April, 1931.
Prologue: The Masquerader
The Gentleman Crook
A favorite theme of romance is found in the adventures of the gentleman crook who reaps rich illicit rewards while eluding the officers of the law. Dressed in a clever disguise, he lives a life of thrilling danger but always escapes detection. The debonair Aristide even talks to the police who are on his trail, without their suspecting who he is. A special detective is engaged for the express purpose of running him to earth, but is so captivated by his engaging manners that he declares Aristide to be an estimable gentleman, an ornament to the community. A most narrow escape he had when, wearing his disguise, he was haled before an august court and the wise judges went so far as to agree that the evidence showed that Aristide may have violated the law some years before, but they could not bring themselves to believe that one of his attractive appearance could still be breaking the law. This incident served as a sort of vindication of good character, and Aristide went out to ply his profession more skillfully and easily than ever among the unsuspecting. Of course in the end the cruel Fates ought to overtake him and he ought to meet the punishment due to his misdeeds. But we dread to reach that sequel. Almost we have forgotten, as we follow the clever escapades of this lawless hero, that our sympathies belong on the side of law and order. We find it hard to sympathize with the slow-witted and blundering officials, and hard not to admire the ingenious way in which the hunted lawhreaker, apparently calm in the midst of every danger, puts their efforts to naught.
The astute reader has already discerned that this Story of the Artful Aristide is merely allegorical. The very title of our book gave a clew to our meaning. The shifty gentleman criminal is Monopoly with its many shady practices in violation of the letter and spirit of the law; and the particular disguise that most successfully has concealed the identity of Monopoly is the basing-point practice. Unhappily for the cause of wise legislation and of good government, a plain impersonal account of business evils has not the fascinating interest of a detective story. When the public feels sure that it is suffering from some industrial ills such as monopolistic prices, it is ready to clamor for some kind of legislative remedy. But when the nature, extent, and even the existence of specific evils are in doubt, and when a clearer understanding of the subject would require patient and prolonged study, the public is likely to be merely bored. Besides, a description of impersonal economic forces and their action has not the romantic charm of personal adventure, although the results of such forces are incomparably more injurious to the general welfare than are the doings of any single super-criminal.
Leading A Charmed Existence
To citizens concerned with the solution of great public questions of an economic nature, no subject is of greater importance than is monopoly and its development in America since 1865. Discrimination was not unknown before, but the basing-point system of discriminations appears to have been as truly an invention of our own times as were the machine-gun, the aeroplane, and poison gas. The plain facts about it may seem at first incredible. For years it led a charmed existence, seeming to wear a magic cap of invisibility so that even those who were paying artificially enhanced prices usually did not know just what was being done to them. Local monopoly has seemed to be endowed with a strange hypnotic power that deluded the spectator. Buyers, like Titania on midsummer's night fondling the ass's head, have sworn upon the witness stand and before our high courts that they saw only economic beauty there. The buying public and the courts have looked upon the ugly face of monopoly and have seen in it only the friendly features of competitive price.
Even the masters of monopoly, or their very talented legal advisers, have not always understood exactly the economic nature of the masquerader whose identity they were concealing. However, they have known full well that this practice of discrimination, which like a gift from the gods had been dropped into their laps, gave them a most effective power to restrain competition and to secure with their competitors agreements and common action that otherwise could not legally be secured. They knew it resulted in higher prices and larger profits, while deceiving the public and "getting by" in the courts.
The Industrial Commission Tries
Following the great business depression of the middle 'go's, there began about 1897 a revival of business, and with this a rapid increase of the movement toward mergers, combinations, and agreements in restraint of trade, things which had begun to be noticed two decades earlier. Public opinion became much aroused on the subject, and discussion of "the trust problem" became more active than ever before. As a result of this, more than of anything else, Congress in June 1898 created an Industrial Commission to investigate and report upon the problems presented by labor, agriculture, and capital. This rather formidable body consisted of five Senators, five members of the House of Representatives, and nine other persons appointed by the President to "fairly represent the different industries and employments." It had the aid of numerous special experts and of a bevy of clerks, and before it finished its four-year task, expended several hundred thousand dollars and collected much interesting and irrelevant information on many topics.
Its first preliminary report (March 1, 1900), after two years of labor, was on the subject of Trusts and Industrial Combinations, a bulky volume of 1600 pages and of more than 1,000,000 words. It has something to say of the cruder form of predatory local price cutting, but from cover to cover not one word about the most subtle and dangerous practice of discrimination connected with delivered prices. Although the honorable commissioners and their staff of experts must have rubbed elbows many times with the mysterious masquerader, they had never penetrated his disguise. Almost two years later (December 1, 1901) another volume nearly as large appeared on the same subject (Vol. 13, of the Commission's Reports).
After You, My Dear Gaston
Meantime great things had been happening in the field of industrial combinations. Under the very eyes of the Commission, and as if in contempt of its activities, the first billion-dollar corporation that the world had ever known was created as a holding company in February I90I. In the following May the Commission staged a dramatic event when Mr. Charles M. Schwab, the youthful president of this new giant in business, was introduced, was duly sworn, and took the witness stand. It was great newspaper copy, and the public eagerly read his testimony, to find that it was almost lacking in any facts not already known to the public. For the most part he was allowed, without embarrassing interruptions, to recite the prosy and familiar annals of the organization of the United States Steel Corporation. Most of the questions asked him were singularly considerate. An atmosphere of deference toward the genial young Colossus of the business world filled the room. This was a tribute to his frank and winning personality quite as much as to the staggering business power which he personified.
Many years later he said of himself: "Here I am, a not over-good business man, a second-rate engineer. I can make poor mechanical drawings, I play the piano after a fashion; in fact, I am one of those proverbial jacks-of-all-trades who are usually failures. Why I am not, I can't tell you." This is becomingly and sincerely modest, but those present on the day we are describing, though blind to the most significant incident in the whole day's events, could not but feel and acknowledge the very real qualities fitting him for business leadership. That day, by his disarming charm, he earned his salary for many years, when a less skillful handling of the situation might easily have altered the whole course of "trust-busting" history and have led within a short time to the dissolution of the greatest existing industrial combination.
The questions asked by the examiners served mainly to give the witness occasion to express his personal belief that the formation of the combination had resulted in various ways only in good, and especially to the public. For a few critical moments, however, the spirits that preside over our economic destinies must have been thrilled with expectation as they listened to question and answer. The subject of prices being lightly touched upon, the witness thought that they were "largely regulated as a question of supply and demand," the magic phrase that banishes all doubts when monopoly is suspected.
The Pack Hits The Trail
The examination was nearing the end when, seemingly by accident, out of connection with anything that had gone before, the expert on transportation opened up a new line of inquiry and a long exchange of questions and answers ensued, of which the following brief verbatim sample may serve to show the character.
Q. (By Professor William Z. Ripley.) Are you familiar with the system of selling goods delivered by the constituent companies? A. Yes. It is simply the fixing of the price that you expect to receive for your goods at the central point plus tariff rates of freight.
Q. Are not the goods as sold and delivered all based on the rate from Pittsburgh? A. If Pittsburgh is the central point, yes. We have to sell at one central point at which deliveries can be collected, and I think Pittsburgh in most instances has been the central point.
Q. Would that be the system when you take in a number of factories or mills not located at Pittsburgh? A. Yes. I don't see any other plan of doing it; you must establish some central point. (1) And the witness continued to recite a jumble of guesses and misunderstandings and misinformation, the nature of which is indicated in our further comments.
Here was the policy of local discrimination, more specifically that of basing-point delivered prices, stalking boldly through the room, but so disguised by the description that not an eye there saw it in its true character. (2) Never again was the subject referred to directly in the examination of this or of any other witness testifying before the Commission. This particular bit of evidence appears in neither digest nor summary, and is strangely ignored in all the conclusions and recommendations of the Commission and in its 10,000,000-word report. While it was off on false trails, a price policy that was to be for many years the most effective tool of monopoly and was to cost the users of steel and of other basic materials myriads of dollars, was made to appear to the eyes of all present to be but an innocent agency of competitive business.
The Windings Of The Fox
This extraordinary piece of testimony has valuable lessons for the study of the trust problem in the first quarter of the twentieth century. The witness declared that he was familiar with the system of selling used by the constituent companies of his corporation, but it is charitable to believe that he was not. There can be no doubt that he was describing the system of "delivered prices" known as Pittsburgh-Plus. Even before the U.S. Steel Corporation was formed, this system of discriminatory pricing and charging for steel had already been used by its constituent companies and by their competitors under agreements of now unquestioned illegality. It was to play an ever more important role in the years to follow. But no one could get from the description given by the witness a correct understanding either of what was actually being done or of the real motives for doing it.
Look at the plausible expression, "the central point." The central point of what? Of production or of shipment? The witness immediately gives the phrase the latter significance. "We have to sell at one central point at which deliveries can be collected, and I think Pittsburgh in most instances has been the central point." He could not "see any other plan." Here the central point is a sort of jobbing or warehouse center, where various grades and patterns of goods are actually, physically, brought together from outside mills to make a single shipment (possibly to save freight costs or trouble). Now it would be hazardous to assert that this sort of thing had never been done in a single case, but in studying thousands of pages of testimony collected in later cases we have found no trace whatever of any such practice. If it had occurred, it would have been lacking in the most essential feature of basing-point prices, as then actually in practice, namely the charging of imaginary freight on goods not collected at a central point but shipped from some other point, the mills where they were produced.
Where Ignorance Was Bliss
Was Mr. Schwab answering in ignorance of the real nature of the practice? Well, it is the duty of the sales department to attend to such minor matters. Perhaps it is the duty of the president of such a corporation not to know about them.
Other questions led the witness upon even more dangerous ground. His attention was called to complaints by customers that they were charged not the actual freight from the place of shipment, but more. Mr. Schwab replied, "If you will point out a method of avoiding that we will be very glad." Hence this book, to make glad the hearts of the monopolists. The witness appeared strangely ignorant of the usual practice in other lines of business (and a short time before in the steel industry) of selling at a uniform mill-base price. He felt this practice of making Pittsburgh the basing point for goods made in, and shipped from, mills not in Pittsburgh, to be a natural necessity in the steel business. But there was no such natural necessity before the various great combinations were formed, although the same thing had for some years been done intermittently by artificial agreement.
The witness evidently felt that he was on treacherous ground, so he proceeded warily. Replying to the question whether there was possibility of this policy developing still further by reason of the Steel Corporation's control of works in widely separated parts of the country, he hesitated and hedged, but opined "upon first thought that there is not much likelihood of any further extension in that direction." Perhaps he believed the plan to be already in operation in all the mills of his company. That seemed to be implied in his statement: "I do not see where it [any further extension] could occur at this moment."
He thought that most of the constituent companies published freight tariffs based on Pittsburgh like that of the National Tube Company, of which the examiner had a copy. But a moment later he hastened to deny this: "That has not been really the case," and he harked back to the idea that this one company (the National Tube) charged freight from Pittsburgh simply because "practically all goods sold by that company go from Pittsburgh, and it was perfectly fair, therefore, to say what the rates of freight would be from specific points." This implies that it would not be "perfectly fair" under other conditions. The witness left the final erroneous impression that (excepting the National Tube Company) the practice of "equalizing freights" was hardly in use at all. "Now, if you take the goods sold by two or more constituent companies, then no such list has been prepared," said he, and he quickly shifted the subject to rails.
The Advantage Of Location
Now rails, as every student of this remarkable price policy of Pittsburgh-Plus now knows, had been the one outstanding exception, the only great class of steel products, that had rarely if ever been sold in that way. It was a good attempt to cover the tracks of this policy; but the transportation expert who "knew his freight rate stuff" was hot on the trail, and in the end barely missed running the fox to cover. So back comes the question to the sale (at the Pittsburgh-Plus price) of steel shipped to Savannah from Birmingham, then a competitor. The witness admitted that competitors (as well as the U.S. Steel's mills) did this. Now the questioners were most eagerly seeking to discover some evidence that the big companies were trying to crush out the little companies. But the witness was able in this case to disclaim such a treatment of his competitors: "That was their advantage; they got a higher price; they reaped an advantage from their location . . . a natural thing for them to do." Again he declared "any manufacturing firm has the rights to all advantages of location."
This generous gesture of the Steel Corporation, like the flourish of a prestidigitator, served to distract attention from the other hand and what was up the sleeve, to wit, the fact that this same Pittsburgh-Plus price policy not only was tantamount to agreed prices followed by all the independents, but enabled every one of the numerous mills of the Corporation outside of Pittsburgh to get higher prices, and to "reap an advantage from their location"—an advantage greatly increasing in later years. This was not a natural advantage, as the witness asserted, but one created by the artificial system of pricing, built on the fiction that all goods, no matter where produced, were shipped from Pittsburgh.
The business which the witness thought entitled to the advantage of location was steel manufacturing, and the advantage consisted in exacting a higher net price and profit from buyers near mills than from those farther away. The advantage consisted in the power each mill not at the basing point has under the basing-point practice to "soak" the neighboring customer good and hard. But what about the advantage of location to the users of steel nearer to the place where steel is produced? Oughtn't they enjoy the "natural" advantage of their location? It used to be so, before the days of agreements, combinations, and Pittsburgh-Plus. If we can speak of what is natural, isn't it "natural" for oranges to be cheaper in California or in Florida than in Canada, and for wheat to be cheaper near the farm where harvested than in the distant city? Distance from the source of production and freight costs have seemed "naturally" to make a difference by increasing prices ever since commerce began, and nearness to reduce them. Fortunately for the witness such embarrassing questions were not raised then, or for many years later.
An Errorless Fielding Record
In answer to the question whether "all parties producing for the market agree to deliver as if goods had been shipped from a single point," the witness made the oracular admission: "I think where such sales are made in that way that is substantially correct." As it was shown that sales were made in this way over a wide territory, the witness by implication admitted this was by agreement with competitors. But that was done in an unguarded moment, and it is hardly fair to chalk this up as an error to spoil a perfect fielding record for Mr. Schwab as a witness for his company on that day. Anyhow, the error let in no runs, and the opposing team made no tallies later.
The examination soon trailed off into harmless issues such as railroad building, control of ore supplies, etc., and never came back to local discrimination. The day ended with smiles and general good feeling, but if the American public which buys steel products had only understood what was happening, there would have been weeping and wailing in the land. Surely the young Mr. Schwab earned his salary that day; no one could have done it better.
Another Detective Bureau
Several years had passed since that day of eminent testimony. One result, more or less directly the fruit of the Industrial Commission's work, had been the creation of the Bureau of Corporations in the Department of Commerce and Labor. This was in the vigorous days of Theodore Roosevelt's administration, proclaiming a new era in economic legislation and reform. A spirit of youthful optimism pervaded Washington. All things then seemed possible, for all things were untried. A member of the mythical tennis cabinet, high in the favor of the President, was a young lawyer from Cleveland. Taking office as Commissioner of Corporations in February 1903, with legal training, but innocent of any special knowledge of economics either theoretical or applied, he had, at the time of which we are now to speak, been nearly three years in office, energetically endeavoring, with the aid of a staff of nearly a hundred assistants and clerks, to perform the new task assigned to him. His chief duty as defined by the law was to investigate diligently the organization, conduct, and management of corporations engaged in interstate commerce. The purpose in collecting this information was not, as in the case of the Interstate Commerce Commission, to enforce the law,
but rather to aid Congress in the making of new laws. (3)
A Fresh Clew
In the closing days of 1905 economists from many universities were meeting in Baltimore, and a little group of them called by appointment upon the Commissioner of Corporations at his office in Washington. Their object was to learn how the work of the Bureau was progressing and to have an informal discussion. It was evident (and later confirmed by the published reports of the Bureau) that the Commissioner (as were his successors) was more interested in the legal aspects than in the more fundamental economic aspects of the monopoly problem. One business practice, however, had particularly attracted his attention. It seemed to him to be new and interesting, and he asked his callers their opinion regarding it. He had found that some factories were accustomed to deliver their products to distant customers at a net price as low as that at which they sold to customers nearer to the mill, if not lower. What did the economists think of that? One of them ventured the opinion that this was discrimination against local buyers and was uneconomic, causing cross shipments and lost energy in mutual encroachment by producers upon each other's natural markets. From this the Commissioner dissented, showing that his question had been asked only in courtesy, as he already had made up his mind on the subject. He was inclined to think that it was only by thus cutting net prices or paying the freight that the benefits of competition could be extended to all parts of the country. He felt that when factories were large and widely scattered, this cutting of prices so that each would sell to the door of the other's mill was the only way that competition could be preserved. His view was the popular one, shared by Congress and later by a majority of the Supreme Court. (4)
But No Arrests
Evidently, however, the Commissioner never felt confidence enough in his theory nor clear enough on his facts to publish them in his printed reports. Nor is it possible to be sure, from his brief mention of the practice, just what variety of local discriminatory prices had attracted his attention. It might have been one of several kinds or a mixture of them, according as sales were made from a single mill or from different mills and by different rules. We now know, however, that at that time and throughout that period these various forms of local discrimination were being practiced, and that they were, and continued to be, an important feature in monopolistic policy. The true nature and effects of these practices was never appreciated by the succession of legalistic Commissioners of Corporations, no one of whom referred to this question in the reports of the Bureau before it was merged into the Federal Trade Commission in 1914.
The investigations of the Bureau into the economic aspects of corporations were mostly given to futile studies on costs of production, made without a clear conception of the economic meaning of "costs." After most of this work had been done, at an outlay of many hundred thousand dollars, the Commissioner holding office in 1912 claimed as a distinctive merit of the Bureau's work that it had shown (what competent economic theorists already knew) that book costs "are more or less meaningless," for various reasons. (5) Meantime the nearer, simpler, more hopeful task of regulating business practices to stop local discrimination was untouched by the Commissioners in their eleven years of service. When they were looking through their legalistic glasses directly at a discriminatory practice built on monopolistic power, they thought they were seeing true competition.
An Eventful Career
These are but glimpses of the elusive and deceptive practices of local discrimination before 1905. As our story proceeds, we shall see how the Supreme Court was misled in the greatest law suit ever involving an industrial enterprise; how a majority (though usually only a bare majority) of our highest court has been blind to this issue when important economic cases have come before it; how Congress has been confused in its attempts to frame new legislation to deal with the trust problem; how the Federal Trade Commission wavered and blundered, though at last it began to grope its way out; how the great patient public, long slumbering on this issue, began to waken, to comprehend, and to mutter discontent. All these things will be described in the following chapters in which will be traced the devious career of masquerading monopoly.
Chapter I: Oil And A Puzzled Court
An Epoch-Making Case
In May 1911 the Supreme Court of the United States handed down the most notable decision it had ever rendered on a case brought before it under the Sherman Anti-Trust Act of 1890. Confirming in all but certain "minor matters" the decision of the lower Federal Court, this decision decreed the dissolution of the then most notorious of the trusts, the Standard Oil Company of New Jersey.
This decision had been long awaited, both by defenders and by critics of this particular corporation, and by friends and enemies of the movement toward monopolistic organization. The attorneys for the Corporation had tragically warned the Supreme Court before its decision that "such a decree" (as that already rendered by the Court below) "if carried to its logical conclusion attacks the very foundations of the modern business world." (1) On the other hand the general public, with its fear of great combinations, was both dazed and elated at what at first view appeared to be the legal victory by unanimous decision on the major issue of dissolution. This decision was followed two weeks later by one dissolving the American Tobacco Company, supported by very much the same reasoning. The members of the Bar were much divided as to the significance of the two decisions, especially in respect to the so-called "rule of reason" there enunciated and christened for the first time.
The Standard Oil Company had, in the period of reckless business methods and "trust" formation between 1870 and 190l, incurred the greatest odium in popular opinion. A great sinner no doubt it had been, but in the public's thought it had become the scapegoat for the sins of all the other corporations grasping for monopolistic power and profits. The story of its great and noble deeds, as told by its promoters and by its lawyers, fills many volumes; the story of its misdeeds, as told by its competitors and victims, by prosecuting attorneys and by tribunes of the popular cause, is equally voluminous. In part these stories, amply documented with evidence taken from public hearings and court records, are real literature, warm with emotion and throbbing with moral fervor. (2)
The Original “Trust”
It is not our purpose to relate this oft-told tale. Much of it has now merely an historical interest in the changed conditions which have developed since the notable decision of 1911— however much or little that decision contributed to bring about the changes. Indeed the Standard Oil Company or group of companies, in the last decade or more, has taken a very different position in respect to its business methods in its treatment of the public and its employees. In contrast with some business rivals in oil whose deeds became a public scandal especially after 1921, its titular spokesman has increasingly won the esteem of the once hostile public by standing for decency and right in business. For the purpose, however, of throwing light upon the subject of industrial price policies, we must recall the circumstances of the famous case.
The Standard Oil Company in some guise or other had been for forty years, since about 1870, almost continuously before the courts as well as before the bar of public opinion. After operating separately under various forms, forty different corporations had been in 1882, by a "trust" agreement, brought under a unified control. This fact doubtless was the main cause of the change that took place about that time in the meaning of the word "trust," making it both legally and popularly a synonym of the word "monopoly." (3) In 1892 this trust was declared by the Ohio Supreme Court to be void, and in 1897 proceedings were brought by the Attorney General of Ohio to show that the trust had not in fact been dissolved. Therefore in January 1899 the charter of the Standard Oil Company of New Jersey was amended so that it became a holding company for the stock of the companies formerly comprising the "trust."
The Legal Mill Begins Grinding
The Industrial Commission made the organization and methods of the Standard Oil Company one of the chief subjects of its inquiries between 1899 and 1901. (4) From 1903 to 1907 the newly created Bureau of Corporations carried on an extensive investigation of petroleum prices in all parts of the country. Before this was completed the Attorney General of the United States filed a bill of equity, November 15, 1906, in the Eastern Federal District of Missouri to enjoin the Standard Oil Company (together with about seventy subsidiary corporations and seven individuals who were the chief stockholders) from continuing the combination. November 20, 1909, the Circuit Court rendered a unanimous decision holding their combination to be "in restraint of trade" and "to have monopolized," and rendering a decree of dissolution against the seven individuals and thirty-eight of the corporate defendants. From this decision "the offending corporation" (words of the Supreme Court) appealed, and with a formidable array of legal talent carried the case before the Supreme Court. On the other side the case was prosecuted with greater vigor than ever had been shown by the Department of Justice in a trust case. An able trio assisted Attorney General Wickersham, consisting of Messrs. Frank B. Kellogg, C. B. Morrison, and Cordenio A. Severance, who greatly enhanced their reputations by their success in this case.
Mountains Of Evidence
When the case at length reached the Supreme Court the record had grown to appalling magnitude. The Chief Justice described it as “inordinately voluminous, consisting of twenty-three volumes of printed matter, aggregating about twelve thousand pages, containing a vast amount of confusing and conflicting testimony relating to innumerable, complex and varied business transactions, extending over a period of nearly forty years.” (5) The Court despaired of studying for itself independently this mass of factual materials and legal briefs. It exclaimed:
“Both as to the law and as to the facts the opposing contentions pressed in the argument are so numerous and in all their aspects are so irreconcilable that it is difficult to reduce them to some fundamental generalization, which by being disposed of would decide them all.” (6) And so, instead of following the usual practice of stating the facts as it sees them, the Court contented itself with paraphrasing the extreme contentions of either side and then wearily declaring: “to discover and state the truth concerning these contentions both arguments [of rival counsel] call for the analysis and weighing, as we have said at the outset, of a jungle of conflicting testimony covering a period of forty years, a duty difficult to rightly perform and, even if satisfactorily accomplished, almost impossible to state with any reasonable regard for brevity.” (7) Of any independent examination and analysis of the abundant evidence regarding the actual business methods and economic working of the enterprise before the Court (adjudged by it to be a monopoly), there is scarcely a trace here or elsewhere in the opinion.
The great mass of evidence, assembled at a direct cost of hundreds of thousands of dollars and at an indirect cost of many millions, was a storehouse of material never before equaled in any anti-trust suit. Here were presented in concrete form all of the crucial issues of the monopoly problem. It might have been said quite as truly of the Standard Oil case, as later it was said of another celebrated case (Pittsburgh-Plus), that the issues were fully 95 per cent economic, and not more than 5 per cent legal. But the Court did not use the opportunity to appraise the economic issues and clarify the whole business situation by indicating just which of these things were economically wrong, and just why. Aside from the noncommittal recital of conflicting statements of rival counsel, there are in the main opinion (8) of 52 pages barely 2 pages that by liberal estimate relate to the economic issues. Even these few lines are so qualified, hesitating, and superficial, as to be useless for the guidance of future business practice.
It Was A Conspiracy
Hastily the Court, like an embarrassed speaker, changes the subject and shifts the discussion to more familiar ground, the legal aspects of the Act, in which alone it sees "the merits of the controversy." (9) The Court deliberately shuts its eyes as tight as possible to the economic (and consequent legal) nature of the specific acts of the defendant. So, after its opening cautious recital of the facts (not as it conceived of them, but as they were alleged by the two parties), the Court declares that it will give no weight to the testimony adduced under the averments complained of except in so far as it tended to throw light upon the acts done after the passage of the Anti-Trust Act and the results of which it was charged were being participated in and enjoyed by the alleged combination at the time of the filing of the bill [1906]. (10) Then after a learned discussion of the meaning of the Anti-Trust Act, (11) in the course of which discussion "the rule of reason" is more explicitly announced, the Court comes to the application of the statute to the case.
There it sees "no cause to doubt the correctness of these conclusions" of the lower Court to the effect “that the acts and dealings established by the proof operated to destroy the "potentiality of competition" which otherwise would have existed, and thus to make the transfer of stocks of January 1899 "a combination or conspiracy in restraint of trade" and "an attempt to monopolize." (12)
The Evil Intent
As reasons for these conclusions the Court declares that the uniting of so many corporations, “aggregating so vast a capital gives rise, in and of itself, in the absence of countervailing circumstances, to say the least, to the prima facie presumption of intent and purpose to maintain the dominancy over the oil industry . . . the prima facie presumption of intent to restrain trade, to monopolize and to bring about monopolization . . . is made conclusive by considering” (13) the conduct and acts of the corporation both before and after the action of 1899.
If these acts are to be taken as "proof conclusive" it would seem that the Court had overcome its doubts both as to the results of the acts and as to the effectiveness in suppressing competition. But again the Court shrinks from committing itself on the nature (economic or legal) of the acts, in and of themselves, and while still disavowing "the purpose of weighing the substantial merit of the numerous charges of wrongdoing made during such period" it finds itself "irresistibly driven to the conclusion" that there was "an intent and purpose to exclude others . . . by acts" not in accord with the "usual methods" of business. (14)
The Court thus, by a tortuous line of reasoning, adopts substantially the prosecution's version of the facts. It decides that this particular company was guilty under both the first and second sections of the Act, not because the merger of 1899 was in and of itself illegal; not, either, because its acts after that date were in and of themselves clearly "in restraint of commerce" or gave proof of monopoly or attempt to monopolize; but only because in all the circumstances of the case, the Court (confessedly confused by the "conflicting testimony") felt that the combination of 1899 manifested an "intent and purpose" to restrain trade (unreasonably) and to accomplish a monopoly.
