Franklin Henry Giddings.

Democracy and empire; with studies of their psychological, economic, and moral foundations online

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ing that both the business man and the economist have a real
interest in discovering a true and adequate theory of the rela-
tion of the trust to expansions and contractions of production,
and to the course of market prices.

The general public undoubtedly believes that trusts are
able to make consumers pay more for all goods which the
trusts control than would be paid under conditions of free
competition. The economist should be able to say whether
this prevalent belief is a great truth or a great delusion. Let
us, then, look for a moment at the principles involved, and
try to decide whether it is possible to state the economic law
of price in a modern way — by which I mean, a way which
takes account of modern, as distinguished from old-fashioned
and outgrown, business methods.

Imagine a commercial world in which the output of every
important product is controlled by a single organization.
Imagine that the entire wheat crop is commercially controlled
by one trust, the cotton crop by another, the iron and steel
output by another, the paper output by yet another, and so
on through the entire list of marketable goods. In such a
commercial world, so organized, would each of these great
trusts be able to fix prices in accordance with its own desire
to amass wealth and pay dividends, irrespective of the wishes
and efforts of consumers? The prevailing opinion among
consumers is, I think, that just such a thing would happen ;



THE TRUSTS AND THE PUBLIC 139

and therefore the consumer finds himself regarding the trust
as a gigantic power for extortion.

The truth, on the contrary, is that by no conceivable possi-
bility could any such thing happen ; and to make the point
perfectly clear I will ask you to try to follow me in a demon-
stration which, in its reasoning, is essentially mathematical,
but is not especially difficult. Obviously, if every product
were controlled by a single trust, the situation would be pre-
cisely the same, as far as prices were concerned, that it would
be if each product were controlled by a single individual.
Let us, then, designate each product by a single small letter,
«, b, c, d, e, etc., and designate the persons in control of
each product by a single capital letter. A, B, C, D, E, etc.
The commercial world, then, is made up of the individuals
A, B, C, D, E, each of whom is the producer of some great
marketable commodity, and each of whom is the consumer of
the commodities controlled by his fellow-producers. Now it
may seem that A, who, we will suppose, is the producer and
controller of wheat, can compel B, C, D, and E to pay extor-
tionate prices for every bushel they demand, because, since
no one else in the world can supply wheat, they must buy of
A or starve. In like manner, it may appear that B, C, and
D, the producers of cotton, steel, and paper, can charge ex-
tortionate prices because they command the only known sup-
ply. This is the assumption that the general public makes.
It is, however, an assumption which has all the charac-
teristics of an inadequate, and therefore a false, economic
theory. It would be true only on one condition, namely,
that the consumption of goods was strictly limited to those
small quantities that are absolutely necessary to support ex-
istence. That condition, however, practically never exists
in the real world ; for human wants are indefinitely expan-
sive, and every known commodity can be applied to a great
number of different uses besides the primary one of support-
ing life. Wheat, for example, is used not only as a food prod-
uct, but in enormous quantities is converted into starch,
dyestuffs, and other chemical products. Cotton is used not
only for necessary clothing, but in vastly greater quantities



140 DEMOCRACY AND EMPIRE

for purposes of comfort, convenience, and ornamentation.
Paper is used not merely for absolutely necessary records,
accounts, and communications, but in enormously greater
quantities for pleasure, and even for trifling satisfactions.

While, therefore, an individual who absolutely controlled
the supply of any given commodity might conceivably com-
pel his fellow-men to pay extortionate prices for that very
small percentage of his product which was absolutely indis-
pensable to their existence, by no possibility could he compel
them to pay such prices for that vastly greater percentage
which they desired merely for purposes of convenience, com-
fort, and pleasure. This percentage they would buy or not,
according as they thought that they could or could not afford
it at the price which was demanded.

And this is not all. Our comforts and pleasures are ex-
tremely variable things. Very few of us feel in any degree
bound to choose one form of merely convenient or pleasurable
satisfaction rather than another. We have preferences, of
course, but we subject our preferences, after all, to a rather
rigid economic control. If, for example, I think that I would
like a new set of china for my dinner table, but discover that
the price is much higher than I expected to have to pay,
while, at the same time, I discover that some other article of
household decoration, which I had believed to be quite be-
yond my means, is offered at a surprisingly low price, the
chances are that I shall postpone my indulgence in china and
pui'chase the alternative satisfaction. Now this principle, as
everybody knows, is practically a universal law of human na-
ture ; and a law of human nature is an economic law, which
the producers and sellers of goods are compelled, in the long
run, to obey.

