CHAPTER XIX THE ANTICIPATED ECONOMIES OF THE TRUST There seems little reason to doubt that the modern trust movement originated largely in the desire of the manufacturers to restrict or suppress competition, and thus to secure monopoly profits. Nevertheless the prospect of securing the economies that the trust form of organization apparently promised also played a considerable part. It is the purpose of this chapter to consider in some detail whether these economies, as realized in practice, are of sufficient importance from the standpoint of public welfare to justify trusts, it being assumed that through government regulation it will be possible to control these huge organizations in so far as this seems necessary or desirable. In other words, is the policy of trust dissolution ill-advised, as occasioning the destruction of an organization superior in efficiency to the one it was intended to replace? In this discussion it is important that the reader keep clearly in mind the meaning of the word trust as it was defined in the beginning of the book. The trust, tersely stated, is a horizontal combination possessing monopolistic power. The economies of the trust form of organization must at all times be clearly distinguished, first, from the economies of large-scale production, and second, from the economies that may be realized by a combination not possessing monopolistic power. The trust, it would seem, should receive legal sanction only if it is able with 1 See Bullock, Quarterly Journal of Economics, 15, pp. 167-217; Durand, The Trust Problem, ch. 4; Jenks and Clark, The Trust Problem, ch. 3; Montague, Trusts of To-Day, ch. 2; Ely, Monopolies and Trusts, ch. 4; and Industrial Commission, vols. 1 and 13. 2 See p. I. out injury to the public welfare to reduce the costs of production or of selling in ways that are not open to large individual plants, and in ways, moreover, that are not open to a combination of large (or small) plants that has no monopolistic power. In some branches of industry, it is to be observed, it may be possible to unite fifty or more plants without achieving a dominant position in the industry. Obviously, therefore, the economies that may fairly be ascribed to the trust are solely those additional economies that a large-sized combination not holding a preponderant position in the industry is unable to secure. The economies of the trust form of organization may be analyzed under three heads: I. Economies in Bargaining. II. Economies in Production. III. Economies in Selling. I. Economies in Bargaining The economies in bargaining may be treated under the following headings: (1) purchase of materials and supplies; (2) distributors; (3) labor; (4) financial institutions; (5) railroads. (1) Purchase of materials and supplies. Large concerns, of course, can often buy their raw materials and supplies more cheaply than small concerns, but can a trust buy its materials more cheaply than a large-sized combination? Viewed in one light the trust can more or less permanently secure its raw materials more cheaply than would be possible under a state of competition. The monopoly profits of the trust arise largely from a restriction of the output,1 and this necessarily involves a reduction of the demand for the raw materials consumed by it. If the raw materials required by the trust are used in many other industries, as is the case with the tin plate trust, for example, the reduction in the price of the raw materials may be slight; if they are used in practically no other industry, as is the case with the tobacco trust, the reduction may be considerable. The 1 If the trust is actually more efficient than other business units, it can of course secure monopoly profits without restricting the output, by merely appropriating the savings effected by it. tendency toward a reduction in the price of the materials and supplies is accentuated if the industry is one of increasing costs, and attenuated if it is one of decreasing costs. However, the attainment in this way of a lower price level for materials confers no advantage upon the trust as compared with its competitors; and is hardly to be cited as an argument for the trust form of organization, since the result is a diminution in the wealth of the country, both in terms of raw materials and of finished products. Without reducing its own output, the trust may nevertheless succeed in depressing the market for materials and supplies, providing, of course, it is not confronted with a trust in these lines. If the sellers of leaf tobacco, for example, had reason to believe that there would be a market for their total output, they would normally be inclined to withhold their product until they had secured the price determined by the equilibrium of demand and supply. But since the demand is uncertain— it depends, of course, largely on the amount the trust decides to buy they may be tempted, particularly since many of them can not afford to hold their crop indefinitely, to take a lower price in order to make sure of a sale.1 If the lower market price thus registered is open to the competitors of the trust, they gain equally with it; yet in either event this economy in the purchase of raw material represents no social benefit, since the producers lose what the trust gains. This practice persistently employed will therefore tend to discourage the production of the articles used by the trust, and thus to diminish national wealth. There is one direction in which trusts may perhaps gain. If they can eliminate unnecessary middlemen, that is, promote a more direct and economical distribution of raw materials and supplies from the producer to themselves (the trusts), they will reduce costs, and in addition will be performing a real public service. And yet the trust may not have any particular advantage in this respect over the large combination; for the advantages of wholesale buying do not increase indefinitely. 