# Popular Science Monthly/Volume 34/March 1889/Competition and the Trusts

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* COMPETITION AND THE TRUSTS.
By GEORGE ILES.
LAST autumn I happened to spend a few days in the heart of the Adirondacks, in a small village some fourteen miles from the nearest railroad-station. During the stage-coach journey I found that two of my fellow-passengers were commercial travelers. It was somewhat surprising to find them invading so remote an outpost of civilization, a hamlet at best, both expensive and troublesome of access. During my stay there, scarcely a day passed that did not bring the shop-keepers a traveling salesman from Albany, Boston, or New York. About a month before my visit, the principal merchant in the one straggling street of the place had been called upon one morning by no fewer than four solicitors of his trade. Could there be any better illustration of modern commercial competition than this penetration of the wilderness of northern New York by men who brought to the tents and cottages of a minor health-resort the latest fashions in dry-goods and millinery, the most recent products of mill, refinery, and cannery, romances fresh from the press? And, conjoined with the very palpable benefits of competitive enterprise, were not its wastes and burdens as clearly exemplified? While that far-away village was much advantaged by the keen rivalry to supply its wants, the efforts to secure its business were certainly not adequately repaid.
Fifty years ago so small a village, instead of several stores, would have had but one or two; their stocks chiefly bought from local makers of cloth, plows, stoves, and wooden-ware. Near by we would have had a shoemaker's shop, and perhaps, if the place were not too small, a tailor's as well. Twice a year the country store-keeper would go to the nearest large trade-center, New York, St. Louis, or New Orleans, and buy goods enough for the entire business of six months. Railroads and the development of steam manufacturing have changed all this. Small local cloth-weavers, stove-founders, and so on, have disappeared, for production is no longer profitable unless conducted on a vast scale. A cotton-mill now employs a thousand operatives instead of a hundred, while to build, equip, and launch a modern foundry demands the capital of a millionaire. The price of a staple article such as paper is now quoted to hundredths of a cent, and so slender have profit-margins become that in certain gigantic industries they consist solely in what a generation ago were deemed waste products. Many Northwestern flour-mills now find their dividend in the bran which used to be thrown away. From cotton-seed, until ​recent years accounted worthless, does the Southern planter derive a goodly proportion of his gains; and while increase of magnitude in industrial concerns tends to minimize the cost of management and to promote the economies due to the division of labor, we see a constantly growing specialization of industry. A few years ago combs formed part of a general variety of goods turned out by an India-rubber factory; now two large concerns exclusively devoted to comb-manufacture supply nearly the whole American demand. Immense factories of wooden-ware and tinware, fitted up with costly and ingenious machinery, have obliterated the small local shops which used to flourish a generation ago, and custom shoemakers and tailors are suffering from the constant encroachments of manufacturers whose wares are made wholesale at the lowest limit of cost. Low prices, due to cheapened production, have created large new home markets, as, for example, in the inexpensive pianos and reed-organs to be found to-day in the homes of all but the poorest.
Every commercial traveler's trim sample-case bears witness to the progress of a hundred arts and sciences employed to increase the supply of a luxury, to make articles of every-day use better and cheaper. Every can of peaches, every quire of paper, every yard of cassimere, testifies to some new achievement of ingenuity and skill. Does some alert mind in the great army of those who earn by serving devise some new and better way of manufacture, transportation, distribution? Rivalry quickly imitates it throughout the length and breadth of the land, to the general profit. In this unceasing economization of human effort the railroads have borne a leading part. Markets no longer mean those furnished by groups of States; the whole Union is now opened up to the enterprising manufacturer, no matter where he establishes himself; and the steadily decreasing freight-tariffs of the railroads are due not only to the growth of their business and to applied science in the details of construction and operation, but also to the economy which attends the unification of great systems. A closely printed page scarcely suffices to enumerate the lines operated by the Pennsylvania Company. From Vancouver to Montreal, a single management extends for twenty -nine hundred miles, and will soon, in reaching the Atlantic seaboard, span the continent.