Established Doctrine Of Intent
Thus the Court, though shrinking from an analysis and appraisal of the separate acts and dealings of the combination, at length, "solely as an aid for discovering intent and purpose," gave them indirect significance, and pronounced them "wholly inconsistent" with the "usual methods" of business. (15) A legalistic habit of throwing every question of plain fact into a seance for mind-readers seems to have been bred of the practice of criminal law No word resembling "intent" or "purpose" occurs in the Anti Trust Act, though it is true that the idea is implicit in the words "attempt" and "conspiracy." (16) But each of these words is used in the statute in addition to other words indicating objective behavior, acts, and conditions, (17) and, surely, not to weaken or displace, but rather to make the statement of causes of illegality clearer and more inclusive. Now the general policy of the courts in determining the existence of monopoly under the Sherman Act seems to follow the same order as the statute: that is, the courts inquire into purpose only in a supplementary way—only when the restraining or monopolistic character of the acts considered singly is doubtful. Some leading cases are cited in the notes. (18)
Nothing could seem simpler than the doctrine in this line of decisions. Proof of intent is not an additional barbed-wire entanglement provided for the defense; it is not an additional burden imposed upon the government to add to its difficulties in prosecutions under the Anti-Trust Act. Lack of proof of intent cannot be set up by the defense to qualify or mitigate the illegality of combinations, of monopoly as a fact, or of specific acts of restraint of commerce; but evidence by the prosecution of intent to monopolize may enable the prosecution to prove the existence of monopoly when without it the acts viewed singly would look quite innocent. Consideration of intent is a safeguard for the public, but it is an additional hazard for the defense. (19)
Were The Acts Innocent Per Se?
If that is the true doctrine of the law, the great emphasis in the Oil case upon intent could but imply that neither the Company's formation nor its acts seemed to the Court to be clearly illegal. Indeed the most ostensible need of the "rule of reason" in the Oil and Tobacco cases, as announced by Chief Justice White, was that a literal construction rendered it impossible to apply the law to a multitude of acts which would come within its scope by resort to a "reasonable" construction. (20) If we are to attribute any influence in later decisions to the new "rule of reason," it is an influence in just the opposite direction, causing the Court to excuse behavior of unquestioned illegality, taken by itself, when the Court in its wisdom (or not perceiving the real economic results) thinks that the public welfare on the whole warrants it. So far as this is done the Court makes itself, not Congress, the lawmaking power. It was the implication of the innocence of the particular acts that made the decision in the Oil case in its economic aspects such a futile and fatal victory for the public, for notorious and scandalous as had been the price policies in the oil business, the Court had declined to condemn them "in and of' themselves, and thus had greatly increased the difficulties of enforcing the Act in the future.
In truth the determination of the real nature, and effect upon prices, markets, and competition, of these essentially an economic task, for the acts and dealings, is essentially an economic task, for the performance of which the Court had no adequate training, and in which it had no competent economic advice. It may be well, therefore, to consider now some of the allegations and evidences of more glaring practices, especially those of unfair competition and of local price cutting, whose real economic nature must be clearly understood before there can be any hope of solving the problem of monopoly.
Chapter II: All’s Fair In Love And The Oil Business
Successive Lines Of Defense
Numerous allegations were made by the prosecution in the Oil case regarding various acts grouped under the term "unfair competition." The defense at various stages in the briefs took various positions regarding it: 1. that monopoly itself is not illegal; 2. that it is only certain definite acts of exclusion that constitute monopoly, and these must be explicitly defined by the law and the courts; 3. that there is no such thing as unfair competition; 4. that the particular form and method of unfair competition, the local price cutting alleged, rarely occurs, yet 5. that on the other hand it is quite the usual and normal form of competition.
The defense at one point maintained that no matter what the "size, domination, and control of the market or prices," in other words, no matter how complete in fact the monopoly, this situation does not constitute a "monopoly in the legal sense," in the absence of specifically prohibited "means and agencies of exclusion." (1) Here, as repeatedly, the defense tried to show that a monopoly is not a monopoly. Both courts in their decisions are silent as to this particular argument, but the Supreme Court implies a rejection of it. Notably the Supreme Court repeatedly shows that it is trying to look through the form to the substance, "the baneful result," "the evils," which monopoly produces, whatever be the means employed, to see the "evil consequences which might arise from the acts of individuals producing or tending to produce the consequences of monopoly." (2) Yet finally it rather vaguely assumes, too, that the means and agencies of exclusion were of a nature prohibited and illegal.
Are These Acts Illegal?
The defense protested that to make monopolizing a criminal offense without any standard for judging the means by which the exclusion of others is effected, which is essential to monopolizing, would be an "intolerable situation." This protest, uttered before the case was decided, surely had much justification. (3) It was the function of the Courts to provide such a standard, but the decision left these matters in as great a haze as before.
Counsel for the Company, however, at this point executed an about-face and sought to throw doubt upon the whole idea of unfair competition, and attempted to muddy all the waters of discussion by denying the possibility that any one (or any court) could draw a line between business acts in respect either to their ethical or their legal quality of fairness or unfairness of competition.
Nowhere is to be found a better statement of the record of misdeeds which, taken as a whole, without analysis, was virtually accepted by the Court as true, than that contained in the painstaking brief of the prosecution. A few extracts from the vast collection of evidence in the record may serve to indicate its salient features:
“The testimony in this case shows that the various defendants have pursued a system of unfair competition against their competitors, whereby the independent companies selling and marketing petroleum have either been driven out of business or their business so restricted that the Standard Oil Company has practically controlled the prices and monopolized the commerce in the products of petroleum in the United States. This system has taken the form of price cutting in particular localities while keeping up high prices, or raising them still higher, in other localities where no competition exists; of paying rebates to customers as a part of said system of price cutting; of obtaining secret information as to competitive business largely through bribing railway employees, and using said secret information to procure the countermanding of orders of said independents, and to facilitate the price-cutting policy; of the use of so-called bogus independent companies—that is, companies held out by the Standard Oil Company as independent which are engaged in price cutting, while the Standard Oil Company maintains the prices through its well-known companies—and other abusive competitive methods against the independents. (4)
Spies And Bribes
We desire here to describe briefly the various devices to which the Standard has resorted in the pursuit of its methods of unfair competition. The Standard Oil Company keeps a secret department in New York, known as the statistical department. Through this department it has a complete system of espionage upon its competitors all over the United States. It was with great difficulty that the Government succeeded in finally uncovering this system. Many of the leading men connected with the Standard Oil Company were placed on the stand and denied knowing anything about the department until they were confronted with certain reports and statements which had come into the Government's hands. It appears by this testimony that the Standard Oil Company has a system of reports whereby every salesman and local agent procures information as to shipments of oil by independents into his district. These are procured by bribing railway employees to report competitors' shipments; by keeping men around railway stations to learn the shipping directions on barrels or cars; by following the tank wagons and salesmen of independents; by employing detectives to procure the information from the independents' employees, and by various other equally disreputable means. These reports are sent in immediately to the head office of the Standard's marketing division. From such reports the local salesmen and agents throughout the country are informed of the shipments made into their territory. This information is also reported to the head sales agents of the several Standard marketing companies at their New York headquarters and is preserved in the statistical department at 26 Broadway, to which we have referred. The greatest secrecy is maintained in regard to this entire system. For instance, railroad employees who furnish a large part of this information do not sign their names to the reports which they furnish or use stationery either of the Standard Oil Company or of the railroad company.
On the basis of this information regarding competitive shipments the Standard Oil Company at this central statistical department keeps complete records showing the percentage of the business done by independent concerns in each of its large territories and in each of its smaller subdivisions and in individual cities. The Government put in evidence from the records of the statistical department at New York such tables showing the percentage of independent business throughout the country, and also put in evidence numerous reports obtained from railroad employees and summarized reports of individual competitive shipments. This information is obviously of the greatest advantage to the Standard in determining where and how far it will cut prices in order to destroy competition. Moreover, it appears that the information of competitive shipments is often used in advance of the arrival of the shipments to secure the countermanding of orders and to facilitate other methods of unfair competition. (5)
Machiavellian Business Morals
The counsel for defendants, having throughout the hearings and in their briefs sought first to deny absolutely the reality of these acts, next, to raise doubts regarding their frequent occurrence, and third, to minimize their importance when they have occurred, at length, in the face of the overwhelming evidence, virtually admitted the truth of the allegations and in the retreating battle fell back upon a fourth and final line of defense, a boldfaced justification of any and all methods that could be employed in competition, in fact a denial of the possibility of any such quality as "unfairness" in business. This shameless doctrine is expressed in part as follows: “The conduct of a trade consists of a multitude of acts varying in their ethical quality. Competition is a state of war. One man may push it to the extreme limits, whilst another may draw the boundary line clear inside of them. Price cutting and rebating, collecting information of the trade of competitors, the operation of companies under other names to obviate prejudice or secure an advantage, or for whatever reason, are all methods of competition. Who knows where the line is that separates "fairness" in these methods from "unfairness"? What legal standard determines what is "fair" and what is "unfair"? . . . What legal rules or standards has a man to guide him in determining when his methods cross an imaginary line between fair and unfair, so that his success thereby becomes a criminal offense? Those who stand upon an Act which encourages competition cannot complain of the extermination which competition involves.” (6)
The law libraries may be searched in vain for expressions more Machiavellian than these. The champions of monopoly incautiously betray their contempt for the Anti-Trust Act itself as aiming to "encourage" competition, and flout any attempt to preserve by any means a wholesome conception of business practices.
Lawyers Defy Morality
In the briefs of the same leaders of the American Bar before the Supreme Court this argument is quite as brutal:
“Price cutting and rebating, collecting information of the trade of competitors, the operation of companies under other names to obviate prejudice or secure an advantage or for whatever reason, are all legal methods of competition whatever moral criticism they may justify. There is no rule of fairness or reasonableness which regulates competition.” (7)
By other defendants' counsel this argument is somewhat softened or muddled:
“Competition knows no limit except that the means used must be lawful . . . How could the law measure and define what was fair, what reasonable, and what undue? . . . He may use any means which does not infringe upon the legal rights of his fellow citizens . . . But aside from this limitation, the choice of weapons and of means, is his own; the war is on, and each competitor may use all means which his wealth, his connections, his study, his superior skill or knowledge may give him.” (8)
The change of phrasing somewhat cloaks the cynicism of the contention, but the use of the word "legal" evades or begs the question whether certain acts, alleged and proved by the evidence, were unlawful. The question is: are the acts not unlawful because unfair? (9)
Sophistical Epigrams
At this point any true economist must voice his protest against the proposition that "competition is a state of war," certainly not the competition contemplated and to be permitted in our system of private industry. This proposition belongs in the class with those sophistical epigrams invented as tools for use in social propaganda, such as Proudhon's dictum that "Property is theft." These catch-phrases to deceive the unwary confuse under one designation things that are extreme opposites. War between nations means the negation of all ordinary processes of trade between them. It means an end for the time of commercial competition and of commercial dealings between the citizens of the warring states. It means the suspension of all the normal peacetime rules of commerce, contractual relations, moral codes, and legal safeguards in business, so painfully built up through centuries of experience in the peaceful arts of commerce. It means, in the relation of the armed forces of the two warring states, abandonment of the normal practices of humanity and a reversion to primitive acts of physical violence and destruction to accomplish the overthrow of the nation's enemies.
Competition in trade and commerce, on the other hand, is, in every essential feature which could have any significance in discussions of monopoly and of restraint of trade, at the opposite pole of human conduct from war. It is peacetime rivalry of fellow citizens or between citizens of two nations at peace. Civilized nations at peace mutually extend to alien traders the humane protection of the civil and criminal law.
Rules Of The Game
In the true ideal, trade is to be likened rather to a friendly game than to deadly war. The game is, or in accord with sound public policy should be, carried on within the limits sanctioned by the rules of the game, of old by "the law of merchants," and today by the best prevailing business practice, as this has been modified, corrected, and strengthened by statute and by judicial interpretation. These rules are designed to make the game of business competition subserve the one great aim of increasing the common welfare. From time to time they must be revised to meet new conditions. Competition, to be sure, may be likened to war in one respect, but in one respect only: it is rivalry. But within the rules of the game it is not a rivalry that destroys the physical wealth of the rivals, does physical violence to them, or transgresses the normal rules of morals and the civil law. Its social ideal in domestic trade is rivalry of peaceful, and even friendly, fellow citizens in productive service for the general good. The buying public, if free to choose between rival producers, in the conditions of a real market, awards thus the prize for quality of goods, service, or prices by the democratic method of popular election, each dollar of purchasing power giving one vote.
It is also a false idea of true competition in trade that it necessarily or usually leads to the business destruction of competitors. This notion, repeatedly suggested in the confused pleadings (10) of lawyers, has appeared also in the confused opinions of the courts. In a market where goods at hand are offered for sale at the same time, the normal result of sellers' competition is a uniform price at which all of the goods are sold. This price, being lower than one where competition between sellers is inactive or absent, is to the advantage of the buyers, and, to be sure, may either at the time or eventually exclude from the market other would-be sellers who are more distant or less efficient. By this very process of selection under fair competition, the more efficient have a chance to succeed, and less successful competitors are led to confine themselves in the long run to other territory where they show that they can excel, or to other lines of effort and enterprise for which their talents and resources fit them better.
Competition And Social Service
There may be much tragic mischance in fair competition, and many personal disappointments through mistaken judgments, but its ideal throughout is that of a process in harmony with social justice, not one shot through with heartless enmity. The more vital operation of competition is to be thought of rather in terms of service to society than in the injury of competitors. Its normal effect is positive not negative, creative not destructive. It is testing, classifying, and rewarding economic agents for the things they can do, and are doing best. There is a great and essential truth in the thought of "the economic harmonies" (however much it may have been at times exaggerated) which is at the very heart's core of the public policy favoring competition and of the laws maintaining it. That truth is twisted into an ugly error when the apologists for monopoly darken the counsels of the courts with confusion of commerce with war.
The careless legal dictum that every act of competition is an attempt to monopolize and every successful act of competition results (in so far) in monopoly, is closely related to this confusion regarding fair competition. It, too, appeared in the arguments of counsel for the Oil trust, and has been joyfully cited by every apologist for monopoly ever since. Its fuller discussion may better be undertaken later in connection with the theoretical analysis of the competition concept. (11)
Shirking Its Job
The Supreme Court failed to pass either a scientific or a clear legal judgment upon perhaps the most shocking business practices ever brought with abundant evidence to its attention. It failed to clarify the distinction between fair and unfair methods of competition which would have set forward by a generation the belated treatment and solution of the "trust" problem. Thus this notable case ended May 15, 1911, with a decision spelling wasted opportunity. The Court, lacking clear convictions on the essentially economic issues involved, side-stepped its responsibilities. It thereby contributed to the enactment, three years later, of the Federal Trade Commission Act with its fifth section declaring unlawful "unfair methods of competition in commerce," an act passed in an attempt by an aroused public to put an end to an intolerable situation. The Supreme Court has been thought at times to display a somewhat jealous spirit toward this rival created by the new legislation of the early days of the Wilson administration; but viewed with the philosophic eye, it is seen to be the Court's own child, born of its neglect.
Who, be he jurist or layman, can doubt that through the Anti-Trust Act of 1890 (if not by the common law) the Federal Courts were endowed with well-nigh plenary power not only to pronounce upon and specify these particular acts as "contracts" or "conspiracies" in restraint of trade; not only (by sections I and ') to punish them by fine and imprisonment; but also (by the fourth and succeeding sections) to prevent, restrain, enjoin, and prohibit each and every one of them? In the most richly documented case relating to industrial monopoly that had come before the Supreme Court, the Court did none of these things, but instead gave to an anxious public a nearly futile decree of dissolution.
Chapter III: Local Price Cutting–Saint Or Sinner?
An Unanswered Question
The "unfair methods of competition" denounced by the prosecution were of widely various kinds and characters. Though the defense in turn denied all these acts, evaded responsibility for them, and sought to justify them, most of them have since been outlawed by public opinion and by Federal legislation. Such are discriminatory railroad rates and rebates, the use of pipe lines not as common carriers, espionage, bogus companies, etc. We may dismiss this part of the subject as res adjudicata. But as regards "local price cutting," the verdict is even yet not so clear. Indeed the term "local price cutting" was then and often still is used so ambiguously as to make impossible a clear conception of its real legal and economic character. The decision in the Oil case as regards this matter doubtless had great influence in determining the main features of the Clayton Act (of 1914) in respect to discrimination, and in other ways also helped to continue and even to increase the confusion surrounding public policy in respect to the regulation of industrial prices. The purpose of our work being to clear away this confusion, no better object lesson can be found than the Standard Oil case, in which most concretely are presented the salient features of this practice.
Competition And Prices
The main facts as summarized in the Government's brief were these:
“This same statistical department at New York keeps records showing the prices at which the Standard sells oil at each town throughout the United States, together with the margin of profit of the marketing company on such oil. Summaries of these records were introduced by the Government. They show in a most startling manner the practice of local price cutting and price discrimination, the widest possible differences appearing in the prices and profits per gallon at different towns even in the same general vicinity, to say nothing of still greater differences between different parts of the country. These statistics corroborate the testimony of numerous witnesses for the Government regarding local price cutting.
The statistics show that in many places where there is a large percentage of independent business and sharp competition, the Standard Oil companies sell oil at a loss, and in most places where there is any considerable competition at low prices with a small margin of profit, whereas throughout the larger percentage of the territory where competition is substantially or entirely eliminated the Standard companies sell at very high prices with a large margin of profit. The tables contain the prices and the profit per gallon in all the leading main stations throughout the United States and many of the substations, and the averages for the several marketing districts.” (1)
Again, to illustrate the extreme differences in the prices in individual cities, it appears that during 1904 in Los Angeles the price of oil was 7.5 cents per gallon, while there was a large amount of competition, 33.4 per cent. At the same time in Seattle, where there was no competition, the price was 5.5 cents, and in Portland, where there was also no competition, 15 cents. The Standard Oil Company lost 3.41 cents per gallon in Los Angeles, while it made a profit of 5.30 cents in Seattle and of 3.87 cents in Portland. Similar conditions exist in various other parts of the United States. (2)
Man Of A Thousand Faces
Through these (bogus independent) companies and also through its openly controlled companies the Standard pursued a system of cutting prices in places where the independents were doing business, in many cases below the cost and to a point which caused loss to competitors. The oral testimony of representatives of independent concerns on this subject of price cutting confirms the evidence from the tables of prices obtained from the records of the Standard and shows clearly the motives for the wide differences in prices at different places. A large amount of testimony was offered by the defendants to show that the independents usually cut prices first. This testimony is in many cases contradicted by the Government's witnesses and in other cases the apparent cuts by independent concerns were explained clearly. It is shown that while in many cases the Standard's well-known companies nominally maintained prices the secret companies were cutting prices, and also that the Standard companies often departed from their public prices by means of secret rebates, and prices openly made by independent concerns to meet these secret prices were what the defendants' witnesses called cut prices. In other cases where oil was selling at very high prices and there was no competition the independents would establish a price the same as the Standard had in other surrounding towns, whereupon the Standard would continue to lower prices until there was no profit in the business. (4)
Chaotic Prices Result From Monopoly
The evidence and exhibits in this case show plainly that there is no uniform price of refined oil and naphtha in the United States. . . . As already stated, even after making allowances for the difference in cost of transportation and cost of marketing, the prices in those areas and towns where the Standard has little or no competition are generally much higher than in places where it has a large degree of competition. This appears clearly by the fact that the profit per gallon of the marketing companies is far higher in noncompetitive than in competitive territories and places. This means obviously that the Standard Oil Company arbitrarily fixes the price of oil in all places where it has little or no competition without regard to any competitive market value. Even in places where there is a considerable degree of competition the evidence of independent oil dealers and manufacturers indicates that the price is in nearly all cases fixed by the Standard and that the competitors merely follow that price and seldom if ever go below it, for the reason that to do so simply invites further cuts by the Standard, until there is no profit in the business. (5)
While therefore it is true that in certain sections of the country and certain towns there is a sufficient degree of competition to lead the Standard to sell oil at what properly may be called a competitive price, it is still the fact that the Standard determines the prices throughout the country. At times, indeed, the Standard sells oil at less than the normal competitive price, and even at less than cost. In so doing, however, it is just as truly fixing the price arbitrarily as where it charges an exorbitant profit, for it employs such extreme price cutting as a means of destroying the business of independent concerns in order that, having driven them out, it may subsequently charge monopoly prices. (6)
Such local price cutting in various lines of business was already an old story in the public's ears. In the period of the '70's and '80's fairly evenly matched enterprises had struggled to attain dominance by crippling or crushing their rivals. It was a real rough-and-tumble fight, no ring rules, nothing barred—hitting below the belt, eye-gouging, kicking and knifing until the weaker adversary was left dead or helpless on the field. Out of such melees a few larger concerns emerged a bit battered but with a greater dominance over some portion of the territory in some lines of trade. After that, aided by discriminatory freight rates and the advantage of greater size and financial power, the maintenance, in a large degree, of their control of the situation was not difficult. In these practices (popularly assumed to be "competitive") the Standard Oil Company had been the outstanding example and had achieved the most marked success.
Practice Of Local Deliveries
But was this because other groups of men in other lines of business were by nature more moral or less willing and desirous of attaining dominance each in its own line? Surely that is too simple a view of the subject. Quite incidentally the true answer was nearly hit upon by Government counsel. They do not see any broad significance in the facts, but they do see that the system of local delivery by tank wagons which early, as a matter of convenience, became a practical necessity, gave "the Standard Oil Company an opportunity to attack the district" as would not have been possible if oil had been sold at uniform f.o.b. prices at central markets. Here is the fuller statement of this situation:
“The Standard Oil Company is particularly able to carry on this predatory competition for the reason that it does not sell its product at central markets or through ordinary channels like most other large. It markets its product to the retailer in every village and community in the United States and often directly to consumers. It does from 85 to go per cent of the business in the United States, leaving about l0 or 15 per cent to all its competitors. It is perfectly obvious, therefore, that if all the balance of the trade in the United States were in one concern it could not afford to have marketing stations and facilities in every part of the United States. In order to market in effective competition with the Standard Oil Company the independents must of course ship by tank cars, which is much cheaper than shipping by barrel, especially in less than carload lots, and they must also have stations for unloading where tanks are available, and tank wagons to meet the trade in competition with the Standard. It would be obviously impossible for such a concern to afford to spread its product over the whole United States. Even if all the balance of trade were in the hands of one concern it would have to confine itself to particular districts where it could have adequate facilities equal to the Standard's, and therefore since the l0 or 15 per cent is in the hands of a large number of independents these independents must all the more confine themselves to small districts. This gives the Standard an opportunity to attack the particular district, as it does, and either to keep the independent concern down to a minimum of business or to destroy it entirely. It has undoubtedly been the policy of the Standard Oil Company to permit the independents to do a small percentage of the business, and this percentage has run from l0 to 15 per cent for many years. By thus keeping the independents within reasonable bounds it may control the prices, permit them to make a moderate profit and not allow their competition to get beyond control, and in most parts of the country make enormous profits itself. There is no question that if this court holds the Standard combination to be a legal organization and not guilty of monopoly—in other words, gives it carte blanche to pursue its own methods—it can eliminate every competitor within two years.” (6)
The system of local deliveries is again referred to in these words:
“Oil is not sold to the trade in appreciable quantities at central markets from which the purchaser pays the transportation charge to destination. Instead, through the marketing system of the Standard Oil Company, which has already been described, the oil is transported by the Standard itself, through one or another of its marketing concerns, to the towns throughout the entire United States, and is there, for the most part, delivered directly to retail dealers. The result is that the price of oil may be, and actually is, widely different in different towns.” (7)
Results Of Delivered Prices
One must have in mind the condition of true markets (described more fully in Chapters XVIII-XX) to appreciate the radical nature of the change that local deliveries by distant large producers to isolated small buyers had quickly wrought in the very nature of the trading process. The local buyers no longer had access to a market where competition among sellers, in accordance with the principle of indifference, resulted in a uniform price to all buyers. The seller no longer sold to all buyers at one place, leaving it to each buyer to transport the goods, or to have them transported, to their destination. The seller sold two commodities at once, the physical goods which he produced, and their transportation to destination. The transportation, also, the Standard partly produced by the use of its own pipe lines and tank wagons, but mainly bought from the common carriers. (The unlawful rebates it obtained are a different story.) Now, if, in fact, the goods continued to be sold at a uniform base price, and the seller then delivered them, charging the regular freight rate, the change would have been a mere matter of words and of putting two items on one bill. It is this which discriminators by means of delivered prices always first explain that they are doing—merely, in the kindness of their hearts, saving their customers the trouble of looking up the freight rate. But the real trouble is that this practice of quoting and selling at delivered prices enables the seller to evade quoting a general price open to all at a definite base or origin of shipment. This destroys even the semblance of a market and gives rise to local price cutting.
Quibbling On Terms
The prosecution declared:
“The practice of unfair competition by means of local price cutting is alleged in the petition and is denied by the answer.” (8) Counsel for the Oil company objected to every bit of testimony about local price cutting as "incompetent" (usually as based on hearsay). Nevertheless the record contains a great mass of evidence on this subject and tables of figures which, even in summarized form, cover 160 pages. (9) Defendant's counsel professed that by analysis they showed that "all towns specified by the Government's witnesses where instances of local price cutting are claimed to have occurred number 37," seemingly insignificant when the company sold oil by tank wagons in more than 37,000 towns in the U.S. (10) In this conflict, not so much of the evidence as of its significance, there is heard a veritable Babel of tongues as to the meaning of local price cutting. The prosecution treated as evidence of local price cutting (and quite rightly, from the economic standpoint) the hundreds of varying "margins" of profits per gallon (net, after making allowance for freight and marketing costs) which had been shown by the investigation of the Bureau of Corporations to have occurred in thousands of cases, varying by localities somewhat inversely with the percentage of competition. The defendants in reply entered upon some ingenious distinctions between local price reductions that still yield a profit, and those that are unprofitable (three varieties of the latter being recognized). At some points in the briefs they justify local price cutting only when it is profitable, and by implication confess its unfairness when it is unprofitable. Such a passage is the following:
“It is obvious, however, that local reductions in price which leave the market on a profitable basis, . . . can only be construed, in the absence of other evidence to the contrary . . . [as] nothing more than competition within the limits of that freedom to trade . . . open to the defendants equally with all other persons.” (11) In their briefs in the Supreme Court they still pretended at times to understand the charge of price cutting as an unfair method of competition to mean: “Cutting the price in that community below cost with the purpose and effect of driving out such independent and destroying his business.” (12) It would usually be impossible to prove what was the cost of production of the seller. "Cost" is a very evasive notion and it can be even approximated only by those having access to all the documents of the business.
