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funds, they may be willing to advance the credit, but
they too have current obligations and would be treated



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CAPITAL 123

in a summary fashion were they to refuse the orders
from higher up.

In the building up of trusts and great railway sys-
tems this power over banks was frequently the factor
which brought success. A good recent instance of its
use is the success the money power has had in hin-
dering the Federal Farm Loan Bank. In addition to
forcing local obstructions, only about $30,000,000 of
its very attractive bonds could be sold. If the Federal
Farm Loan Bank were a success, the farmer would
have a source of credit independent of the regular credit
S3rstem, — something which would strike at the very
root of the money question. In time other classes of
business would demand similar advantages and sweep-
ing reforms would be ushered in. At present the large
financial interests have a monopoly of the money mar-
ket in that they control both the issue and the rate of
interest. The fact that the Government prints the
notes and certificates is a matter of na importance.

The great success attending credit concentration
probably indicates considerable change in this field in
the near future. The substitution of public for pri-
vate capital in railroads, mines, and utilities in general
would serve to lessen bank domination. Success of
the Farm Loan Bank is another promising factor.
The gold standard which the financial interests once



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124 AMERICAN CITIES AND THEIR BUSINESS

thought would always serve their purpose is breaking
down and this may lead to surprising developments.
Methods may be found of freeing local banks from
the centralized control. Monopolized credit facilities
discourage production. The issue of credit is less than
what business would warrant and credit can be arti-
ficially withdrawn for ulterior purposes. The rate of
interest is higher than necessary. The time is ripe for
fundamental changes. Any reduction in interest rate
will be an aid to productive business. There is every
reason to believe that the banking business can be op-
erated on a smaller margin between interest paid out
and interest charged, — on the one hand by drawing the
teeth of monopoly and on the other by reducing the
number of very small banks.

THE CAPITALIST OF THE FUTURE

Assuming that the trend of events is shifting the
emphasis in business from ownership to production,
we may expect a new type of capitalist to develop. As
ownership becomes less powerful managerial ability
will come to the fore. To-day the brilliant, forceful,
inventive men who make American business as good
as it is are almost entirely the lieutenants of owners.
They do the work for the " old man up-stairs " or the
figureheads anid reward getters on the boards of di-



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CAPITAL 125

rectors. Lacking the great capital needed in modem
enterprise, they must (as the independent man in feudal
days tied up to some lord) tie-up to some capitalist or
group of capitalists and become " his man." This type
of man even if he draws $10,000 or $25,000 a year is
exploited by our emphasis on ownership as much as the
common laborer. All society loses by having him ex-
ploited and his brilliant possibilities curtailed by the
less able hand of ownership.

As the power of ownership declines, we may expect
to see available capital more plentiful than now. The
power to capitalize the future taken from the few
will throw this factor to the efficient producers. At
present capital is so monopolized that the banker, the
last man to choose for business management, has his
thumb on every business in America. The big banker
has delayed our business development probably as much
as ten years and a break must come. The natural
evolution will be the taking over of monopolies, the
curtailment of the right of inheritance, and the gradual
dissociation of small business and the man of ability
from the large ownership group. Charles M, Schwab,
the well known President of the Bethlehem Steel Cor-
poration, in a recent speech predicted control by the
propertyless class in the near future. The labor fac-
tor will certainly become increasingly important.



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126 AMERICAN CITIES AND THEIR BUSINESS

With Steps in this direction being taken at the rapid
pace characteristic of the modem world, it is not dif-
ficult to imagine as the new capitalist of a few years
hence a man of superior knowledge and dynamic power,
who can get together and hold together an efficient,
harmonious group of workers.

City promotion needs this type of man. He is with
us now in fact but being tied up with some large finan-
cial interest, he is a servant of this interest, hampered
by traditional methods and by the temporary point of
view of his employers. On the other hand the people
associate him with the idle rich or special privilege.
If we are fortunate in our business evolution, this tsrpc
of man will gradually be dissociated from the idle rich
and special privilege, and the people will gradually ac-
quire that all important respect for executive ability.
Gradually he will be in a position to work with rather
than, as is so often the case now, against the interest
of the city.



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CHAPTER VIII
THE CASE FOR PUBLIC OWNERSHIP OF UTILITIES

" I set the assertion that the finest public life will exist in
a community which has learned to combine its citizens in
the largest number of cooperative functions for the common
good." — Walter Rauschenbusch.

The case for private ownership of city utilities is so
constantly presented in books, magazine articles, and
the daily press that a restatement is probably utmeces-
sary. Our whole past induces us to private owner-
ship and the burden of proof is on those who advocate
public ownership as a step in advance. The case for
public ownership has also been well presented by many
writers, although it is not so prominent perhaps in the
minds of our business men. The main object of re-
stating some of the more important reasons for city
ownership is that the theory of city promotion here
given, provides a new approach to the problem and
furnishes a new test that may help many to decide the
issue.