The benefits of competition in manufacture and trade are so many and conspicuous that its losses and burdens are very apt to be disregarded; yet they are neither few nor insignificant. One class of them is the creature of steam, which, applied within recent decades to transportation and manufacture, has in the main been so great a source of public advantage. Forty or fifty years ago a weaver made cloth and a shoemaker boots for customers within a short distance of loom or shop, so that they could pretty ​accurately adjust supply to demand, and their shelves were rarely too heavily laden with wares. To-day, so rapidly have improvements in steam-machinery multiplied the output of factories and mills, that overproduction is their chronic case; and this overproduction is in no slight measure due to a fallacy into which sanguine men have been led by the rapid expansion of America's railroad system. Beyond the increase of market due to new populations attracted by this expansion, unwarranted expectations have been entertained. The mere aggregation of the small districts in which business was done in the past has been taken to mean an immense enlargement of the whole national demand, as if taking down fences were to augment the area of contiguous farms. Railroad extension means new rivalry quite as often as new customers. Woolens woven in Minnesota now compete in Massachusetts and Connecticut with goods of home production. Iron castings from Tennessee and Alabama are to-day entering Northern markets by virtue of freight-tariffs nominal in comparison with those of fifteen or twenty years ago. Now that the whole Union is merged as a single market, calculations with regard to competition are more difficult than ever before. A generation or two since under-supply was a common liability. To-day the opposite embarrassment of overproduction is the business man's problem as he surveys dislocations of industry as much more severe than those of his grandfather's time as the waves of the storm-beaten Atlantic exceed the ripples of a mill-pond. And evil has bred after its kind. Prior to 1878 Canada had a low tariff; the protective duties enacted that year were imposed chiefly because of overproduction in the United States. It was shown that Canadian manufacturing interests were demoralized through the Dominion being made a slaughter-market for the surplus stocks of American factories and mills.
Competition's systematic underselling is chargeable with the enormous losses which arise from adulteration. Consumers are usually poor judges of the purity or durability of what they buy, and the appearance of cheapness easily deceives them. When once adulteration has lowered a price, they resist the increase of it necessary to restore a sound standard of quality. Yet, as a rule, the great majority of those who practice adulteration are unwilling parties thereto. If a grinder of paints begins mixing sulphate of baryta with his white leads, his competitors must do the same. If a dealer in sirup dilutes it with glucose, in self-defense others in the trade must practice the same deception. The low prices brought about by such methods mean dear buying. Especially is this the case with textile fabrics. Cottons and woolens are not seldom deteriorated in wearing quality one half by admixtures which only reduce the cost of production one fifth; and greed has ​not hesitated to dilute and falsify the drugs employed to assuage pain and heal the sick and wounded. With this not only the intensity of modern competition but the width of its area has had something to do. One of the strongest moral checks in human nature is sympathy with suffering; but if aggravation of suffering be remote in place, uncertain in time, and unpublished, conscience is apt to slumber. A druggist to-day receives from scores of factories hundreds of preparations, concerning the purity of which he knows little or nothing. He dispenses them not to neighbors, but to customers, who, from the necessities of the case, must be strangers to him.
Not only in adulteration, but in other evils developed by competition, is the meanest man in a trade the lawgiver in that trade. A manufacturer or miner imports cheap Italian and Hungarian labor, thereby reducing the standard of living among his other work-people to the Italian and Hungarian level, and obliging his competitors to follow his example. A few firms who introduced child-labor into the manufacture of garments are responsible for the shrinkage in wages which of late years has steadily overtaken the entire seamstress class.
Adam Smith tells us that one of the elements of price is the higgling of the market—a pregnant observation concerning one of the grievous burdens of competition. We hear much about the frauds perpetrated by those who make and sell goods—we hear little concerning the frauds committed by those who buy; yet buyers and sellers are made of the same clay, and buyers not seldom grudge to pay a fair profit to the men who supply them. To illustrate: Let us suppose the firm of Robinson & Co. to be makers of thermometers, on which they set prices as just to their customers as to themselves. They are accustomed to sell a tenth part of their output to a certain New-Yorker. He goes to them one day and says that, unless they reduce their prices five percent, he will cease to deal with them. Although at a deduction from the profit fairly their due, they comply, simply because to refuse will result in larger loss than to submit. What one customer has done others may do, so that "higgling" may for a longer or shorter time force capable and industrious men to work without wages. Competition may be dreaded for just as well as for interested motives. A new rival may inflict severe loss through overestimating the business field which he enters; through cutting the price of a staple below cost, and making it what is called a "leader"; or through downright dishonesty and recklessness.