Putting On A Bold Face
But evidently fearing that this defense could not be maintained in the face of the abundant evidence of slashing cuts in local prices, the Oil company generally sought to justify without qualification both profitable and unprofitable local price cuts, declaring both to be normal methods of competition. So, beginning with the denial of the practice and opposing the introduction of any evidence of it, the defense ends by not only admitting it, but by justifying it most broadly as a normal and desirable method of competition. They said:
“In fixing different prices for sales of the same commodities in different localities or to different persons a trader is using one of the important instruments of competition, and the freedom to do this for the purpose of holding or increasing his trade is one of the equal rights which all traders enjoy and which this statute cannot have been intended to impair.” (13) Specifically of unprofitable local price cutting, they said:
“Nor can it be doubted that [local] reductions in prices . . . [on an unprofitable basis, . . . made to meet prices initiated by the competitor in that locality] are similarly legitimate. There is nothing illegal in selling at an unremunerative price, nor is such a practice in conflict with the rights of others to be free to trade,” (14) And it is declared that if such local discrimination is taken as indicative of a purpose “to monopolize trade, then competition in any locality under such circumstances must cease and all trade be handed over to the latest comer who is willing to take it at an unremunerative price.” (15)
But “He Began It”
While thus in the broadest terms justifying all forms of price cutting, defendants sought to show that in most cases where prices were reduced to an unprofitable level it was the independents (not they) who began the cutting (a quite innocent act, as they had just claimed, but if any one was guilty, it was the other fellow).
“In every case it appeared that the decline in the Standard's prices was forced by the price cutting of the competitor.” (16) In doing this the defending lawyers gave another twist to the notion of (local) price cutting by making it mean prices below those previously existing in a locality—not prices below those charged by the same seller contemporaneously in other localities. By this confusion of time differences (fluctuations), with place differences, they were able plausibly to accuse their competitors of being local price cutters when the latter were simply charging uniform base prices at certain bases or sources of supply. (17)
A Prosecution Confused And Hesitant
Throughout the conduct of the case the prosecution seemed weakly to imply that local price cutting (the real discriminatory sort) might be all right under ordinary conditions (as between competitors of fairly equal strength or even by a very strong competitor if the result was not to create a monopoly, even though it drove the weaker competitor out of business). The prosecution in hesitating expressions explained to the Court its attitude toward local price cutting, revealing its lack of firm grasp of any underlying theory:
“We do not wish to be understood as discouraging enterprise or as taking a position against legitimate competition, but if the Sherman Act means anything in this country it means a monopoly acquired by such methods of competition as this. Unless it is enforced, the small corporation or individual who wishes to engage in business will have absolutely no opportunity at all. This testimony is valuable as showing the intention of the Standard Oil Company to monopolize the commerce in oil throughout the United States. In many districts it has an absolute monopoly. We mean by absolute monopoly that in those districts it does all of the business and has eliminated every competitor. Practically this is the case throughout the Rocky Mountain country and most of the Pacific Coast States. The percentage of independent business throughout the entire Southern States is very small. Moreover, where there is competition the competitors are usually strictly under the control of the Standard, in that they must, in order to be allowed to do business, sell oil at practically the price the Standard dictates and confine themselves to a small percentage of the trade.” (18)
Befogged By Intent
There is therefore evinced in the argument of the Government no thought of condemning local price cutting (or any other of the market and price practices of the defendant) per se. The prosecution was maintaining only that local price cutting was unfair under all the proved circumstances of the case, that is, when done with intent to achieve and with the result of actually achieving a complete (or almost complete) monopoly of the business in that territory. Thus it was the prosecution that first advanced the theory of "intent" and "purpose" which unfortunately was adopted by the Court in its decision. It and the Court chose to place the chief emphasis throughout upon the feature of conspiracy, although in the Sherman Act, to make assurance doubly sure, "conspiracy" and "combination" are both proscribed. Not only are combination and monopoly declared illegal, but conspiracy with other persons to do these things, even if without result or success, is brought under the same ban and penalty. It can, however, hardly be maintained that this theory on which the case was prosecuted completely bound the hands of the Court, so that it could not place its stamp of disapproval upon these uneconomic practices. Can this be so, in view of the wide range of the Court's discretion, jurisdiction, and powers?
Public Welfare Falls By The Wayside
A word in this connection regarding the public interest at stake in local price cutting. If a strong company charges monopolistic prices and makes monopolistic profits in any territory, the only way usually that the public can get the benefits of competition is some independent to reduce prices in that locality. Now if this lower price (freight figured) is the independent's general price at its own mill base point, this is not "local" price cutting. But if a company cuts its price in one area, while maintaining its price elsewhere, that is local price cutting. The one is competition, the other is evading competition. The latter so-called competition, not directed against all competitors in a real market area, but only against certain isolated competitors, is only pseudo-competition. (This point will be further treated in connection with the discussion of the nature of competition and monopoly in Part V.)
This famous Oil case thus ended without throwing any light upon the fundamental economic issues; rather, just because issues so plainly presented were ignored, it left them in greater haze and confusion. From a record that still is a great mine of evidence regarding business practices of the large enterprises of that day, not one nugget or grain of precious principle was extracted by the bungling processes of the law to enrich judicial wisdom on the economic nature of monopoly. Such a failure alone is perhaps sufficient to prove that success cannot be achieved by the law without assistance from economic analysis.
Chapter IV: Thus The Law Decrees
Crime Goes Unpunished
Prosecution and defense alike, each for its own purposes, had repeatedly called attention throughout the trial of the Standard Oil case to the fact that the Anti-Trust Act was a criminal statute, providing penalties of fine or imprisonment, or both, for the guilty. The decree, however, that was issued by the Circuit Court, and confirmed "except as to minor matters" by the Supreme Court, merely "commanded the dissolution of the combination, and therefore in effect, directed the transfer back to the shareholders" of the stock to which they were entitled in the various subsidiary corporations. (1) As the stock of the holding company was very closely held in the hands of a few men who had been continuously in control of the enterprise since its beginning, this disposition of the matter was generally viewed by the public as futile.
If the penal clauses of the statute were ever to be applied, they must have been in this case. Justice White seems to have forgotten his own mildly sarcastic comment upon the closely parallel decree in the Northern Securities case, of which, in dissenting, he had said in 1904: “the evil sought to be remedied is the restraint of interstate commerce and the monopoly thereof, alleged to have been brought about, through the acquisition by [certain individuals] of a controlling interest in the stock of both roads. And yet the decree, . . . authorizes its return [the stock] to the alleged conspirators, and does not restrain them from exercising the control resulting from the ownership. If the conspiracy and combination existed and was illegal, my mind fails to perceive why it should be left to produce its full force and effect in the hands of the individuals by whom it was charged the conspiracy was entered into. (2)
Was The Verdict Futile?
Counsel for the Standard, when trying to convince the Court that the agreement of 1899 was really of little importance, had urged that in the period from 1892 to 1899 there "was no actual competition in the legal sense between any of the Standard Oil companies." The stock was held in the same proportionate relations by a certain few people. And, as if warning of the futility of such a decree as later was entered in this case, they declared: "There was also no possibility of competition because of the continued common ownership of all the companies." (3)
Without multiplying legal comments on this remarkable outcome of the case, it may suffice to note these words of a distinguished lawyer, now a justice of the Supreme Court, as follows:
Q. In the Standard Oil we now have 28 corporations, but a mutual ownership of stock? A. (by Mr. Brandeis) Yes.
Q. And they are not common directors, but the evil persists just the same? A. The evil does persist, and I think the great evil that was done there was to have the decree in the form in which it was. I should most strongly have contended, and, in fact, in arguing the Tobacco case did contend, that there was a dissolution which did not dissolve.
Q. You think the Supreme Court has the power to order the dissolution of stock ownership, but that the mere matter of preventing common directors will not accomplish the dissolution? A. It will not. (4)
A student of the economic aspects of the oil industry since the decree makes this restrained comment upon it:
“However commendable the law and its interpretation may have been, in its application to the oil industry, it seems to have been practically vitiated at the outset by the method of dissolution agreed upon. . . . Thus, the holders of a majority of the stock in the Standard Oil Company of New Jersey now became the holders of a majority of the stock in each of the constituent concerns, and as such exerted a controlling influence in all. But the Court had done its duty, and the Department of Justice seemed satisfied with the dissolution. . . . Meanwhile, the oil industry, notwithstanding its rather frequent investigation at the hands of governmental agencies, has been free from active Government regulation.” (5)
Old Evils Persisted
The majority opinion of the Supreme Court in its brief preliminary discussion of "the remedy to be administered" mentioned, besides dissolution, the need "to forbid the doing in the future of acts like those which we have found to have been done in the past which would be violative of the statute." (6) The opinion further approved the decree of the court below as respects enjoining the owners of stock "from in any way conspiring or combining to violate the act or to monopolize or attempt to monopolize in virtue of their ownership of the stock.. . . ." (7) This seems to be nothing more than a superfluous general statement that they must not conspire to violate the law, without any specific indication as to what they were to refrain from doing.
The Court's decree presumably aimed at the restoration of competitive conditions in the oil industry. How far was it successful? An unqualified answer is not easy to give, and careful consideration of the history of the industry since the decree leads to a moderate judgment, inclining neither to the one extreme of denying any effect nor to the other of affirming that success was complete. For a good many years prophecies by the more pessimistic critics of the decree seemed to be verified. There appeared to be little change for the better and "obviously a genuinely competitive situation was not immediately established." (8) Each of the Standard's subdivisions no doubt continued to exercise a considerable measure of monopolistic control after the decree. It was observed that because of the conditions as to quantity, etc., that are placed upon the shipment of oil by pipe lines, "neither the Court's decree nor the legislation of Congress has yet served to make the pipe lines of the country common carriers de facto though they are common carriers de jure." (9) The fact that the pipe lines were largely in the hands of the Standard group hampered the starting of small competing plants. In some regions, notably in mid-continent and in the Rocky Mountains, the dominance of the Standard was much greater than in others. (10)
Still Local Monopolies
Federal investigations (11) have shown that at times, as in 1921, if not always, the Standard has been able to exercise a local monopoly power in Montana and Wyoming, both by paying there lower prices for crude and by charging higher prices for refined products than it did in near-by territory, due account being taken of cost of freight. That is, the company sold only at delivered prices, and not at refinery base prices, and netted more on sales within the territory nearest its plants. Too lenient a judgment of this practice is expressed in the words: "It may be that no logical objection can be offered to such a policy on business grounds." But the same student suspects that monopoly is masquerading in the disguise of competition when he says:
“But obviously any claim that such a practice results from the free working of competitive influences is fictitious and untrue.” (12)
The same geographical relationship of (net realized) prices varying nearly inversely with freight differences has pretty regularly prevailed in other cases, as, e.g., between the mid-western States and New York. The Standard has maintained higher discriminatory prices in the regions nearer the wells and refineries (non-competitive), while dumping its excess production two thousand miles away to be disposed of in a more competitive area, where supply and demand operated to lower prices. An economic paradox, and a sure sign of a local monopoly!
Still Fear of “Reprisals”
A more subtle and pervasive sort of domination or control of price policies seems to have been continued by the Standard (i.e. by the branch operating in each region) by virtue of its being the most important company, even where competitors have been numerous in the field. This, too, can be shown by economic analysis to involve the element of local monopoly. A "follow-the-leader policy" takes the place of the older, cruder, cutthroat competition and works just as effectively. The Standard takes the lead in naming a price in a particular locality, and others as a rule adhere to it. In many places and over long periods the prevailing practice (as described by the Federal Trade Commission around 1915) was this:
“The market price was that named by the Standard Oil Company, which established and maintained fixed differentials for different classes of customers. The members of the Marketers' Association agreed to maintain and follow the retail prices and the differentials allowed by the Standard for the different classes of customers.” (13)
Public bids from widely separated refineries to supply municipalities are, when opened, found to name identical delivered prices, and identical delivered prices prevail in the wholesale and retail trade. This docility of all the so-called independents in following the leader may be seen, on more careful scrutiny, to be the result of competitors' fear of cutthroat competition, more artfully and sparingly exercised than in the old days, united with the hope of reward in being allowed to live and obtain higher prices by acting with tacit if not explicit agreements.
“The smaller independents seem to have a genuine fear of the Standard's ability to force them out of business should a price-cutting campaign be inaugurated.” (14)
An untiring deliver after the facts of the situation comments as follows:
“No one who has talked much with independent oil men needs to be told that only a man of much courage or of little sense will try to "buck the Standard Oil Company," or, in other words, to set a price different from that which the Standard has set. Some independents have done that in the purchase of crude oil, and even in the sale of gasoline, but it is generally regarded as a dangerous policy.” (15)
The President of the National Marketers' Association (not producers but jobbers) said in 1923:
“If you start real competition—and by that I do not mean multiplying the opportunities we have today to buy stuff, but I mean competition that bases its price on cheaper delivery cost—you are up against a system of reprisals that rather deprive you of a desire to try the experiment more than once.” (16)
Systematic Collusion
In citing these passages we do not mean to imply that like prices asked by two or more sellers in a real market is a sign of conspiracy, collusion, or restraint of trade. On the contrary, "one price in a market" is the normal result of true market conditions. But observe, this whole regime of follow-the-leader is an artificial system of delivered prices calculated with reference to an arbitrarily selected point. The crux of the situation is implied in the phrase used above by the official of the Marketers' Association, who no doubt knew what he was talking about: "real competition—and by that . . . I mean competition that bases its price on cheaper delivery cost." That means that the independents who are bullied, coaxed, or rewarded (or induced in all three ways) into a tacit agreement to conform to this system of delivered prices are able (and required) to charge more to near-by customers than to those farther away.
The Happy Family
Before the dissolution decree this policy was practiced in the oil industry boldly and baldly; it continued to be practiced in a more artful way thereafter in the oil as in many other industries. It escaped the attention of the courts both in the Oil and in the Steel dissolution suits and was very vaguely understood by the public until the movement began in 1919 which resulted in bringing the Pittsburgh-Plus complaint before the Federal Trade Commission. Restraint of competition took on a form so tolerant in outer appearance as to pretty well deceive the public and the courts as to what was really happening. No longer was the slogan "extermination"; it became "cooperation." A policy of live-and-let-live took the place of a war of prices. Monopolists no longer tried to look and act like pirates, but like Sunday school superintendents. All efforts now were bent toward maintaining prices, so that all sellers alike might flourish, not cutting prices, either locally or generally, to kill off the weaker. So long as the little independents were "good," the big company would, in the then new phrase, "hold the umbrella over them and they could stay in out of the rain." If the little fellows began to misbehave, did not stay in their places, became too greedy, tempted by generous and stable prices, then at last it might be necessary for the market leader to teach them to keep their places.
The Publish Pays The Florist
So far as the public is concerned, this live-and-let-live policy in its immediate workings is not better but worse than the older, cruder methods of cut-throat competition. The lion of monopoly no longer devours the independent lambs on sight. For long periods they lie down together, but the public "is the goat." Prices remain high for longer periods, and the intervals when they are low become rarer and briefer, reversing the rule of the old regime when frequent periods of low prices to the public were followed by occasional brief periods of pretty complete monopoly control. It pays the market leader to be a gentle missionary rather than a bold bad man. This milder policy of collusive maintenance of prices had, for years before the decision of the Oil suit, been tested by the Standard in alternation with the policy of local price-cutting. Rewards were sometimes bestowed upon competitors in place of blows. Monopoly had learned to "say it with flowers" and make the pubic pay the florist's bill. This policy had become quite as important likewise at this time with other large corporations such as U.S. Steel.
But not a suspicion of all this appears to have crossed the minds in the Department of Justice. Learned in the law but innocent of economic training, their thought on these matters still was of the vintage of the '80's, and they continued to present to the Court indictments based on the naive assumption that the only price policy by which a powerful corporation could accomplish a "restraint of trade" was that of cutthroat competition. On this assumption great masses of evidence in the Oil and other important cases were collected in the effort to prove an intention to destroy smaller competitors—and of course with meager results. The evidence had little pertinence to the economic and legal issues regarding the policy actually in operation. The joke was on the public. While it continued to watch at one hole, the sly fox Monopoly was running in and out at another.
The Stars In Their Courses
In the long run, however, conditions may change, and even the weak dissolution decree may help to change them and may become more effective through them. Such appears to have been the course of history in the eighteen years after 1911. Too much significance must not be attached to certain figures showing the decline of the proportion of the whole oil business of the country done by the eleven Standard companies, from approximately 85 per cent (about 1905) to 50 per cent of the total by 1923. (17) The oil business as a whole, largely as a result of the increase of gasoline engines, of automobiles, and of good roads, was advancing by leaps and bounds in the years following the dissolution decree. At the same time there occurred a rapid westward shift of the industry to the newly discovered fields in the mid-continent, California, Rocky Mountain and Gulf regions, some of them offering tempting opportunities and favorable conditions for independent, decentralized investment and enterprise.
Moreover, delivery by auto-truck tanks was probably a development favorable to competition by smaller companies in restricted districts near the wells. Independent competition was favored also (as compared with conditions before 1910 and quite apart from any influence of the dissolution decree) by the almost complete victory of Federal control of railroads in the legislation of 1903, 1906, and 1910, over the old and long-continued abuses of freight rebating and of local and personal discrimination in freight rates and service which had been most effective agencies in building up the Standard Oil monopoly. The new trust-curbing legislation of 1914 and the activities of the newly created Federal Trade Commission visibly increased the courage of smaller enterprisers and the caution of market leaders.
The Decree May Have Helped
These circumstances help to explain both the decrease in the Standard's percentage of the total oil business of the country and an appreciable improvement in competitive conditions, more marked in some areas and in some respects than in others. But this explanation does not rob the dissolution decree of all significance in bringing about this result. The long and expensive lawsuit had brought to the promoters and owners of the Standard an undoubtedly distasteful notoriety. New forces (reflections of public opinion and the new legislation) were moving in the business world, making for better ideals and practices. With the lapse of years, a new generation of leaders, animated by this better spirit, was coming into control. Then, most directly, the outcome of the suit was a condemnation, even though vague and unspecific, of the illegal practices of the company, and gave some assurance of fair play to independents and of protection by the government against a renewal of the abuses.
The Standard became by the decree not one but eleven companies, legally separate and legally warned to continue to act separately. No longer was there a strong central control. Even the personal and sentimental ties were weakened by time. Relentless fate removed one after another of the notable men who, working together with one mind, had built up the great organization. Large blocks of the capital stock were sold on the exchanges and came into the hands of widely scattered investors. Each separate organization had its own officers, largely working within its own territory, each with its separate problems, policies, and ambitions. Profits accrued to separate treasuries, out of which dividends were separately paid. At length around 1922 the customary relationships of the various Standard companies began to be more gravely disturbed. With large production and price reduction on the Pacific coast, the crude oil of California "literally pushed its way into the refinery markets of the East." "Eastern Standard companies, unrestrained by sentiment, suspended in part their purchase of crude from the Prairie Oil and Gas Company" (of the Standard), which long had limited itself largely to buying and selling mid-continent crude. This, with other similar happenings, "indicates strongly that the old Standard Oil Company is crumbling from within." (18)
The Standard Oil Company of Indiana has especially allied itself since 1925 with various non-"Standard" oil enterprises and has come more directly into competition with several of the other Standard companies by entering their territory. (19) As these words were first written, the battle of the proxies was on between the titular head of all the Standard companies and the chief executive of the Standard Oil of Indiana for control of that organization. The result was a victory of the former, in March 1929. The sympathies of the country were strongly with the victor because of his fine plea for higher norms of business ethics in respect to the pending Fall and Sinclair oil scandal suits.
Live-And-Let-Live Limited
Each of the Standard companies is usually the largest company operating in its main territory, though it may have several large rivals. Brief and bitter local price wars have been frequent in the past few years, evidently to chastise the little fellows. The Standard could not now, if it would, crush its larger competitors without a very costly war of prices. They are no longer weak in finances and poor in equipment. So far as any one of the Standard companies acts "in restraint of trade" it must do so chiefly by "conspiracy" (in fact if not in name) with others, and that means some form of live-and-let-live policy, some device of delivered prices to disguise monopoly. This policy tends to degenerate into chaotic local price cutting if the power of the dominant leader relatively decreases greatly. The problem of insuring truly competitive conditions in the oil industry thus is now much the same as that in numerous other same tactics are employed. The final solution is to be attained only by putting an end to discrimination. The weak dissolution decree at last, however, in ways unforeseen, has partially justified itself by its results. In strengthening in some ways the struggling forces of competition it has ceased to be a mere scrap of paper.
Part II: Steel Makes Its Thrilling Escape
Chapter V: Enter The Good Trust, Clad In Steel Armor
The Guessing Contest Continues
The masked ball goes merrily on. Now enters one disguised as a good trust, all clad in steel armor.
One capable student of the problem commented as follows upon the outcome of the Oil and Tobacco suits:
“It is one of the disappointing aspects of the decisions that they fail to answer clearly the question which just now most vitally concerns the business community, namely, how far does the statute as interpreted by the court go in its condemnation of great industrial combinations? To present the problem concretely: is the United States Steel Corporation a combination in restraint of trade in the statutory sense or not? I have read with care the reasons given in the decisions . . . and I must confess my inability to give a confident answer to this question. [And he speaks of the suspense and dread that result from this situation.] (1)
The Court had failed to give a clean-cut answer to either of the two chief questions, legal and economic: first, whether such a merger as that of 1899 was illegal in itself, or secondly, whether the acts leading up to and in furtherance of it were in themselves illegal, and if so in what the illegality consisted. The Oil decision gave little if any guidance for the future either to business or to the legal profession. Virtually it said to the country: Keep on guessing; we cannot now tell you what weight we propose to attach, in adjudicating the Anti-Trust Act, to the various contracts and business policies evidenced in this case; we really do not know ourselves. However, the Court implied that if any other combination were brought before them that seemed to them, all things considered, to be as bad as the Standard Oil Company, it would be declared illegal. Little help that was toward predicting what the Court would do, as the country learned with a shock not many years later in the Steel dissolution suit.
Politics Spurs Action
The Oil decision with its dissolution decree was rendered March 15, 1911, and, as if by unanimous consent, public thought turned to the U.S. Steel Corporation as next to be haled into court in this new and more vigorous policy of enforcing the Anti-Trust Act. It was, indeed, rather generally assumed that the Department of Justice had simply been awaiting the outcome of the Oil case to decide just what would be its next step in regard to the Steel Corporation. That great combination, formed in 1901 under the very eyes of the Industrial Commission then in session, had brought under unified control more numerous and varied concerns and plants and probably a considerably larger capital than had the Standard Oil Company. For ten years, in a period of most active discussion of "trust busting," it had pursued its way somewhat defiantly and unhindered by Federal prosecution. However, by direction of Congress in 1905, it had been extensively investigated by the Federal Bureau of Corporations.
The campaign of 1910 was approaching, in which, as every one foresaw, the "trust issue" was destined to play an important part. President Taft was preparing to stand in the next campaign for the status quo in legislation and a more vigorous enforcement of the Anti-Trust Act, with the emphasis on dissolution. The Oil dissolution decree lent new plausibility and hope to that method, but the "rule of reason" had raised new doubts and fears in many minds. The politicians at Washington were looking for issues, and by June 1911 the so-called Stanley Committee of the House had put on the witness stand the astute Mr. Elbert Gary, who, after an interval, had succeeded the genial Mr. Charles M. Schwab as president of the Steel Corporation. The Committee continued its hearings with many witnesses well into the early weeks of 1912, compiling 4,000 printed pages of testimony relating almost entirely to the steel industry. Meantime, on October 26, 1911, the Attorney General of the United States made a vigorous gesture on behalf of the Administration by filing a petition in the Federal District Court of New Jersey, praying that the Corporation and its constituent companies be held to be unlawful monopolies and be decreed to be illegal and be dissolved. For nine years the case dragged through the courts.
A Close Call
The long-awaited final decision in 1920 verified the jubilant predictions of the corporation lawyers after the Oil decision. The Court now, by a bare plurality, with three vigorously dissenting and two taking "no part in the consideration or decision of the case," exonerated the defendant U.S. Steel Corporation from the charge of being a monopoly.
The plurality consisted of Justices McKenna (who delivered the opinion), White, Holmes, and Van Deventer, all four of whom had voted for conviction in the Standard Oil case. The minority consisted of Day (the only other justice holding over since 1911, and the writer of the vigorous dissenting opinion in this case) and Clark and Pitney, two more recent appointees. Justice McReynolds took no part, presumably because for a year and a half, while the Department of Justice was prosecuting this suit, he had been Attorney General (March 1913-August 191 4); nor did Justice Brandeis, who, as a practicing attorney before taking his seat on the bench, had expressed his opinion that the Steel Corporation was in fact a trust. It was generally believed that in view of the very reasons for their non-participation, these two justices were in sympathy with the view of the minority. Never has there been a more paradoxical situation and a closer decision in an important case in our highest court.
The Corporation was declared to be a good trust, or at least a reformed sinner, and considerably shaken in nerve and much bedraggled, it marched out of court as proudly as it could, bearing a certificate of good character signed by four of the seven—or to speak more accurately, by four of the nine—members of the Supreme Court. It had won, no doubt, in terms of counsel fees, a costly victory, but cheap at the price. A miss is as good as a mile, and for practical purposes five more votes would have been a sheer waste of good ballots. Ever since then, whenever (as in the Pittsburgh-Plus hearings) by some careless phrase any one has intimated that in any way the Steel Corporation might be monopolistic, its counsel, like mercenary lions of Lucerne, would shake their shaggy manes and roar, defying all the world to imply a questioning of this verdict by a plurality of the Court in vindication of their worthy clients.
The Issues In The Case
It is not essential for our purpose to give an extended account of the formation and history of the Steel Corporation. That will be found set forth in testimony collected in many public hearings and in numerous writings, critical or otherwise. It may suffice to recall a few salient points, letting the other facts appear in turn as the economic issues come under discussion. This great industrial combination, proclaimed as the first billion-dollar corporation in the history of the world, was formed in 1901 by means of a holding company which brought together into one super-combination a number of combinations which had been formed mostly between 1898 and 1900, in various branches of the iron and steel industry. After the beginning of the suit in 1911 the voluminous record grew for four years until the Circuit Court rendered its decision June 3, 1915, four judges participating, two (Judges Buffington and McPherson) uniting in one opinion, and two (Judges Woolley and Hunt) in another, but all four concurring in the conclusion to dismiss the bill.
The issues both in the Circuit and in the Supreme Court, briefly expressed, were these: (a) Was the combination formed for the purpose (with the expectation) of achieving a monopoly? (b) Has it in fact succeeded at any time in achieving a monopoly or (not treated as just the same question) in restraining trade? (c) (If the answer to (b) is in the affirmative): Does the corporation now possess monopoly power, or (not just the same question) have the illegal practices been continued to the present? (d) (If the answers to (a) and (b) are in the affirmative and the answer to (c) is in the negative): Does the original expectation of, and temporary success in, achieving monopoly warrant a present dissolution decree when all illegal practices have been discontinued and the combination has now no monopoly power? (2)
Gilding The Halo
The two opinions in the lower Court differed absolutely in their answer to the first question and somewhat in details and emphasis as to the others, but agreed as to the one important practical point, their refusal to dissolve the combination. Judges Buffington and McPherson, both natives and lifetime residents of Pennsylvania, answered emphatically in the negative all the questions. They united in an ardent vindication, at times mounting to a glorification, of the Steel Corporation as a law-abiding enterprise making (with slight exceptions) for perfect competition and for higher ethical standards in business. The combination was the natural and inevitable result of economic evolution. Every claim of merit was conceded, every complaint denied in a manner which left to the Corporation counsel nothing to desire.
Some Doubts Of Sanctity
Further comment may be given in Justice McKenna's own words.
