been made and the courts could not be appealed to for help.
Indeed, the law forbade this very practice of price-fixing.
The pool was so called because frequently the receipts of the
various companies were put into a common fund, to be
later divided according to some prearranged apportion-
ment.

The second stage has given to the trusts their present
name. The various corporations, which sought to elimi-
nate competition among themselves, agreed to

Trustees.

turn over their stock to a board of trustees. This
board gave back in exchange trust certificates. It could
regulate production and fix price because it held a majority
of the stock in all the companies. The second stage was
short-lived, because the courts declared illegal the practice
of trusteeship.

The final outcome of this development is the holding
company. Under this plan each company maintains a
separate legal existence, but there is formed The holding
another corporation which is empowered to hold com P an y-
stock in the other companies. This corporation is known
as the holding company and secures unity of action, because
it can command a majority of votes in each of the con-
stituent companies. Practically the same purpose of com-



266 Problems of American Democracy

modity control and price regulation can be obtained under
this method as under the former illegal method of trustee-
ship.

Social Results. — If the trust organization is a natural
monopoly of increasing returns, it is possible for certain
Advan- advantages to follow from it. The economies
tages. Q £ j ar g e sca ] e production may be reflected in a

lower price. Monopoly may avoid the wastes of com-
petition and render superior service. In a certain small
section of a city, for example, it was found that over a
dozen independent milk dealers covered the same route
early each morning to the increasing cost of the sleeping
consumers. Combination, by effecting economies, could
result in lower prices. It is also claimed that monopoly
creates a more stable market, for here there is little mis-
directed production. Under free competition, the price
fluctuates constantly according to conditions of supply
and demand, whereas monopoly seeks to study demand
and regulate supply accordingly. The natural effect of
this process is to stabilize prices.

Monopoly price may be steadier than competitive price,
but it is frequently higher. Society has not always received
Disadvan- its share of the economies of large scale produc-
tages. £j on j n jj^ f orm £ i ower prices. On the con-

trary, monopolies have made individual fortunes and
increased the inequality of incomes. A one-cent advance
in the price of some essential may mean thousands of
dollars additional profit to the corporation. Furthermore,
the seeking of favorable legislation or the obstruction of
restrictive legislation by wealthy corporations has some-
times had a corrupting influence upon politics. Their
ruthless methods toward smaller competitors, however,



The Regulation of Monopoly 267

have been the most frequent objections to monopolies.
Often the independent concern has been deliberately forced
out of business. A great combination has been able to
keep prices lower, temporarily, in the section where com-
petition exists, until the independent producer is forced
to join the combination or to go out of business. Often
the economic struggle for existence has been as keen as
that among the lower forms of life where the larger animals
devour the smaller.

Political Aspects. — There are four courses open to
society in dealing with monopoly. The first is that of
"laissez faire" or "hands off." The earlier Possible
economists assumed a state of free competition public

policies.

which they made the center of their economic
systems. But neither the assumption of perfect competi-
tion nor the policy of "laissez faire" can be adopted to-day.
A second policy which has been tried is that of dissolution.
Here the results have been far from satisfactory, because,
while the corporation is legally broken up, the monopoly
continues under some other form. Some of the devices
which make this possible have already been described.
The process of "trust busting" has been compared to an
attempt to unscramble scrambled eggs. The third alter-
native open to society is the policy of public ownership
and operation. The extension of this idea to all forms of
industry would bring us face to face with socialism. The
only other alternative in dealing with problems of monopoly
is the policy of government regulation of industrial com-
binations.

