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(authors icon)1918

The Regulation of Competition versus The Regulation of Monopoly

Address by Dr. Charles R. Van Hise
at the Twenty-First Meeting of the Economic Club of New York (Friday Evening, November 1, 1912)

Dr. Van Hise

Ladies and Gentlemen: It is with great pleasure that I find myself able to agree with much that Mr. Brandeis has said. Indeed, with his fundamental thesis that there should not be monopoly in this country, I coincide fully. The question before us, as stated in the program, is "Regulation of Competition versus Regulation of Monopoly." So far as I know, Mr. Brandeis was the one to whom this phrase is due. The phrase was indeed a stroke of genius, in that it struck popular fancy and was accepted as a correct statement of the trust problem. The alternative presented naturally led the people to turn toward regulated competition. However I hold that no such necessary alternative is before us at the present time. There are other solutions of the question of the trusts than regulated competition or regulated monopoly. The scientific mind demands not simply that two of the various possible solutions be considered but that all be taken into account, and the best one among them selected. (Applause.)

Thus far in the discussion this evening, magnitude and monopoly in industry have been treated as synonymous terms. They are not synonymous terms. Monopoly has a well-defined meaning in law, as we know, and it is that meaning which should be assigned to this term in a discussion before an economic club. There may be a great magnitude in a business, and not monopoly. Indeed, it is believed that by far the greater number of large organizations fall short of monopoly; but it has been tacitly assumed that all are monopolies. That is a thing to be proved with regard to any one of them of which it is asserted. Only if we assume that all of the great concentrations of industry are monopolies, does the statement of the question as "regulated competition versus regulated monopoly" correspond with the problem.

It is generally agreed that concentration of industry up to a certain point is necessary in order to give efficiency. It would not be held by anyone, I imagine, that we should return to the situation of fifty or sixty years ago, in which industry was minutely subdivided, in which there were few organizations of large size, and very numerous minor organizations scattered all over the country. Do any here believe that we shall ever return from the great flour mill to the crossroads grist mill? It is impossible. This illustration and many others which could be mentioned show that some degree of concentration is allowable. The practical question is, what degree of concentration is permissible and advantageous, not only for economy in production, but for the advantage of the people at large. It is, therefore, clear that it does not meet the question which confronts us in regard to the so-called trusts to assume that all of the concentrations of industry are monopolies. If we can make that assumption and place it as the foundation stone of our argument, it is easy to win approval of the idea of regulated competition.

Monopoly has never been recognized in this country by common law, nor by statute law; neither has it ever been so recognized in England. Co-operation in industry, both by combinations and by contracts, has been recognized by the laws of both countries. The distinction is fundamental. In England, in the middle ages, both common and statute laws were very stringent against combinations and contracts in restraint of trade. But Parliament more than sixty years ago wiped out all the statutes against such combinations and contracts, provided they were not monopolies, contrary to public policy, or immoral; and, of course, immoral refers to those practices which have been mentioned as objectionable by Mr. Brandeis, and which we all agree should be prohibited.

Also in this country in colonial days the laws were very strict against combinations and contracts in restraint of trade. But here again there was a gradual amelioration of the laws, until co-operation was permitted along many lines, including division of territory, limitation of output, and even fixing of prices; provided always that, as a result of the co-operation, the combinations or contracts did not result in monopoly, were not general, were not immoral, and were not contrary to public policy.

Thus we see that the law in regard to combinations and contracts in restraint of trade went through a similar evolution in this country and in England, and that the laws finally became very liberal. In other countries than England and America the laws in regard to co-operation are also liberal. By gradual development the principle has been reached for most civilized nations that freedom in trade means freedom to combine as well as freedom to compete. This was the situation in this country also when in 1890 the Sherman Law was enacted, and immediately the wheels, so far as combination was concerned, were turned back to the conditions of the middle ages. All combinations and contracts in restraint of trade were prohibited, and this applied to the latter even if limited in extent or confined in time. This national legislation led to an influenza of similar legislation in the states, and within a few years more than thirty states had passed statutes against combinations and contracts in restraint of trade, many of them even more drastic than the Sherman Law.