“The other opinion [by Judge Woolley and concurred in by Judge Hunt, 223 Fed. Rep. 161] was in some particulars, in antithesis to Judge Buffington's. The view was expressed that neither the Steel Corporation nor the preceding combinations, which were in a sense its antithesis, had the justification of industrial conditions, nor were they or it impelled by the necessity for integration, or compelled to unite in comprehensive enterprise because such had become a condition of success under the new order of things. On the contrary, that the organizers of the corporation and the preceding companies had illegal purpose from the very beginning, and the corporation became "a combination of combinations, by which, directly or indirectly, approximately 180 independent concerns were brought under one business control," which, measured by the amount of production, extended to 80 per cent or go per cent of the entire output of the country, and that its purpose was to secure great profits which were thought possible in the light of the history of its constituent combinations, and to accomplish permanently what those combinations had demonstrated could be accomplished temporarily, and thereby monopolize and restrain trade.” (3)
After this and further comparisons of the two opinions in the Circuit Court, Justice McKenna says: "We concur in the main with that of Judges Woolley and Hunt." The only difference indicated by him is that he hesitatingly suggests that Judge Woolley underestimated, "it may be," the influence of the "tendency and movement to integration" which made the formation of the Corporation "a facility of industrial progress" "though it cannot be asserted it had become a necessity." This is an economic question to which we must later revert.
More Doubts
The dissenting minority, Justices Day, Pitney, and Clark, quite agreed with Judge Woolley's view that the original purpose of the combinations was illegal. “It is the irresistible conclusion from these premises that great profits to be derived from unified control were the object of these organizations.” (4) And they agreed with Judge Woolley rather than with Judge Buffington that “The contention must be rejected that the combination was an inevitable evolution of industrial tendencies compelling union of endeavor.” (5) Therefore, agreement was expressed by nine judges (two district and seven Supreme Court) that the original formation of the corporation was in violation of the law, and by the same nine that it was not a necessity of economic evolution—though four of the nine hesitatingly called it a tendency, a movement, and a facility of industrial progress and appear elsewhere in the opinion to assume that it was necessary for the public welfare.
Did It Achieve Monopoly?
We pass on still hopeful to the second question, and here we find another and quite different ground on which the dissenting minority would have based a decree of dissolution. They believed that the combination not only was born in illegality, but succeeded for a time in illegally achieving a monopoly and continued for a time acting in restraint of trade. The minority declared that "this unlawful organization exerted its power to control and maintain prices" and thus violated the law "by its immediate practices." (6) They believed therefore that “if the Sherman Act is to be given efficacy, there must be a decree undoing so far as is possible that which has been achieved in open, notorious, and continued violation of its provision.”
Justice McKenna and his three colleagues of the plurality adopted a different view, that of Judges Woolley and Hunt, which turns on a technical legal distinction between the fact of possessing monopoly power and the derivation of that power from the very formation of the merger. They believed that the testimony did “not show that the corporation in and of itself ever possessed or exerted sufficient power when acting alone to control prices of the products of the industry.” (7) Its organizers therefore did not achieve monopoly by the very fact of the combination. They had "underestimated the opposing conditions." They did, however, succeed in restraining trade in that “at the very beginning the Corporation instead of relying upon its own power sought and obtained the assistance and the cooperation of its competitors (the independent companies) . . . it concerted with them in the expedients of pools, associations, trade meetings, and finally in . . . "the Gary Dinners" [between 1907 and 1911] . . . "They were pools without penalties" and more efficient in stabilizing prices.” (8)
A Show Of Indignation
Judge Woolley, whose views Justice McKenna and the plurality accepted, had declared with a show of indignation:
“By the proceedings at the Gary Dinners, and at the meetings of the dinner committees, the fixing and maintaining of prices were as successfully accomplished as by meetings called for that purpose during the period from 1904 to 1907, and by the pools created for that purpose from 1901 to 1904. It therefore appears that from the organization of the corporation in 1901 until the Gary Dinners were discontinued in January, 1911, the corporation, first by one method, and then by a second method, and then by a third method, employed means to procure the establishment and maintenance of uniform prices for its diversified products, and by these means the Steel Corporation, with its competitors, did combine and control prices, and in controlling prices restrained trade. If by the three methods pursued, in the three periods named, prices were not artificially and successfully maintained, as shown by the history covering those three periods, I am at a loss to know by what means it would be possible to fix and maintain prices that would unduly restrain trade in the sense of violating the Anti-Trust Law.” (9)
Guilty Monopoly But No One Guilty
It appears therefore that Judges Woolley and Hunt as well as the entire Supreme bench, agreed that the Corporation was, from its formation until a few months before the inception of the suit, for ten years openly, flagrantly, and continuously violating the Anti-Trust Act. That is a penal statute, for whose violation are prescribed as penalties fines or imprisonment or both, and as remedies, under the equity powers of the Court, either dissolution or any other measure that the Court in its wisdom might deem effective. What is the Court going to do about it? Just here, where the opinion has reached the climax of condemnation, it abruptly changes to palliation of the offenses and explanation of the surprising decision to do nothing whatever about it.
This apology contained two reasons for treating the Corporation as guiltless. The first rested on a sharp distinction drawn by the Court between acts by the Corporation in illegal restraint of trade performed with the connivance of others, and the exercise of monopoly powers by the Corporation itself. So far from deeming such conspiring in restraint of trade to be an evidence of monopoly (power) by the Corporation, the Court takes it to be conclusive proof that the Corporation was not a monopoly—for otherwise it would not have had to secure the cooperation of others. It is therefore held (in the words of Judge Woolley, p. 178) that "the corporation, in and of itself, is not now and has never been a monopoly or a combination in restraint of trade." The emphasis is strongly on the phrase "in and of itself," and the distinction strongly insisted upon is that taking part in the creation of a monopolistic condition or "a combination in restraint of trade" does not constitute the corporation itself "a monopoly" or make it a combination in restraint of trade. The thought is that its power and guilt are no greater than those of any little independent. The complaint did not include the independents, but if they had been included, they surely could not have been more guilty than was the Corporation; so it seemed to follow that, although "a monopoly, and "a combination in restraint of trade" had been formed, nobody was guilty. O wise judge! A Daniel come to judgment!
A Call For Common Sense
It is well to recall here Chief Justice White's conclusion, after his learned survey of the history of the law in the Standard Oil case, that
“In this country also the acts from which it was deemed there resulted a part if not all of the injurious consequences ascribed to monopoly (which originally could arise only from an act of sovereign power) came to be referred to as a monopoly itself. In other words, here as had been the case in England, practical common sense caused attention to be concentrated not upon the theoretically correct name to be given to the condition or acts which gave rise to a harmful result, but to the result itself and to the remedying of the evils which it produced.” (10)
Where now was "the practical common sense," and upon what was the attention of the Court concentrated? Was it upon the acts and facts that constituted restraint of trade and thus monopoly? The argument seems to be merely a quibble about the difference between "a combination in restraint of trade" and "a monopoly" in the sense of a single corporation able by itself alone to "restrain trade."
The minority disagreed very emphatically with this conception of a monopoly, and clearly recognized the relative and limited character of monopoly. Justice Day said:
“Nor can I yield assent to the proposition that this combination has not acquired a dominant position in the trade which enables it to control prices and production when it sees fit to exert its power . . . That the exercise of the power may be withheld, or exerted with forbearing benevolence, does not place such combinations beyond the authority of the statute which was intended to prohibit their formation, and when formed to deprive them of the power unlawfully attained.
It is said that a complete monopolization of the steel business was never attained by the offending combinations. To insist upon such result would be beyond the requirements of the statute and in most cases practicably impossible . . .” (11)
The Court Grants Immunity
Another reason in the minds of the plurality of the Court for not dissolving the Corporation seems to have been the belief that the accused had reformed his ways and that therefore, on grounds of public policy, he should be pardoned for past offenses. The minority believed (here in accord with the plurality) that the combination was illegally formed, but maintained on principles of law alone (as opposed to the plurality) that the combination should be dissolved regardless whether its conduct had been exemplary since, and regardless of what ends of public welfare the Court might think would be served by allowing it to continue. Justice Day, with the concurrence of Justices Clark and Pitney, said with severity:
“As I understand the conclusions of the Court, affirming the decree directing dismissal of the bill, they amount to this: that these combinations, both the holding company and the subsidiaries which comprise it, although organized in plain violation and bold defiance of the provisions of the act, nevertheless are immune from a decree effectually ending the combinations and putting it out of their power to attain the unlawful purposes sought, because of some reasons of public policy requiring such conclusion. I know of no public policy which sanctions a violation of the law, nor of any inconvenience to trade, domestic or foreign, which should have the effect of placing combinations, which have been able thus to organize one of the greatest industries of the country in defiance of law, in an impregnable position above the control of the law forbidding such combinations. Such a conclusion does violence to the policy which the law was intended to enforce, runs counter to the decisions of the Court, and necessarily results in a practical nullification of the act itself.” (12)
These are scathing words, not used by reckless and radical critics of the Supreme Court, but spoken in the presence of all the world by three most able and respected Justices of the Court, while Justices McReynolds and Brandeis sit silently by, thinking we know not what unutterable thoughts.
Law A Mere “Abstraction”
Justice McKenna's reply to the bitter accusations uttered by the dissenters was an implied admission of their truth, but he seems to be appealing to some occult reason (whether or not it be the rule of reason) as elevating the Court above the obligation of literally enforcing the statute. He says:
“But there are countervailing considerations. We have seen whatever there was of wrong intent could not be executed, whatever there was of evil effect, was discontinued before this suit was brought; and this, we think, determines the decree. We say this in full realization of the requirements of the law. [How clearly we hear in these words the echoes of the heated debate within the judicial chambers!] It is clear in its denunciation of monopolies and equally clear in its direction that the courts of the Nation shall prevent and restrain them (its language is “to prevent and restrain violations of” the act), but the command is necessarily submissive to the conditions which may exist and the usual powers of a court of equity to adapt its remedies to those conditions. In other words, it is not expected to enforce abstractions and do injury thereby, it may be, to the purpose of the law. It is this flexibility of discretion . . .” (13) and more on this line to the bewilderment of the lay mind—and to the equal bewilderment of the three dissenting members of the Court. If this is the rule or reason, it ceases to be a mere obiter dictum and is used now in interpreting the Anti-Trust Act. A law whose specific application Justice McKenna did not favor became ipso facto an "abstraction," not to be enforced.
The Good Bishop Forgives
This much is clear to common intelligence, unillumined by any supernatural light; also it is clear that the Court has improvised for the occasion a new statute of limitations to nullify the operation of the Anti-Trust Act. Although a corporation in its very creation and for years thereafter may be a violator of the law, it somehow has its guilt all wiped away by time. The intervening years are viewed as a period of probation in which the sinner, without "reforming" legally the form of organization illegally assumed, may show by his good deeds that he will henceforth be a blessing and not a curse to society (as Congress in its ignorance had supposed). It is as if an incorporated Jean Valjean had stolen a suit of clothes—yes, a whole store full of clothes—and, being caught with the goods, was not only let go scot-free but allowed to keep the loot because it would help make him a good citizen. This is easy for any one to understand without special legal training. But the good Bishop forgave for the theft of his own goods, not those of the public.
Profiting By Official Tort
Warming to his task, Justice McKenna imputes to the Department of Justice not so much a neglect of duty as a sort of dispensing and pardoning power to be exercised merely by neglect of its duty to enforce the Act promptly at the time it is violated. He says: “it is certainly a matter for consideration that there was no legal attack on the Corporation until 1911, ten years after its formation and the commencement of its career. We do not, however, speak of the delay simply as to its time—that there is estoppel in it because of its time—but on account of what was done during that time—the many millions of dollars spent, the development made, and the enterprises undertaken, the investments by the public that have been invited and are not to be ignored. And what of the foreign trade . . .” (14)
"A matter for consideration." Why, and by whom? As he has just said: "by a court of equity to determine what is the appropriate relief" to be granted. That, as the Justice says, is "not . . . to advance a policy contrary to that of the law, but in submission to the law and its policy, and in execution of both." (15) The Biblical phrases used by Chief Justice White twenty-two years before seem to have undergone a transformation so that they now read something like this: The rule exacts that the spirit which killeth a law of Congress, and not the letter which vivifies it, is the proper guide by which to interpret a statute correctly. (16)
The Suppressed Truth
The issues presented in the Steel case differed in important ways from those in the Oil case, and on these differences, emphasized and magnified, hung the opinion of the four who now voted to acquit a combination in steel, whereas the same four had all voted eight years before to convict a combination in oil. But equally certain does it appear today in a careful study of the economic aspects of the two cases, that in quite as important ways the issues were alike, and the likenesses were overlooked and misinterpreted by the Court. Such a study reveals a remarkable negligence in developing and presenting to the Court the economic aspects of this case, and a no less remarkable astuteness of the defense in suppressing pertinent evidence regarding the real nature of the selling devices used by their clients. The defense enlisted economic experts to make an expensive ex parte study of the case, testimony which the defense was unprepared to combat. The Supreme Court, learned in the legal rather than in the economic phases of the problem, was confused and misled by this suppressio vers et sugggestio falsi.
A decade is a brief period in the history of nations and of the law, but even this short time has served to throw new light upon the facts of this case and upon principles that were then obscure. It would, of course, be rash to assert positively that had these matters all been well and truly set forth, any one of the four Justices in the plurality would have voted differently. This is not, however, an unreasonable guess, inasmuch as the Court was so evenly balanced that a hair might have tipped the scales, whereas the suppressed evidence and arguments were ponderous. This famous suit has gone into history, but it is not without hope and prospect of future service in this field of public policy that, after this brief outline of its legal aspects, we now subject to a critical examination its neglected economic features.
Chapter VI: An Empire Of Steel
The Steel Armada
Throughout the progress of the Steel dissolution suit the question constantly recurs whether the very existence of such an enormous aggregation of steel plants and resources did not constitute in effect a "continuing violation" of the Anti-Trust Act. The facts were such that they suggested to every mind the same thought, that this enormous combination must in the very nature of things possess great power to "restrain trade." Here are some extracts from a description dated 1907, after some further additions had been made to the combination, but referring mainly to the year 1901, all written in an admiring, not in an adverse, spirit: (1)
“To escape from its bewildering statistics let us imagine that the United States Steel Corporation is a combination of the navies of the world. Let us suppose that we are standing upon some lofty promontory where we can see the mighty fleet pass in review before us. It consists of 213 squadrons, some with few vessels and some with many. After years of warfare, these squadrons were organized into eight powerful navies: and now, finding that it is better to combine than to compete, they have decided to come together under one admiral and one flag.
Leading the way come the Carnegie war ships, the most formidable steel navy in the world . . . It is practically thirty fleets under one control . . . Next comes the Federal Steel Navy, commanded by Admiral Elbert H. Gary. . . . It is a strong aggregation of five large fleets . . . and now . . . come the American Steel and Wire vessels, 126 in all. . . . Most of the ships are gay with fresh paint. Flags are flying, bands are playing, and all is spick and span . . . Another two year old fleet follows—the American Tin Plate. Its ships are noticeably smaller but more numerous. It is an aggregation of 38 squadrons with a78 vessels in all . . . Next the National Tube, a thirty vessel fleet . . . It was upon this fleet that Carnegie was about to make such a fierce onslaught when Morgan, the peacemaker, interfered . . . The sixth fleet flies the well-known Rockefeller flag. It was picked up, here a vessel and there a vessel, by its dreaded commander. It cost him little but he is selling it for something like fifty million dollars . . . In the rear come two smaller fleets—the National Steel and the Steel Hoop. . . . As if this immense aggregation were not enough, four other large squadrons are soon to be added—the American Bridge, in which was Carnegie's old warship, the Keystone, the Clairton Steel, the Union Steel, and the Shelby Steel Tube.”
An Industrial Empire
Evidently this was written before the notorious purchase of the Tennessee Coal and Iron Company, in 1907. The writer then presents what he calls a "feast of statistics," of which here are a few morsels:
The United States Steel Corporation owns as much land as is contained in the three states of Massachusetts, Vermont, and Rhode Island.
It owns and operates a railroad trackage that would reach from New York to Galveston.
It has nineteen ports and owns a fleet of one hundred large ore ships.
It makes more steel than either Great Britain or Germany, and one quarter of the total amount made in all the countries of the world. Its stock and bonds outstanding were $1,400,000,000 at the date of its first annual report. St. John in the wonderful vision with which the New Testament concludes . . . pictures it as a "city of pure gold." But this was Heaven, not earth. Nothing terrestrial, whether past or present, fact or imagination, equals the wealth of this single American Corporation. And not even this stupendous total expresses the full power of this industrial empire. Behind it stood Morgan, Rockefeller, and Carnegie, representing about two billion dollars of well-handled and aggressive capital. Said the Wall Street men: it means unity, cooperation, assured profit.” (2)
Stripped of all rhetoric, the cold unadorned facts are staggering in their seemingly necessary implication of unified irresistible power to dominate in essential ways the steel business of the country. Before 1901 this one combination had been some twelve combinations, and not many years before some 200 or more independent plants and managements. (3)
New Realities Of Price Control
Looking at realities and not at abstractions, would any one for a moment maintain that an ironclad agreement among either these several hundred concerns or these twelve groups to act as one as to prices would not have given them collectively far more power over prices than could possibly be exerted by any one of them or by all of them acting as separate units? Would not such an agreement and conspiracy, so long as it continued in force, have been flagrantly illegal and a continuing violation of the Anti-Trust Act?
Mr. Gary admitted after some hesitation that the ultimate power as to price policies for all subsidiaries was vested in one central management. Can any one doubt then that the unified power of the United States Steel Corporation in restraint of trade was far more effective and continuous in its operation than any mere pool or secret conspiracy of the constituent parts could have been—always unstable and difficult to maintain? Looking at the realities rather than at legal formalities, did not the very creation of the Corporation therefore put under a single control a power over price policies far greater than any that had or ever could come before the Court in the form of a complaint against a group of independents for conspiracy in restraint of trade? The patient ultimate purchaser of steel may here see the highest Court perform the mathematical and economic miracle of showing in the light of reason that in matters monopolistic the whole is less than any of its parts. Learned judges will demonstrate to their own satisfaction that while it was grossly illegal for independent corporations to have a merely partial agreement to control prices, it became perfectly legal for the same hundred-or-more once independent companies to follow absolutely unified price policies after they had been financially merged into one. Such to the legalistic mind is the mystic power of legal incorporation to transform into a single "person," incapable of conspiracy with himself, scores of separate corporations which in turn control hundreds of separate plants and comprise thousands of individual owners and a billion of capital. Could any more effective means have been taken to make impossible over a large part of the industrial field the continued existence of truly independent industries of moderate size? Surely, here too is some explanation of the quick growth of a new swarm of mergers after the remarkable decision in the Steel Dissolution suit.
“The Natural Thing To Expect”
The reasonable answer to these questions was promptly given by Judges Woolley and Hunt in the lower court. After some scandalized comments on the way in which many "competitive producing concerns" were acquired, Judge Woolley said:
“The immediate, as well as the normal effect of such combinations, was in all instances a complete elimination of competition between the concerns absorbed, and a corresponding restraint of trade.” (4)
This referred to the several constituent combinations which were formed before 1901. Of the power of the United States Steel thereafter, the same Judge says: “by the power resulting from the increased elimination of competition, the Steel Corporation would be enabled to fix and regulate the production and prices of all commodities in the industry. Such would seem to be a natural thing to expect of a combination of competing corporations which in themselves were combinations of competing corporations. . . .” (5)
The dissenting minority of the Supreme Court summarized in the following words the views first held by all four judges of the lower Court, and approved them as expressing the truth of the situation: “the constituent companies of the United States Steel Corporation, nine in number, were themselves combinations of steel manufacturers, and the effect of the organization of these combinations was to give a control over the industry at least equal to that theretofore possessed by the constituent companies and their subsidiaries; that the Steel Corporation was a combination of combinations by which directly or indirectly 80 independent concerns were brought under one control. . . .” (6)
An Astonishing Reaction
Judge Woolley, however, later contradicted his own propositions and shifted his view, saying of the period before 1911: “Without the cooperation of independent producers, prices of steel products could not have been raised and maintained by the corporation alone.” (7) And of the period after 1911 he declares: “the corporation, in and of itself, is not now and has never been a monopoly or a combination in restraint of trade. . . .” (8)
If the "immediate and normal effect" of the forming of each of the subsidiary corporations was "in all instances, a complete elimination of competition between the concerns absorbed and a corresponding restraint of trade" (i.e. among the individual concerns of each group), how is it possible for a rational mind to maintain that a further supercombination of these combinations would suddenly nullify all this accumulated monopoly power? Is not rather the conclusion inevitable that supercombination would further extend this monopoly power by the elimination of competition among the several groups at certain other places and in certain other areas?
But no; the weasel phrase "in and of itself" served to shift the Judge's thought from the elimination of competition between and among the hundreds of concerns formerly owned and operated separately, to the continuance of competition between these same concerns (collectively) and whatever independents there were remaining. And lo! this giant corporation suddenly found it "impossible" to exercise any "restraint of trade" whatever "if not combined with its competitors" (the independents remaining). (9) Because the elimination of competition among some 200 combined concerns did not at the same time eliminate competition with the remaining independents, it did not restrain trade at all!
Lost In The Mazes
No logical connection is discoverable between Judge Woolley's two conflicting propositions. He simply gets lost in the mazes of his own argument, and because the Corporation between 1901 and 1911 cooperated with the independents so as to fix prices more effectively, he leaps to the non sequitur that it had acquired no power by reason of its size and consolidation to fix them at all as among its own members or to force or induce the smaller independents to conspire with it to fix them. (10) In this and the other opinions that favored the Corporation is implied the assumption that unless the great combination had complete monopoly power to fix prices by itself it had no power whatever more than would have been possessed by its two hundred parts acting separately. Between absolute monopoly and absolutely free competition these judges see no possible gradation!
Even Judge Buffington has to wrestle with his doubts on this prima facie absurdity:
“The vast size of the Steel Corporation they formed, the influence and control incident to such size, its seeming power to crush competition, its ability to absorb business through its systematized organization are all factors so associated with monopoly to restrain trade and crush out competition that we may say that, standing alone as a mere isolated fact, this great company gives one such an impression of monopoly that we feel we may in this inquiry place the burden upon it and its formers to satisfy us by affirmative proof that monopoly was not the purpose for which it was formed.” (11)
Yet Judge Buffington concludes after an examination of the plausible explanations given by the "formers" that they have sustained this burden of proof and have convincingly shown not only that monopoly was not the purpose for which it was formed, but also was not a result attained by its formation. He concludes that the Corporation was a "normal, regular, and natural outcome" of a gradual, sustained evolution of the iron and steel industry. But neither he nor Judge Woolley nor Justice McKenna gives further thought to the economic problems of what is the normal, regular, and natural and inevitable effect upon prices of such a vast merger of formerly competing companies.
New Twists Of Logic
Justice McKenna in the prevailing opinion followed the devious windings of Judge Buffington's reasoning in the lower Court. At first he had to struggle against serious doubts. He says:
“The Corporation is undoubtedly of impressive size and it takes an effort of resolution not to be affected by it or to exaggerate its influence. But we must adhere to the law and the law does not make mere size an offense or the existence of unexerted power an offense. It, we repeat, requires overt acts. . . . (12)
The thought here plainly is that the Corporation has great powers of a sort to influence prices and restrain trade, but that it is not guilty, because it does not exert them. But this is soon shifted, following the fallacious reasoning of the lower Court, to the different thought that this enormous aggregation of steel producers "neither attempted nor possessed the power alone" (Judge Woolley's words) to restrain trade or influence prices in any way. Justice McKenna gives a new curve to the twisting logic, beginning with these words:
“It is greater in size and productive power than any of its competitors, equal or nearly equal to them all, but its power over prices was not and is not commensurate with its power to produce.” (13)
A loose proposition from which is drawn a lame conclusion! For this does not say what Justice McKenna at once assumes that it does. It does not say that the combination has no greater power over prices either than had any one of its uncombined competitors, or than its constituent concerns would have had if acting separately without illegal conspiracy. It says merely that its power over prices "is not commensurate with" "its power to produce." The power of the Corporation to produce was at least tenfold greater than that of its nearest competitor and about two hundredfold greater than that of any one separate plant; Justice McKenna's declaration amounts merely to saying that "its power over prices" "was and is not" tenfold greater than that of its nearest competitor, or two hundredfold greater than any single plant would have. But he illogically twists this into the proposition (upon which he then based the decision) that the great combination has, by virtue of its size and combination of formerly competing companies, no power whatever to influence prices or to restrain trade.
All Doubts Flung Aside
A moment more the leap to the fallacious conclusion is halted by a doubt in the mind of the Justice:
“It is true there is some testimony tending to show that the Corporation had such power . . .”
But he brushes this aside and adopts completely the (revised, not the first) view of the lower Court on this point.
“The conflict was by the judges of the District Court unanimously resolved against the existence of that power, and in doing so they but gave effect to the greater weight of the evidence.” (14)
He adds, to the same effect: "whatever there was of wrong intent could not be executed." (15) He fully accepts certain testimony and the interpretation put upon it by Corporation counsel, “that no adventitious interference was employed to either fix or maintain prices and that they were constant or varied according to natural conditions.” (16) He sarcastically rejects any suggestion "that this testimony be minimized or dismissed" by any consideration of the power and influence of the Corporation. Now this plainly asserts that the Corporation acting by itself alone (a thought often repeated in the friendly opinions) was not "a monopoly," had no monopolistic power, and could not act successfully to restrain trade.
“Mere Size” And Price Leadership
The fact that the Corporation assumed the leadership in price agreement was undisputed and is repeatedly assumed in the opinions as a matter arousing no curiosity and calling for no explanation. It is treated as a mere accident, a mere quirk of Fate. The Court assumes that the great size of the Corporation gave it no greater power to assume this leadership in conspiring and in securing (either compelling or attracting) the cooperation of the independents than any one of its constituent companies would have had if acting separately! This applies to the period of admitted agreements between 1901 and 1911, and a fortiori to the period after 1911 when, the judges believed, (17) no common action as to prices was taken and no leadership exercised. Of course, if the size of the combination enabled it to take a leadership as to prices which otherwise would have been impossible, then "mere size" would be the source of "restraint of trade," no less because exerted indirectly than if exerted directly.
Only a singular ignorance of the history of the American trust movement as well as of the theory of monopoly could make it possible for any one, judge or layman, to believe that monopoly is monopoly only when acting without the compliance and cooperation of smaller competitors. If a corporation controls less than 100 per cent of the product within a certain territory, it can, to be sure, exert monopoly power for a time and within limits merely by restricting its own output; but this is neither so effective nor so profitable a method as that of securing by hook or by crook the cooperation of its competitors. Indeed the failure of a large combination either to drive independents out of business or to bring them into conspiracy with it (by pools, agreements, etc.), though not necessarily depriving it of all its power, must cost it large profits. Economic analysis makes the reasons for this very clear. Let the fear of prosecution deprive the big corporation of the power to drive its competitors out of business, and there is left to it still the very effective method of bringing them into cooperation (conspiracy in restraint of trade), the policy followed by the Steel Corporation.
