PUBLIC POLICY IN RESPECT TO MONOPOLE' I 1. Moral judgments of competition and monopoly. $ 2. Public char acter of private trade. 3. Evil economic effects of monopolistic price.
4. Common law on restraint of trade. 5. Growing disapproval of combination. 6. Competition sometimes favored regardless of results.
I 7. Increasing regard for results of competition. I 8. Common-law remedy for monopoly ineffective. if 9. Federal legislation against mo nopoly. 10. Policy of the Sherman Anti-Trust Law. $ 11. Policy of Monopoly accepted and regulated. $ 12. Field of its application.
II 13. The industrial trust,—a natural evolution? I 14. Artificial versus natural growth. $ 15. Kinds of unfair practices. $ 16.
Growing conception of fair competition. 17. The trust issues in 1912. I 18. Anti-trust legislation of 1914. 19. Guiding principles of the new policy. 20. Some early fruits.
§ 1. Moral judgments of competition and monopoly. What should be the attitude of society toward monopoly! Is it good or bad as compared with competition! Some very strong ethical judgments bearing on practical problems are found in the popular mind connected with the ideas of com petition and monopoly. Competition usually is proifounced bad when viewed from the standpoint of the competitors who are losing by it, and good when viewed from the stand point of the traders on the other side of the market who gain by that competition. Competition among buyers thus ap pears to sellers to be a good thing; that among sellers appears to themselves to be a bad thing (and vice versa). Many per sons are moved by sympathy to pronounce competition among low-paid and underfed workers to be bad, and each worker is convinced that it is so in his own trade. Yet nearly all men are of one mind that competition is a good thing in most industries, those that are thought of as supplying the "gen eral public." Monopoly is believed by public to be wrong in such cases, and competition to be the normal and right condition of trade. Yet there are some men interested in "lam business" who look upon competition as bad, and upon monopoly as having essentially the nature of friendly co-. operation. The roots of these opinions, or prejudices, are easily discoverable in the theoretical study of the nature of monopoly.' Yet often different men or groups of men feel so strongly on this matter, viewing it from their own stand points, that they are quite unable to understand how any one else can feel otherwise. There is thus a great deal of con troversy to no purpose.
it, not only because it is a high price but because it bears the character of personal extortion.
The medieval notion of justum pretium, the just price, may have been often misapplied, and it was often criticized and ridiculed by economists in the period of idealized competition (from Adam Smith to John Stuart Mill). But at the heart of the notion was the judgment that general uniform prices fixed in the open market are the proper norms for prices when one of the traders is caught at an exceptional disad vantage. The modern world has been compelled to reexamine the conception of the just price.
§ 3. Evil economic effects of 'monopolistic price. The oretical analysis confirms this view. Any exercise of monopo listic power over price keeps some, the weaker bidders, from getting any of the desired goods, or limits them to their most urgently desired units. What may be called the "theoret ically correct with two-sided competition is the one that permits the maximum number of trades with a margin of gain to each trader. In narrowing the possibility of sub stitution of goods by trade, the sum of values of goods for most men is diminished. Thus all citizens who are the vic tims of an artificially created scarcity look upon monopoly as "bad," just as they do upon the evils of nature—drought, locusts, fires, and pestilence. A monopoly has an indirect and more distant bad effect upon the spirit of all those trading with it. If they are producers selling at prices depressed by mo nopoly, their money incomes are reduced; if they are con sumers buying at monopoly prices, their real incomes are re duced ; in either ease, their psychic incomes, the motives of all industry, are diminished and their industrial energies are relaxed.
§ 4. Common law on restraint of trade. The first re corded case in English law wherein the courts sought to pre vent the limiting of competition by agreement runs back to the year 1415, in the reign of Henry V. This was a very $ See Vol. 1, pp. 66, 67.
simple case of a contract in restraint of trade, whereby a dyer agreed not to practise his craft within the town for half a year. The court declared the contract illegal (and hence unenforceable in a court), and administered a severe reproof to the craftsman who made it. Thus was set forth the doc trine of the moral and legal obligation of each economic agent to compete fully, freely, and without restraint, even re straint imposed by a contract voluntarily entered into for his own advantage.
