some have perished already.

It is probably true, however, that most trusts of the general character last described, are not of that character strictly. Very likely most of them are buttressed either with some special privilege of their own, or with contractual interests in the special privileges of other combinations. In that event their success depends upon the power of the monopoly they so enjoy - to which extent they are in the category of trusts of the second class described above, those grounded in legal privilege. As the latter rise or fall, so may the former.

Trusts grounded in legal privilege may be expected to succeed or collapse according as their legal privileges do or do not enable them to control the original sources of supply of the goods they handle. Unless they acquire control of these, it is only a matter of time when another trust will. And if another trust does, it will either absorb the first one or crush it.

Steel manufacturing trusts might for a time control the steel market. But let another trust secure the ore mines, and the steel trusts would be at its mercy. Manufacturing combinations, however complete, however wealthy, even though buttressed with patents and in combination with railroads, can retain their power only while the owners of the natural sources of their supply are not combined.

It is a sine qua non to success that a trust have its feet upon the earth. This has been discovered by the great trusts. The steel trust goes back to the land, and makes ore mines part of its property. The coal-transporting trust of the anthracite region is careful to secure not only highways, but coal mines. The trust that does not follow their example is doomed.

To analyze this subject is to conclude that the rage for forming trusts will eventually react and produce a stupendous crash. Trusts with much watered stock and without much monopoly power, will go first to their fate. They will be followed by the monopoly trusts that fail to secure fundamental monopolies. In the end no trusts will be left to rule in the economic field save those which have their feet upon the ground. The trust question leads directly to the land question.

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