Equality In Guilt Makes Innocence
The opinions in this case both in the District and in the Supreme Court imply a very different and mistaken understanding. Said Judge Woolley:
“The raising and maintaining of prices of steel products from 1901 to 1911 cannot be attributed to the dominancy by the corporation over the industry, because of its size. It was due to cooperation between it and nearly all other producers in a joint effort to raise and maintain prices, in which they persisted and succeeded. Without the cooperation of independent producers, prices of steel products could not have been raised and maintained by the corporation alone. The offense of the corporation, therefore, was . . . an offense precisely similar (18) to that of which every independent and cooperating producer was guilty, and consisted in the act of combining with its competitors, (19) to produce an unlawful result. If it had not combined with its competitors, or if they had not combined with it, restraint of trade, due to the fixation of prices, would in my opinion have been impossible . . . The corporation dominated only in the sense of contributing substantially to what was done and making attractive what it desired to be done, and the others yielded cheerfully. Their offense was no different from that of the corporation, and the offense of the corporation was distinguished from theirs only in the leadership it assumed in promulgating and perfecting the policy.” (20)
"Their offense was no different" and the Corporation's offense "was distinguished" . . . "only in the leadership," and the Court detected in this "only" neither any hint of a guilty conspiracy nor any result of the superior size and financial power that was of any significance whatever. The Court could detect no evidence (though it was baldly patent) that the Corporation exercised any coercion ("others yielded cheerfully") to force others into a conspiracy to raise and maintain prices before 1911. This conclusion is at variance with the first reasonable presumptions of the Judges themselves as well as with the most elementary knowledge of monopolistic methods.
Blameless Life And Neglected Evidence
Another and perhaps even stronger reason that the Court declined to dissolve the billion-dollar corporation was that it believed that the objectionable practices, after being continued for ten years, had been abandoned nine months before the institution of the suit. Greater weight was given to this belief by the further belief that this change came not from fear of prosecution, but "from a conviction of their futility, from the operation of forces that were not understood or were underestimated" at the formation of the combination—this again implying that the Corporation proved to have no power whatever to affect prices.
The Court declares that "since 1911 no act in violation of law can be established against (the Corporation) except its existence be such an act." (21) This pronouncement marked the success of the counsel of the Corporation in presenting, but far more in skillfully suppressing, evidence, while it marked the failure of the Government counsel either to comprehend or to present to the Court the real situation. The Court was deceived as to the essential facts and as to their economic meaning.
For this result the prosecution seems the most blameworthy. Much neglected evidence which would have cast a different light on many features of the case was readily available, but its significance was overlooked. Defendants' counsel were much more awake to some important economic aspects of the case than were the attorneys for the Government, and they had taken the precaution to engage economic experts to make an ex parte study of the case for nearly two years before it came to trial in the Circuit Court (in 1915), at which time was closed the record on which the case was later carried to the Supreme Court. The prosecution on the contrary ignored economic advice. (22) Throughout the tens of thousands of pages of printed testimony that one may read today, it is patent that Government counsel were in respect to the economic issues groping their way in a labyrinth without any guiding thread of principle.
New Fashions In Monopoly
Government counsel were in the main conducting the case along the lines laid down in the Standard Oil suit, seeking the same kind of evidence, hoping to obtain the same sort of decree of dissolution. They failed to sense the great change in the conditions and circumstances. The Oil decision was based largely on evidence of price wars and cutthroat competition of an earlier date designed to put smaller competitors out of business. The Steel Corporation, however, had used mainly the method of agreement with its smaller competitors, the policy of live-and-let-live, and of the maintenance and stabilizing of (local discriminatory) prices as high as possible. Fashions in "trusts" and trust methods had changed between 1900 and 1990 as much as those in women's dress. Even before the dissolution of the Standard in 1911, ruthless cutthroat price wars in the oil industry, as in other leading industries, had largely ceased. They had mostly given place to a policy of live-and-let-live, with common understanding and action in a scheme of basing-point prices, while cutthroat competition was only a concealed weapon for occasional though effective use. Most of the more spectacular and damaging evidence of the older, cruder methods in the Oil case antedated 1901, and that case would have presented a very different aspect if the evidence presented to the Court in 1911 had been confined to the acts of the preceding ten years. The Standard was made a scapegoat for popular resentment against corporation excesses. It had to bear the odium of its older practices, while the Steel Corporation succeeded well in disassociating its record after 1901 from that of the constituent companies before that date, so that it suffered scarcely at all from the hangover of prejudice in the minds of the judges against the unbridled violation of the law in the 'go's when the constituent combinations were formed. Thus, starting with a clean slate, it succeeded first in convincing the Court that while it "conspired" between 1901 and 1911 with smaller competitors, it in no sense dominated their actions, but dealt with them purely as co-equals; and finally in making the Court believe that after 1911 its policies and prices had completely exemplified conditions of free competition, the ideal operation of supply and demand in true markets. Government counsel failed to comprehend the new situation and the need of a new legal attitude toward it.
Hoodwinking The Supreme Court
A tangle of facts and confused interpretations must be cleared away to uncover the real situation. Let us for the present dismiss the conditions of the ten years preceding October 1911, except such of them as continued in effect after the suit was undertaken. It was conceded, in Justice McKenna's words, that "the activities and offendings" of the accused in the period from 1901 to 1911 "have illustrative periods of significant and demonstrated illegality." (23) It was to the events after 1911 that the judges voting to exculpate the Corporation attached a controlling significance, which led them, with slight exceptions, to pronounce the Corporation's record to be spotless in respect to the issues of the suit. (24)
As we reread the evidence and opinions in the case with the aid of economic analysis and of facts that have later come to light, it is clear that the prosecution and the Court were both off on the wrong trail. Needless to say, the defendant, so far from setting them right, led them off further into the jungle of confusion. It was in respect to the prosecuting counsel a case of the blind leading the blind; in respect to defendants' counsel, a case of hoodwinking the Supreme Court—helping to darken its blindness.
Chapter VII: Integration Without Integrity
Uncovering The Hidden
We have seen how strong and clear was the first impression of all the judges that such a gigantic merger of steel enterprises must gain a large measure of unified influence over prices. But only the three dissenting in the Supreme Court adhered to this reasonable view, while the other judges (eight in all) emerged from a welter of arguments gripping the contrary conclusion. In truth the power was being constantly exercised and therefore existed. The main facts in this remarkable chapter in the masquerade of monopoly came to light years later (1920-1923) in the hearings on the Pittsburgh-Plus complaint before the Federal Trade Commission. With slight interruptions, from the time of its formation in 1901, the Corporation was the ringleader in a gigantic conspiracy in restraint of trade and in an artificial system of price maintenance. This was continuing under the eyes of the Court as it was pronouncing its pardon for past errors and exonerating the accused from all charges of present power or efforts to restrain trade. While lacking in part the cruder features of the methods followed in earlier price wars, this method was as effective in giving substantial results. The Standard Oil in its balmiest days never got better ones. Results—that was what business wanted; how it got them was to it "merely an academic question."
Competition Among Various Groups
What has economic theory to say as to the effect a vast combination of formerly competing concerns may have in restricting trade? Is it in effect "a continuing violation of the statute"—as the judges unanimously thought on first glance it must be? The full answer (which is in the affirmative) is a part of the general theory of market prices and market areas. This chapter will seek to indicate merely how in some concrete ways the Steel Combination must effectually have altered the formerly operating forces of competition.
The some hundreds of steel plants composing the Combination were of different sorts and produced a variety of steel products, some plants only one main class, other large plants several classes of products. The main classes of steel products (while there are great numbers of patterns, sizes, and varieties in each class) are: rails, plates, shapes, bars, tubes (pipe), and wire. The Combination included also a number of cement plants, as well as numerous fabricating plants for turning out such products as bridges, steel cars, and tin plates. (1)
Now the question of competition divides into as many special questions as there are main classes of steel plants; for, except in some remote way, rail mills cannot be said to be competitors of plate, bar, tube, or wire mills, or tin-plate mills with bridge factories. So it is chiefly, if not solely, with the mutual competition of plants of each general class that we are concerned in a consideration of the effects of the merger of separate plants under the single control of the Corporation. However, in the testimony and in the briefs and opinions, only the faintest traces (if any) of such a distinction appear.
Again Seeking Intent
In the prevailing opinions little time is spent on the question whether the effect of the merger was to give monopolistic power to the Corporation. (2) Even that little is merely an "inquiry whether it was formed in order to so monopolize or restrain trade,'' (3) or to answer the question, "Was an intent to monopolize or to unduly restrain trade shown by the circumstances which led up to and surrounded the organization of the Corporation?" (4) Here again, as in the Standard Oil case, the legal mind is engrossed with the question of "intent" to monopolize, almost completely disregarding the question of actual economic power to monopolize. An enormous amount of evidence had been introduced regarding the conversations and negotiations of Messrs. Morgan, Schwab, Carnegie, et al., preceding the first merger in 1901, and with President Roosevelt regarding the purchase, in 1907 of the Tennessee Coal and Iron Company. The two opinions in the lower court analyzed these ex parse statements at length but arrived at opposite conclusions. Judge Buffington (Judge McPherson concurring) found the "formers" of the Corporation guiltless of any intent to monopolize: “we cannot but feel, in the light of the proofs, that (the various purchases) were made in fair business course, and were, to use the language of the Supreme Court in the Standard Oil Case, "the honest exertion of one's right to contract for his own benefit, unaccompanied by a wrongful motive to injure others." (5)
Judge Woolley (Judge Hunt concurring), from the same evidence, drew the opposite conclusion as to intent, or purpose:
“I am of opinion that the circumstances which led up to and surrounded the organization of the Steel Corporation show that those who organized the Steel Corporation intended it to monopolize and unduly restrain trade.” (6)
Integration With Honest Face
In examining the evidence as to intent, Judge Buffington was greatly impressed with "the tendency of the steel business (from the '80's on) towards concentration, combination, rounding up, or continuity of operation (p. 123). "From these figures the insistent necessity of integration in the steel business will be seen" (p. 125). These ideas reenforced his conviction, earlier expressed, that "the iron and steel trade of the United States has been a gradual sustained evolution" (p. 121). As proofs of this he saw the "rapid and widespread fever of integration by consolidation that took place toward the close of the century," notably the formation of the constituent companies, the Carnegie Steel and the Illinois Steel, which then formed the Federal Steel (pp. 127-131).By integration is here meant carrying the process of manufacture continuously under one ownership and management "back to the base of supply and also into more diversified and extended finished product" (p. 131). If integration was the motive, then monopoly was not—so ran the judicial thought. But if we find that integration was not the motive—what then as to monopoly?
Mr. Gary had plausibly advanced this view of the purpose of the formation of the Federal Company: “in this whole plan, . . . there was an effort made to acquire property that would be useful to each other, and by that I mean to acquire a plant that furnished certain commodities to another plant which we were acquiring and to acquire—the latter because it could, at good advantage, secure the products which it needed for its uses, and so all through the line, from the ore down to the conversion from one product into another and the final distribution of the finished product: (7)
Judge Buffington said of this and other similar testimony:
“All of which seems to strengthen and confirm the conclusion of the insistent requirement of integration in the steel trade at the close of the century.” (8) Further he said:
“That this plan of integration in varied products—and nothing in excess of the required integration—was carried out is also shown by the proofs.” (9) The "proofs" consist of assertions in manifest conflict with the facts, made by officials of the Corporation. The Judge therefore believed "that integration along manufacturing lines" was one of the important "avowed purposes of those who formed the Steel Corporation," and this combines with other testimony to convince him "that monopoly of the steel and iron business was not the purpose for which that corporation was formed." (10)
The Honest Face Deceives The Court
Judges Woolley and Hunt are more suspicious. They are impressed in the explanations of Messrs. Schwab, Morgan, et al., with respect to the objects in view, by such “conspicuous features . . . [as] overcapitalization, and the elimination of competition, . . . in seeking the purposes for which the corporation was organized. That evidence, as against the testimony to the contrary, impels me to the opinion that the primary purpose of the organization of the Steel Corporation was not integration.” (11)
Justice McKenna concurred "in the main" with the views of Judges Woolley and Hunt "except" on this very point: “it may be, that they underestimated the influence of the tendency and movement to integration, the appreciation of the necessity of value of the continuity of manufacture from the ore to the finished product. And there was such a tendency; and though it cannot be asserted it had become a necessity, it had certainly become a facility of industrial progress.” (12) Justice McKenna, agreeing rather with Judge Buffington in this matter, approvingly summarized his conclusions in these words:
“The corporation, in the view of the opinion, was an evolution, a natural consummation of the tendencies of the industry on account of changing conditions, practically a compulsion from "the metallurgical method of making steel and the physical method of handling it," this method, and the conditions consequent upon it, tending to combinations of capital and energies rather than diffusion in independent action . . . The tendency of the industry and the purpose of the corporation in yielding to it were expressed in comprehensive condensation by the word "integration," which signifies continuity in the processes of the industry from ore mines to the finished product.” (13)
Behind The Mask
Thus it is plain that belief in the economy, value, facility, and probable necessity of integration tipped the scales heavily to the final decision not to dissolve the Corporation. It appreciably confirmed the plurality in the view that dissolution would check a natural evolution of industry toward greater efficiency and lower costs, which, given complete competition, which was assumed, eventually would lead to lower prices to the public. The Court was attempting to justify in the name of integration something essentially different and was postulating competition where it was a contradiction in terms. In the course of the discussion the economies of integration become confused with two quite different ideas: first, with the advantages of large production in a single plant; second, with the advantages (indeed the supposed necessity) of horizontal merger under one ownership of numerous like plants in diverse localities.
By this confusion, the virtues and evolutionary necessity of technical integration are transferred as an economic halo to the graceless head of the combination of competitors in restraint of trade. (14)
There are no doubt technical and resulting economic advantages of (vertical) integration of processes within a single plant, in some cases. To show them, much testimony was collected, of which many extracts appear in the opinion. (15) Greatest stress is laid upon inventions (such as the Jones mixer) by which the fluid pig iron could be used in Bessemer converters or open-hearth furnaces without cooling and remelting. This is real technological integration in a single plant, but most of the remainder of the evidence relates to vertical financial merger of physically separate plants—the advantage on the one hand of steel fabricators' being able to produce for themselves a regular supply of crude (or partly fabricated) material, and on the other hand of steel producers at stages of the process nearer the ores having, without uncertainty or selling costs, a more regular outlet for their products. All this evidence is irrelevant to the question whether the formation of the gigantic combination by horizontal financial merger of like plants in 1901 was a necessity and a great technical economy, though the Court assumes that it is relevant. (16)
Judicial Somersaults
In discussing integration each Court contradicts itself in different parts of the same opinion. Most of the discussion bears on the question whether large size and apparently overshadowing power are necessary conditions of evolution toward efficiency, and the answer both of the Circuit and of the Supreme Court in substance is in the affirmative (by Judge Buffington explicitly so, and by Justice McKenna and his colleagues, so in effect). But when the question under consideration is whether genuine, active, effective competition has existed after the formation of the Corporation, the argument of the witnesses, of defendant's counsel, and of the Court, is reversed with eagerness to show that so-called competitors only a fraction of the size of the Corporation are as thoroughly integrated and quite as efficient. This leads to the conclusion that the Corporation, even if it had the purpose, has not the power "to throttle the growth" of competitors which, though much smaller, are quite as efficient as it is. In hundreds of pages of testimony "competitors" emphatically assured the Court that they were, by virtue of thorough integration, and their resulting technical efficiency, abundantly able to meet the great Corporation on any plane of competition.
These witnesses, skillfully selected and guided, succeeded in convincing the more impressionable judges in the lower Court of two directly contradictory propositions; the formation of the Combination did, and at the same time did not, lead to greatly increased technical efficiency. The illogical shift from the notion of the necessity of "integration" to that of its futility is, at some points in the opinion, swift and startling! (17)
False Interference
What becomes of the notion that the formation of the Corporation was a great, and the only possible, step forward in technical efficiency? Judge Buffington forgets this issue and goes on to argue that inasmuch as efficiency was not the result of the formation of the Corporation, monopoly was not the purpose. Is there any logical connection between the premise and this conclusion? None whatsoever, except as disproof. If Judge Buffington's revised view was correct, that the Corporation was not more efficient technically, and as these shrewd practical men may be assumed to have known what they were about, is not the more probable inference that their real reason was something else than the one they professed? That it was to gain greater control of prices was the view taken sanely by the three dissenting Justices. It was also the view taken by Judges Woolley and Hunt who (as to this point) more consistently held that the "purpose" was monopoly; but they mistakenly believed it failed for lack of power; "the constituent companies absorbed by the corporation were strongest at their birth." (18) The plurality of the Supreme Court, however, in this instance, preferred to loop the loop with Judge Buffington.
A Fantasy Of Mass Specialization
Confused also throughout the discussions of the advantages of integration was the idea of plant specialization—that is, the advantages of large production of a single product at a single plant. This idea showed itself in the oft-cited version of the siren song in which Mr. Schwab lured the financial affections of the willing Mr. J. P. Morgan. Mr. Schwab said in that fateful address in New York on December 13, 1900, to which Mr. Morgan listened with such entrancement:
“I believed that the next great step in economical manufacture was to so regulate the business and plants of the business in manufacturing on a larger scale than had ever been attempted heretofore; that instead, as was then the practice, of having one mill to make 10 or 20 or 50 products, the greatest economy would result from having one mill make one product, and make that product continuously.” (19)
The examples given show that by one product is meant not merely a general class such as steel products, or a somewhat narrower class such as "structural steels," but an extremely narrow class such as "angles exclusively," "beams exclusively," "and so forth," also “bridges and other fabricated materials . . . steel cars, and one kind of steel cars . . . passenger cars, for example, as being different from freight cars, two separate works, as following out this general line of policy, would have to be built and so operated.”
Incidentally thrown in, is the suggestion “that great economies would result from locating mills [evidently each one of these fabricating mills] at the point of consumption, by which the cost of transporting the finished material to the point of consumption would in many cases be reduced or saved. (20)
Mass Production V.S. Freight Costs
Now despite the authority of Mr. Schwab as a master ironmaker, he has here confused two opposite economic aspects of the problem of large production, one its technical advantages at the plant, the other its limits and disadvantages in marketing the product. His doctrine of the marvelous efficiency of large production to be developed without limits ignores the simple principle that specialization is limited by "the extent of the market," that is, by the amount that can be sold profitably from one plant. Decreasing unit-cost of manufacture by mass production at one place is offset by steadily rising cost of shipment to points of consumption over wider areas. In producing heavy products especially the limit of net advantages in mass production at one plant is quickly reached. At that point it becomes more efficient, not less so, to produce some variety of products nearer the consumers rather than in plants more narrowly specializing. When Mr. Schwab incidentally later recognized "the advantages of scattered duplicate mills" he was refuting his main argument. He was following the Biblical injunction—literally though not in spirit—not to let his left hand know what his right hand doeth. But his evidence "went over great" with the Court, which hearkened trustfully to the words of the oracle of big business.
Does Merger “Save Freight”?
The argument on integration turns at some points on the (supposed) economic necessity, in order to save freights, of uniting, under one ownership, plants turning out like products, but in different territory:
“The proofs also show it is necessary to have structural plants in different localities. In that regard and referring only to the Middle West equipment, the proof is that the American Bridge Company has in the West [here quoting from defendants' testimony, Vol. I0, p. 3961] "a plant at Toledo, one at Ambridge (Pittsburgh), one at Gary, Ind., a large plant and a comparatively new plant; one at Chicago, one in Minneapolis, one in St. Louis, and one in Detroit . . . It is a zone business more or less." A zone business is a "business within 300 or 400 miles of where the plant is located. It is a question of freight rates." (21)
All of this is in its economic analysis and implications a veritable welter of half truths, untruths, and distorted truths, pervaded with the belief, developed for the purpose, and leading to the conclusion, that these mergers of like plants were part of a process of integration, and that integration was a natural economic and commendable evolution of industry and justified the formation of the U.S. Steel Corporation, and in no way influenced or diminished the forces of competition. These statements so exaggerate the effect of stabilizing freight rates and abolishing rebates that this alone must falsify the conclusion. Of course, the need to pay any freight whatever to that extent locally restricts "the market" (more accurately, the profitable sales area) of any factory. Every business, but particularly one whose products are heavy, to some degree is a "zone business." Illegal rebates had only partly modified this restriction to the plants whose owners were thus favored, enabling them to sell farther away from their mills on a delivered price and to ship into territory where otherwise their smaller competitors would have been able to survive.
Better Stop Discrimination
It is a dangerous half truth that the only way of "overcoming the regular freight rate" is by horizontal merger, for its true meaning can be only this: either that goods have been sold at discriminatory prices or that illegal rebates have enabled a mill to sell in territory where otherwise it would have been unable to sell profitably. When these rebates are stopped, the only way the mill can "overcome" the new (that is, return to the old illegally created) conditions is to acquire a mill in that territory! Or discrimination may have been practiced by local price cutting, and such merger to reduce this discrimination is called a natural "tendency to integration"! But the advantage resulting from this is quite different from that of integration; it is often spoken of in the testimony as "a saving of freight." But clearly the "saving of freight" is there, whoever owns the duplicate plant before the merger. The so-called "saving" is the result merely of the nearness of the mill to the customer (point of delivery)—a geographical fact, not a technological fact of greater efficiency resulting from merger. The freight is in no way "saved" to the public when two or more competing plants which have been cutting prices locally are merged into a single corporation. The "saving" is simply added to monopolistic profits. If all discrimination were stopped by legal action, the "saving" would come to the public in lower prices.
The Marvels Of Logical Catalysis
The use of the integration argument in the suit was analogous to that of a catalyst in a chemical process, helping to transform and energize other arguments which would have been inert but for its presence, but in the end forming no part of the product. Thus the supposed need of integration (of the kind and on the scale occurring in this combination) strongly helped to persuade the judges to accept at face value the flimsy explanation of the "formers" of the Corporation and to acquit them of any purpose or intent to control prices and restrain trade. It invested this mainly horizontal merger with a halo of merit and sanction as a great and needed advance step in technical efficiency and in social economy. This merit and sanction was, in the process of confused thinking, diffused over the essentially different process of the merging of great numbers of like plants in scattered locations, and this too became (in the minds of the judges) a great and necessary advance step in technical efficiency, assumed to be without any effect whatever in the direction of restraint of competition. Particularly the great economies of "integration" (plus gigantic merger) appeared to the judges to have been the necessary condition for the large development of foreign business in steel (mostly through dumping) and to have had this (as it seemed to the judges) admirable and beneficial result. These remarkable illogical transformations being completed, the notion of the great technical benefits and need of integration (plus merger on so large a scale and in this particular case) drops out of the reasoning. The judges make the discovery through other evidence (or think they do) that the "integration" of this corporation (even with its over-towering financial power and alliances) had somehow left it weaker competitively than many of the smaller independents, unable to stem their steady growth at a greater rate than its own, unable without their willing cooperation to restrain competition in any manner whatever. These opinions should necessitate a revision of the earlier arguments on integration, but the sophistical catalyst had done its work and forms no part of the final judgment.
Other Influence In The Argument
These later conclusions are mainly inconsistent deductions from a quite different line of evidence. This now, in its turn, it is our task to examine. This evidence was all directed to persuading, and did persuade, the judges who voted for vindication to accept the astonishing proposition that during the nineteen years of its existence (1901-1990) the accused Corporation and its subsidiaries had never, by reason of size, integration, and combination of formerly competing plants, possessed any power or exercised any influence over prices. These judges conceded that in the first ten years (1901-1911) there had been numerous restraints of trade by agreement in which the Corporation acted only with the same power and in the same way as did any of its smaller competitors. But these old lapses were to be forgiven and forgotten. Since 1911 "no adventitious interference was employed to either fix or maintain prices and . . . they were constant or varied according to natural conditions," (22) apparently meaning: in the way prices would behave if the great steel combine had never been formed, or if it were dissolved into its constituent elements. Thus was completely evaded the question whether, by the merger, competition restricted among the constituent plants of the Corporation. We have in the next chapter to examine the reality of its competition with the independents.
Chapter VIII: The Giant Weakling
More Drafts On Credulity
It takes some credulity to believe that the units in the steel combine went on competing just as fully as if they had not been combined. After that, Baron Munchausen must sound as tame as a Rollo book, and Gulliver’s Travels be but a bedtime story. After that, the proposition that the members of such a combination would go on competing as fully with the remaining independents and they as fully with each other as if no combination had been formed, should present hardly more difficulty than the axiom that the greater includes the less. But the lawyers of the Steel Corporation took no chances, and not anticipating how easily their victory would be won, they skillfully marshaled a mass of evidence to convince the Court of the truth of these propositions. The testimony was mainly of two kinds, or from two sources: first, from independents (supposedly free to compete); second, from customers (supposedly free to testify). Against such testimony the prosecution made a truly pitiable showing, in view of the real situation as it is now known. This evidence was supplemented by some other. In a negative way of rebuttal were presented statistics as to the relative upward trends of steel prices and other prices after 1901, and further, some opinions from professed experts to the effect that the Corporation had no power by itself to restrain trade in any manner or degree. Various other matters were touched upon in this connection, but most of them were of minor importance.
Figures Don’t Lie, But–
Very impressive, no doubt, were statistics of the rate of the Corporation's growth relative to that of all others taken together. They were appealed to repeatedly and confidently by the defense, and cited trustingly in the vindicating court opinions. This evidence weighed heavily in the scales of judgment. There is no need to burden the reader with masses of statistics. The bare figures are not in dispute, but only their significance. The salient facts are these: The Corporation had grown (absolutely, in tonnage produced) 34 per cent, but all other companies combined had grown 59 per cent. (The opinion says, at one point, 40 per cent.) Certain independents had increased their own production by much greater percentages, two between 63 and 91 per cent, four between 153 and 463 per cent, one (the Inland Steel) by 1,496 per cent, and one (the Bethlehem Steel) by the startling figure of 3,780 per cent. The Corporation's proportion of the total national output (relative growth), however, had declined. The Corporation's proportion of the total in 1901 was 50.1, but in 1911 had fallen to 45.7. Conversely, all other (so-called) competitors in 1901 produced 49.9 per cent of the total, and in 1911 54.3 per cent.
What Do They Prove?
These figures were accepted in the prevailing opinions as very significant. What were they taken to signify? The disproof of any monopolistic power residing in the Corporation or of any participation by it in restraint of trade; nothing less. (1)
Yet this idea must in the light of economic analysis of the situation be rejected. It results from ignoring the simple truth that monopoly is always a limited and relative power, shading off in various directions, according to freight-costs, as well as to other conditions, such as styles, patterns, service, financial resources, etc. A fuller elucidation of this problem is a part of the theory of markets and market sales-areas but it is worth our while to look at some aspects of the subject in the present connection.
It is obviously illogical to infer from the growth of competitors in outlying regions of the country, where the Corporation has no plants, that it has no power whatever to restrain trade in the region where its plants are located. In principle this is as false as it would be to infer from the growth of plants in Germany or in Belgium that a corporation controlling the entire product of the United States had no monopoly power. The difference is one of degree and not one of principle. Such plants as the Bethlehem Steel, the Colorado Company at Pueblo, the Lackawanna Steel at Buffalo, are separated by hundreds or by thousands of miles from the nearest plant of the Corporation producing the same kind of goods. The most notable exception to this statement is Jones and Laughlin at Pittsburgh, whose cooperation with the Corporation in price policies has been notoriously harmonious.