What, then, would be the actual situation in which our
imaginary producers. A, B, C, D, and E, each having absolute
control of a particular product, would find themselves placed ?
They could, if they chose, limit production to those very
small quantities of Commodity which men must have or die ;
but if they did this, A, B, C, D, and E would themselves live
and die poor men. No great fortune would ever be amassed



THE TRUSTS AND THE PUBLIC 141

by that policy. The alternative confronting them, then,
would be to encourage the development of a multiplicity of
uses for their respective products, and a liberal consumption
to be met by a large production ; and this they could do only
by offering their goods at reasonable prices.

This alternative adopted, our imaginary producer would
instantly make a most interesting discovery — the discovery,
namely, that he was living and producing in a world ruled
by competition, and not, as he had supposed, by monopoly.
Until now he had imagined that the only kind of competi-
tion which he had to fear was' a competition between him-
self and some other producer of the same sort of commodity
which he was producing and offering. That is to say, A had
thought of competition as coming only from some other A,
A,' A," etc. B, in like manner, had thought of competition as
coming only from some other B, B,' B," etc. and he had sup-
posed that in getting rid of such competition he had suppressed
competition for good and all. But now he discovers that the
real competition of the real business world is not the compe-
tition between A and A,' or between B and B'; it is the com-
petition between A and B, between A and C, between B and
C, between C and D, and so on. In other words, it is not
the competition between one seller of wheat and another
seller of wheat, between one manufacturer of cotton and
another manufacturer of cotton, that really rules the business
world ; it is rather the competition between the producer of
wheat and the producer of cotton, the producer of cotton and
the producer of iron, the producer of iron and the producer
of paper, and so on, which really controls the course of prices.
This competition is real, it is inevitable, it is controlling,
because of the ineradicable fact that each of the p;roducer&
is appealing to a consuming public whose purchasing power
is limited. The consuming public is not at present, and so
far as human foresight can now perceive it never will be, in
the enjoyment of an unlimited income. Consequently, if
the world buys more wheat, more cotton, and more iron, it
will, sooner or later, and for a limited time, buy less paper,
less china, less furniture, and other things. Every industry,



142 DEMOCRACY AND EMPIRE

then, is appealing to a consuming public to which every other
industry is appealing, and which cannot buy unlimited quan-
tities of commodity from each industry. This simply means
that when one group of producers demands unusually high
prices, all other groups of producers can very considerably
increase their sales, in virtue of that law of human nature
according to which men can and do, to a great extent, sub-
stitute one group of conveniences and pleasures for another,
postpone certain enjoyments for a time, and distribute their
expenditures at all times in such a way as to obtain the
greatest satisfaction for a given outlay.

Dropping now this figure of an imaginary world in which
each product is absolutely controlled by a single producer,
we observe in the actual business world of to-day a certain
approximation to the condition of things which has been
described. Nearly every important industry is now con-
trolled by a trust or a business organization closely resem-
bling a trust. This means that, to a considerable extent, the
competition of A with A,' of B with B,' and of C with C/
has been brought under control. It does not mean and it
cannot mean that the competition of A with B, of A with
C, and so on through the entire list has been suppressed. It
still remains true that the greater part of nearly every com-
modity is produced to satisfy the demands of comfort and
convenience, rather than those of absolute necessity. It still
remains true, furthermore, that consumers can and will cur-
tail any particular group of comforts and conveniences when
their prices rise beyond a certain limit, and expand the enjoy-
ment of other comforts and conveniences if their prices are
lower. It still remains true, in short, that producers organ-
ized into trusts, quite as much as producers who compete
with one another, are offering their commodities to a con-
suming public whose annual income is a limited amount
of purchasing power, — a public which, therefore, distributes
its commercial favours unequally among all these different
trusts, and therefore compels the trusts to compete with one
another, however perfectly each trust may have suppressed
competition among its own producing members.



THE TEUSTS AND THE PUBLIC 143

There need be no fear, then, I take it, that the consuming
3)ublic is to be brought under economic subjection by the
trust. Competition disappears in one form only to reappear
in other forms. Economic law is as inexorable as 'the law
of gravitation, and business will never cease to be controlled
by it.

The trust, like any other form of human organization, may
do evil as well as good ; but it is not now my purpose to dis-
cuss the trust in its moral aspects. Much harm, I think,
has been done already by confusing the moral, the legal, and
the political aspects of trusts with their economic function.
No sensible man would think of condemning a business career
as immoral, as illegal, or as contrary to public policy just
because business men have been known to cheat their cus-
tomers, to defraud their creditors, and to bribe officials. Is
it any less irrational to denounce the trust as an unrighteous
invention because trusts have been known to do things which
the moral consciousness of mankind condemns, and which
good citizenship pronounces contrary to public policy ? The
trust should be dispassionately regarded, and calmly studied
^s a form of organization which is powerful for both good
^nd evil; and it should then be held by the public to the
same moral responsibility to do good rather than evil, which
the common conscience of mankind imposes upon the indi-
vidual. The trust, moreover, is a legitimate source of public
revenue and should be subjected to a just taxation. My
■effort in this paper has merely been to show that, if the trust
conducts its affairs within the limits of morality, law, and
public policy, it cannot long inflict serious injury on the com-
jnunity in consequence of its strictly economic functions.