The question now arises, what were the results of these statutes? The Sherman Act contains two fundamental provisions, one of which prohibits every contract and combination in the form of trust or otherwise in restraint of trade, and the other makes monopoly or attempt to monopolize illegal.

By the public it was supposed that "every contract and combination in restraint of trade" meant what the words said, and that Congress in using these words meant to pass a new and drastic law to replace the common law; indeed the earlier decisions of the Supreme Court supported this point of view and held that the reasonableness or unreasonableness of a contract or combination was immaterial. However, in the Standard Oil and tobacco cases the Court took an entirely new attitude and stated that only restraint of trade which was undue was meant to be covered by the law (although the word "undue" is nowhere in the act); that the restraint meant was that which was not permitted under the common law; and therefore that only combinations were prohibited by the law which were unreasonably in restraint of trade.

Why was this change in front made? Well, of course, I do not know; but it is a fair conclusion that the investigations of the Supreme Court led them to the view that if the Sherman Act were enforced in accordance with its terms prohibiting all contracts and combinations in restraint of trade, this would create an impossible situation. Therefore they inserted the words "undue" or "unreasonable" into the law, so as to make it as nearly as practicable in accordance with common law; and thus started a second cycle of development by judicial decision in order to make the law approach as nearly as possible to the common law which existed before the act was passed. (Applause.) One cycle of evolution in regard to this matter had been sufficient in Germany; sufficient in England and other countries. America is the only civilized nation which must go through this development twice.

While these recent decisions of the Court do not go far enough, they clearly point the way to a ground intermediate between the two proposed for discussion this evening, "Regulation of Monopoly or Regulation of Competition," and this is: Freedom of competition, prohibition of monopoly, permission to co-operate, and regulation of co-operation. (Applause.) As already noted, if it can be assumed that the question as stated contains all of the possible alternatives, it is easy to reach a conclusion. We must not have monopoly and therefore we are driven to the other conclusion-- regulation of competition; but since the assumption is fallacious, the conclusion has no foundation.

What is the situation which confronts us at the present time? The Sherman Law and the state anti-trust laws are upon the statute books. We have gone through one stage of development, have made the first step in the second stage, and now it is proposed to neutralize the decisions of the Court by defining "reasonable" so that it shall mean prohibition of all contracts and combinations in restraint of trade, and thus succeed in getting statute law back to where Senator Sherman and the people thought they had gotten it thirty years ago through the enactment by Congress of the Sherman Act, and thus compel again the beginning of a third cycle of development.

This solution of the problem of combination makes me think of the philosopher, Harold Udgardin by name, an Esquimau who lives up on Hudson Bay. "Harold has one trap now set in the same place where it has been for twenty years; he has not yet caught a fox in it, but will not consider changing its location, as it is a good place, he reasons, and ought to catch a fox." (Laughter.) "It preys on his mind if he doesn't visit and trim this fox trap regularly, and he has been known to get up and go out in the night to bait it when he was especially negligent. " (Laughter.)

Notwithstanding that the trap of the Sherman Act has never caught a fox for twenty years, and only smells in one or two places of a tail or a leg (laughter), it is proposed to strengthen its "springs" and sharpen its "teeth" with the expectation that it will then catch a sufficient number of foxes to become the solution of the great fundamental problem of concentration of industry! (Applause.)

In regard to the Sherman Act, it has been assumed that its only violators are the great combinations. This assumption is made in practically all discussions of the question. The steel trust, the tobacco trust, and a few other large combinations are mentioned; and it is supposed that the small business men and the small producers are not acting in violation of the law. But the principle of co-operation which the Sherman Act tries to suppress extends from the great industrial centers, like New York, to the country cross-roads. Does it make any difference here in New York whether you buy anthracite of one company or another? It doesn't make any difference at the country town either. The price is the same from all the dealers in the same locality. The same is true of ice, the antithesis of anthracite, and is also true of all standard articles. The principle of co-operation has extended from the great manufacturers and the great dealers of the large cities to the small manufacturers and small dealers of the small cities and even villages. All are cooperating in exactly the same way; the principle is the same for the large and the small man, one is violating the law just as certainly as is the other. (Applause.) I am willing to stand for enforcement of law when the law is enforced alike for all; but when somebody is picked out because he is in the front seat, or because it is good politics to attack him; and ninety-nine, or nine hundred and ninety-nine are allowed to escape, I say that it is a profoundly immoral situation. (Applause.) And that is exactly the existing situation in this country. The politician who says, "Break up these trusts; destroy them," says with the very same breath, "We must have co-operation among the farmers." (Laughter.)