The Center Of Monopoly
It was said in 1907 of the geographical distribution of the some two hundred plants in the Corporation:
“Its iron-works and steel-works are mainly in Pittsburgh and twenty-five smaller steel cities within a hundred miles' distance; but it also owns large plants in Chicago, Joliet, Milwaukee, St. Louis, Worcester, and elsewhere. It is about to create a new industrial center (Gary) at the southern end of Lake Michigan.” (2)
The year this was written the Corporation acquired also the Tennessee Coal, Iron and Railroad Company, whose plants were at or near Birmingham, Ala. After the building of Gary the Corporation's production of steel of the more basic forms was in a measure approximating 95 per cent confined to the two districts, Pittsburgh and Chicago, with small outlying plants at Duluth and Birmingham; at the other outlying cities mentioned it had fabricating plants (whose products were not so fitted for standardization either as to quality or prices). Within this great elliptical empire of steel, with Pittsburgh at one focus and Gary at the other, the predominance of the Corporation in capacity and output was overwhelming. Outside that area, either at Chicago and westward or eastward in the old middle States (eastern Pennsylvania, New York, Maryland) protected or safeguarded by a broad zone of costly freights, occurred much the largest increase of its competitors' output, both absolutely and relatively. Nowhere in the evidence, hearings, and opinions in this suit is there any hint of any significance to these facts other than that they were taken to prove that the Corporation was "not a monopoly"!
Zones Of Relative Monopoly
The fact that "the steel business is a zone business" bobs in and out of the discussion; you see it when it can be used to becloud the issue (as to make it appear that a horizontal merger of like plants is necessary for "integration"), and you do not see it when it would enlighten the issue (as to show, truly, that monopoly is relative to place and limited by distance). The growth of the competitors in the aggregate all over the country does not prove the general impotence of the Corporation to dominate price policies. By the use of these percentage figures the Corporation is pictured as a comparative weakling, unable to cope with its more vigorous independent competitors, ignoring the fact that most of them are located in parts of the country where the Corporation had either no plants at all or none of the same kind.
The Courts thought it pertinent to enter into an extended inquiry to show the possibility of independents drawing ore supplies from Cuba and Brazil to plants on the Atlantic Coast where they have "in many cases substantial freight advantage over the Steel Corporation," and to show that other eastern, southern, and western companies, as the Colorado, etc., have large ore supplies of their own. Judge Buffington concludes from these facts "that the steel and iron business of this country is not being, and indeed cannot be, monopolized by the Steel Corporation." (3)
Judge Woolley also sees in these facts a proof that "the Corporation has not a monopoly of the raw materials of the steel industry," (4) implying that monopoly is absolute, therefore nonexistent unless it extends in equal degree to every portion of the national territory.
Absolute Vs. Relative Growth
The feat of convincing the Court of this economic absurdity was performed by defendants' counsel with virtuosity. The main fallacy is the rather superficial confusion of a decrease relative to competitors with an absolute decrease of size and of monopoly power. It is a statistical trick to cite as significant that in twelve years a small plant at Bethlehem increased 3780 per cent of its size in 1901, whereas the Steel Corporation, which already in 1901 was producing more steel than all Great Britain or than all Germany, increased less than 40 per cent! Start the comparison only a little earlier, and the increase at Bethlehem can be shown to be infinite! It is usually a mathematical impossibility for any older enterprise to increase at as great a rate per cent in a certain period as can an enterprise in its beginning years. (5)
A Mysterious Paralysis
Closely connected with this phase of the general argument was the notion that the Corporation lacked the power to put any one competitor out of business by local discrimination (price cutting). No specific attempt to substantiate this notion appears in the prevailing opinion of Justice McKenna, for he waves this and related matters aside with the words, "our consideration should be of not what the Corporation had power to do or did, but what it has now power to do and is doing." (6) This was but a superfluous remark, for in the next few pages he concluded that the Corporation neither was doing nor had the power to do by this or any other method anything unlawful that could put competitors out of business. Thus tacitly, the Supreme Court adopted a view which had been presented by defendants frequently throughout the hearings and which had been accepted by the lower Court, to wit, that the Corporation had no economic power to cut prices locally (at least, not enough to cripple any selected competitor seriously). It expresses the truth far better to say that because of the fear of prosecution under the Anti-Trust Act, the Corporation did not think it safe to cut prices locally though it might have had the power.
A Disastrous Doctrine
Intertwined in the reasoning of the Court's decision is the implication that "a combination in restraint of trade" is not illegal under the statute unless or until the power thus attained could be shown, by specific evidence of its results, to have been exercised. Justice McKenna said:
“The law does not make mere size an offense or the existence of unexerted power an offense. It, we repeat, requires overt acts . . . It does not compel competition nor require all that is possible.” (7) To say that "mere size" is not an offense surely ought not to mean that "unexerted power" attained by combination of formerly competing plants is not an offense under either the first or second section of the Anti-Trust Act. Such a doctrine is fraught with peril to the statute and disaster to the public interest. It grants immunity from prosecution to any combination not only at the time of its formation but so long as (in this case ten years), from fear of prosecution, it refrains from exerting its power. Then, by the plurality opinion, the combination may continue to enjoy immunity later, if it can convince the Court that although formed for that purpose, it is not at the moment exerting its thus acquired monopolistic power. At least that was what happened in this case, the Court being further confirmed in the justice of this conclusion by the odd notion that although the constituent combinations undoubtedly had great monopolistic powers, these collective powers vanished the moment the supercombination had been formed! If the real ground of the decision was that the combination had no monopoly power, is not the proposition about "unexerted power" a mere obiter dictum in this case? Yet it has been repeatedly cited in later briefs to justify monopoly attained by merger.
A Confident Independent
The groundwork for the reasoning and conclusion that the Corporation had not the power to cripple its competitors by local price cutting was carefully laid by defendants' counsel by means of opinions that in the very nature of market conditions and relations in the industry the Steel Corporation could have no such power, and of statements by leading independents (who obviously had not been put out of business) that they "thought" the Corporation could not put them out of business if it tried. These pseudo-practical opinions of "independents" are, however, all expressed in nearly the same words used in the testimony of the chief theoretical expert witness, as if they were reciting an agreed formula. The Court feels the hairy hand of the practical Esau but hears the dulcet voice of the academic Jacob. The evidence and argument on this point are discussed at length only by Judge Buffington, but his conclusions are implied and embodied in the two other prevailing opinions. The conclusions, as we shall show, are thoroughly unsound in economics.
The president of the Cambria Steel Company of Johnstown, Pa., goes upon the stand and gives testimony which the Court said was "enlightening as showing that his and other companies in the steel business feel that the Steel Corporation has no power, even if it disposes, to monopolize, restrain, or stop their business." The witness made sweeping and confident claims that any one of a number of smaller companies, including his own, could compete successfully with the U.S. Steel because "fully the equal" in efficiency and experiencing "absolutely no difficulty in producing the various products at practically the same cost."
The witness assented to the proposition that the Steel Corporation has no such advantage “as would enable it to put its competitors out of business . . . impossible to do so without committing suicide . . . could not confine destructive warfare to any one competitor . . . because the markets are all affected in sympathy, and, if the price was made below cost in one market only . . . we would seek other markets . . . You cannot affect the price in one market without affecting it in all the other markets in the country.” (8)
This testimony, if correct, was an obvious disproof of the claims that the great combination was a technical necessity of progress. The industrious but brain-fagged Judge Buffington first cited this evidence impressively to prove that the Corporation was no more efficient than its small competitors, and then ignored it when a few pages later he came to examine the evidence which led him to his erroneous opinion regarding the "necessity" of the integration.
Zone Business Markets “All Over”!
Comes, too, the president of the Republic Iron and Steel Company, of Youngstown, Ohio, which, the Court says, had "practically eliminated all its scattered iron mills and concentrated them in operation at a few points of production," producing now little iron but about a million tons of steel per annum. His testimony (which the Court pronounces "instructive") announces with a bang an astonishing doctrine of "markets" for a zone business. He affirmed that the "market" for his product is “all over the United States and Canada. The Steel Corporation has not power to put the Republic out of business . . . or its competitors generally, or any of its principal competitors . . . [because], one, it has not the physical ability, and secondly, it would involve its own market . . . [and] suffer equally with us.” (9)
He then explained that by physical ability he meant technical efficiency, through integration, together with management and financing, and explained that all "markets" are involved because every company is compelled to sell steel to every one of its customers as cheap as to every other, for if it did not it "would probably soon hear from" the one charged more, "because these two men would naturally compete in the general market of the United States with their machinery."
This leaves the impression that any customer who found that he was paying more to a factory for steel than another customer had but to call the seller's attention to the fact to have the discrimination corrected—a preposterous statement. In fact, for twenty years many enterprising customers had vainly sought in a variety of ingenious, legal, and justifiable ways to escape from the consequences of such discrimination. The witness continued with a mingling of truth and error: “the markets are interrelated and interlaced to such an extent that you cannot reduce prices, in my judgment, in one market, without affecting in a short time the market elsewhere for the same commodity.” (10)
The attempt of counsel to get a stronger statement elicited only a reiteration from the witness that the Steel Corporation could not localize a destructive warfare against its competitors.
Mr. Schwab Proud And Confident
To the same effect spoke Charles M. Schwab, once president of the Steel Corporation, now the head of one of the largest independents, the Bethlehem Steel Company. He went even further and developed the paradoxical idea that the size and strength of the giant Corporation made it even weaker than a small independent in this sort of competition. Secure in his protective zone of freight rates, he replied proudly and confidently, "It could not put me out of business, even if it desired."
Judge Lindabury, chief counsel for the Corporation, explained that he was "speaking, of course, of power, not of inclination," and Mr. Schwab finally replied:
“I think it would be easier for a large independent to attack a smaller manufacturer in his district than it would for the Steel Corporation to do so . . . Because the business of the independent is so circumscribed to the locality within which his competitor would be located; while if the Steel Corporation expected to do it they would have to extend their operations over a greater field, following the same policy that they always have followed.” (11)
Observe, the witness referred to this as indicating merely the "policy," not the limited power, of the Corporation. (This no doubt referred to the basing-point policy.) The examining lawyer, however, sensed the danger in this suggestion and therefore quickly shifted his questions so as to bring out the contrast between those wicked old days when the old constituent companies spanked the babies so hard that they died, with these gentle times when the Corporation runs a children's hospital. Mr. Schwab's answer is quoted in another connection in the following chapter.
Some Bad Academic Theory
From so-called practical witnesses there is more testimony to the same general effect, that the Corporation had no more power over price policies than any little independent. Most of it implies a complete ignoring of freight limitations in the steel business. It pictures the steel industry as not a "zone business"—its products can be sold from each mill everywhere as, indeed, under the basing-point conspiracy to sell at identical delivered prices was the case. But there was nothing in the statement of this theory to limit its application to steel; it applies equally well—or by the same bad logic—to every conceivable business. But the completest formulation of this paradoxical argument was made by the academic witness who no doubt had supplied counsel with the model on which all the like testimony was patterned. He declared that although local price cutting against particular competitors was easy to practice in other businesses, it was simply impossible in the steel business. The interested reader may consult in the Appendix a summary of this astounding testimony. (12)
This academic version of the doctrine thus expounded is even more confused than that of the practical witnesses. They, as a result of wide experience, of course knew well that the "market" (sales-territory) for the products of a steel mill does not extend equally all over the country except as the result of agreed restraint of competition from other mills. If the cross-examination had been guided by an understanding of the real economic situation, it must have elicited from these witnesses the admission of certain simple facts which would have exploded the hydrogen in this argument. The sale of any standardized product such as steel to all parts of the country from one mill is impossible except under a policy of artificial identical delivered prices, and this involves an agreement, tacit or open, among sellers, and a restraint of trade. The net realized prices are very far from uniform, being highest near the mill. It is not economic normalcy, it is economic absurdity, for mills to sell and make cross shipments into each other's "natural" territory. This that was happening in the steel industry was the result of the Corporation's domination, not the proof of its powerlessness.
Why Lacking “Inclination”
Undoubtedly the Corporation had the "power" to kill off many of its smaller competitors in various parts of the country. Then why did it not do so? That it did not, for more than brief periods, employ the old cutthroat methods was pretty certain. By the courts this fact was referred to as if it banished from their mind any lingering doubts as to the powerlessness of the Corporation. The lenient attitude of the Corporation can be simply explained by its fear of the law. The leaders of the combination were shrewd men: they knew that with the Anti-Trust Act in force, and an aroused public resentment, the day of such strong-arm tactics was past. They feared the legal consequences. The Anti-Trust Act was so far effective that it put the fear of the law into the Steel Trust so that it hesitated to slay its smaller competitors with a club. This change in the situation was more promptly and clearly recognized by the founders of the Steel Corporation than by most other trust magnates (though likewise by the Standard Oil, for the violent deeds for which it was condemned in 1911 had mostly occurred before 1900). Even with its ostensible policy of benevolence toward competitors the Corporation barely squeaked through with an acquittal.
A Famous Victory
But this new fear of the law did not mean the assurance of free competition and of unrestrained trade, as the public and the courts had believed it would. Far from it. By other means the combination was able to attain in large measure, if not completely, the purpose of its organization, and it proceeded to make prompt use of them. It is hardly doubtful that if the judges had known the truth as to the basing-point practice, they would have pronounced a different verdict. The plurality voted to vindicate the giant combination because they were persuaded that it was not only innocent of all attempts to control prices after 1911 and up to the moment of the decree of 1900, but because they believed it to be powerless to do so or even to bring any pressure upon the independents (by penalty or reward) to enter with it into any form of agreement, explicit or tacit. The Corporation was an amiable Gulliver, bound and helpless among the Lilliputians. It was giant in size but a pigmy in strength. How the successful litigants must have roared with laughter over these naive economic views as they got together—corporation lawyers, Steel Trust officials, and fellow conspiring-independents—to celebrate and revel in their famous victory.
Part III: The Millennium Of Metal Monopolists
Chapter IX: Be Good And You’ll Be Happy
Faith And Innocence
The keystone in the arch of reasoning over which the Court passed to a verdict of vindication for the Corporation at the bar was belief in the absence (at least after 1911) of any means or acts of restraint of competition in the steel industry. It was a belief in the prevalence, complete and unconfined in area, of a regime of real markets and market prices determined by the workings of "demand and supply." Let us examine further the evidence and reasoning on which this faith of the Court was built. The evidence was of both an affirmative and a negative nature— affirmative in the direct testimony of numerous supposed competitors and of customers that in their opinion competition was real and active in the steel industry, and negative in that the prosecution (if it even tried) did not succeed in getting any independents or customers to testify to the contrary. (1)
It is now known that both the affirmative testimony and the inferences from it were false. There was in fact among the sellers to all intents and purposes an understanding and agreement as to price policy—the Pittsburgh-Plus plan—though a loose use of words doubtless relieved their consciences from a sense of guilt for misstatements made under oath. There was on the part of buyers (customers) generally a misunderstanding of the real nature of the price policy in operation, and also in the case of many of the fabricators testifying (who seem to have been skillfully selected)
a selfish bias in favor of the price policy in force as against their competitors.
Artful Mingling Of Truth And Error
The government's case was built upon the assumption that the Corporation had a dominating power, not that it was merely one co-equal conspirator among the others. Government counsel suggested in accord with this view that the general acceptance by the independents of the Corporation's prices was but another evidence of its power, but the Court rejected this view in favor of its opposite; namely, that it was rather an evidence of weakness—the Corporation "did not have power in and of itself, and the control it exerted (i.e. before 1911) was only in and by association with its competitors." (2) Justice McKenna referred unfavorably to government counsel's suggestion thus:
“In one [paradox] competitors (the independents) are represented as oppressed by the superior power of the Corporation; in the other they are represented as ascending to opulence by imitating that power's prices which they could not do if at disadvantage from the other conditions of competition; and yet confederated action is not asserted. If it were this suit would take on another cast. The competitors would cease to be the victims of the Corporation and would become its accomplices. And there is no other alternative.” (3)
The failure of the prosecution to assert confederated action was one of the worst of its many blunders—but this was not Justice McKenna's thought. He sees in the admitted fact of confederated action (before 1911) only a proof of the weakness of the Corporation, and he refers to the suggestion of confederated action after 1911 with the implication of its self-evident absurdity. It is true, he says, that if confederated action were asserted the suit would have taken on "another cast." But it is clearly not true, as he assumes, that there is "no other alternative" between being victims or willing, co-equal accomplices. Surely both common experience and court records daily disclose situations where accomplices are also in a measure victims—are more or less coerced into becoming accomplices. Many an Oliver Twist is victim of some Fagin. Further, is not an artful mingling of fear and reward, of force and favors, usually a more effective way than force alone for a leader—though the stronger—to secure compliance with his will? Accomplices may be in a measure victims, and fear may be mingled with rewards to enforce cooperation. Here are alternative explanations which the Court dismisses summarily, either of which would have given the case a very different cast. The Court was in the dark as to the real nature of the prices charged. They were not, as the Court was led to believe, general uniform market prices, but rather a complex system of discriminatory prices, which involved concerted action by all the independents to conform with (and to abstain from competing to reduce) the delivered prices named by the Corporation.
Sticking to So-Called Market Prices
The Court was impressed by the testimony (as set forth, for example, by Mr. Schwab) that it was the practice of the Steel Corporation to name its prices openly in the trade journals and to "stick to these prices, throughout the trade." It was not observed by the Court, however, that these published prices were not uniform mill-base prices, but Pittsburgh base prices which, by the addition of freight, immediately became a national system of Pittsburgh-Plus delivered prices, identically quoted by all the independents as well as by all the mills of the Corporation wherever located (at Birmingham partially modified). The Court attached much importance to the expressions of the witnesses representing six different independents. (4)
There is no mystery to us today in what was a sealed book to the Court. It meant in the case of rails a "tacit" understanding as to uniform price at all mills, unvarying over long periods of time j it meant in the case of other steel products that each independent was adhering to a system whereby its prices at its mill were the Pittsburgh mill-base price plus freight cost to its mill—while its delivered prices everywhere else were determined by the mere announcement of the Corporation's Pittsburgh price. Observe too that this meant that every independent mill (not at Pittsburgh) was systematically discriminating among its own customers as to its mill prices, and faithfully abstaining from lowering its prices to all that sales-territory where it had a natural freight advantage. If that was not the negation, denial, and defeat of real price competition, there never could be such a thing as restraint of trade.
What Is Pittsburgh-Plus?
It is not quite the time or place for the systematic discussion of the nature and the history of the Pittsburgh-Plus practice, but it will help the understanding of what follows if we here define it. Pittsburgh-Plus is the term used first for a certain method of delivered price quotation in the steel industry, next for the actual delivered price at which a particular shipment of steel is sold, and finally for the system of prices resulting, in their territorial relations.
Pittsburgh-Plus as a method of quotation is the quoting to their customers by mills outside of Pittsburgh of delivered prices made up of a Pittsburgh base price for goods, plus the freight that would have to be paid on those goods if they actually had to be shipped from Pittsburgh to their destination. The Pittsburgh-Plus system of steel pricing is used to embrace, together with the system of actual prices, the whole complex of explicit and tacit understandings bringing about and maintaining prices more or less closely in accord with this method of quotations. (5)
The Real Situation
We here find the explanation of the ever-recurring assertion of the all-too-friendly independent witnesses that their "markets" extended over the entire United States. In respect to a "zone" business limited by freight (which under natural conditions the business of steel, or any heavy standardized product, is in high degree), such a statement as applied to competitive markets is an absurdity. (6) Indeed it can only be made to describe a situation where all real markets everywhere (even that at the basing point, Pittsburgh) are destroyed and, by widespread collusion among steel sellers, the customers are deprived of the right to bargain between the nearer and the distant mill. Of this, more in connection with customers' testimony.
The establishment of this system of artificial prices was just what had been accomplished by open conspiracy through pools before and after the formation of the Corporation down to 1904, just what was continued by common action reflecting a tacit illegal agreement down to 1907, and continued further by the Gary dinners, admittedly illegal, down to 1911 (with a brief interruption in 1909). Most astonishing of all, in view of the trustful innocence of the Court (excepting the three dissenting justices), this was just what continued in actual operation after 1911 down to the very day of the decision in 1920 and for fully four years thereafter. Indeed, despite the Federal Trade Commission order of 1924, this system of pricing, somewhat modified, persists even to this day. For nearly twenty years under the very eyes of the Department of Justice this practice had continued. As the Court was gravely declaring that prices were everywhere being determined by local demand and supply, in fact they were everywhere being automatically determined by the Corporation's committee on Pittsburgh base prices. The Corporation, by using its dominating position to enforce a follow-the-leader policy in industry, was accomplishing even better results to its own profit and that of the independents than had been accomplished by illegal pools and agreements. The beauty of the arrangement was that whereas the old methods would pretty certainly have brought a decree of dissolution and have defeated the purposes of its founders, the new method brought encomiums and a laurel wreath from the highest Court of the land.
Vested Rights At Pittsburgh
What were to the Corporation the other advantages of this arrangement, as compared with either the old periodic price wars or a system of local markets and genuine competition? The advantages were of several sorts, all eventuating, of course, in pecuniary profit. First, this system artificially insured to Pittsburgh its continuance as the dominating center of the steel industry long after the conditions had passed that once had naturally made it so. Most of the basic plants of the Corporation were, we may recall, at the time of its formation, in and near Pittsburgh (the Pittsburgh district). Many of these plants were technically inferior to Gary and to those of many younger independents. In naming the Pittsburgh base price for steel products, the Corporation had initially the greatest assurance that that price (being a net receipt to all mills in that district) which set the minimum that it would get at any of its mills would contain an ample margin of profit above cost at Pittsburgh's obsolescent mills. Next, this price by the Corporation's own action and tacit agreement and practice of the independents determined automatically the delivered price (Pittsburgh steel price plus freight) in every part of the United States. Thus all Pittsburgh mills (so long and so far as this price policy was in force) were insured of entry, on a basis of exact delivered price equality with all independents, without higgling, to every distant hamlet in the country. This gave to the Corporation for its originally enormous capacity near Pittsburgh a sort of vested right and assurance against having its sales-territory gradually narrowed by the underselling of plants in the outlying areas. The aging beauty had her face lifted. The basing-point practice effected an artificial increase and prolongation of Pittsburgh's power to sell anywhere and everywhere without having to meet a local cut in competitive prices and without having to scrap her antique hunks of junk. This was heaven in the realm of Vulcan and Pluto. One magical effect of this was manifest in periods of increasing freight rates (as in 1918-19), the normal effect of which would have been to have at once cut off Pittsburgh from a large sales-area, whereas, instead, the result was merely an automatic increase of delivered costs of steel products to consumers in almost every part of the country.
Boosting Profits Elsewhere
Further, not all the Corporation's plants were at Pittsburgh and every one of its mills outside that district could charge the same delivered price as the Pittsburgh mill, inasmuch as the independents playing the game did not cut it. This, of course, gave the mill at any distance from Pittsburgh a (net) price on all sales at its doors greater by the amount of the freight than the price received at Pittsburgh. At mills as far away as Chicago the imaginary freight addition to the base price (on steel not shipped at all) was about I' to 30 per cent; at Duluth it was over 40 per cent of the base price. If the Pittsburgh mills' price gave a fair profit, the profit (in dollars) at the outlying mills was certain to be greater by the amount of the freight, unless their cost of production was higher. Such figures as have, despite the watchfulness of the Corporation officials, filtered through to the public, agree with other evidence in indicating that the newer mills built after 1901, taking advantage of the great technical inventions, were much more efficient than the older ones at Pittsburgh. If, with real competition, prices had in time come into accord with costs (plus a "fair" profit, say as much as at Pittsburgh) the mill price at these newer mills would have to become much lower than at Pittsburgh, and the delivered prices in a large area would have fallen. But under the Pittsburgh-Plus price policy the building and enlargement of the mills at Gary meant a continually widening and deepening of the vein of gold from which profits could be mined after 1907. At the same time the growth in the total production and use of steel in the country was such that this increase at Gary and elsewhere in the Chicago district could occur without cutting into the production at the mills in the Pittsburgh district. But these events—never forget—were occurring while Pittsburgh-Plus was in operation, which undoubtedly was artificially retarding a still greater growth in the consumption of steel that would have occurred if lower prices had prevailed at the outlying mills and over a large part of the country. Such a growth of mills in outlying areas would have occurred partly because of displacing Pittsburgh products there, and partly because of a stimulation, by lower prices, of new demand in those areas.
“Independents Follow Cheerfully”
The system of pricing in operation had in it certain elements of instability and weakness, being, as it was, in defiance of a more natural adjustment of prices geographically relative to mills and market areas, and maintained, as it was, only by a widespread conformity of action by many independents. The immediate interest of each of these independents was often—indeed, in some ways, steadily—such as to tempt them to break away from this practice; but their long-run interest (in view of the dominating power of the Corporation) was such as to prevent them, except at times of overwhelming pressure, from yielding to this temptation. Let us see by what means the Corporation made it to the interest of the independents to conform, and virtually to conspire with it thus in restraint of commerce.
The Corporation could work upon its competitors through two motives, fear and favors. First, as to the favors. For the independents in the Pittsburgh district (greatest of whom was the firm of Jones and Laughlin), what could be more agreeable than to secure all the benefits of a generous price (generous at least to the sellers, though not to the buyers) insuring an ample margin of unit-profit, together with the advantages of stability of prices and entrance on equal price terms to the most distant destinations in the country? Here were large rewards for conformity. For when has it ever been a painful task for sellers to conspire to secure from the public higher prices with ample profit?
Even more luscious was the reward of independents at some distance from the Pittsburgh base, on sales for near-by delivery and in a direction away from Pittsburgh. To mills at Youngstown, Chicago, Johnstown, Philadelphia, Buffalo, and Bethlehem, many of them even better situated than Pittsburgh in relation to ore supplies and some of the other essentials for efficient production, and to deliveries, came with every weekly announcement of the Corporation's Pittsburgh price the glad tidings that they could add to this amply profitable base price the full amount of freight from Pittsburgh to their mill and in their territory. They did not need to expose themselves to the danger of detection by entering into a pool, or even by attending Gary dinners. If these methods had not been illegal, it still would have been silly to use them when exactly the same result could be reached through the simple method of not acting the fool by cutting the Corporation's prices. No more killing the goose that lays the golden egg! The day of miracles had returned. The steel industry had found the pot of gold at the end of the rainbow. Agreeable? Well, rather! But agreement? Who could prove it? They had "agreed" to nothing—but they did just what they would have done if a definite contract in restraint of trade had been drawn up in black and white, and so did the Corporation in its turn. And so in a growing country, where steel mills multiplied, fortunes were made at the price only of playing the game according to the plan and leadership of the Steel Corporation—very different from the purpose and plan envisaged in the Anti-Trust Act. Could they "get by with it" if it came to court? At least it was worth the attempt—with little to lose and hundreds of millions to gain even if the courts eventually got wise and put an end to it.