Not until the eighteenth century was this rigid doctrine somewhat relaxed so as to permit the sale of the "good-will" of a business under limited conditions, and some "reason able" contracts in restraint of trade. Later the emphasis was somewhat further shifted, by judicial interpretations, from the notion of free competition to that of "fair" com petition, so as to permit contracts involving moderate restraint of trade, if the essential element of competition was retained. Thus it was said that a piano manufacturer might by con tract grant an exclusive agency to a dealer in a certain ter ritory, there being many other competing makes of pianos, and such a contract "does not operate to suppress competi tion nor to regulate the production or sale of any commod ity." But with such moderate limitations the courts in cases under the common law have steadily disapproved con tracts in restraint of trade that would appear to be to the disadvantage of third parties, whether producers or con sumers.
§ 5. Growing disapproval of combination. The attitude of the courts became in one respect stricter. Some earlier cases involved the doctrine that what is lawful for an indi vidual to do alone is lawful if done in combination with oth ers. Indeed, a comparatively recent case 5 declared, regard ing a group of dealers agreeing not to deal with another, that 4 77 Miss., 476. Cited by Bruce Wyman, "Control of the Market," p. 137.
"desire to free themselves from competition was a sufficient excuse" for such action. But the general trend has been to the doctrine that a combination of men "has hurtful powers and influences not possessed by the individual." Hence threats of associations of traders (retailers or wholesalers) not to deal with another if he continued to deal with some third party have been declared acts in restraint of trade.' Yet in the case cited the court seemed to have been more con cerned with protecting "the individual against encroachment upon his rights by a greater power," "one of the most sacred duties of the courts," than with rights and interests of the general public endangered by such restraint of trade.
Mogul Steamship Company v. McGregor I L. R. 23 Q. B. D. 5981.
rights and interests of the shipping public; it considered the immediate and not the ultimate effects of the "smashing" of rates; it allowed itself to be deceived by the appearance of acts that in outer form were competition, but that had as their purpose the strengthening and maintenance of monop oly-. These acts are forms of the "unfair" practices that will be mentioned later..
§ 7. Increasing regard for results of competition. De spite the binding precedents, the courts in some later deci sions have refused to look upon competition as good regard less of its motives and of its consequences. In a federal case 10 the judge, in a brief and acute dictum, recognized the evil of a rate war that would result from threats of definite cuts. They impair "the usefulness of the railroads them selves, and cause great public and private loss." The court's opinion was no doubt largely influenced by the fact road rates were already subject to regulation: "Every pre caution has been taken by state legislatures and by the Con gress to keep them just and reasonable,—just and reasonable for the public and for the carriers." In a state case 11 the facts were that a man of wealth started a barber-shop and employed a barber to injure the plaintiff and drive him out of business. The court recognized that while, as a general proposition, "competition in trade and business is desirable," it may in certain cases result in "grievous and manifold wrongs to individuals"; and in this ease the "malevolent" man of wealth was declared to be "guilty of a wanton wrong and an actionable tort." The economist can but pronounce this judgment admirable as far as it goes, but it is remarkably confined to a consideration of the private legal rights of the injured competitor, and gives hardly a hint of a higher criterion for judging competitive acts, that of the general welfare.
9 See below, I 15.
la Averrill v. Southern Railway (75 Fed. Rep. 736). 11 107 Minn. 145.
The further enlightenment of judicial opinion upon the subject of cutthroat competition used as a tool to create monopoly was shown in the granting of an injunction by a federal court, in restraining the use of "fighting ships" by a combination, and by the indication in 1915 23 of the willingness to grant a similar injunction if necessary. Similarly "fighting brands" of goods have been recently pro hibited.
§ 8. Common-law remedy for monopoly ineffective. The common law contained prohibitions enough, both broad and specific, against contracts and acts in restraint of trade. The common law contained likewise a closely related body of doc trine by which the railroads, as common carriers, ought to have given equitable and undiscriminating rates to all ship pers. There was a strong body of influential opinion that long maintained that the common law was sufficient to prevent monopoly, that the only thing needed was to enforce it. Even now, after all that has elapsed, there are some in railroad and business circles who still appear to hold that opinion. But the evils of railroad discrimination and of other monopolistic practices continued, and for some cause the common law was not enforced, excepting occasionally, disconnectedly, and without important results.