Why, gentlemen, the cranberry growers of Cape Cod, New Jersey, and Wisconsin sell about ninety percent of their product through an agency down here in Hudson Street. Have we heard of the attorney-general prosecuting these farmers? (Laughter.) There would be a great and shrill cry if that were done, and there would be many lacking votes when it came to election.

In this country we have not a special situation which concerns a few men, but a general, irresistible impulse. It is all very well to ask, "Has the time come when a few rich men shall defy the law?"; but Edmund Burke said more than a century ago, "I do not know the method of drawing up an indictment against a whole people." And that is the situation which we have in this nation as regards combination. There is just as copper-riveted an arrangement between the three icemen in the country town as there is in steel; and any solution of the problem of combination, if it is a just solution, must be applied not only to steel and tobacco, but to the small tradesmen and the farmer. Just as certainly as many of the great combinations are violating the Sherman Act, so are the small aggregations of wealth violating state anti-trust statutes. This general violation of the trust laws, national and state, is the problem that we have before us.

The attorney-general of the United States says, if we can only break up each of the great combinations into six, or eight, or ten parts, these different parts will compete; that the tendency to competition under such circumstances is irresistible. But I tell you, gentlemen, the tendency for co-operation in this twentieth century is so much stronger than the tendency for competition, that you will never restore the latter in the old sense. There will be competition between different classes of goods; there will be competition between the great mail-order house and the village grocer; there will be competition in service. I am just as anxious as Mr. Brandeis can be, to have trade regulated by competition as far as possible; but as a matter of fact, competition has broken down hopelessly in this country to adequately control prices, to adequately control quality, and we all know it. Why, it is the theory regarding competition that it will regulate prices and quality; that it will give us reasonable prices and superior quality. That is a beautiful theory. (Laughter.) But if this theory has ever corresponded to the facts in the past (and this I doubt) we may be sure that in the future it will never again do so.

We have recognized the failure of competition to secure quality, by the establishment of the pure-food laws. Why should we have pure-food laws if competition will give us good quality? If articles were fraudulently sold, so important to the general welfare as foods, there was a remedy in the courts. If I am sold a thing as pure strained honey that is wholly innocent of having any relation whatever with a bee (laughter), I have a remedy in law; I have been fraudulently dealt with. Why don't I take my case to the courts? You know why. The loss is so small that it is impracticable for the individual thus to obtain redress. Finally, the people recognized that competition was wholly inadequate to secure pure food and national and state pure-food laws were enacted and special officers were designated upon whom was imposed the duty of protecting the public. When we confessed that competition did not regulate quality, and imposed the duty of protecting the public upon administrative officers, we succeeded in getting pure food, or a reasonable proportion of pure food at least (laughter), and never until then.

The situation is further illustrated by clothing. Shoddy is frequently sold as woolen. To do so is fraud, and the aggrieved party may get redress in court under the theory of the law; but of course he never does, for the loss is too small for the individual to go to the trouble and expense of redress which would be far greater than the loss. But if we had administrative officers whose duty it was to protect the individual at public expense for textiles, shoddy would not be sold as woolen very long, because the risk would be too great.

Now, why is it that competition to regulate prices has broken down? Because of the simply enormous advantages which come with co-operation. One of these has been mentioned--the economic gains of magnitude. In this matter there is no difference between Mr. Brandeis and myself up to a certain magnitude. We agree that the nation will not return to the country grist mill; but this does not settle the question regarding the magnitude that is permissible. Mr. Brandeis asserts that a great many of the large industrial organizations have exceeded the magnitude which gives the highest efficiency. I may assert, upon the other hand, that very few of them have gone beyond the stage which gives increased efficiency. Neither of us can prove our case. We haven't the facts to do so. (Laughter and applause.)