One of the remarkable developments of modern competition is in the matter of its costly and pervasive methods of solicitation. This, in the case of the commercial-traveling system, has had ​effects good and evil. While it brings the latest products of metropolitan taste and skill to the remotest and smallest settlements, its services, when ignorantly and chancefully directed, as in the case of the Adirondack village, result in waste and loss. An agent of shrewdness and fidelity can exercise a very valuable watchfulness over his principal's debtors, yet a system which tends to make a "connection" the property of an agent, transferable to a new employer, is not one to diminish the liabilities and cares of business management. But the chief evil of the over-solicitation which is so common is the undue cheapening of credit. While it continues to be as difficult as ever for a merchant to borrow money, there is nothing easier than his getting credit for money's worth in the form of goods. Whereas an old-time shop-keeper, in his face-to-face transactions with a wholesale merchant or manufacturer, explained why he deserved credit when he wanted it, nowadays persuading people to take credit, even for what they do not want and may not pay for, has become a fine art; while the investigation of the creditability of firms is the function of immense "commercial agencies." A step in the direction of sound business organization has been taken by the employment of commercial travelers to ascertain a demand before it is supplied. A manufacturer of hats or straw-goods designs a variety of styles for an approaching season's trade, and turns out the quantities ordered and no more. By similar methods many importers avoid carrying large stocks of goods, and are becoming more and more commission-merchants, or brokers, unburdened by the rent of extensive premises and the losses incidental to buying for chance sale.
In Great Britain, every year, more than a hundred million dollars' worth of goods are distributed at retail at a gross cost little exceeding five per cent. In New England the experimental imitations of British co-operation have transacted business at an expense one half more, 7·7 per cent. Retail distribution in America probably costs twenty per cent of the prices consumers pay, and, because of their utter absence of organization, the outlays for solicitation constantly grow. Conspicuous premises are leased at enormous rents to attract chance buyers. Windows are decked by artists whose skill is a specialty, invoking the aid of scene-painter and stage-mechanic. Newspapers are filled with adroit and reiterated allurements. Circulars repeat them; hoardings re-echo them. At home the bell-ringing army of hawkers and canvassers consume time which is money, and patience, which is more. Minor articles of use or beauty are gratuitously distributed, to remind us at every turn of the merits of some pill, soap, or insurance company. Who shall measure the cost of all this to the solicited, in distraction and annoyance? One of the most promising fields ​for American business enterprise I believe to be the organization of retail distribution, which, among other economies, can rid itself of the expense of solicitation. We have already great bazaars which combine the variety of a country store by assembling under one roof the special departments of ordinary city warehouses: is it not possible to organize for such marts stated circles of customers, on whose steady trade the proprietors can rely—circles sufficiently large for adequate support, independently of showy premises or other advertisement? Some such organization could offer customers lowered prices in consideration for their agreement to forego the luxury of buying at random. Some such improvement in retailing would make it possible to introduce certain advantages of British co-operation among a public who prefer individual enterprise to board-management. A buyer in Rochdale or London hears from a co-operative salesman the exact truth regarding the quality of his flannel, coffee, or gloves. The salesman has no interest in deceit, and money is expended to the best possible advantage. The profit which attends this replacing an antagonism of interests by an identification has been remarkably exemplified in New England by the factories mutual-insurance companies. These concerns insure more than four hundred million dollars' worth of mill-property, at one fourth the cost of non-co-operative underwriting.
