THE PROMOTION OF INDUSTRY

273. Government in its Relation to Business.

Modern Views of

desirable

governments are very closely connected with the business relations. interests of the people, although there is considerable difference of opinion regarding the closeness and character of these relations. Many people believe that a government should limit itself to warding off dangers from which a business man cannot possibly protect himself; others advocate the greatest amount of aid to business in the form of favorable legislation and actual money subsidies; but the majority believe that business should be protected and promoted as far as is demanded by the best interests of the whole people.

business.

So much of our ordinary business is transacted through Government corporations, which are really artificial persons created by and ordinary the state, that supervision of corporations is essential. Since at least ninety-five per cent of our business is done not with cash, but on credit, safeguards are necessary to preserve a credit system. Contracts, written or unwritten, play so large a part in commercial transactions that indefiniteness in the law of contracts, or uncertainty in its enforcement, would be fatal to industry and commerce. Moreover, every line of activity is depressed by unjust, discriminating laws, and is benefited by wise, fostering legislation.

interests.

Many undertakings are of such nature that they must Government be performed or specially supervised by our governments. and public Since canals or railways are semipublic enterprises, they are common carriers and must not manage their business to the disadvantage of any person or community. Public improvements, such as the location and improvement of highways, should not be left to private parties. Essentials such as water for cities should be owned and managed by the public. Government must have special power of regulation, and, if necessary, prohibition over necessary but dangerous or objectionable industries, such as powder factories, gas works, or garbage incinerators. In its final analysis the power to regulate must include, if necessary, the power to prohibit.

274. Protection and Organization of Industry. — Modern society has encouraged the saving of wealth because it is desirable that we have as much capital as possible. In order to increase wealth we permit persons with savings to combine their capital in a single business organization known as a corporation. A corporation is a group of persons legally associated and empowered by a government to act as one person in doing business or performing some other social task. Corporations are endowed by the public with many

(This plant covers 276 acres; there are 47.5 acres of floor space actually under roof.)

privileges, including monopoly rights to the use of patented machines,2 in order that they may do as useful a work as possible. They should be subject to public supervision and control; otherwise the privileges may be used for private gain, not for the public good.

1 Corporations not only combine the capital of many savers, but they continue to exist even when their members die. If one stockholder in a corporation wishes to sell his stock, he can transfer it to another person. Corporations are therefore more useful forms of business organizations than partnerships.

2 In order to encourage the invention of mechanical devices, Congress permits the Patent Bureau to issue to inventors patents which grant them the

tions or

As the scale of production increased, a wider market was Formation demanded. In the new markets much greater competition of combina existed than ever before because each large producer com- monopolies peted with other large scale producers of the same kind of goods. In time one of three things happened: (1) either each competitor limited his business to a smaller territory, which ordinarily was impossible, or (2) one of the producers "failed and was absorbed by the other, or (3) the two, three, or more competitors got together and agreed not to compete with one another. As the last was the most sensible thing from the business point of view, combinations usually grew out of the development of large-scale industry, expanding markets, and the resultant keen competition.

275. Successive Forms of Business Combination. In The problem the United States since the Civil War we have witnessed of combining legally. several successive forms of combination in industry and in transportation. The public has at all times been an interested spectator of these changes, for it has always opposed combinations and monopolies as bad for the people even if good for the producer. The problem confronting the uniting corporations was to find a form of combination which would meet their business needs and not be illegal.

The first form of combination used by the large-scale producers was the gentlemen's agreement. The firms agreed not to cut prices and, in some cases, not to invade each other's territory. As money could be made by breaking this agreement and some of the members of the combine were not "gentlemen," they broke their word. The others could not appeal to the courts to make the offender keep his contract, because the public would probably have declared the whole arrangement contrary to law.

exclusive right to manufacture and sell the patented device for a period of seventeen years. It is difficult to overestimate the influence exerted by this system in improving the mechanical methods used in almost every branch of business in the United States. The granting of copyrights is intrusted to the Congressional Library, to which application must be made, and with which two copies of each book or drawing are left. The ordinary fee is $1, and the exclusive right of publication is granted for a term of twenty-eight years with the privilege of renewal for fourteen years longer.

Failure of the gentle

men's agree ment.

Nature of a

pool.

The trustee

bination.

The corporations next devised an arrangement called a pool. They agreed to divide up territory and not to cut prices. They tried to keep any member of the combination from breaking this agreement by pooling profits. To each member of the pool who had kept the agreement was then distributed the share to which he was entitled. From a business point of view the pool was successful, but the law interfered by declaring pools illegal.

Next the corporations placed all of their business in the form of com- hands of several trustees who were to hold the stock of the different corporations and transact the business of the combination. From this form we get the name trust." This in turn was declared illegal.

Fate of the

pany.

66

Then the corporations resorted to the scheme of organizholding com- ing a new corporation to take the place of the trustees. As the object of this new corporation was to hold the stock of the different corporations, it was called a holding company. It also was finally declared illegal.

Formation of great consolidated companies.

Economies of large

scale production.

A form of combination still held to be legal, unless it is a monopoly (§ 279), is the giant corporation. This is a single corporation with very large capital which buys out, or really absorbs, the older competing corporations. The old corporations no longer retain their identity, as was the case in all of the older forms of combination, for there is only one corporation. The United States Steel Corporation is the best example of a giant corporation.

276. Advantages and Evils of Combination. - Under modern conditions large-scale industry is inevitable. It permits a better use of capital and a more complete division of labor, which in turn lead to a larger output than the same number of workers and the same amount of wealth otherwise would have produced. It enables the producer to buy his materials in larger quantities and in markets where they are cheapest. He can employ skilled chemists or other experts and special time-saving machines which smaller producers cannot afford. He can make use of by-products which would be worthless to a small establishment. The

profits of the oil business and some others come from what were at one time simply by-products. In pork packing houses, for example, it is said that everything is utilized but the squeal. All this economic development is socially valuable because it adds to the wealth of society.

overcharge

Society loses these economic advantages if the large-scale Why comproducers keep the special profits of industrial organization binations instead of sharing them with the public. If competition the public. can be eliminated, the combination can not only reduce its expenses, but it can charge the public higher prices for commodities. Many combinations have become semi-monopolies, a monopoly existing when any person or group of persons controls the supply of a commodity.

1

nal practices of huge combina

tions.

Some monopolies are objectionable also because they do Semi-criminot "play fair." They raise prices where there is no competition, but they lower them far below cost where some minor competitor tries to do business. They force the producers of raw materials to sell at the price dictated by the monopolist. They oppress labor because they also have almost a monopoly of employment for certain classes of workers. They browbeat the railways into giving them special rates or rebates. Some large businesses were built up by such means, which are semi-criminal from the social point of view. How our governments have tried to deal with the problem of corporations in general and of monopolies in particular we shall see in the following sections.

THE CONTROL OF INDUSTRY

277. The Problem of Corporation Control. The control of corporations may be said to constitute the great administrative problem of our national and state governments. The national Constitution does not give the national government the right to control industrial corporations, except so far as

1 Control does not mean control of the whole supply. With a necessity such as wheat, the control of a very small percentage of the total supply enables a monopolist, e.g. in a corner, to raise prices and gain all the advantages of monopoly.

State rather than national control.