I have looked through the books, and I have had experts examine the literature of concentration, to find if investigations had been made which would give us facts upon which to base a judgment regarding the relation of efficiency and magnitude. The only such investigation of which I find record is that of Herbert Knox Smith in regard to the steel industry. The Commissioner of Corporations, as the result of an elaborate inquiry, reached the conclusion that the large concentrations in the manufacture of steel are very much more efficient than the small ones, and for certain products he gives the amount per ton. He states that the five great combinations--United States Steel, Lackawanna, Cambria, Jones-Laughlin, and Republic--have an advantage for pig-iron and steel billets from $2.50 to over $5 per ton as compared with the smaller organizations.

Thus for iron and steel it has been proved that a hundred-million-dollar combination is economically more efficient than a ten-million-dollar combination. It has not been proved that a thousand-million-dollar combination is more efficient than a hundred-million dollar combination; no investigation has been made to determine this point. It may be asserted that the United States Steel Corporation is not more efficient than its four strong competitors; or the contrary; and we are exactly where we were before, because we don't know the facts. The question is one for scientific investigation, and it is to be hoped that the national bureau of corporations will do the work. Similar investigations should be made for other lines of industry than steel, so that we may have a scientific foundation upon which to decide how far we shall permit magnitude.

I shall turn aside for a moment to consider one point which has been presented. It has been argued that the lack of efficiency of the large steel corporations explains the more frequent failure of rails in this country than in Europe. But there is no other country in the world in which the speed and weight of the train and engine, in freight and passenger service, approach those in this country. We all know that the striking force of the blow of a train increases directly as the load and as the square of the speed; consequently rails in this country are subject to stresses far beyond those in any other country. Also it should be remembered that the very rails manufactured in Germany and England, which are alleged to be so excellent, are produced by great trusts in the sense in which the term has been used here to-night. The German steel combine has control of a larger percentage of the iron product of Germany than the United States Steel Corporation has for the United States. However, it may be said that the German steel combine gives greater freedom to the individual plant, that it is a federation rather than a consolidation. The same thing would have been true in this country had it not been for the Sherman Act. Men who build up a business dislike to surrender its management to some one else. Affiliation of the different companies in the same business was developing in this country in the same way as in England and Germany, on the principle of cooperation. Then the trust was declared to be unlawful, and so arose the holding corporation; and now again, driven by law, the holding corporation is passing to complete merger. Each step was to escape the last decision of the court, because of the irresistible tendency for co-operation. Germany and England are vastly more fortunate than we are in this respect, in that, permitting reasonable co-operation, they have allowed firms to co-operate without driving them to consolidation. The units of the various kartels and combinations in these countries have therefore surrendered their autonomy to a less extent than the elements of the combinations in this country.

I should be glad to present several of the other forces which have led to general co-operation in industry, but I have not time to do so. I shall merely mention one of them; this is the waste of competition in its relations to our natural resources. The many wastes of the competitive system you are all doubtless more or less familiar with, but the waste of natural resources through this system is often neglected. We have some five thousand bituminous coal operators who could produce perhaps 200,000,000 tons of coal per annum, more than the present market demands. In consequence, these men, unable to co-operate except in violation of law, are competing with the inevitable result of very wasteful mining. Indeed, more wasteful mining of coal is going on in this country than in any other civilized nation. It is appalling, the amount of the coal that is left underground through existing methods of exploitation. If these five thousand operators were allowed to agree upon limitation of output and division of the market, it would be possible to reduce these frightful wastes which will be disastrous to the industry of this nation a few centuries hence. With regard to the natural resources which it took the building of the world to make, we should consider not only our own generation, but future generations. Under the competitive system, we are recklessly skimming the cream of a continent with no regard to the rights of our children or our children's children. But I must proceed to the constructive side of the question before us, in the few minutes that remain to me. My proposal, gentlemen, is neither regulated competition, nor regulated monopoly, but freedom in competition, prohibition of monopoly, permission for co-operation, and regulation of the latter.