Briefly to summarize them, the chief evils attendant upon competition are those which grow out of ignorance concerning what competitors are doing in a given field; the excessive cost of solicitation in its various forms and consequences; the absence of responsibility when business is in the hands of small firms; and lastly, the immense tax commonly included in the prices of retail sale. It was in the business of transportation that the losses attending unrestricted competition were first severely felt, and first sought to be remedied. Shippers, by adroitly playing one line off against another, were able to lower rates much beyond fair limits, especially when ill-considered rivalry or the profits of promotion and construction had created unnecessary roads. To prevent the recurrence of costly and sometimes ruinous tariff wars, agreements as to rates were made—only to be broken whenever it suited the interests of any one of the parties to do so. This experience at last led to the device of the pool, an ingenious attempt to retain the beneficial features of competition while discarding its evils. A pool, let us say, comprises four trunk-lines connecting Chicago and New York; their business for a certain period prior to the formation of the pool is ascertained to have been in the proportions of thirteen, eighteen, twenty-eight, and forty-one per cent. Freight is then apportioned in these ratios; but if the expressed desires of shippers would vary this allotment, it is maintained. ​nevertheless, by officers of the pool known as "eveners." When a second term of the organization is discussed, these shippers' preferences, as growing out of the improved management or facilities of a particular line, are given weight in a revision of ratios. Were pooling agreements legalized so that their terms could be enforced, Mr. Fink, the first railroad authority in America, declares that the principal step toward settling the railroad problem would be taken. In the great work which the Interstate Railroad Commission has accomplished, not the least benefit has arisen from the publicity it has given to complaint. It is now clearly proved that corporations dread condemnation at the bar of public opinion, and that they often have an unsuspected sense of responsibility which can be directed to curtail their abuse of power.
With a home market safe from foreign competition, with the steady swallowing of little fish by great, and the growth of these from great to greater, it was only natural that the policy which aimed to suppress what was deemed undue rivalry in transportation should be paralleled in manufacturing industry. Hence a few years ago we saw associations begun to be formed among producers of iron, steel, paper, salt, and other articles of prime necessity, all intended to regulate output and price-lists. As a rule, these associations did not work well. They lacked the means to punish breaches of faith to which superior facilities or management might tempt one of the associates. Some more substantial bond was called for if agreements were to be respected and harmony of interests maintained. Then arose the "trust," with its organic tie; an industrial creation nothing short of revolutionary. In the most approved form of "trust," such of the concerns to be affiliated as are not incorporated, are transformed into joint-stock companies. Then all the companies, new and old, transfer their property to the "trust," an unincorporated board which represents each of the unified concerns. The trustees then exchange "trust" certificates for the various companies' shares, usually on the basis of a trebled or quadrupled valuation. Control is then exercised by the board over all the operations of the industry thus organized; one refinery or mill is enlarged, another is closed; territory is apportioned to each active member of the combination, output is regulated, prices fixed. Let us mark the prize which tempts to this apparently perilous relinquishment of direct control of its affairs by each party to the union. We can see it best displayed in the case of the Standard Oil Trust.
No chapter in the history of American industry is more interesting than the record of the rise and progress of this "trust." Beginning in 1870 with an inconsiderable refinery in Cleveland, its founders took diligent heed of the fact of railroad competition: "special" rates were then commonly granted to any shipper who ​understood the profit which lay in "higgling." These Ohio refiners handled an article whereof freight was a large element of price; so, making "special rates" their opportunity or cover, they gradually succeeded in obtaining enormous rebates from ordinary terms, not only on the oil shipped by them, but on oil shipped by competitors. With this infamous advantage, the growth of their operations and of their power was rapid. Not many years elapsed before they were able to lay a pipeage system for their oil at a cost of thirty million dollars, supplanting the railroad system which had given them their chief impetus. In its struggle to extend and maintain its practical monopoly, the investigations of this "trust" at Albany and Washington disclose how the combats of swamp and jungle may be repeated in counting-house and exchange. Violence and fraud were employed to further the process of pushing rivals to the wall. Clerks were tempted to betray a competitor's confidence, workmen were bribed to explode his stills. To-day the Standard Oil Trust refines three fourths of the petroleum of the United States; fortunately, its interests chime with those of consumers, who therefore share in the benefits of its high and compact organization. The field of oil production constantly widens, bringing to market an increasing volume of crude oil; as the "trust" owns nearly all the transporting, storage, and manufacturing facilities in the country, it finds it best to make prices so reasonable that its sales may be the largest possible. This "trust" possesses almost every advantage which would inure to a state monopoly, managed by eminent ability at work for individual gain. It enjoys the immense saving which results from organizing the whole Union as a single market, whose wants can be systematically ascertained, and as systematically supplied from the trade-center of each territorial division. It reaps the gain which flows from so adjusting supply to demand that labor can be given uniform or nearly uniform employment, which comes from preserving credit from undue cheapening, and thus minimizing one of the chief perplexities of business—the estimation of risks. By unification of management, any new improvement in machinery or process is introduced at once into every refinery the trust controls. Mr. Dodd, one of the Standard's solicitors, declares its profits during 1886 to have been thirteen per cent, a much smaller return than that popularly supposed. It is worthy of note that the Standard people are now buying large tracts of oil lands, presumably with intent to control the production of oil as well as its distribution, refinement, and sale.