The history of government regulation of industry in
this country is interesting. The movement first began
with the individual states, some of which passed laws so



268 Problems of American Democracy

drastic that they were declared unconstitutional by the
courts. Moreover, the federal government alone has control
History of over interstate commerce, and it was seen that
reg ation: Qn j gu( .j i governmental action could cope with

Sherman J ° c

Law. big business which operated in all the individual

states. Consequently, the Sherman Anti-trust Law was
passed in 1890. This act made illegal "every contract,
combination in the form of trust or otherwise, or con-
spiracy, in restraint of trade or commerce among the sev-
eral states, or with foreign nations." It was made crim-
inal to "monopolize, or attempt- to monopolize, any part
of the trade or commerce among the several states, or
with foreign nations." The attempted strength of this
act was its very weakness. The Sherman Anti-trust Law
could hardly be called successful because of its sweeping
indictments against all combinations. Railroad combina-
tions and labor unions alike would come under its con-
demnation. The courts have, therefore, found it difficult
to enforce this law.

The Clayton Act, passed in 1914, made more definite

the policy of regulation. It modifies and makes clearer the

terms of the original Sherman Act, specifically

Clayton Act. • 1 1 • * • • -i ■

exempting labor unions. Again, it prohibits
one corporation from holding stock in another corporation
for the purpose of lessening competition. A similar aim
is sought in the provisions which oppose interlocking direc-
torates. It is illegal, under certain circumstances, for an
individual to be a director in a number of large corpor-
ations. Financial and industrial centralization is opposed.
Congress also established in 19 14 the Federal Trade Com-
mission. This body consists of five members appointed by
the President. So far, it is largely an inquisitorial organiza-



The Regulation of Monopoly 269

tion. It can demand reports and investigate the activities
of corporations which are thought to be violating some of
the anti-trust provisions. It may make recom- Federal

Trade Com-

mendations to the attorney-general and, if mission.
necessary, aid in the prosecution of offending corporations.
The final authority over corporations rests in the courts,
particularly in the United States Supreme Court. That
body must pass upon the legal status of a given
holding company, that is, it must decide whether Court

Decisions.

the corporation in question is or is not a legal
monopoly. In 1910 the court ordered the dissolution of
the Standard Oil Company and the American Tobacco
Company. It was shown that these combinations had
developed, through unfair competition, an unreasonable
restraint of trade. A monopoly existed because of the
power to limit output and fix prices. Another important
decision was reached in 1920 regarding the United States
Steel Corporation. This corporation was not declared
illegal, because in spite of its size it was held not to be
a monopoly.

How can the State best secure to society the gains of
large scale production? Because the problem presents so
many different aspects, no generalization can be Other
attempted. Nevertheless society must have ties,
some protection against the abuses of monopoly. Several
courses of action have been already indicated. Germany
has f rankly recognized monopolies as legitimate and encour-
aged great selling agencies known as Kartels. For the
United States federal incorporation has been suggested.
Uniform and open systems of accounting would also expose
monopoly practices and profits to the searchlight of public
opinion. It has been argued further that the Federal Trade



270 Problems of American Democracy

Commission should be given additional powers. On the
other hand, it is contended that too much regulation
hampers efficiency. As a final weapon there is always the
possibility of government price-fixing commissions. Our
war-time experience, however, shows us the difficulty of
determining not only a fair price, but also a fair rate of
profits.

QUESTIONS FOR DISCUSSION

1. Define monopoly and monopoly price.

2. Show the relation of monopoly to large scale production, and
to the corporate form of business organization.

3. What do you understand by the so-called law of supply and
demand?

4. Differentiate between an elastic and an inelastic demand.

5. What is the principle of decreasing cost?

6. Show the limitations upon monopoly.

7. Make your own classification of the kinds of monopoly.

8. Illustrate the different kinds of legal monopolies.

9. Explain the difference between natural and artificial
monopolies.

10. Show how there can be monopolies of labor.

11. What kind of a monopoly is the trust? Why is it so called?

12. Sketch the stages in the development of the trusts.

13. What advantages may a monopoly possess?

14. Show the disadvantages.

15. Explain the attitudes that society may assume toward
monopoly.

1 6. Give the main features of two federal laws seeking its regulation.

17. State some recent developments.

18. What suggestions do you have for the regulation of monopoly?

TOPICS FOR SPECIAL REPORT



1 . The nature and organization of a holding company.