It has been proposed that the concentrations in industry should be so divided that no one corporation shall have more than fifty per cent. of any business. That is Mr. Bryan's suggestion, In the case of the Stanley bill the presumption of the violation of the Sherman Law is against a corporation having more than thirty per cent.; this is understood to be Mr. Brandeis's suggestion; at least, it agrees with the percentage he has mentioned in this connection.

Now, it makes no difference, whether the great combinations are broken up so that no one has more than fifty per cent. or thirty per cent. of a line of business, or so that there are ten with ten per cent., or twenty with five per cent. The demonstration of this lies in the fact already cited, that thousands of farmers may co-operate in marketing their products, just as perfectly as do the five great manufacturers of steel. This they do in various parts of the country for fruit, for cotton, and for other products. Some of the smarter state legislatures appreciated this situation, and in order to prevent the farmers from being hit by their anti-trust laws exempted the products of the lands so long as in the hands of the producers. This was true for Texas, Louisiana, Illinois, and South Dakota. You see the farmers have so many votes that they have to be dealt with gently when they form a trust. (Laughter.)

But naturally the United States courts declared these features unconstitutional, as being special legislation, and not giving equal protection under the laws. I venture to predict that it will not be so popular a political game to shout, "Bust the trusts" when the farmers understand that their trusts are also to be "busted."

Therefore, I believe, we shall ultimately permit co-operation. If we, however, retain freedom of competition, permit concentration sufficient to give efficiency, allow reasonable co-operation, and prevent monopoly, this will require regulation just as it has been necessary to regulate the railroads. This done, the Sherman Law will be forgotten.

Has there been any prosecution of the railroads for violations of the Sherman Act because of collusion in fixing rates? And yet everyone of us here knows that they are just as flagrant violators of the Sherman Act as any other class of corporations in the United States. Are the freight rates the same for different roads between any two points? Are the passenger rates between New York and Chicago identical on all roads? Can you do better in price by traveling over the Pennsylvania than over the New York Central, or any other road? The rate is the same, provided the speed is the same. How does it happen that the roads all got together? Just by Providence, I suppose. It was doubtless by a providential act that these rates were fixed identically upon all the roads, under the same conditions, all over the country. (Laughter.)

Why is it that nobody proposes to indict the railroads for collusion? Simply for the reason that the rates which they can charge are controlled by commissions, national and state. Nobody has any longer any wish to make them any further trouble, because the public is protected by its commissions. That is the sum of the whole matter. The railroads are just as much amenable to attack under the Sherman Act as any other combination in the United States, but when the railroads are giving reasonable rates, and are competing in giving reasonable service, even if the law is on the statute book and is the hallowed thing that has been described, the sense of official justice (laughter) is such that they are not attacked in the courts. Will the attorney-general of the United States or the attorney-general of this or any other state, bring suit against the railroads for conspiracy in fixing rates when the public is properly protected! I have not heard the proposal made anywhere.

However, it is a wrong condition when we have on the statute books a law of a kind which requires the officers of justice to close one eye, whenever they pass by the men in control of one great group of industry, and at the same moment see and prosecute other men not one whit more guilty. We ought to remedy the condition so that honorable business men shall not be in the position, the unfortunate position, of being technically violators of statutes which it is not advantageous from the public point of view to enforce. (Applause.)