Incited by the success of the Standard, a great many "trusts" have been formed, imitating its methods in endeavoring to control the production of some leading article of trade. None of them, however, exhibit the ability of its management, or the ​sensitiveness to criticism and sense of public responsibility which. have marked the Standard's later history. These "trusts" fall in the main into four classes—those which, like the iron and steel trust, are fostered by a tariff which excludes foreign competition; those like the envelope trust, which derive an additional element of monopoly from patented machinery and processes; those like the gas trusts, which are of quasi-public character, and operate under municipal franchise; and lastly, those which, like the Standard Oil and Cotton-seed Oil Trusts, depend solely upon aggregated capital and unified organization for their supremacy. That lowering the tariff would abate the excessive gains of "trusts" of the first-mentioned kind is proved by the sudden rise in the value of their certificates on the defeat of a national Administration pledged to tariff reform. In so far as abuse of patent-rights is made auxiliary to "trust" extortion, the curtailment or forfeiture of such rights, when so abused, becomes a subject demanding legal redress. With respect to "trusts" exercising quasi-public privileges, such as those of gas-supply, the remedy consists in municipal control, as convincingly maintained by Prof. E. J. James, of Philadelphia, in his treatise on the subject.
In considering the difficult questions which the advent of the "trusts" has created, it is necessary to discriminate between those which treat the public fairly and those which exact the utmost the public can be made to pay. If the Standard Oil Trust, disgraceful though its history may be, can prove that it gathers, transports, refines and sells petroleum cheaper than could the competitors whose place it has taken, what can be said against it? Its managers have built up a Union-comprehending organization, and are entitled to share in the results which flow from the economies they have perfected. Fairly managed, a trust is the last term in a process which began when a machine dispossessed hand-labor; which advanced when steam was applied to the machine; which took another step when steam-machinery, operated by massed joint-stock capital, undersold private firms. Industrial progress has steadily marched forward along the lines dictated by the economy of bigness over smallness, of high specialization, of the adjustment of supply to an ascertained demand, the constant substitution of knowledge of markets for ignorance regarding them, the unremitting elimination of chance. To many thousands of worthy men engaged in the rivalry with new methods they have meant defeat and ruin. This is pathetic but inevitable, for, when once men find out some better or cheaper way of doing a thing, they never go back to some costlier or more troublesome plan, no matter who suffers. Excluding then from all combinations to be pursued and condemned those which are controlled with fairness, we have to consider the best course to ​adopt with the conspiracies whose aim is nothing but the artificial raising of prices and impoverishment of the public. To cite two examples: Under "trust" control refined sugar is one half to three quarters of a cent per pound dearer in comparison with raw sugar than before the "trust" was formed. Raw linseed-oil, on the establishment of a "trust" was immediately advanced from thirty-eight to fifty-six cents a gallon. Against such extortion the remedy is first and chiefly competition. With capital for profitable investment abundant and cheap, no "trust" is secure in its control of the market. So rapidly and suddenly have the great majority of "trusts" arisen, that competition with them has not yet had time fully to manifest itself. To build and equip a sugar refinery demands a million dollars and takes a year's time. In an industry such as that of sugar-refining, in which trust-control has been assumed only recently, such independent competitors as remain unincluded derive no little advantage from the "trust's" existence. They are free from regulation of their output, and find a ready market for all they manufacture by keeping their prices a mere fraction below the "trust's"—a condition of things certainly attractive to competition.
To curb and punish the plunderers who, turning their talons from their rivals, direct them upon the public, a variety of legal remedies have been sought. The most important recent decision affecting predatory "trusts" was that delivered by Judge Barrett in the Supreme Court of New York, January 10, 1889, in the suit of the people of the State against the North River Sugar-Refining Company, to dissolve the company and declare its charter forfeited for entering the Sugar Trust.