2. The history and practices of some great capitalistic monopoly.

3. The Sherman Anti- trust Law and its effects.



The Regulation of Monopoly 271

4. The Clayton Act — ■ its detailed provisions.

5. The Federal Trade Commission and its work.

6. Great Supreme Court decisions concerning the trusts.

7. The advantages of federal incorporation.

8. An interstate industrial commission.

9. The platform of the Progressive Party in 191 2.

REFERENCES

Burch, H. R. American Economic Life. Chapter XXVII.
Clay, H. Economics for the General Reader. Chapters VII and VIII.
Ely, R. T. Outlines of Economics. Chapter XIII.
Hamilton, W. Current Economic Problems. Chapter IX.
Meade, E. S. Corporation Finance.
Tarbell, I. M. History of the Standard Oil Company.
Van Hise, C. R. Concentration and Control.

Young, J. T. The New American Government and Its Work.
Chapters VII and VIII.



CHAPTER XXII

Government Control of Transportation

I. General features
i . Natural monopoly

2. Public utility

3. National control

II. Development of the railroad

1. Rapid growth

2. Characteristics

3. The evil of discrimination
III. Regulation of the railroad

1 . The Interstate Commerce Act

2. The Interstate Commerce Commission

3. Results

4. Effects of the Sherman Act

5. Later legislation

6. Government operation during war

7. Esch- Cummins Act

8. The Railroad Labor Board

9. The difficulties of rate-fixing
IV. Other transportation agencies

1. Telegraph and telephone

2. Express companies

3. Water transportation

General Features. — Transportation agencies are nat-
ural monopolies, that is, they are subject ,to the law of
Natural increasing returns. The railroad is an outstand-
monopoiy. j n g exam pi e# Profits increase out of all pro-
portion to the increase in the volume of business. This



Government Control of Transportation 273

makes possible the partial utilization of receipts to-
ward paying for the building of such things as tracks,
bridges, stations, and rolling stock, rather than for the
immediate cost of transportation. Competition, which
means the duplication of equipment, is wasteful. The
monopolistic character of many transportation agencies was
not at first recognized by public opinion or by statute law.
Disastrous competition was frequently encouraged. On
the other hand, the railroad has often abused its monoply
power by unfair practices. Because of the principle of
increasing returns, it has sought increased business so
eagerly that favors have been shown and discriminations
made illegally.

The essential character of transportation service, as well
as its monopolistic nature, makes it a public utility. Again,
the early railroads were built partly by govern- p u bii c
ment aid. Finally, a railroad has the right of utlllt y-
eminent domain. If an individual does not care to sell his
property, but if it is necessary for the construction of a
road, the railroad has the power to seize it and to pay him
an appraised valuation. For these reasons the railroad and
most other transportation agencies have been termed quasi-
public corporations.

The constitution specifically states that "Congress shall
have power to regulate commerce with foreign nations and
among the several states and with the Indian National
tribes." The absence of this power on the part controL
of the federal government had been one of the chief defects
of the Articles of Confederation. Nevertheless, the fathers
little dreamed of the revolution that was to take place
in methods of transportation, nor of the importance of this
simple statement. The courts subsequently interpreted
s



274 Problems of American Democracy

the term commerce in its broadest sense. Chief Justice
Marshall, who formulated so many important decisions in
our early history, defined commerce to mean intercourse.
There has therefore been little dispute concerning the status
of such later inventions as the telegraph and the telephone.
Most means of transportation are known legally as com-
mon carriers. Although the federal government has control
over interstate commerce, the state has some slight control
over intrastate commerce. With the industrial expansion
of the country and the ramification of the great arteries of
commerce throughout the land, federal jurisdiction has
become relatively more important and overshadowed that
of the commonwealth.