Why? The answer may be ventured that in the common law the whole question of restraint of trade was treated pri marily as one of private rights and only incidentally as one involving general public policy. Cases came before the courts only on complaint of some individual who felt injured. Now the injury of higher pfices due to eontracts in restraint of trade is usually diffused among many customers, and the loss of any one is less than the expense of bringing suit. Consequently, it rarely happened that eases were brought be fore the courts except by one of the two equally guilty parties to a contract in restraint of trade, when the other party had 12 216 Fed. 971.
failed in some way to do his part. When such an illegal con tract in restraint of trade was proved before a court by a defendant in a civil suit, the contract was declared unenforce able, and the only penalty in practice was that the plaintiff could not collect his debt or secure performance from the defendant." A very similar situation existed in the case of the individual's grievances against railroad charges and serv ices.
§ 9. Federal legislation against monopoly. The passage of the Interstate Commerce Act in prohibiting dis crimination and railway pooling, and that of the Act of 1890 "to protect trade and commerce against unlawful restraints and monopolies," popularly known as the "Sherman Anti trust Law," were part of one public movement to remedy monopoly. From one point of view it seems true, as has often been said, that in essence these statutes were simply enactments of long-established principles of the common law. Section 1 of the Sherman law declared illegal "every con tract, combination in the form of trust or otherwise, or con spiracy, in restraint of trade or commerce among the several states, or with foreign nations." Section 2 made it a mis demeanor "to monopolize, or attempt to monopolize." But, from another point of view, these new laws showed a marked change both in the conception of the interests in volved and in the means of preventing the evils. The evil was at last conceived of as a general public evil; the laws are not merely to protect individuals," but "to regulate com merce," "to protect trade and commerce." More important still, it was made the duty of public officers (district attorneys of the United States) to institute proceedings in equity "to prevent and restrain" violation of the Sherman Act, and a 14 Arnott v. Pittston and Elmira Coal Co., 68 N. Y. 558 (1877).
15 See ch. 29. is At the same time the rights of injured individuals are better safe guarded by section 7 of the Sherman law. pnrmitting the recovery of three-fold damages and attorney's fees.
special Commission was instituted to deal with railroad cases. It was this undertaking of the initiative by the government, the treatment of the problem as one of the general welfare, that marked a new epoch in this field. The methods and agencies provided might be at first inadequate and ineffec tive, but time and experience could remedy those defects.
In important ways opinion and policies were not yet clear and consistent. They wavered from one to another conception of the method for dealing with the problem. It was clear only that laissez-faire had been laid aside. There are three other possible policies, reflecting as many different conceptions of the problem of monopoly : (1) monopoly prosecuted, (2) mo nopoly accepted and regulated, (3) competition maintained and regulated.
Tobacco Company, decided in 1911, the results being absurdly futile.
Act itself, with odd inconsistency, contains an anti-pooling provision (Section 5), the purpose of which seems to have been to compel competition as to rates, which is now practically im possible under the other provisions of the law. The policy of "monopoly accepted" 'was seen to involve as a necessary feature public regulation of rates to the point, if necessary, of absolutely fixing them. The principle has come to be ac cepted that wherever competition ends there public regula tion of prices and service begins. Monopolistic enterprises are ipso facto quasi-public institutions.
§ 12. Field of its application. This policy, gradually ex tending in practice, came to be applied to the class of indus tries which, for lack of a better name, are called local utili ties. The one characteristic that they all have in common is that the service, or product, which is sold requires for its delivery some special use of public highways and an expen sive, permanent, physical plant, such as gas-pipes, water pipes, poles and wires. The telegraph, the telephone, electric lighting, street railways, regular steam railroads, and some other minor industries all answer to this test." Beginning about the year 1900, one state after another enlarged the powers of its state railroad commission or cre ated a new corporation commission to regulate these "local" or "public utilities." 10 They have accomplished much, but the development of this kind of regulation has not proceeded in many cases beyond the adjustment of relative rates and the abolition of discrimination among the different individ uals and classes of customers. Experience has shown the great difficulty of determining what is a fair absolute level of charges. A new science of accounting has been develop ing to assist in the solution of a problem the complexity of which transcends the agencies at hand to deal with it. With this policy applied to the local utility (and railroad) phase of monopoly, there remains still the problem of the industrial trusts in the manufacturing enterprises.
sacrificed. Irresistible economic forces, it is said, are creating larger and larger units of business; friendly cooperation and unified action must take the place of competition in business.