Judge Barrett's decision declared the charter forfeited and the company dissolved. The grounds of his judgment were that a corporation is liable to be dissolved by the abuse of its powers, or if it has exercised privileges or franchises not conferred upon it by law. He held that the directors of the corporations composing the "trust" had acted illegally in abdicating their direction in favor of the trust-board, to whom all shares of capital stock had been transferred. While corporations have no legal power to consolidate, the "trust" was practically a consolidation, which legally had no existence nor responsibility. He declared, further, that resting upon the inherent right of sovereignty, franchises are granted by the State on condition that corporate privileges shall not be abused, shall not antagonize the safety and welfare of the community. It was held proved that the Sugar Trust had not been formed for protection against ruinous competition, but for the illegal purpose of artificially enhancing the cost of a necessary article of commerce; that the "trust," by virtue of its combined capital and control, had power to crush any rival who, without ​equal resources, might enter the lists against it; and that, even if adequate competition with it were to arise, the delay incident thereto would be sufficient for intolerable oppression of the people. The case is to be carried to the Court of Appeals, and its fate there will be of national interest. In the courts of Ohio, Illinois, Louisiana, and other States, it has been decided that all combinations to suppress competition, raise prices, or restrain trade, are illegal, and it has been proposed to attack the "trusts" along the line indicated by these decisions.
Should the illegality of "trusts" in general, as now constituted, be maintained in courts of final appeal, the question emerges. How can the benefits of business organization, which the "trust" includes and has introduced, be secured with at the same time avoidance of abuse by a control practically amounting to monopoly? It is highly probable that, if corporations are denied the exercise of the economic and beneficial features of "trusts," firms attracted by the resulting advantages will establish organizations substantially similar. Indeed, individual accumulations of wealth have long since passed the point where they confer power to control single important industries of the United States. Clearly, then, a question of no little difficulty is before the American people. Ordinary competitive business has in many departments become so complex, unwieldy, and wasteful, as imperatively to demand some such simplification as "trust" organization offers. If that organization be denied to groups of capitalists, the powers sought by such organization will in all likelihood, with some delay, be exercised by individuals who will have all the temptation to abuse their strength into which corporations have been led in the past. Law must in the nature of things lag behind exigency, and in this new transition of business, from competition to combination, it evidently has to confront a problem of supreme importance. In the development of the Copper Trust we have seen how an international combination may become a conspiracy to rob the world: a singular piece of testimony to the obliteration of national boundaries by modern methods of locomotion and communication!
For "trusts" limiting their operations to the United States a line of treatment has been suggested which has doubtless had its origin in legal consideration of the railroad question. Since its settlement is stoutly maintained by expert authority to consist in frank acceptance of the "pool" and its legalization, why not, it is asked, also legalize the "trust," surrounding its control with all the safeguards necessary and feasible? The State already exercises a degree of supervision over certain quasi-public businesses—banking, insurance, and railroading. Its supervision may be justly extended to the "trusts," while at the same time the ​levy of a just tax will make the people sharers in the advantages of "trust" organizations. Their affairs published, their managers will have a better chance to cultivate a sense of public responsibility than at present, when, without status, their security threatened by attacks of all sorts, they seem intent on making the most of an opportunity which they expect to be brief. Because less in direct legislation than in residual competition lies the curb of extortion, this must be insured by strict enforcement of adequate laws against conspiracy. Were "trusts" legalized, it is said—did publicity attend their transactions—it would be both wise and profitable for them to make the public willing parties to their existence by employing their systematization of business to serve the public better than unorganized competition in the past has ever been able to do.
To this proffered solution of the "trust" question is opposed the objection that it involves an extension of governmental powers much in advance of existing evidences of governmental efficiency. Yet public control or restraint in some form is imperative. Whatever truth the self-regulating theory of private enterprise may have had in the days before combination, vanishes at a time when individual monopoly can levy a national tax in the shape of extortionate profit. However reluctantly we may admit it, more and more does exigency tend to enlarge the scope 'of State authority. Hence greater need than ever that public-spirited effort should purify politics, and endeavor to lift it to statesmanship. When the nation has been threatened by foes without or within, her citizens have ever given prompt response to the call for defence. To-day she seeks protection, not from armed invaders, but from economic oppressors. It is war again, but war demanding in its generalship not only courage in an unpicturesque field, but business sagacity of the highest order.