Development of the Railroad. — The perfection of the
locomotive in England took place about the same time as
Rapid Fulton's successful invention of the steam boat,

growth. /p^g ear ij es t railroads in America were small
affairs designed for horse cars. There has been a tre-
mendous development from the primitive wood burning
steam engine to the powerful locomotive of to-day. The
early carriages were small, open affairs like the stage coach,
and the speed was slow and uncertain. By the time of the
Civil War some improvements had been made and about
thirty thousand miles of track laid. During Grant's admin-
istration the first trans-continental railroad was built.
There was a veritable fever of railroad building, and by the
end of the century there were two hundred thousand miles
of trackage. The United States leads the nations of the
world in railroad mileage. The census of 1920 disclosed
almost three hundred thousand miles. According to recent
figures of the Interstate Commerce Commission, the labor
employed in the railroad industry numbers one and a half



Government Control of Transportation 275

million persons. The capital invested is estimated at
twenty billions of dollars. Next to agriculture, rail-
roading is the greatest single business in the United
States.

Railroads took the place of the earlier roads and canals
in developing the country. The rapid growth of cities and
the settlement of the West would have been character-
impossible without them. Time and space have lstlcs -
been annihilated. It took as long to go from Boston to



Passenger Car in 1830 — B. & O. R. R.

Washington in the early days of the Republic as it does
now to cross the continent. Because of the need for trans-
portation facilities early railroad building was encouraged
by the government. The national government gave the
railroads thousands of acres of the public lands. States



276



Problems of American Democracy



advanced money and granted immunity from taxation.
Their securities were eagerly bought by both individuals




Courtesy of New York Central Railroad
The "De Witt Clinton" Train of 1831

and governments. This rapid and extensive railroad build-
ing had its misfortunes. Some roads took a long time to
show profits, because of the great initial expense and the




The Largest Locomotive in the World

time required to develop a heavy volume of traffic in the
thinly settled sections. Financial failures and reorganiza-



Government Control of Transportation 277

tions took place. Meanwhile, the control was gradually
shifting into the hands of fewer individuals. To-day, the
railroads can be classified not only geographically but also
financially. Thus, we speak of the Harriman and Gould
lines, or of the Vanderbilt and Moore interests.

The monopolistic development of the railroad, although
inevitable, was unforeseen. As the railroad grew in size
and power, the public attitude changed from Tfae
that of encouragement to one of censure. The of discrimi-

. -it nation.

cry of extortionate rates was raised. It was
also claimed that particular cities and individuals were dis-
criminated against. A lower charge was sometimes made
for a longer than for a shorter haul. This happened in
transportation between two seaports, where there was com-
petition with cheap water transportation. Again, dis-
criminations were made concerning different commodities.
Thus, Minneapolis claimed it was so much cheaper to
send wheat to the Atlantic Coast for export than flour that
her milling business was in danger of ruin. Finally, dis-
criminations were practiced against individuals. A large
shipper was granted a cheaper rate than a smaller shipper
for the same service. An unpleasant connection was
shown between railroad discriminations and the growth of
certain trusts. The monopoly power of the railroads was
felt to have such a powerful effect upon the fortunes of
men and the fate of communities that the demand for
government regulation became imperative.

Regulation of the Railroad. — In 1887 was passed the
famous Interstate Commerce Act, which represents the
first attempt to deal comprehensively with the whole prob-
lem of national transportation. It contained the following
main provisions: (1) unreasonable or extortionate rates



278 Problems of American Democracy

were prohibited; (2) discriminations between persons,
places, and commodities were made illegal; (3) fares and
The rates were to be made public; (4) common

Commerce carriers were not to charge more for a shorter
Act - than for a longer distance under the same

conditions of transportation; (5) pooling transactions
between railroads were forbidden.

For the enforcement of the above provisions a commis-
sion was created which is known as the Interstate Com-
merce Commission. It originally consisted of five members,
appointed by the President with the consent
interstate of the Senate. The number of commissioners

Commerce

Commis- was later increased to seven, and the term of
office fixed at seven years. Its original powers
were merely those of investigation. Where discriminations
were found to exist, the commission was to bring suit
against the railroad through the usual channel of the courts..
Since the time of its creation the scope and powers of the
Interstate Commerce Commission have gradually widened.
It has become the central governing body for the regula-
tion of all interstate commerce.