The outcome must be monopoly in every important line of manufacturing industry and perhaps of commerce. In view of public opinion toward monopoly, its acceptance necessi tates its regulation. This argument is supported by appeal to the experience in the field of railroads and other local utili ties, where public opinion has, after long hesitation, recog nized competition to be impracticable and the acceptance of monopoly as inevitable. As extremes often meet, the view of the industrial trust as a natural evolution is most favored, on the one hand, by men of "big business," already interested financially in trusts, and, on the other hand, by the most radi cal communists (or socialists) whose ideal is the complete monopolization of industry under the government.
Now, when one examines the methods that the notable trusts actually did employ, and apparently had to employ, even when they were already powerful single enterprises, in order to destroy their competitors and to attain their monopo listic power, the word "natural" seems hardly to describe the process. The evidence is not a matter of hearsay, but is embodied in a long line of judicial decisions, and in numerous special inquiries by governmental commissions and officials.
§ 15. Kinds of unfair practices. This evidence is a star tling array of "unfair practices" and "unfair" forms of competition, which, however novel in appearance, are essen tially of the kind that have been illegal under the common law for the past five hundred years. Many of these practices were baldly dishonest, many of them were contemptibly mean.
The manifold varieties of unfair competition may be roughly grouped under three headings, according as they are connected with (1) Mega,' favors received from public or quasi-public officials; (2) discrimination against, or control of, custom ers; (3) foul tactics against competitors.
(1) Among the practices in the first group are discrimina tory rates and rebates from railroads, favoritism in matters of taxation, undue influence in legislatures, special manipula tion of tariff rates through powerful lobbies or paid agents, undue influence in the courts through the employment of law yers of the highest talent, who often later became judges.
(2) Among the unfair practices toward customers are dis criminations among them by the various forms of price-cut ting, grants of credit, and kinds of service. The liberty of retail dealers is limited in a variety of ways, such as fixing resale prices, requirement of exclusive dealing, and full-line forcing.
(3) All the methods just mentioned as employed in deal ings with customers are likewise unfair toward competitors. Many other methods are used to the same end, such as: entic ing away their employees, or corrupting and bribing them to act as spies, paying secret commissions, false advertising, misrepresenting competitors, imitating their patterns in goods of defective workmanship, shutting off their credit or their supplies of materials, acquiring stock in competing compa nies, malicious suits, infringement of patents, intimidation by threats of business injury or of scandalous exposures, opera tion of bogus independent companies.
§ 16. Growing conception of fair competition. Any in dustrial trust that was able to gain domination and monopoly power only by the use of such practices, or any part of them, can hardly be deemed the result of a "natural evolution." If "artificial" means the use of artifices, surely this develop ment deserves the adjective. Yet, even if not natural, this development may be thought to be "inevitable," human na ture being as it is. But the bald fact is that while the great trust movement was in progress no effort worthy of the name was being made to enforce even the then existing laws and to oppose this artificial development. The same allegation of inevitableness was once commonly made of discriminatory railroad rates and rebates, evils that have been in large part remedied only since the period 1903-1906, when at last in telligent action was taken.
To those who came to see the problem in this light, accept ance of industrial monopoly, with its complex task of fixing by public commission the prices on innumerable kinds and qualities of goods, seemed at least premature. Rather, the first step toward a solution seemed to be the vigorous preven tion of unfair practices, and the next step a positive regular izing of "fair competition." The fundamental idea in this is the enforcement of a common market price (plus freights) at any one time to all the customers of an enterprise. By this plan, potential competition would become actual, and small enterprises that were efficient might compete success fully within their own fields with large enterprises that main tained prices above a true competitive level. Even general lowering of prices by a large enterprise with evident purpose of killing off smaller competitors is unfair competition under this conception. It was for years recognized that the realiza tion of this policy required legislation regarding uniform prices and the creation of a commission for the administra tion of the law.