VIII
THE RAILROADS AND THE STATE



VIII
THE RAILROADS AND THE STATE

In the United States the relation of the railroad to the
government has assumed, at some time and place, every
possible form, from an uncontrolled private ownership to
ownership and management by the state itself. The views
of economists, legislators, and business men as to the best
solution of the problems presented by the conflicting interests
of stock and bond holders, directors, shippers, and the public
at large have a correspondingly wide range. The present
drift of both events and thought is strongly toward a ju-
ridical and administrative compromise, of a kind that is in
perfect keeping with the historical characteristics of Ameri-
can political development. However European nations may
solve such problems, we shall solve them ourselves in a way
of our own.

The conditions that have given rise to these problems have
so often been described in recent years that it is unnecessary
to rehearse them in any detail. Railroad mileage and traffic
have grown with a rapidity that have made all conditions of
cost and value unstable, and all methods of management
experimental. The expectation entertained in the early days
of railroad building, that competition would regulate charges
and profits as unfailingly and as simply as it once regulated
them in wholesale trade, was entirely disappointed. Com-
petition is found to be a vastly more tremendous force than
could have been dreamed of, but it works with ruinous
irregularity and inequality, reducing service almost to a
gratuity in one place, while failing to reduce excessive
charges in another ; at one time carried on between different
lines with reckless fury, at another time giving place to

147



148 DEMOCRACY AND EMPIRE

combination and pooling. The opportunities for directors
to make great fortunes at the expense of investors have
been almost unlimited, and they have been diligently
improved. Individual and local discriminations for a long
time were carried so far that at last they exhausted the
patience of a people which, on the whole, submits to imposi-
tion more good-naturedly than any other in the world.

Shall these evils be left to correct themselves if they will,
or shall the state attempt to correct them, and if so how?
The first of these questions has been answered for at least
the time being. Faith in a self-correcting virtue has died
out. State action has begun, and its continuance is in-
evitable. There are two forms that it can take, namely,
state ownership and state regulation. In regard to each, we
may raise questions of moral right, of expediency, and of
probability. The question of legal right is a question solely
of the sovereign will of the people, which makes legal rights
and destroys them, but which, is itself always profoundly
influenced by considerations of moral right.

The question of moral right is, therefore, fundamental. Is
the right to make money by means of certain opportunities
conferred by the state, one which the state has no moral
right to recover? Are the values of railroad property so
entirely a creation of private effort that the state may not
interfere in their administration?

The right of the state to take possession of the railroads
by honourable purchase at a just valuation, is never
questioned except among the few who deny that there
is a moral basis for governmental functions beyond the
preservation of order and the enforcement of contracts, and
by the still fewer who deny the validity of any governmental
action whatsoever. Those who hold that government is justi-
fied by necessity, if not, indeed, as Aristotle taught, as a
means to the moral development of man, will not claim that
any particular class of citizens has an irrevocable right,
against society as a whole, to such opportunities for money
making as railroad transportation affords. The opportunities
were conferred by the state ; the state, by an honourable bar-



THE RAILROADS AND THE STATE 149

gain, may recover them, and it may then refuse to reconfer
them.

The right of the state to impose conditions on private rail-
road property and to regulate its management is more difficult
to state clearly and simply, but it is no less certain. Of no
railroad whatever has the value been created by private effort
alone. The very first factor in the creation of railroad wealth
is contributed by the state. Nothing can be done toward the
construction of a line until right of way is secured, and it is
doubtful if right of way through ten miles of country farms,
to say nothing about city building lots, could be obtained
without an exercise by the state of its right of eminent do-
main, whereby land is condemned to the proposed use, and
the owners are obliged to accept a compensation fixed by
judicial process. And this is not all. It has become a pos-
sibility for one man to own a whole railroad system, but no
one man could have built a railroad system in the first in-
stance, and no number of men in the early days of railroading
would have risked their capital in a railroad system under
the law of ordinary partnership, which makes each partner
individually liable for the total obligations of the enterprise.
Another form of organization was necessary, which should
have special legal powers and privileges, and in which an
individual's liability should be limited in some proportion
to his investment. That form was found in the joint stock
corporation, an artificial legal person, created by the state
for no other reason whatever than the expectation that it
would promote the public welfare, and over which, there-
fore, the state has at least as much moral right of control,
to any extent necessary to insure the public welfare, as it has
over natural persons. And this moral right has abundant
expression in legal right.