The results of the Interstate Commerce Act were more

apparent in the matter of preventing discrimination than

in preventing virtual "pooling." The publica-

A.6SUltS« • r t

tion of the rates and the short and long haul
clause of the new law helped to prevent discriminations
between persons and places, but the prohibition of "pool-
ing" was difficult to enforce. The true monopoly char-
acter of the railroad had not been discerned at that time.
It was not seen that it was both impossible and undesir-
able to try to restore competition between railroads. There-
fore, when the attempt was made, the inevitable hap-



Government Control of Transportation 279

pened. When deprived of the privilege of "pooling," the
roads were forced into combination. Financial wrecks
and reorganizations took place, out of which arose fewer
and greater systems by the process of consolidation.

The Sherman Anti- trust Act of 1890 marks the next
step in the history of railroad regulation. Many of the
combinations which had been effected were
declared illegal. In 1897 the Supreme Court f t h C e s
declared against associations for the purpose of fct e . rman
rate-making. In 1904 it ordered the dissolu-
tion of the Northern Securities Company, which was a
holding company designed to unite the Great Northern,
the Northern Pacific, and the Burlington systems. In
191 2 the court dissolved the merger of the Union Pacific
and the Southern Pacific Railroads, because the former
company held forty-six per cent of the stock of the latter
company. It is safe to say that the true monopolistic
character of the railroad was not seen until the advent of
the World War.

The Elkins Act of 1903 increased the effectiveness of the
Interstate Commerce Commission by giving it additional
powers. Corporations, as well as their agents, Later legis-
were now liable to prosecution. Again, the latlon -
Hepburn Act of 1906 permitted the Commission to revise
rates. Before this time, it could merely rule that a given
rate was unfair. Now it had the power definitely to fix
a maximum rate. Again, its authority was extended to
all companies doing an interstate business, including pipe-
lines. The later Act of 1910 created a special Commerce
Court in which railroad cases might be tried. However,
this experience was not successful and the court was abol-
ished in 1 9 13. The Adamson Act of 19 16 dealt especially



280 Problems of American Democracy

with problems of wages and working conditions in the rail-
road industry. At that time the railroad brotherhoods
were threatening to strike and to hold up the transporta-
tion facilities of the entire nation. Such a situation was
antagonistic to the welfare of the whole American nation.

Behind the great mass of railroad legislation of the
twentieth century may be observed the steady advance of
the principle of government regulation and the
mentTpera- gradual recognition of the monopoly character
war. durmg °f the railroads. These tendencies were hast-
ened by the World War, when it was imperative
to establish a unified control over the chief transportation
agencies of the country. On January first, 1918, the
President declared the railroads of the nation to be under
the operation of the government. This was continued for
twenty-six months under a Director General of the Rail-
roads. Similar governmental control was exercised over
the telegraph and telephone lines. Such measures played
an important part in winning the war. Prompt action
was necessary to insure the transportation of troops and
war materials in the most direct and systematic fashion.
Government operation of the railroads, however, was
purely a war measure and its success must be judged
accordingly. The needs of such a critical period were so
abnormal that the experiment proved neither the advan-
tages nor the disadvantages of general government oper-
ation of public utilities.

With the cessation of hostilities came the question of
the future of the railroads. While some writers made a
plea for the continuation of government operation, with the
ultimate aim of government ownership, others were equally
insistent in demanding that the roads be turned back



• Government Control of Transportation 281

immediately to their owners. A third scheme, called the
Plumb Plan, proposed the control of the railroads by the
workers. Finally, the Esch-Cummins Act was
passed, and the roads were returned to private Cummins
ownership on March first, 1920. This was an
exceedingly important piece of railroad legislation. The
equipment and rolling stock of the roads had not been
kept up during the war by any replacement fund. Hence,
the new legislation provided for a credit fund of three
hundred million dollars. It also planned for the ultimate