A Blissful Conspiracy
On the witness stand in 1922 Henry P. Bope, a veteran of the steel trade, commented as follows upon the use of the Pittsburgh base by the Bethlehem Steel Company: “to my knowledge [Mr. Schwab] has always used the Pittsburgh basis in order to get all the money he could out of the freight . . . I would not say that Mr. Schwab was a philanthropist, at least not in business.” (7)
Another reward to the independents for entering into this tacit conspiracy was not only the implied promise but the actual security it gave them from attack by the Corporation, either through local price cutting directed against any one of them, or through a general "price war" extending to all parts of the country. This reward, therefore, is but the positive aspect of the fear on the part of smaller competitors of these dreaded reprisals. Despite the assertions that the Corporation lacked the economic power to employ these measures effectively, assertions coming both from practical and theoretical so-called experts, there could have been no illusions in the minds of these practical officials of the independents that such a power could be exercised in both these ways. As for the Corporation, it shrewdly chose the course that was best for itself under the circumstances, best in the long run for its treasury, and best for its legal self-preservation. At the same time it gave the blissful assurance to every competitor that he had only to "play the game" to be secure against attack by a competitor who could, when he would, wield the club of Hercules. The benevolent giant, however, never would begin a cut of prices, local or general, that was not in the common interest of all producers. There could be no price war anywhere unless some rash independent began it. The Corporation would never strike the first blow. Stable prices maintained at a generous level, peace and security, these were the positive aspects of reward to independents for entering upon and helping to maintain the most effective conspiracy in restraint of competition in prices that, perhaps, the world has ever seen.
Threat Of The Big Stick
Let us now look at the grimmer reverse side of the shield, the motive of fear that must have been ever present in the minds of independents. The Corporation was following the maxim of our one-time President: Speak softly and carry a big stick. Let us again recall that the prosecution in the steel suit attempted to follow the pattern set in the Oil case and to marshal its evidence toward the discovery of those cruder practices toward competitors proved in that and in other successful prosecutions under the Anti-Trust Act. (8) This doubtless was a serious mistake in the tactics of the prosecution. Times and manners in the steel business had changed since 1901 and largely and necessarily because of the formation of the Corporation. That changed the situation, not because it was a new force for business morals, but because now, as the great market leader, it had such power and dominance that it rarely needed to use-violence to enforce its price policy. Formerly, before 1900, in the period of formation of the earlier combinations, which became subsidiaries of the great "combination of combinations," ruthless price wars and local price cutting against particular independents were frequent. But little if any of this was true competition, and surely it was not legal after 1890, if before. It was merely a pseudo-competition—a use of discriminatory local prices as an offensive weapon to create or to strengthen monopoly. It was thus that the earlier monopolistic combines were formed, which later became the super-monopolistic combine, formed too, be it noted, under the threat of "ruthless" competition. (9)
It is therefore mere persiflage to say, as Judge Buffington did, that “no testimony has been produced in this record that a return to the old trade war system of ruinous competition would, as a matter of fact, benefit the public interests.” (10) Surely not. Why should any one try to prove that such methods would be to the public interest? What a travesty of reason to imply that such an orgy of illegality was really competition! How absurd to imply that the one alternative to dissolving the combination was a return to "the old trade war system of ruinous competition" while Justice sat helplessly by, watching the destruction wrought by this flouting of the Anti-Trust Act!
The Frightful Alternative
These distorted views, whose belief is implied in the final verdict of the highest Court, were trustingly taken by the courts from the lips of the leading officials of the Corporation, who at every opportunity on the witness stand pictured the new peaceful regime of ethical business relations among steel producers, in contrast with the wicked old days which, they artfully implied, would inevitably return if the Corporation were to be dissolved. Such utterances had marked the hearings of the Stanley Committee in 1911, of the Cummins Committee of the U.S. Senate in 1913, and many public expressions of such men as Messrs. Gary and Schwab. Mr. Gary was asked by Congressman Martin Littleton in the hearings of the Stanley Committee of the House of Representatives (June 2, 1911, p. 79 ) :
Q. “Is it your position that [the Sherman Anti-Trust Act] practically orders a continuance of the old warfare of competition? A. I am afraid it does. I do not know that it does, but I fear it does.”
This thought was industriously and in the end successfully played up by the skillful corporation lawyers in this case. To take one example: Mr. Schwab was on the stand, giving expression to the remarkable views before noted, concluding with the assertion that the Steel Corporation would, in order to cripple or destroy any one selected independent, "have to extend their operations over a greater field, following the same policy that they always have followed." (11) The examining lawyer here gave the testimony an adroit turn to bring out the evils of the old days whose return only the continuance of the combination could prevent:
Q. “That is, destruction of the small and weak was a practice not unknown to them in the old days, was it? A. It was.”
Q. “And with quite effective and marked results?” A. [Stage direction, "In a suggestive tone"] “At times, yes;”
Q. “What percentage of them emerged from the different steel wars in the old days, these small fellows?” A. “Not many.”
Q. “There were more gravestones than there were live competitors?” A. “Yes.” [Stage directions should read, “All look silently and significantly at each other a moment, then smile.”] (12) Other similar statements by independents are quoted by Judge Buffington, (13) expressing satisfaction that the old days of indiscriminate price cutting were no more. But note that these are exactly the sentiments that would be expressed by fellow conspirators in restraint of trade who were enjoying their share of the positive rewards plus the no less valuable negative reward of immunity from local price cutting by their giant competitor so long as they played his game. But the judges saw no possibility of such an interpretation—engrossed as they were with the thought that the giant weakling had somehow lost its power (not merely the inclination or the motive) to cripple or destroy its competitors as was done in the wicked old days.
Even Mr. Schwab Trembles
But Mr. Schwab has no such judicial illusions, and when he drops his guard he tells in another connection how even he, as president of the Bethlehem Steel Corporation, does not dare, for fear of precipitating a war of prices, to "vary by 10 cents a ton" the price announced by the Steel Corporation. Judge Buffington quotes this testimony with the naive and inconsistent comment that "we can readily see how rail manufacturers simply followed that basic price to prevent the ruinous rail wars of the past." Mr. Schwab was speaking of the remarkable fact that rails all over the country had for many years been sold at the unvarying price of $28 (a mill-base price in contrast with the Pittsburgh-Plus prices on most other steel products): “if I were to vary that [price] 10 cents a ton today I would precipitate a steel war . . . that would result in running my works without any profit . . . I would not vary the price of my rails under any circumstances, not if I knew it was to get 100,000 tons in orders, for the reason that my competitor next door would put the price down to (sic) $1 a ton, or $.50 a ton even, and we would all be in a position where we would be running without any profit at all. (14)
Leaving aside the artful or humorous suggestion that so small a reduction as 10 cents or even 50 cents a ton would wipe out all profit, here evidently is an utter paralysis of competition in price, a paralysis of fear, as Mr. Schwab describes it. And who is the competitor that is "next door" to everybody else? Who but the market leader who names and maintains the unvarying price ? Would small competitors at a distance be able to come in and take away the "zone business" of rails at Bethlehem if prices were 10 cents or 50 cents a ton lower? Rather would they not be less able to do so than before? How, indeed, is there ever to be anything resembling real competition and a real market price at any producing center when the strongest independent in the country dares not name at his own mill and in his own sales territory a price less by 10 cents a ton than that sanctioned by the great market leader? We are sure that a "ruinous steel war" (both general and local price cutting) would be illegal, but as those causing it contest this interpretation and never have been punished by the law, it is just as effective a threat for them to hold over their small competitors as if it were legal. Indeed, the decision in this suit went further than the courts had ever gone before to legalize an occasional use of price wars, the very thought of which is enough to paralyze would-be competitors with fear.
Survival Of The Fittest
However, after the formation of the Steel Corporation in 1901 the rule was a continued adherence of all to a scheme of prices based on Pittsburgh, not on their own mills, and the exception was an occasional period in which reductions of prices went to the extreme, as in 1908, 1909, and 1911 (and again in 1921, the year after the decision in this case). The unanimity of action in the period before 1907 was mainly secured by pools and agreements unquestionably illegal, and from 1907 to 1911 by "understandings" furthered by the Gary dinners, likewise illegal. (15) At intervals, however, as in 1909, the Corporation was forced "to declare for an open market," and then, as it declared with grim humor, it "permitted natural laws to take their course." (16) The Court believed that in the periods of agreement "the Corporation dominated only in the sense of . . . making attractive what it desired to be done, and the others yielded cheerfully." (17) That is, the judges admit that the Corporation has sought to sway the action through offering rewards, but they deny that it has used the motive of fear.
Now, just what was "an open market"? Ought it not to be just what the Anti-Trust Act intended as the ideal? Alas, that the sober judges missed the humor in the droll remarks of Mr. Elbert Gary which were included in the record of this case! In February, 1908, in conference assembled with the competitors of the Corporation, he counseled them “to assist one another by the friendly interchange of views rather than a resort to unreasonable and destructive competition, which would ultimately result in the application of the law of the survival of the fittest.” (l8)
A Billion Plus Is Speaking
When 1500 million dollars was talking at 10 and 20 millions, could there have been any doubt in the mind of any one present who was (financially) the fittest to survive, or just what Mr. Gary meant? What in fact happened was told by himself a year later, with certain decorative dictums to assure the public that all was done within the law. As a result of various meetings in the first half of 1908, said he, “stability of prices, as distinguished from wide and sudden fluctuations, existed until about the beginning of 1909, although no agreements were made to maintain prices, and notwithstanding a small percentage of manufacturers stood aloof from the conferences . . . It appears that for one reason or another . . . many of the smaller concerns . . . have been selling their products at prices below those which were generally maintained [that is, Pittsburgh-Plus as announced by the Corporation] . . . In view of the circumstances . . . the leading manufacturers of iron and steel have determined to protect their customers, and for the present at least, sell at such modified prices as may be necessary with respect to different commodities in order to retain their fair share of the business. The prices which may be determined upon and the details concerning the same will be given by the manufacturers to their consumers direct as occasion may require.” (19)
"Modified" prices to be known only by each customer! The Iron Age complacently calls this a "temperate and even amiable declaration," but it plainly means that the prices of the Corporation are no longer to be either public or uniform at Pittsburgh, and that such special prices are to be made to each customer in each case as will undersell the independents that dare to offer lower prices. It is a plain announcement of a punitive expedition against independents who have dared to reduce prices in their own neighborhoods.
Gentlemen, Friends, Neighbors
With the temporary abandonment of the Gary dinners as a result of public criticism, competition again became active, and nearly two years later Mr. Elbert Gary, having assembled about him in one room 95 per cent of the steel trade, made to them a statement in which he reached the highest level of his peculiar humor, artfully intermingling cajolery and veiled threats, expressions of respect for the law, and suggestions of the way in which it might be evaded. Thus he spoke, in part: “in view of the fact that we have no right legally to enter into any arrangement by direct or indirect means which enables us to maintain prices, to divide territory, to restrict output, or in any way to interfere with the laws of trade or to stifle competition, and in view of the fact that we cannot legally directly or indirectly do anything which may be construed to be in restraint of trade, and, therefore, are relegated to the one position of treating each other on the basis of fair, just and equitable treatment, it behooves us to use the greatest care in the exercise of our rights, and in the transaction of our business so as to make it absolutely certain that day by day, and with reference to every transaction, we are certain to recognize the rights of our competitors or friends, and the obligations which we are under toward them . . . we have something better to guide and control us in our business methods than a contract which depends upon written or verbal promises with a penalty attached. We as men, as gentlemen, as friends, as neighbors, having been in close communication and contact during the last few years have reached a point where we entertain for one another respect and affectionate regard.” (20)
What could be lovelier and more gentle than these words? But how is respect and affection better to guide in their business methods, and to what end are these methods directed? Surely not toward even "indirectly" entering into an "arrangement" to maintain or control prices, for that is "illegal"—and the good Mr. Gary would not suggest that!
Mr. Gary An Easy Mark
So we get a shock, as the spokesman of $1,500,000,000 continues speaking as follows to the small-fry millionaire in pendents:
“At the present time the question of maintaining or changing the prices of the commodities in which we deal is uppermost in our minds.”
Then, after further discussion of this topic, comes again this ironical disavowal that his words mean what every listener there knew they did mean: “if by my conduct or by my language I have induced any of you to suppose that I believe our corporation has any advantage or is disposed to take any advantage, or has intended to urge you to fix or to maintain prices concerning your commodities which are not in accordance with your own views, I do not hesitate to ask your pardon.”
Alas for the foolish belief of Messrs. J. P. Morgan and Charles Schwab in 1901 that merger—artfully christened integration— would bring any advantages to the giant corporation! The humble Mr. Gary not only makes no suggestions to the competitors of the Corporation regarding maintaining prices, but he turns to them for suggestions—but of course only about lowering prices—not about raising them; that would be illegal.
“If any of you desire to lower prices at any time, and will make the fact known to me, you will find that I am a follower and not a stubborn opposer. I shall always beg leave to express my opinions in regard to what I think are fair prices, but I will do it not for the purpose of expecting you to adopt my views, nor for any purpose except the same purpose that you have in mind when you express to me your opinions. We deal in the open, we deal fairly, and, as I have frequently said, you will always find me an easy mark. If a majority of you shall be of the opinion that I am making a mistake in advocating the maintenance of prices you will have no difficulty in getting me to change my opinion.” (21)
Isn't that delicious? Mr. Gary—Judge Gary—an easy mark! And what could be more legally, sarcastically, vaguely explicit than the warning of what he, backed by $1,500,000,000 of capital, intended to do if any one rashly continued to sell to any of the Corporation's customers at prices lower than its announced figures?
Disarming Suspicion
Nearing the end of his remarks, the cautious old lawyer thought it well to disavow again any evil intentions. The world is so suspicious! Honi soit qui mal y pense.
“You may read in the newspapers hints that we are actually making agreements to maintain prices or that we are indirectly or by inference making arrangements which are in restraint of trade and so we must make it certain that the contrary is true. I would not make an agreement under any circumstances to maintain prices or to do or refrain from doing anything which would prevent me from being absolutely independent from all others in every respect concerning every department of our corporation, or in regard to the conduct of our business, and I would not ask for any different conclusion from others. As I said before, the very fact that it is understood we have this right; that we are independent; that we can go out of this room and do exactly as we please without violating any agreement or understanding, and that all must depend upon the belief that as honorable men we are desirous of conducting ourselves and our business in such a way as not to injure our neighbors, must make each of us much more careful in regard to the conduct of our affairs.” (22)
These words were spoken in 1911, but seventeen years later Mr. Gary's successor was believed by hardheaded observers to be disposed worthily to preserve the Corporation's traditional policy, if not to sharpen it. A despatch of January 2, 1928, from Pittsburgh commented on the opening of several new mills for the manufacture of sheets and strips to supply partly rolled material to regular tin mills, and indicated the likelihood that, with this increased output, prices might have to be reduced. As to the attitude of the new Corporation chief it said:
“Designation of Mr. Farrell as the chief executive of the Steel Corporation confirms expectations that his policies as to sales competition will prevail. This does not mean that there will be more disposition to seek orders by the price-cutting route. Rather it means that independent producers will be more careful, realizing that Mr. Farrell could be aggressive on occasion.” (23)
There you have it—the mailed fist in the silk glove.
Chapter X: Camouflaging A Conspiracy
Guilty But Forgiven
Of the period from 1901 to 1911, Judge Woolley's view, adopted by the majority of the Supreme Court, was thus expressed:
“It therefore appears that from the organization of the corporation in 1901 until the Gary Dinners were discontinued in January 1911, the corporation, first by one method [the pools created for that purpose, from 1901 to 1904], and then by a second method [by meetings called for that purpose during the period from 1904 to 1907], and then by a third method [the Gary dinners], employed means to procure the establishment and maintenance of uniform prices for its diversified products, and by these means the Steel Corporation, with its competitors, did combine and control prices, and in controlling prices restrained trade. If by the three methods pursued, in the three periods named, prices were not artificially and successfully maintained, as shown by the history covering those three periods, I am at a loss to know by what means it would be possible to fix and maintain prices that would unduly restrain trade in the sense of violating the Anti-Trust Act.” (1)
Judge Woolley's disapprobation here reached its climax, sweeping aside Mr. Gary's pretenses and condemning these dinners as "in effect pools," as "pools without penalties." Justice McKenna believed them to be "more efficient in stabilizing prices." (2) Even the most trustful Judge Buffington declared “the conclusion inevitable that the result of these meetings was an understanding about prices that was equivalent to an agreement . . . We cannot doubt that such an arrangement or understanding or moral obligation—whatever name may be the most appropriate—amounts to a combination or common action forbidden by law. The final test, we think, is the object and the effect of the arrangement, and both the object and effect were to maintain prices, at least to a considerable degree.” (3)
Here, too, Judge Buffington reaches his climax of disapproval, making results the test. Despite this record of illegality, all four Circuit judges, followed closely in this by Justice McKenna and three of his colleagues, found it possible to let the Corporation go scot-free. After a superficial show of differences of opinion in details, Judges Woolley and Hunt face about abruptly and unite with their more lenient colleagues in their surprising verdict. Surely Justice McKenna misstated the views of the judges in the lower Court (while agreeing with them in dismissing the case) when he said:
“We have seen that the judges of the District Court unanimously concurred in the view that the Corporation did not achieve monopoly, and such is our deduction.” (4) The Corporation together with its fellow conspirators did, even on the Court's own statement, achieve a monopoly before 1911, but the Court makes everything hang on the verbal technicality that the Corporation was not "a" monopoly (that is, did not have unlimited power), and although it entered into a combination in violation of the Anti-Trust Law, it did not achieve monopoly "in and of itself," but only by persuading the independents to conspire with it.
The Prodigal Son
Confusing as are the reasoning and conclusion of the Courts regarding the period before 1911, they are lucidity itself compared with its view of the situation thereafter. The lower Court believed that all illegal conduct ceased “January 11, 1911, and the bill in this suit was filed on October 26, 1911. The testimony does not show that since the date of the last Gary dinner the corporation, either alone or in cooperation with others, has fixed or maintained prices of the products of the steel industry, or attempted so to do.” (5)
This view was adopted in its entirety by Justice McKenna and three of his colleagues: “the illegal practices have not been resumed, nor is there any evidence of an intention to resume them.” (6)
Conspiracy Before 1911, And After
In 1909 and 1910 Chicago mills partially, then fully, adopted a "mill base Chicago" for a time, but in November 1910 the return to the Pittsburgh basing plan was announced. A notable temporary change of this sort occurred in February 1921 in the territory east of Pittsburgh, after the conclusion of this suit. But between 1911 and 1920 came the most remarkable decade of prosperity and harmony the steel business had ever known. It was in this Golden Age of peace in the steel business when the lion and the lamb were lying down together, during the four years 1911 to 1915, that the testimony was taken and the record in this case was compiled. The next five years, 1916-1901, witnessed the Great War, its end, and two prosperous years following. Never was a decade so completely lacking in periods of "open markets," never was the system of Pittsburgh basing-point prices all over the country maintained so near to perfection. There were merely slight ripples to disturb the calm, and a short time (1917-18) when the War Industries Board partially modified the plan by establishing a Chicago base.
The most that the prolonged conspiracy before 1911, branded by the courts as illegal, could do when it was most successful, was partially and temporarily to attain a follow-the-leader scheme of delivered prices, with Pittsburgh as the basing point; yet after 1911 the same plan almost continuously and perfectly functioned without the open appearance of meetings and agreements. Judge Buffington applied the test of "the object and the effect of the arrangement" to the means by which the Pittsburgh-Plus plan before 1911 was realized, and even he declared that both object and effect were to maintain prices. But he and the other majority judges, seeing that in the period after 1911 these same means were no longer employed, decided with great positiveness that their effect, a restraint of competition, could not possibly exist. Judge Buffington in the eager advocacy of his opinion accepts as a "fact" the claim of witnesses “that the iron and steel trade in the various products of the Steel Corporation is and has been open, competitive, and uncontrolled, and that all engaged therein have free will control in selling at their own prices.” And he forgets his own previous belief when he concludes “that the prices of the product sold by the Steel Corporation have been the result of the joint action of the law of supply and demand and of that vigorous rivalry which has at all times [italics ours] existed between the Steel Corporation and its competitors.” (7) Judge Woolley more guardedly and consistently limited his statement to the period after 1911: “the testimony does not show that since the date of the last Gary Dinner the corporation, either alone or in cooperation with others, has fixed or maintained prices of the products of the steel industry, or attempted so to do.” (8)
And Justice McKenna, likewise observing this limitation, declares: “since 1911 no act in violation of law can be established against it.” (9)
On this vulnerable belief turned the verdict.
Customers Give Their Opinions
This belief was based not only on the testimony of supposed competitors, as described in the last chapter, but upon that of customers, which made upon the judges an even greater impression. The defense called 200 of its customers as witnesses to declare that they believed competition had been active, a number which "seems fairly representative," as the Court said. The prosecution attempted to belittle this testimony by remarking that nearly 40,000 others had not been called, but Justice McKenna taunts it with its failure to produce a single customer to testify to the existence of "the sinister dominance of the Corporation." The Supreme Court said: “Not having done so, is it not permissible to infer that none would testify to the existence of the influence that the Government asserts?” (10)
In the light of the facts now known we must say, however, that the inference was erroneous and therefore not "permissible." Although the great masses of evidence on this phase of the case covered a large portion of ten volumes of the printed hearings, the opinions disposed of this phase of the evidence somewhat summarily, Judge Buffington's opinion being the only one in which any specific testimony was repeated. Even that cited only fifteen of the customer-witnesses, and this inadequate survey was accepted without amendment by the other majority judges. Of the expressions chosen as most representative regarding the existence and prevalence of competition, nearly all involved an economic interpretation of what was happening, rather than a recountal of the happenings themselves. They were opinions, not facts. The question whether the prices quoted and the system of prices were a proof of real competition was in this case the very crux of the controversy, and its answer on any agreed statement of facts called for interpretation by experts, economic or legal, respectively. As to the real significance of what was occurring under their very eyes, these "practical" witnesses were almost wholly in the dark. (11)
A Juggle Of Dates
When the Department of Justice, other public officials, and the Supreme Court itself all failed to penetrate this masquerade of monopoly, how can it be thought that these lay witnesses understood the real economic and legal situation? Recall certain conditions which we have already observed. The testimony in this case nearly all related to the period from 1901 to about 1913, and the larger part of this particular testimony was taken in 1910. The record was closed in 1914 and necessarily went to the Supreme Court as of that date (the District Court decision being rendered in 1915). Undoubtedly further evidence relating precisely to the years from 1914 to 1900 (and until February 1901) would have shown a pretty steadily increasing adherence to the "official" formula, and a pretty constant reduction in the number and range of "varying" quotations (of delivered prices) that could be obtained by a buyer from different mills. The "formula" of identical delivered prices had worked rather haltingly in the period 1901 to 1911, when the means employed to make it work were flagrantly illegal, but paradoxically worked more and more perfectly in the succeeding decade when the Court believed no such illegal methods were used and competition was complete and perfect. Note, however, that the testimony about competition which impressed the Court, while all taken after 1911, was put in general phrases and mostly relates plainly to the whole preceding period back to 1901. Some specifically say "since 1901"; others say "always" (or negatively, "never"); and only rarely a more cautious statement is confined to the period after 1904. It is this evidence from customers relating to this period before 1911 which is the main and (together with that of competitors for the same period) the only basis of positive testimony for the Court's conclusion that after 1911 there was no restraint of competition. The Court's conclusion was influenced largely also by the negative fact that no customers or competitors testified to the opposite effect.
A Curiosity In Judicial Reasoning
We are thus confronted with this curiosity in judicial reasoning: that the Court accepted as proof of perfect competition, in the period after 1911, witnesses' belief as to practices and prices before 1911; yet the Court had itself concluded from other evidence that the earlier period had been marked by the flagrant and repeated use of illegal means of restricting competition. The Court saw no inconsistency in this juggle of dates and of testimony.
If the judges were right, as no doubt they were, in their recognition and condemnation of the illegality of the earlier period, are we to conclude that the witnesses were consciously misrepresenting? No, the very looseness of their language, which should have stamped their testimony as worthless, gave a thousand loopholes for misunderstanding. This was so in respect to almost every phrase in the testimony, as quoted by the Courts, that involved a denial of an agreement as to prices. In all this testimony, when witnesses denied knowledge of any agreement they were assuming that the various meetings before 1911 did not evidence an agreement (though the Courts held that they did). When therefore the Courts declared (in 1915 and 1920 respectively) that these actions did amount to an agreement, all this testimony automatically took on a meaning different from that which the judges trustingly continued to give it. This is so as to the testimony both of competitors and of customers. (12)
The African In The Woodpile
A further comment upon this ambiguity in the meaning of "agreement." We now know very well what was the mode of quotation of prices and what was the general scheme of relative local prices that was in operation (with some interruptions) in the steel industry during most of the period embraced by the evidence. The Pittsburgh-Plus system was not recognized, understood, or passed upon in this case by the courts, unless indirectly and as it were unwittingly in their condemnation of the particular means of attaining it by open agreement between 1901 and 1911. But in interpreting the evidence it must always be remembered both that the customers very vaguely understood how this plan worked and what was being done to them, and that the sellers always strenuously denied that conformity with this formula of pricing and selling steel would involve any understanding, agreement, or conspiracy as to prices. This was the position maintained by the Corporation also throughout the Pittsburgh-Plus hearings and arguments from 1919 until 1924. Therefore, when (for example) the sales manager of the Lackawanna said of the years 1901 to 1910 that "there was no time during that period when the prices he either quoted or fixed were quoted or fixed in agreement with any of their competitors," this did not, as he used the words, deny the entire conformity of his prices with the Pittsburgh basing-point scheme. This was the African in the woodpile. The witness and the Courts were simply begging the question by excluding any such practical conformity of action from the meaning to be attached to the word "agreement." (13)
Almost the first judicial utterance on the issues of this case had been Judge Buffington's remark: "This case—a proceeding under the Sherman Anti-Trust Law—is largely one of business facts." And he had continued:
“The construction of that statute has been settled by the Supreme Court . . . It follows, therefore, that our duty is largely one of finding the facts and to those facts applying settled law.” (14) How easy it sounded! But how complete the failure of the Court, through lack of economic insight, to understand the true state of facts, and how unsettled the law which it applied—further unsettled by this application.
The Bias Of Location
Another circumstance further weakening this customer testimony in which the Courts placed implicit trust is the limitation of the business concerns represented to locations in the territory known as the Pittsburgh district (or to cities adjacent to it, or in a comparatively few cases to points eastward). Witnesses from areas west of central Ohio or farther south are almost wholly lacking. Was this pure accident, or was it the result of design? These witnesses were 200 in number, estimated to be one-half of 1 per cent of all customers, of whom the Court cites specifically 15 (or about one-twenty-fifth of 1 per cent of all) as most significant. These were hardly a fair statistical sample, and they appear to have been carefully hand-picked for the defense. It is now well understood that the Pittsburgh-Plus scheme of prices in operation when most of this testimony was being taken was to the advantage of the fabricators in the Pittsburgh district. They bought their steel materials at the flat Pittsburgh basing price, without freight plus, while fabricators at a distance from Pittsburgh were compelled to pay the full Pittsburgh-Plus rate, although they might be at the very door of the mill from which they bought. The disadvantage to competitors was felt little if at all in the fairly neutral zone of freights in Ohio (as far as Cleveland, Toledo, Canton, etc.), and relatively little eastward, where freight hauls from Pittsburgh even to the coast were not so great. The disadvantage was greatest to the fabricating plants as far west as Chicago, or farther. (Certain technical conditions, such as freight on waste and cuttings in fabrication, increased this disadvantage.) Likewise jobbers of steel in the Pittsburgh and adjacent districts had an advantage over competing jobbers in outlying areas. Direct consumers, such as local gas and coal companies (buying pipe, rails, etc.) in the Pittsburgh district did not directly compete with concerns at a distance, but at least enjoyed the lowest prices possible under this plan (that is, the net Pittsburgh base) and had every reason to be satisfied. Finally, railroads, because able to accept delivery at any point on their lines, were largely relieved of any disadvantage of the freight-plus burden at a distance from Pittsburgh (and rails, it will be recalled, were sold at a base price uniform at all mills, in exception to the general scheme).
