This was obviously a painful experience for men nurtured in the traditional antimonopoly faith and they felt the need to rationalize or justify their conduct. Such a rationalization was readily available in the theory of "natural" monopoly—an intellectual device that enables one to be simultaneously against monopoly in general and for monopoly in particular. If, in these industries, there is a natural and inevitable tendency toward monopoly, as the theory postulates, then how can man contend against the inexorable forces of nature? Is it not the part of wisdom to recognize such "natural" monopolies, to legalize them, and to regulate their behavior in the public interest? This self-satisfying rationalization salved the conscience of mankind for approximately two generations and in our time has become one of the principal bulwarks of monopoly in the United States.
Although approval of legalized private monopoly in the railroad and public utility fields constituted a significant departure from traditional antimonopoly policy, the break, in the original instance, was by no means final or complete. Rather, it was partial, tentative, revocable, and carefully circumscribed; there was nothing in these first hesitant steps to suggest an irrevocable, unlimited, unidirectional movement toward monopoly. On the contrary, the popular attachment to competitive principles and the deep-seated hostility toward monopoly are reflected in the numerous safeguards and limitations imposed on grants of privilege to public service corporations. If men felt compelled by institutional exigencies to legalize private monopoly, they did so reluctantly and with grave misgivings; it was a dangerous venture which required unusual precautions against miscarriage. The theory of "natural" monopoly, despite its plausibility, was never entirely convincing. Some limited degree of monopoly might be necessary or desirable in particular situations, but it would be socially tolerable only if rigorously circumscribed. The extent to which early legislation sought, while authorizing monopoly, to preserve a residuum of competition is indicative of the mood prevailing in the late nineteenth and early twentieth centuries.
First—and on the side of government—it was asserted that no grant of privilege—whether by charter, franchise, license, permit, or certificate —constituted an abridgment of sovereignty. The inherent powers of government—privilege, eminent domain, proprietary, police—were to remain intact. This effort to preserve the essentials of sovereignty is most revealing; it indicates clearly an intent that government should continue to be master in its own house. It meant that government retained complete freedom of action to grant competing franchises, to terminate existing grants, to condemn properties for public use, to control streets and ways, to supply the needs of the community if it so desired, to create new institutions, and to regulate the economic behavior of grantees—all as the public interest might require. Those responsible for such legislative declarations seem to have contemplated a principal-agent relationship. This
concept was consistent with the idea of public interest, which assumed the continuous and unimpaired supremacy of popular sovereignty.
Subsequent events were to demonstrate that this original assumption was wrong. The system of privilege thus established eventually eroded away sovereignty and rendered government subservient to these privileged interests. This was the work of the courts and administrative commissions, and of pressure politics operating on the legislative and executive branches of government. But this untoward development was no part of the original intention and was certainly not anticipated. The public interest concept, as originally conceived, was sound in theory; it fell upon evil days and was distorted into an instrument for the promotion of monopoly only because of human failure under powerful economic and political pressure. Later discussion will indicate how public regulation gradually shifted its objective from protecting the public interest to protecting the monopolies created under its aegis.
Second—and on the side of competition—public interest regulation sought to preserve individual freedom by restricting the activities of monopoly grantees. They would engage solely in supplying an essential public service, nothing more; they would be confined to one market, one service, one technique, one organization; they must remain independent, being prohibited from merging or consolidating with like firms in adjacent markets or with firms providing substitute services. The effect of these restrictions was to leave large areas of economic activity open to competition. Individuals, partnerships, corporations, co-operatives, and public bodies were free to supply their own needs, to use substitute services or facilities, to perfect and use alternative techniques, and to shift their patronage to rival producers who offered better terms. These freedoms, while not providing complete immunity from the oppressions of monopoly, were nevertheless very important. Moreover, they were potentially more significant for the future than for the immediate present because every advance in technology and every new substitute service promised to extend the scope and intensify the vigor of competition, provided these new opportunities were open to all. Thus, in the beginning, the legalization of monopoly on this restricted basis did not pose a major threat to the extinction of competition. It was possible, so the argument ran, to have monopoly in the limited areas where it appeared preferable without destroying or jeopardizing competition over the general field. Obviously, this was to be a delicate operation, the success of which would depend on the skill of regulatory authorities in restricting the encroachments of monopoly while maintaining or expanding the area of free competition. Subsequent discussion will indicate how they failed in this job and allowed monopoly to spread.