Aside from special constitutional and statutory provisions
in each commonwealth for the government of corporations,
there is a body of common law of fundamental importance
defining the rights and obligations of common carriers, which
the courts are expected to enforce, and in full knowledge of
which railroad enterprises are undertaken. These laws are



150 DEMOCRACY AND EMPIRE

the substantial basis of an indefinite control that may be ex-
ercised by each state within its own boundaries.

That wider control, which only the nation can exercise,
is Tested in the Federal Government by the constitutional
provision expressly conferring upon Congress the power to
regulate commerce between the states.

The question of the comparative expediency of state own-
ership of raiboads on the one hand, and of governmental
regulation on the other hand, opens up considerations so
many and so involved that volumes would be necessary for
any thorough discussion of them. In an article like this it
is possible only to point out a few of the more important
conditions on which the answer turns.

It is held by many economists that a business which is by
its nature a monopoly is properly a function of government,
while business that is self-regulated by competition is properly
a function of individuals.

Any business tends to become a monopoly when consoli-
dation of plant and management secures such important
economies that the public can be better served by one con-
cern than by two or more. That this is true of railroads, few
well-informed persons any longer doubt, and not many com-
petent students any longer deny that business of this nature
either should be owned by the public or should be subjected
to administrative regulation by the government. Public
opinion has rapidly settled toward this conclusion, but there
is still a wide divergence as to whether public regulation
or public ownership is the wiser plan. Thus, for example,
while many cities are experimenting with municipal owner-
ship of gas and electric lighting plants, Massachusetts has
placed all her gas and electric lighting companies under
regulation by a commission.

Public ownership involves great difficulties and some dan-
gers that cannot be ignored. For one thing, we cannot be
sure that it will stop with those businesses that have the
monopolistic character now. The growth of trusts suggests
the possibility, at least, that the production of nearly all the
great staples of commerce may drift under centralized man-



THE KAILROADS AND THE STATE 151

agement. But even if this does not happen, the objections to
public ownership and management, of even a comparatively
few great business undertakings, are serious, from an eco-
nomic no less than from a political standpoint.

President Hadley has summarized the economic objections
in his proposition that it seems to be difficult for a govern-
ment to manage a great business interest so as to combine
economy with a progressive policy. There are examples of
careful economy with low prices of service, as in the state
railroads of Germany, but the service in these cases is inferior
to that offered by private corporations in the United
States. The usual superiority of private management in
this matter becomes conspicuous in great emergencies. The
energy displayed by the Pennsylvania railroad, in reestab-
lishing its through traffic after the Johnstown flood, was
something not to be expected of any governmental business
management that we are acquainted with at present. On the
other hand, governments may give, on the whole, better ser-
vice than private companies, but at the expense of taxpayers.
It is possible that state administrations will yet solve the
problem of uniting economy with enterprise more success-
fully than private management can do it. If it does, one
great objection to state ownership of railroads will disappear.

We need not dwell on the political difficulties involved in
an enormous extension of the civil service and in the tempta-
tion to conduct a public business that touches vitally every
locality and almost every individual in such a way as to in-
fluence elections. But there is one difficulty which is so
peculiarly an American difficulty, and which is, neverthe-
less, so often left out of consideration, that it calls for ex-
plicit statement.

As a people we are deficient in certain characteristics and
habits that would seem to be essential to a successful govern-
mental management of railroads. We have not been used
for generations to having governments do many things for us,
least of all to manage great industrial enterprises for us.
The popular thinking has not been trained into a form to
enable it to guide wisely, to criticise judiciously, an admin-



152 DEMOCRACY AND EMPIEE

istration undertaking such functions. We have a belief — be
it true or false, still a firm conviction — that the American is
peculiarly qualified to manage great undertakings by private
enterprise, and a popular willingness to look on at this sort
of management, wonder at it, and see what will come of it.

It is, indeed, no more true of us than of other nations, that
all industrial undertakings can be better carried on by indi-
viduals than by governments. But just what undertakings
will be better handled by government, and what by individ-
uals, is peculiarly one of those matters that will always be
determined for each state or nation largely by its own char-
acter, habits, and traditions. In this country the competition
of waterways has hitherto been a chief factor in determining
railroad tariffs ; and it happens that through various causes,
some of them historical, the development of inland naviga-
tion has never enlisted the earnest effort of private capital ;
it has always been a matter for governmental administration,
and in all probability it always will be. In the case of
railroads, on the contrary, Americans have manifested a
remarkable genius for private administration, and none at
all for governmental management. We should seriously
consider whether this is not the real secret of the failure
successfully to manage so important a property as the
Hoosac tunnel and its connecting railroad by a state Hke
Massachusetts, which has done more than any other state in
the Union, by means of various administrative commissions,
to hold corporations of all kinds to their public responsibili-
ties. To one who watched the histoiy of that enterprise



Online LibraryFranklin Henry GiddingsDemocracy and empire; with studies of their psychological, economic, and moral foundations → online text (page 12 of 29)