1 If their product is perishable, the position of the sellers is even more unfortunate. The president of the American Tobacco Company, while claiming some advantage in the purchase of labels and similar articles, admitted that the trust could not buy the principal raw materials-leaf tobacco, sugar, and licorice any cheaper than its competitors; in fact, it was at somewhat of a disadvantage, since it could not pick up bargains in the same way that a smaller buyer could.1 Testimony to the same effect was given by the promoter of the rubber trust; by a leading official in the Standard Rope and Twine Company (a successor of the cordage trust); and by the president of the silver-ware trust.2 A competitor of the whisky trust asserted that he could buy one car of corn just as cheaply as the trust could buy 100,000 bushels (say 80 cars); and counsel for the Corn Products Refining Company (the glucose trust) admitted that his company had no advantage in the purchase of corn.4 The president of the United States Steel Corporation testified that the constituent companies of the trust each purchased their supplies separately, thus showing that the formation of a trust did not permit any saving in this regard. The conclusion would appear to be justified that while trusts may have decided advantages in buying as compared with small concerns, they have no striking advantages, if any, over large companies, except indeed such advantages as represent no social benefit. The trust, to be sure, can often effect a saving by integrating its business in such a way that it assures itself an ample supply of raw materials at cost; and it is the more likely to find this advantageous, if it must buy its raw materials from another trust further down in the productive process. Yet integration is not limited to the trust form of organization; it is open to any concern with ample financial resources and operating on a large enough scale to justify the undertaking. The Bethlehem Steel Corporation, for example, is as fully integrated as the United 1 Industrial Commission, XIII, pp. 326-327. 2 Ibid., p. 36; I, pp. 163, 1050. 3 Ibid., I, p. 184. 4 Brief for the Corn Products Refining Company (no. 10-122), p. 31. 5 Industrial Commission, XIII, p. 453. States Steel Corporation. If integration is incomplete, so that the trust must still rely on other concerns for a portion of its materials, the production of a part of its supply may improve its strategic position, and may result in an economy in bargaining; if, on the other hand, integration is complete, the absorption by the trust of the profit at all stages of the productive process represents an economy in production. Yet in either event, whether the economy be one of bargaining or of production, the gain accrues, not as the result of the organization of a trust, but as a result of the integration of industry, a practice that may be availed of by any concern, whether trust or not, which produces on a sufficiently large scale and which is able to command the requisite capital. (2) Distributors. The trust is unquestionably in a position to bargain more effectively with the distributors of its products. The trust, controlling the greater part of the supply of a particular commodity, naturally possesses a strategic position in negotiations with the distributors, whether they be jobbers, wholesalers, or even retailers. The evidence indicates that the tobacco trust, for example, was able to encroach steadily on the jobbers' margins during the period from 1901 to 1910.1 To the extent that the competitive system had evolved a distributing organization that was wasteful, there would be an obvious gain in the reduction of the number of distributors. However, the available information does not indicate that the formation of trusts has been accompanied by far-reaching changes in the distributive machinery. The wall paper trust endeavored to economize by eliminating the middleman, but after three years gave up the experiment." There are lines of business, to be sure, in which the middlemen have been eliminated in the selling end, yet these are not solely or characteristically those businesses that are dominated by trusts. 1 Report of the Commissioner of Corporations on the Tobacco Industry, part III, pp. 71, 80, 171, 190. 2 Industrial Commission, XIII, p. 284. The cotton yarn trust endeavored to dispense with the services of the commission merchants who were accustomed to handle the sales of cotton yarn on a commission basis; but lost more |