The American business man is like to have a holy
fear of substituting public for private capital. His
experience seems to teach him to fear it, and many

127



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128 AMERICAN CITIES AND THEIR BUSINESS

writers who ought to know better, have held it up as
inefficient and bad for other business. Practically all
the economists of standing have opposed city owner-
ship on economic grounds. Now that experience in
many cities and especially in forced public control of
so many utilities and even factories found in the war-
ring countries, has proved the opposite, private owner-
ship is being defended on other grounds — notably lib-
erty and free institutions.

SERVICE AT COST

The fundamental reason why public ownership of
services naturally monopolistic in character is an
economic success, is that when these services are ren-
dered at cost all free competitive business secures an
important differential over business in other places
not so favored. The point that every business man has
a right to fair profit, about which so much is said in
the United States as a plea for the utilities, has nothing
to do with the question as to whether it may pay other
business to withdraw certain services from the field of
private enterprise. Let there be fair compensation, of
course; let there be a fair profit while the utility is
conducted by private capital. The fair profit, at least,
is necessary to attract the needed amount of private
capital to the service. Quite different is the question



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PUBLIC OWNERSHIP OF UTILITIES 1 29

as to whether business competing with the outside
world would gain by withdrawing certain common
services from the private field.

Utility charges must be higher than cost of produc-
tion by the amount of profit. This profit whether large
or small must, therefore, make the cost to users so much
higher than the cost of production. If the cost of
production were even somewhat higher in the city
owned service, therefore, the consumer would still be
the gainer. There are several factors, however, tend-
ing to make the city cost lower. Capital can be ob-
tained at a lower rate of interest. The high salaries
for financial and political ability are not needed in the
public plant.. The operation is resolved into simply
supplying the necessary units of service. Rather or-
dinary managerial ability and engineering talent are
the requirements. The private utility on the other
hand must have financial ability and it must keep the
political situation lined up.

The efficiencies of privately owned utilities are for
the utilities — new processes, better systems, more
capable management are put in for the profit of the
private owners. Their necessary object must be to
let as little advantage reach the public without appro-
priate compensation as possible. On the other hand
the inside efficiency of the privately owned utility is



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130 AMERICAN CITIES AND THEIR BUSINESS

likely to be low as compared with that of a competitive
business of similar size. There is not the necessary
incentive. A monopoly business decays internally be-
cause it can cover its mistakes by higher selling price.
Efficiency is difficult and is carried to a high point only
under the stress of the competition with others willing
to pay the price and having the intelligence.

UTILITY DOMINATION IS HARMFUL

City utilities are so essential to the business and life
of the city that those who own them dominate the city
business to a large degree. They can decide a good
deal of the possible manufacturing, wholesale and re-
tail development and what resident sections are to be
developed or left undeveloped. Those on the inside of
a transportation utility, for instance, can know before-
hand where developments are to take place,, and they
can discount the land values owned by other people in
other sections. The undesirable congestion in the
Loop District of Chicago is a mystery to those who do
not know that insiders in the transportation companies
are heavy owners of real estate in the Loop District.
That this congestion is bad for the business of Chi-
cago cannot be seriously considered by the traction
companies. There is not a city in the United States
with privately owned utilities whose business is not



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PUBUC OWNERSHIP OF UTILITIES I3I

largely controlled by these interests; it is a natural, in-
evitable condition growing out of the business factors
of the situation.

The utility control of business development is un-
questionable and obvious to any one who has given
much study to utility enterprise. Should the business
of the city competing with the outside world have a
boss or decide its own line of development? Mani-
festly this business ought to know what it needs and
what is advantageous or disadvantageous to itself bet-
ter than outside parties, especially when these parties
have economic ends at variance with those of produc-
tive business. With utilities financed by public capital
and managed by men directly under the city govern-
ment, business competing with the outside world will
be able to control and use these services so as to give
itself differentials.

UTILITIES MUST COMBINE WITH OTHER
SPECIAL PRIVILEGE

Privately owned utilities have two methods of in-
creasing profits open : they have the usual business op-
portimities of adding to profit by increasing sales and
reducing costs, and in addition to these that of se-
curing a larger unit price through political power.
Every utility interest must aim to acquire as much



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13^ AMERICAN CITIES AND THEIR BUSINESS

political power as possible, not only as a means to more
profit, but as a means of protecting itself against price
reduction and stringent regulations. Because these in-
terests represent relatively few people, this political
power can be acquired only by joining forces with
others looking for special favors. The utility inter-
ests must consequently always be lined up with the
sinister forces of the city. The possibility of getting
profits in this manner strengthens the hands of all
those who are working against the city. The public
utility supplies the sinews of war, and the rates charged
bear this burden, for under private management the
cost of public corruption (as it is called) is a part of
the " cost of production."