§ 17. The trust issues in 1912. The campaign of 1912 presented in an interesting manner the three policies above outlined. The Republican party, led by President Taft, stood for the policy of monopoly prosecuted; its program was the vigorous enforcement of the Sherman law. The Progressive party, led by Mr. Roosevelt, stood in the main for the policy of "monopoly accepted and regulated"; its program called for minimizing prosecution and for retaining trusts under a system of regulation. The Democratic party, led by Mr. Wilson, stood for the policy of competition maintained and reguiated, and the problem was to find means to strengthen and regularize the forces of competition.
In practice these programs doubtless are less divergent than they appear. All alike proposed the retention of the Sherman law. The two proposals to go further were pre sented as mutually exclusive alternatives, whereas they nec essarily must supplement each other in some degree. The Progressives did not expect all industries to become monopo lies, and the Democrats tacitly conceded to monopoly accepted the large field of transportation and local utilities it already had occupied. But there was a real difference in the angle of approach and a real difference in emphasis. The Demo cratic program (though somewhat unclearly) showed greater distrust of monopo'y and greater faith in the possibilities of creating fair conditions of competition (which never had fully prevailed) in which efficiency would be able to prove its mer its and monopoly would work its own undoing. It is more logical for the country to give this policy an adequate trial before adopting irrevocably the policy of general industrial monopoly. In either case, competition actual or potential is the fundamental principle by which prices have to be regu lated. Where competition is enforced it is by applying some general rules that create a general market price instead of discriminatory prices, but the fixing of the price is left to the competitors. Where monopoly is accepted prices must be fixed with reference to an estimated competitive standard, that which under hypothetically free conditions would just suffice to attract and retain private enterprise and capital.
The price advances within that period had been so swift and bewildering that they obscured all distinctions of normal demand, normal supply, fair price, war profiteering, and monopoly. For example, investigations in 1921 in New York and other cities revealed incredible monopolistic practices in the building industries, by labor and capital alike.
But for all this it cannot be doubted that a new and potent agency for creating higher business standards has been brought into existence. The new legislation drew the atten tion of the country to the development of a better commercial morality. Many business men wrote to the Commission com mending the purposes of the law, and offering their coopera tion to eradicate long standing practices which they deplored. The Commission admirably declared that it iwas seeking "to understand and make allowance for the difficulty of the prob lem, to see both sides of every case, to protect men in the furtherance of legitimate self-interest by all reasonable and normal methods, and at the same time to keep the channels of competition free and open to all, so that a man with small capital may engage in competition with powerful rivals, as sured that he may operate his business free from harassment and intimidation and be given a fair opportunity to work out his business problems with such industry, efficiency, and intelligence as he may possess." § 20. Some early fruits. Through the investigations of its economic division the Commission has collected a stupen dous mass of detailed information on the conditions and the trade practices in many of the leading industries of the coun try, throwing the light of publicity into many a dark corner of commercial abuses.
The legal division of the Commission at the end of its first five years had received almost exactly two thousand ap plications for complaints (for unfair practices and violation of the C'ayton Act), upon which it had made inquiries and dismissed about one half without publicity. The number of these had increased each year, more than one third having been in the last year. The Commission had in more than six hundred of these cases issued formal complaints, of which more were in the last year than in the previous four years.
In taking up these complaints the names of the complain ing parties are not disclosed. The Commission's work is primarily to protect the public interest and not merely to intervene in "contests between individuals in relation to their private rights." On this theory, the Commission may and does institute proceedings "on its own motion without charges being made to it or upon application of parties not directly affected by the practices complained of." This present policy in respect to monopoly stands out in striking contrast to the theory of the private litigant and the injured party as embodied in the preceding law and practice. It still remains to be seen whether, in the near future, it will be possible to scotch the snake of monopoly and give to the "common man" the chance to live and work according to fair rules of the game in business enterprise.
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Orth, S. P., (Ed.), Readings on the relation of government to prop erty and industry. Bost. Ginn. 1915.
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