I have not time to more than touch upon the necessary modification of the law; but the substance of my remedied proposal is that there be an interstate trade commission and state trade commissions, which shall have substantially the same powers to regulate co-operation in industry that the Interstate Commerce Commission and the state commerce commissions have in regard to the public utilities. (Applause.) It seems to me that the interstate and state commerce commissions and the administrative bodies for the pure-food laws point the way for the next constructive step in the development of the laws regulating industry. It would perhaps be chimerical, with public opinion as at present, to propose the repeal of the Sherman Act; but by amendments to this act the situation may be met. The Sherman Act can be left to apply, as defined by the Supreme Court, to monopoly. Unreasonable restraint of trade may be defined as monopolistic restraint of trade, and it is rather generally agreed that monopoly should be prohibited. To make the matter perfectly clear, another amendment should allow reasonable co-operation, but such co-operation should be under the watchful eyes of administrative commissions in order to protect the public.

the Charles Van Hise

In the moments that remain to me I cannot define all of the powers which these commissions should have. My idea is that they should exercise powers under broad, simple rules of law, and that detailed regulations should be formulated by the commissions. For instance, Mr. Brandeis and I would both agree that unfair practices should be prohibited, and by unfair practices we mean what was meant by immoral practices in the common law. But the most vital point of the law should be this--that when the individual is wronged, through unreasonable prices, or rebates or other discrimination, it should be the duty of a public commission to handle his case. The aggrieved individual should not be obliged to carry his case through the machinery of the courts; he should make complaint to an administrative commission, and it should become the duty of that commission, representing the public, and him as a part of the public, to secure redress. This, while the greatest, is but one of the many advantages which may be gained through the establishment of trade commissions, national and state. (Applause.)

At first, we should be conservative in giving additional powers to these commissions. The powers given should be based upon the same principles that have been applied in the pure-food laws, and in the control of the public utilities. The American people always move slowly in these matters, and step by step. I should not expect that these trade commissions, if created, would at once be granted all the powers which they would finally exercise. In this matter I should expect the same slow development to take place that has occurred regarding the commissions which control the public utilities.

More than forty years have elapsed since the creation of the first state commerce commissions, and more than twenty years since the creation of the Interstate Commerce Commission. These early commissions had the powers of recommendation, of requiring publicity, etc. Finally the commissions of Illinois and Iowa were given the power to control rates, but comparatively little came of this authority. It was not until 1905 that in Wisconsin a comprehensive law was enacted to control the railroads. The passage of the law was strongly resisted by the companies, because of the fear that the proposed commission would treat them unfairly, but the act was passed despite their opposition. Under the law, there was appointed in that state by Senator R. M. La Follette, then Governor, a scientific commission composed of three men, one a well-known lawyer, the other a keen statistician, and the third an eminent professor of transportation. I have heard from many of the railroad men, including a railroad president and some of the ablest railroad lawyers, that the Wisconsin commission has been fair and reasonable both to the railroads and to the public. Neither side would go back to the previous situation--upon one side hold-up bills to be defeated by questionable methods at each session of the legislature, upon the other side numerous rebates and discriminations. Before we had a railroad commission in Wisconsin, there was continuous war between the people and the railroads. Since that commission has been created, and especially since its authority has been extended over all the public utilities of the state, including power to adjust rates, we have had peace.

Similarly, the Interstate Commerce Commission had small powers at first, merely those of recommendation; and it was but six years ago that this Commission finally gained the power to fix maximum rates; and at the present time the Commission has not the power to initiate rates. The initiative rests with the railroads. It is only two years since that the Commission gained the power to suspend advances of rates pending investigations regarding their reasonableness. Thus, stage by stage, conservatively, the development of the control of public utilities by administrative commissions was worked out.

Substantially the same history applies to the pure-food laws. Doubtless the extension of laws of this class will go on until fabrics are included, until fraud will be practically eliminated through the use of false names for any commodity.

I would have the proposed trade commissions pass through a similar history. They should be given the power to prevent immoral practices, and in order to do this it would be necessary to give them initiative in investigation. Thus, precisely as with the commerce commissions, by slow development, industry, where co-operation has so extended as to become affected with a public interest, would be controlled by trade commissions under the same lawful methods that have been applied to the public utilities. Concentration, co-operation, and control are presented as the key word to the solution of our great industrial problems. (Applause.)

Van Hise in his office

Van Hise, Charles R. The Regulation of Competition versus the Regulation of Monopoly. New York: Knickerbocker, 1912.
From the UW Madison Memorial Library: (Cutter) HKLP 83 V31