ONE-SIDED CONTRACTS

The utility franchises are generally granted for long
periods, usually twenty-five years or more. A fair
contract covering such a period is impossible because
no one can foresee the conditions for that length of
time; one or the other of the parties to the contract
will be at a disadvantage. The franchises are gen-
erally so loosely drawn that the utility can escape if an
unforeseen condition cuts into profits, but the provis-
ions can all be enforced against the city no matter how



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PUBLIC OWNERSHIP OF UTILITIES 133

onerous. In private business contracts generally last
only so long as they are advantageous to both parties ;
contracts between the public and private interests, how-
ever, last as long as they are advantageous to the pri-
vate interest. The public, of course, is the constructive
business of the city needing the utility service. From
the point of view of this public in fact, as Tom John-
son used to say, " the best franchise is one that has
expired." The city is then in a position to allow the
public utility to continue serving the people on good
behavior, or to take it at any time under public man-
agement.

PUBLIC OWNERSHIP CREATES CIVIC INTEREST

Wherever public ownership has been tried, the citi-
zens have been found to be more critical of the service
under public control than when it was under private
ownership ; they take more interest in it and are more
anxious to demand and force improvements, all of
which is to the advantage of the business served.
The railroad congestion and failure in the Spring of
19 1 7 would never have been tolerated by our business
men had the service been under public management.
The interest in the city developed by the acquirement
of the privately owned utilities greatly stimulates the



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134 AMERICAN CITIES AND THEIR BUSINESS

interest of the citizen in his city, while at the same
time removing the utility interest from politics. The
city then appears to touch the citizen at more points,
and he is likely to feel that he has much more voice
than formerly in the development of the city. Family
pride and interest develop around family possession
and family distinctions. As some one has said not
much family pride would develop if the family posses-
sions consisted of few odds and ends of furniture.
City pride and interest likewise are dependent on city
possession; the city must have something to be proud
of and activities that demand interest. The interest
in city affairs essential to the most efficient public
operation of utilities will not be developed imtil the
city takes up such active services for the citizens.
The more extensively the city goes into these, the more
citizens it will directly touch and give a logical, day
by day, self-interest reason for paying close attention
to public affairs. Such is universal experience where
city ownership has been seriously tried and on an ex-
tensive scale. There is little reason for expecting this
interest in any but the more farsighted or altruistic
until the city does touch the citizens directly. Then
not only will the utilities publicly owned be made ef-
ficient by the spur of a multitude of watchful critics,
but the whole public life will reach a higher tone.



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PUBLIC OWNERSHIP OF UTILITIES 1 35

REGULATION A FAILURE

For any city, especially the small city, the attempt
to get good, cheap service by means of regulating pri-
vately owned utilities is most wasteful economically,
and probably would not be seriously entertained except
for the ardent desire to harmonize the long established
and seemingly essential custom of private ownership
with the need for better and cheaper services. City
ownership has appeared to have all the terrors of the
unknown. This regulation, however, must always fail
of its main purpose. The most common method
of failure is that by which the utilities gain practical
control of the city government and appoint their own
tools on the commissions, thus presenting the farce
of regulating themselves. Again the utility commis-
sion may fall into the hands of practical politicians
who must fight the utilities to hold favor and who
bear bait the utilities with burdensome exactions un-
necessary from the point of view of the city business
man and citizens. More rarely well intentioned com-
missioners will drive the profits down to such an ex-
tent that capital improvements cannot be provided,
thus weakening the quality of service. In any case
the extra costs of private ownership run on and to
them are added the costs of the city regulation



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136 AlCmCAN CITIBS AND THEIR BUSINESS
PUBLIC UTILITIES AND CITY DEBT

One of the most specious arguments against muni-
cipal ownership of the profit yielding utilities is that
it will increase (he city debt. The total bonds issued
for the water works system of New York, for in-
stance, are stated as city debt and the person un-
familiar with accounting assumes that New York
City's debt is greater by this tremendous sum. Over
against these bonds^ however, is the asset consist-
ing of that wonderful water supply system that can
yield in revenue more than is sufficient to meet the
interest on these bonds and the full expenses of opera-
tion. In its waterworks New York City has a net
asset rather than liability. A municipal balance sheet
would show such facts and it is more than inertia that
prevents cities from using up-to-date accounting
forms. For many interests they would tell too much.

The erroneous principle of regarding the bonds is-
sued by a city for taking over profit making utilities
as a gross addition to the city debt, applied to private
business would demand that all bonds and stock be
considered a debt to be paid off within a few years.
In other words the industry would have to return the
capital as well as provide interest and other costs of



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PUBUC OWNERSHIP OF UTILITIES 1 37

operation, including repair and depreciation. Capital,
however, is almost never so withdrawn, and there is no
more reason why it should be withdrawn in a city
owned utility.

THE COST MUST BE MET

On the other hand there is the assumption that the
city has no obligation to meet if the profitable utility
is privately owned. Yet it ought to be plain that all
bond and stock issues by such a private company are
obligations in that returns on them must be provided
out of the charges for the service. There is much
more opportunity for increasing the obligations to be
covered by the charges, under private than under public
management. Under the latter it can be. increased
only when additions are needed; under the former it
will be increased at least whenever the earnings ap-
proach what would look to the public like a fair return
on the capital. Under the former it will be increased
when insiders see an opportunity to capitalize the
future and get away with the profits in the present.
Yet so long as utilities are privately owned, the cap-
italization must be the basis of rate making, and when
they are taken over this capital, no matter how much
watered, will probably have to be paid for.



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138 AMERICAN CITIES AND THEIR BUSINESS
DANGEROUS FEAR OF THE UNCERTAIN

The strongest factor of a serious, neutral nature
working against city ownership, however, is probably
this : very many business men prefer taking a smaller
profit to the possibility of a larger profit entailing
what appears somewhat uncertain. Many a business
man will say, ^^ We are doing fairly well, why make
such a radical change ? " This attitude is comparable
to that of the business man who argues : " My business
is large enough for me; why should I try to increase
it? " Both attitudes are unsafe in a rapidly changing
business world — especially when those changes are
emphasizing large scale production and larger turn-
overs on smaller margins. Under such conditions the
best is likely to be none too good and the city or in-
dividual enterpriser relying on fair, second-rate, good
enough, will be left far behind. The danger is that
this city or this man will come into competition with
those reaching the best. The best must be aimed at
even at some risk as a means of insuring what the
city already has. City ownership has not been suffi-
ciently common in the United States as yet to become
a prominent factor; no city has more than a little of it,
but in a short time the movement will develop to great
proportions suddenly, and business will swing in great



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PUBLIC OWNERSHIP OF UTILITIES 139

slices to those cities best prepared with it. The enter-
priser in productive business should look on the
economies of city ownership first as a means of con-
serving his present status and second as a possible
source of large differentials over rivals in less venture-
some cities.

In the October, 1916, number of Marine Engineer-
ing, Mr. H. McL. Harding, a well-known consulting
engineer, said:

" There are being built new terminals along the Atlantic
and the Gulf of Mexico. Some of these will overtower the
others. Which city will have the greatest terminals?

" The most successful city-owned port in each state with
the best terminals will become the metropolis of such state.
Such is almost universal history of great modem cities.'*

And again as a conclusion he says,

" In the competition between port cities, a city whose ter-
minals are largely privately owned and controlled cannot
successfully compete with a city whose terminals are owned,
controlled, and operated by the city for the people."

THE FEAR OF EXTENDING SOCIALIZATION

Another somewhat neutral reason for slow progress
in public ownership is the fear many citizens have that
city ownership of public utilities will be the beginning
of a swift end to private business. Rather than sacri-
fice this, they would sacrifice the possible economic



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II40 AMERICAN CITIES AND THEIR BUSINESS

gains from city ownership. In the first place this
view ahnost grotesquely exaggerates the possibilities
of progress in socialization; it foresees possibilities
beyond the hope of the most ardent socialist. In fact
the process of socialization must be slow — a few
steps taken at a time and at most the calamities of
those who fear it, are for other generations who will
know more than we. The tree never grows to the sky,
the baby elephant does not increase indefinitely in
weight. Socialization will probably go only so far as
it is economically valuable to business not socialized,
and to that point it will be desirable. In the second
place an economically valuable step cannot be success-
fully opposed. It may win gradually and with results
of an entirely positive character or it may come sud-
denly with many maladjustments after a bitter
struggle. Those who do not learn to fall in with the
demands and tendencies of ihe age, may be suddenly
brushed aside. We have before us a period of social-
ization, and the only question is — not whether there
is going to be any — but what lines can be profitably
socialized in the near future.

THE PROBABLE UMIT TO SOCIALIZATION

Although no one can pretend to know the future,
it is probable that socialization will go no further than



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PUBLIC OWNERSHIP OF UTILITIES I4I

what IS needed for most efficient production. There
is no reason at the present time why the government
should take over a Ford factory to produce Ford cars,
but there is much reason why it should take over the
railroad system. What is the distinction? There
are several :

Railroad evolution is practically complete; the un-
certainties have passed away, making it comparatively
easy to operate by the government. The present own-


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Online LibraryArthur Benson GilbertAmerican cities; their methods of business → online text (page 8 of 14)