Interested Witnesses
With these facts before him, let the reader scrutinize this list of fifteen witnesses whose testimony was selected by the courts as most strikingly proving the satisfaction of the whole body of consumers with the existing scheme of prices. The list comprised 7 fabricators, 4 jobbers, and 4 direct consumers. Ten of the 11 fabricators and jobbers were located in the Pittsburgh district or as near as Cleveland, and the other one was a small firm to the east, at Brooklyn. Two of the four direct-consumer witnesses were in the Pittsburgh district, one being the president of a local coal company, the other the president of the largest local gas company (and at the same time a director of the Steel Corporation—a fact which the Court manifestly overlooked). The other two witnesses were purchasing agents of railroads, both of which had interlocking directors with the Steel Corporation. (l5) Thirteen railroads which, through their officers (usually the purchasing agents), testified to satisfaction with the fairness of the Steel Corporation, had interlocking directors with it, and three others were closely affiliated with companies likewise so connected. Fourteen of the fifteen witnesses who most impressed the Court were, because of their location, either directly profiting by the system or not subject to its disadvantages. Counsel for the prosecution, after eight years spent on the case, failed to sense the real nature of this evidence, and had failed to bring a single customer-witness to rebut this testimony, as could easily have been done. (16)
The Missing Actor
It is, in our present understanding of this problem, indeed an incredible thing that such an important influence as the basing-point system should have been entirely ignored in the greatest industrial lawsuit the world had ever seen. This perhaps justifies the consideration we have given to this feature of the case at a length which might else seem unwarranted. The trial of the steel dissolution case was the play of Hamlet with Hamlet left out—it may be a more accurate comparison to say, the play of Othello without Iago. The masquerade of monopoly had been carried off successfully even in and through the chambers of the Supreme Court of the United States, in virtual contempt of that august tribunal.
Chapter XI: The Pittsburgh-Plus Practice
Victims Become Vocal
The mills of justice like the mills of the gods, grind slowly. Not until ten years after the formation of the Steel Corporation was a suit begun to attack its legality. Not until another nine years
had passed was the case decided. (1) Most of the evidence contained in the record on which the final decision was based related to a state of facts seven or eight years earlier. Meantime the world had
experienced the greatest war in history and the steel industry in all its branches had enjoyed in the United States the most phenomenal growth and prosperity. When the venerable Justice McKenna was delivering his opinion, March 1, 1920, the steel industry, together with general business, was at the height of the after-war boom, destined to collapse a few months later. How confidently he pointed to the fact that from 40,000 customers "not one was called" by the prosecution to complain against the price practices of the Corporation, and he exclaimed: "Is it not permissible to infer that none would testify?" Alas for the fallibility of human judgment! As these words were uttered, the mutterings of discontent, for many years increasing, were beginning to swell into a loud chorus of complaint. In 1918 numerous individual protests had been made against the price policy of the Corporation, culminating in January 1919 in the formation of the Western Association of Rolled Steel Consumers for the purpose of bringing about the abolition of the price system known as Pittsburgh-Plus. In the legal proceedings which followed in the next five years, not one customer but scores went upon the stand to testify, not in praise of the Corporation, but in protest against the unfairness and illegality of its price practices. The number of discontented customers who had now found their voices ran into the tens of thousands. True it is that great difficulty was experienced in pcrsuading the first witnesses to testify, for all but a few braver spirits were seized with panic at the very suggestion of appearing against the all-powerful Corporation. But as the ranks of the protestants grew, and therewith their confidence in earnest action, so grew their courage and eagerness to testify. The thing complained against, be it noted, was no new thing, but was the very condition secured and the practice enforced between 1901 and 1911 by various methods of pools, agreements, and meetings pronounced by the courts to be illegal, but, mirabile dictu, a condition which when even more regularly and completely maintained after 1911 without any visible machinery of illegal agreement, the majority of the Supreme Court mistook for a normal system of competitive market prices.
How Pittsburgh-Plus Started
Until the Pittsburgh-Plus complaint before the Federal Trade Commission, beginning in 1920, some months after the decision in the dissolution suit, no effort was made by any public agency to inquire into the history of this much-used practice in selling steel. In the hearings on that complaint, however, many witnesses were questioned, most of whom displayed a surprising ignorance of the practice or a strange inability to tell, in their wordy and obscure answers, anything really definite about it. One witness called by the Government, however, a man of unequaled experience in this field, told the whole story in a fairly connected way that may be fitted together with all the other clear bits of evidence on the subject. He was, to be sure, at times evasive in his interpretations, which he confused with his statement of facts. But listen to the tale of the birth and youth of Pittsburgh-Plus, as told by Colonel Hepry P. Bope, a veteran of the steel industry. He was testifying in November 1922.
When a mere boy, in 1879 he entered the employ of the Carnegie Steel Company as its first stenographer, and later for many years was its salesmanager until 1918, when he became connected with the American Steel Corporation. Asked what was the practice before 1880 as to price quotation for steel, he answered:
A. “The practice was to quote f.o.b mills. Every mill was a law unto itself.”
Q. “And the difference in prices between the mills, did that amount to the freight rate, or was it entirely independent?” A. “Each mill made whatever price seemed necessary to take the business. . . .”
Q. “Was this time you speak of, in 1880, the first time, as far as you know, that the Pittsburgh basing system was established?” A. “As far as I know, the first time.” (2)
History is still silent regarding any earlier use of this device. Its use for many years after 1880 was confined to beams (structural materials). Prior to 1900 or 1901, there were few PittsburghPlus prices on plates, shapes, bars, sheets, tin plate, or wire. (3) The first step taken to introduce Pittsburgh-Plus prices in structural materials had been the formation in the spring of 1880 of the first beam association, including the Carnegie Company and three others, all three located east of Pittsburgh, in New Jersey or Pennsylvania, (the Passaic Rolling Mills, the New Jersey Steel and Iron Company, and the Phoenix Iron Company). The Carnegie Company, having no competitors west of it, simply named the Pittsburgh price, and the other conspirators used that price, plus freight, as their price delivered to customers, a highly convenient and profitable arrangement for everybody but the consuming public.
Experiments In Monopoly
It surely is not an insignificant coincidence that the invention, the earliest successful application, and for nearly twenty years the only considerable use of this system of basing-point delivered prices was in that branch of the steel industry where monopolistic conditions earliest appeared, and where the territorially limited monopolistic control by a dominant leader could most readily be strengthened by agreements with smaller competitors in the outlying sales territory. But even with the Carnegie Company in this dominant position, as the most experienced witness testified, the structural steeI producers could not maintain "uniform" (delivered) prices without having a basing point. As he said, they tried to do so once, much later, in 1909, but with such poor success that in a short time that they were glad to go back to the Pittsburgh base. This example would have been instructive to the judges who had curiously argued that agreement between the dominant corporation and smaller competitors effectually proves that it is "in and of itself not a monopoly."
After a few years, about 1884, the Beam Association decided to try a zone method of fixing prices. They parceled out the country, taking an average freight rate and using Pittsburgh as a basing point. As a result of this system the various producers of beams reached the customers in each zone at the same delivered prices (which were discriminatory prices net to the mill). The straight Pittsburgh basing-point plan, rather loosely observed, alternated in use in the selling of structural materials with the zone plan, which predominated between 1897 and 1904. After 1904, beams usually were sold (except in brief periods of the breakdown of the.practice) on the straight Pittsburgh-Plus plan, and the zoning plan was abandoned.
Some time in the ‘90's the Pittsburgh-Plus plan was adopted by the wire-nail manufacturers. The first specific mention in the record is a notice of the reaffirmation of prices on the Pittsburgh basis in 1895. (4) Abundant evidence appears of its continued use for wire thereafter, though sometimes (just when does not appear in the record) this was considerably modified by making what was called an "arbitrary" plus for Chicago over the Pittsburgh base, regardless of the freight rate.
Steel billets, too, as early as 1896 were sold for a time at delivered prices on a Pittsburgh base, fixed, of course, by a pool, (5) but this arrangement appears to have been short-lived, and in November 1900 the basic steel makers met and again chose Pittsburgh as the basing point for the delivered prices which they fixed by agreement.
Monopoly Full Grown
It was shortly before and during the year 1900 that large numbers of steel plants were combined to form the various large companies which were destined to be merged in turn within another year to form the United States Steel Corporation. Evidencing the new-found powers of these mergers to restrict competition, a veritable epidemic of the use of Pittsburgh-Plus began. Mr. Charles M. Schwab, then with the Carnegie Steel Company, and long experienced in practicing the gentle art of monopoly in beams, looking upon his handiwork and finding it good, organized in 1900 a Plate Association and fixed the price of plates on the Pittsburgh base, a scheme that then operated successfully, with slight interruptions, for a quarter of a century. It was, however, for a time (between 1901 and 1904), modified somewhat by exceptions and by a zoning plan in which the whole country was divided into seventeen districts, in each of which the price (delivered) of structural steel was the same, regardless of differences in freight costs from Pittsburgh. (6)
The same year (1900) most, if not all, of the sheet and tin mills of the country were absorbed by the American Sheet Steel Company and the American Tin Plate Company, these two being l~ter combined in the American Tin Plate Company, this in turn becoming a part of the United States Steel Corporation. The American Sheet Steel Company "took in nearly all of the sheet' producing mills," and at once inaugurated the Pittsburgh-Plus Plan. (7)
A Mushroom Custom
Until that time, the most experienced witness testified, the price of sheets and of tin plates had never been made on a Pittsburgh base, but generally had been sold f.o.b. mill, although in 1899 either a New York or a Chicago basing point was used. (8) There was testimony specifically as to one new mill, started in Ohio in March 1901, that it continued until 1903 to sell f.o.b. and then "started selling on the Pittsburgh base because it then became the 'custom' of steel mills to do so." (9) Likewise other new mills for a time shaded the Pittsburgh-Plus price, "what was known as the market," but soon, about 1903, began "to adhere to Pittsburgh-Plus.'' (10) Ah, how brief the time needed—in this case, three years—for an illegal practice, maintained by continual acts of illegality, to be transformed into an immemorial business custom, which unsuspecting jurists may be made to believe is the result of a natural evolution, to be respected and protected by the courts as a necessary exercise of that "freedom of competition" which alone can preserve the rights of the public! (11)
A Non-Producing Basing Point
Observe a peculiar condition of the sheet and tin plate industries—a "striking" fact we should say, if it had not failed ever to strike the dim sight and the dull ears of all the official investigators and the courts. There were no mills for the manufacture of sheets or tin plates either in Pittsburgh or in the Pittsburgh switching district, and the Ohio mills produced a greater tonnage in sheets than those in Pennsylvania (all of which were outside the Pittsburgh district). Now the fairy tale of the origin of PittsburghPlus, oft told to show the simple convenience and "naturalness" of the plan, was that Pittsburgh was the great center of steel production from which most steel products were actually shipped when the Pittsburgh basing-point practice came into use. In the case of some kinds of steel, largely produced in the Pittsburgh district, the use of Pittsburgh as a basing point had a deceptive appearance of naturalness, though in principle it is artificial for all kinds of products alike. But such an explanation of the use of Pittsburgh as a base for pricing sheets and tin plate is peculiarly fantastic.
Now For A Merry Life!
Now Pittsburgh-Plus was off and away on its merry life, bringing joy to the hearts of monopolists, and levying its rarely remitted toll from that patient burden bearer, the American people. For the formation of the giant steel corporation saw the all-but-universal adoption in the steel industry of this plan of bringing independents into conformity with the prices named by the Corporation, and of securing identity of delivered prices quoted to and paid by consumers. This whole movement had gone on under the very eyes of the Industrial Commission—Argus-eyed it should have been with its great corps of "experts" and investigators, but blind to the real significance of these occurrences.
It was at this historic point of time in May 1901 that Mr. Charles Schwab appeared on the witness stand and gave utterance to the serio-comic opinions which were related and interpreted in our openmg pages. No doubt the reader would now find new interest and significance in perusing again that dialogue in which Mr. Schwab, who undoubtedly knew every turn and winding of the devious trail, so effectually threw his questioners off the scent and made them look as foolish as a pack of hounds sniffing the air and baying the moon, not knowing where they are or how they got there. Perhaps this was what, after all, the "formers" of the Corporation meant by "integration," a word by which they later hypnotized the courts. It was integration of prices, the delivered prices of the Corporation and of its former competitors becoming one and the same to each customer, regardless of their own diverse conditions of production, location, freights, and customers' nearness to the mills—a unity from which the buying public, except with rare anct brief respites, was to have henceforth no appeal to the saving grace of competition. What is such integration but monopoly? Was it not the vision of this kind of integration which so inspired the youthful wizard of Pittsburgh when he wove his spell over the great House of Morgan?
A Plan With A Purpose
When the simple facts are narrated regarding the early history of Pittsburgh-Plus up to that day of May 1901, as these facts now may be gathered from sworn testimony given for the first time twenty years later, can there be any uncertainty regarding the purpose and real nature of the practice? It is so plain that it calls for no Sherlock Holmes to unravel it. But no more than did the Industrial Commission, did the various Commissioners of the Bureau of Corporations down to 1914, see and comprehend just what was happening. Neither did the Department of Justice in its blundering attempts, after ten years of unaccountable delay, to prosecute the giant merger for violation of the Anti-Trust Act, open its eyes to the real situation and make these facts an essential part of the incriminating evidence. Nor did the courts, unaided by the prosecuting counsel, succeed any better in appreciating the real nature of this practice, whose existence was barely mentioned through the course of the Steel dissolution suit, and to which no significance was attached in the attempt to determine the existence of monopoly. The courts were concerned solely with the means employed to circumvent the law and not with the end itself; or it may be more accurate to say, they were concerned only with superficial means, and neither with the more ultimate means nor with the end itself. The pools, agreements, and meetings between 1901 and 1911 (which the judges in both courts unanimously held were illegal) were mere secondary means directed toward establishing and maintaining the Pittsburgh-Plus practice. This was the immediate means used to bring about an illegal restraint of trade, monopoly, the real aim and end of all these practices.
Silence Is Golden
So the courts (without truly having before them any considerable evidence relating to anything after 1912) concluded, in the absence of evidence of formal agreements with independents, that after 1911 a state of ideal competition began and continued until 1920; whereas, in truth, the Pittsburgh-Plus system, to create and enforce which was the sole object of these illegal practices, had never been so completely successful in its results as it was in this very period. It was as if the courts, having declared that any agreement to accomplish the illegal end (restraint of trade) was illegal, had then assumed that no such agreement could possibly be made unless the court could see the conspirators' lips or fingers moving to speak or spell the forbidden words. The illegality consisted not in actually restraining trade, but only in talking about it. The courts were interested only in symptoms and not in the disease, for the real disease, the real offense against the Anti-Trust Law, was the maintenance of Pittsburgh-Plus, itself the proof and exercise of monopoly power.
Patriotic Recess
For years after the Steel dissolution suit had begun in 1911, few ripples of true competition in prices disturbed the calm surface of the waters of monopoly. From 1914 until 1917, with enormous sales to the warring powers, the American steel industry was enjoying a feast of rising prices paid alike in foreign and in domestic sales, a large part of the latter with a bonus of Pittsburgh-Plus prices thrown in for good measure, heaped up and running over. Then the waters began to be troubled. In April 1917 the United States entered the war, and for a time, in the first wave of patriotic enthusiasm, selfish private considerations were swept aside on behalf of national necessity. In September 1917 the War Industries Board as a war measure established Chicago as a basing point for steel prices, on a parity with Pittsburgh, thus for the time eliminating the Pittsburgh-Plus practice as applied to mills in the Chicago district. This necessarily changed the territorial price relationships of the sales areas not only near Chicago but for great distances westward. The manufacturers (called fabricators) are middlemen in the sense that they purchase rolled steel as the "raw" (partly finished) material which they make into more elaborate forms, such as steel buildings, boilers, automobiles, windmills, hardware, and thousands of other articles. Western fabricators, not having now to pay the artificial Plus for their materials, enlarged their plants and extended the sales territories of their products.
The Gods On Olympus
But suddenly, July 21, 1918, after ten months, while the war was at its height, Pittsburgh-Plus was restored on the suggestion of Mr. Elbert Gary, president of the Steel Corporation, at a meeting of the War Industries Board, on which he was serving without pay. This action dramatically illustrates the ways in which the gods on the industrial Olympus sometimes dispose of the fate of the mere mortals down on earth who must pay the bill. The action was taken at the most intense stage of military operations, without public knowledge or the slightest opportunity for a hearing being given to the fabricators or to the general public.
Mr. Brookings, the chairman of the War Industries Board, who had previously confessed with evident regret that he did "not know what the change means to the purchaser or consumer," began with a cheerful pun:
"That leaves the one basic question for us to discuss, I believe. Is it understood that the steel people now feel that it is necessary and wise to change the basic price of Chicago?"
Mr. Gary: "I think our Committee agrees generally as to what Mr. Replogle has said on the subject."
Mr. Brookings: "Mr. Replogle has stated that in his opinion it would be a good thing to do." Then turning to Mr. Replogle (well known in the steel industry): "Will you write this up so there will be no question about it?"
And it was done. (12) Yet even now there is some question about it. Within less than a week the Illinois Steel Company (the great Chicago and Gary subsidiary of Mr. Gary's corporation) had raised to the Pittsburgh-Plus rate the prices to its customers who had contracts under the Chicago base, and simultaneously, with one heart and one mind, the independents "cheerfully" followed this patriotic example.
At once arose protests from many business concerns that were adversely affected. These being futile, the Western Association of Rolled Steel Consumers for the Abolition of Pittsburgh-Plus was organized in January 1919 and engaged an eminent attorney, the late John S. Miller, who was in correspondence and in conference with Mr. Gary until July 1919.
The Commission Draws Back
It seems to have been Mr. Gary's suggestion (perhaps sparring for time, as the dissolution suit was still pending) that the subject should be brought to the attention of the Federal Trade Commission, and together these two had a meeting with the Commission. Acting on this line, the Association on August 1, 1919, made application for a complaint to be issued against the Steel Corporation and certain independents. Likewise applications were made by the City of Duluth, by the State of Minnesota, and by many organizations of business men in the west and south. The Supreme Court having meantime delivered its opinion in the dissolution suit, the Commission, four months later, in July 1920, denied the application for a complaint by a vote of three to two. Mr. Gary's legal staff had vigorously combated the application. The individual statements made by each of the five Commissioners and given to the press make instructive reading today, showing, as they do, the widest divergence of reasoning even among those voting on the same side and the hopeless bewilderment of the Commission as a whole in the face of issues which most of them were unfitted by their training to analyze and resolve. Commissioners Murdock, Colver, and Gaskill voted against, and Thompson and Pollard for, the issuance of the complaint. Commissioner Huston Thompson in dissent showed fullest appreciation of the issues involved. However, the main ground on which he based his vote was simply that, in view of the large public interests involved, of the many applicants for a complaint, and of the insufficiency of data thus far collected by merely ex parte methods, other evidence was necessary before the Commission could properly determine whether to dismiss the application.
The opinions show that the Commissioners were somewhat chastened by recent decisions of the Supreme Court in which the Commission's actions had been rather sharply rebuked and limited, e.g., the Gratz case, and were in awe of the recent decision in the dissolution suit, in which, as the most legalistic of the Commissioners believed and declared: “The United States Supreme Court has established the validity of such [the United States Steel Corporation's] existence and ownership. Under the law it may fix a price for the product of all its mills on a common basis. It does so, using Pittsburgh as the base.” (l3) Thus this legal mind drew from that decision (taken in connection with an implied minor premise of the unqualified private property rights of a corporation) what seemed to him the simple (though it is truly a preposterous) conclusion, that the Pittsburgh-Plus practice was recognized and sanctioned by the Supreme Court, despite the fact, as shown in our foregoing chapters, that even its existence was ignored throughout the dissolution suit.
The Commission Moves
Such widespread resentment as was then felt against the Corporation's prices and practices, especially in the west and south, by thousands of its customers, so recently before described by Justice McKenna as happy and content under its benign rule, was not to be easily put down by this first rebuff from the Commission. On September 1, 1920, the advance of freight rates by 40 per cent automatically increased the Plus (this being also the difference in net realized price) at Chicago from $5.40 to $7.60 a ton, and made corresponding differences in price throughout the country, in accordance with the Pittsburgh-Plus scheme of pricing. Protests redoubled and a new petition for the issuance of a complaint was filed. Mr. H. G. Pickering of Duluth now ably presented the case for the Western Association in place of Mr. Miller, whose health had failed and who soon after died. On September 20, 1920, by a vote of three to two the Federal Trade Commission granted a rehearing, which began December 6. The increasing public interest was evidenced by the appearance, by attorney, of the American Farm Bureau Federation and, by representatives, of other organizations. April 30, 1971, again voting three to two, (14) the Commission issued a complaint against the Steel Corporation (no independents being included). The gathering of evidence and taking of testimony in many parts of the country was begun promptly and was continued for two and a half years.
Pittsburgh-Plus Condemned
Meantime, early in 1903, was organized The Associated States opposing Pittsburgh-Plus, by the four States of Illinois, Iowa, Minnesota, and Wisconsin, which appropriated various sums totaling $55,000 and were joined by twenty-eight other States through executive action. Eleven of these States through their legislatures passed resolutions condemning or protesting against PittsburghPlus. The Associated States largely superseded and took over the activities of the Western Association of Rolled Steel Consumers, and later submitted a brief as amici curiae. On its petition the final hearings in the case were postponed from May to December 1923 to permit the employment of economic advisers to study the economic issues which had been given such a dominant place in the respondents' defense. Dismissal of the complaint was generally expected. The testimony of three economists regarding the price theory involved was given in December 1923, the oral arguments of counsel were concluded June 24, 1924, and the decision of the Commission (voting four to one, Commissioner Gaskell dissenting) was given July 21, 1924, ordering, in substance, that the Corporation cease and desist from the Pittsburgh-Plus practice.
Within the sixty days allotted, the Corporation filed its answer, half evasive and contemptuous, promising to comply with the decision so far as this was practicable (whatever that may mean). The Commission, still thrilling with its own temerity in rendering a decision that a few months before scarcely any one had expected, was as much pleased as it was surprised to escape the unpleasant prospect of another long contest before the Supreme Court, the outcome of which must ever be doubtful, and the more so in the light of then recent litigation. It was therefore not prepared to take affront at the flippant manner of the Corporation, and prudently refrained from demanding a more specific answer. It has not courted trouble since by inquiring too closely through its field agents what has really been done in compliance with the order "to cease and desist." So here, in a matter of the greatest moment in the field of trade practices, the Commission has given to the public little information about actual conditions.
So Far As It Pleased
From the press and other unofficial sources, however, it may be learned that the Corporation soon put into effect a Chicago base price $2 above the Pittsburgh base (on the plan of the Birmingham differential which had been in force some years, as a modification of Pittsburgh-Plus in southern territory). This action was at once followed by all the independents. After the temporary collapse of the basing-point system in the crisis of 1921, prices on plates, shapes, and bars at the Chicago mills had never been returned to the Pittsburgh base, but had been quoted on a Chicago base generally $2 above Pittsburgh. This seems to have been just what was now, as a show of partial compliance with the order, made the rule as regards other classes of steel products. At the same time this action gave a measure of assurance that full Pittsburgh-Plus on plates, shapes, and bars would not be suddenly restored, as had several times happened before. As a Chicago $2 differential was $4.80 a ton less than the full Plus, the result of the change was to reduce the cost (relative to the Pittsburgh base) of steel to fabricators and to other users of steel in Chicago and in western territory by that amount below what it had been or would have been under the old system of prices. Colorado, Duluth, Birmingham, and other mills adjusted their prices to this new base.
The "overnight effect" of the partial abrogation of the Pittsburgh-Plus plan, September 16, 1924, is shown on the accompanying diagram. It was greatest ($10 a ton) at Duluth, nearly as great at Birmingham, about $6 at Chicago and near by, and as much as $3 at many points westward. East of Chicago, Pittsburgh-Plus rates remained in full force, excepting at Buflalo, where the rate (slightly adjusted with the new rate at Cleveland) was reduced about $.60 a ton. This demonstrates the falsity of the contention of witnesses and of attorneys for the Corporation that the Pittsburgh-Plus method of quotation had no influence whatever on prices. Even this substantial moclification of it altered at once the whole complex of territorial relationships of prices, and the interests of great numbers of fabricators and of ultimate consumers.
Substantial Results
Three years after the order went into effect one of the leading steel trade journals could say editorially:
“Those who attacked the Pittsburgh-plus method have thus far been victorious. Their prime motive was cheaper steel and they have obtained it . . . As with the 8-hour day in the mills, what is roundly scored today as revolutionary is the accepted practice of tomorrow. The current method of quoting has become commonplace and there is no agitation for revision from either producers or consumers.” (15)
The prosperity of many of the western fabricators was indeed phenomenal. They were from $3 to $10 a ton stronger than before in their bidding against mills fabricating in the Pittsburgh district, who by the old plan were on a plan of price equality or better with mills in the uttermost parts of the country. Western fabricators were now able, in a more normal way, to underbid and thus to exclude the fabricated products of the Pittsburgh district from a larger part of this western territory. The steel mills too, in the Chicago district, have ever since been able to run at a higher percentage of their capacity than before, relative to those in the Pittsburgh district. Even this partial alteration of the rule of pricing (which the spokesman of the Corporation had strenuously maintained was "merely" a mode of quotation and had no effect on prices) had worked something of an economic revolution in the territorial distribution of the steel industry.
Folks Still Believe In Fairies
A year later the journal just quoted made the further comment:
“Four years ago this month the federal trade commission's decree of banishment against Pittsburgh as a basing point for . . . products produced in the Chicago district became effective.... The practical intent of the commission's order was to make Chicago independent of Pittsburgh in the pricing of steel. The East was not a party to the Pittsburgh basing point proceeding. This intent has not wholly become fact. Chicago base prices today are usually a differential . . . over the Pittsburgh base. Consumers, however, have benefited because delivered prices even on this basis are less than would be the sum of the Pittsburgh base plus a freight rate of $6.80 per ton. While Pittsburgh today still wields an influence not only on Chicago but also on all markets, its disintegration as a base is pronounced.
Birmingham as well as Chicago is a base for many finished products. (16) Many of the smaller middle western wire mills are their own basing points. . . . It may be that these changes would have evolved naturally, but undoubtedly some impetus emanated from the federal government's mandate.” (17)
Evidently the writer of this editorial even then only vaguely understood the purely arbitrary character of the Pittsburgh basing practice, and still put faith in the childish tale of the "natural evolution" of this business practice. In truth it was the result of artificial agreement, or of simultaneous action tantamount thereto, and could be put down only by the strong arm of the law. Otherwise his comments, so far as they go, probably indicate pretty well the actual situation at the time.
Multiple Bases
After 1924, Chicago did not truly become an independent basing point, nor did the independent mills determine their own prices on a mill base in a freely competitive market. The Chicago base (a fixed differential of about $2 above the Pittsburgh base) is announced by the Corporation for its own mills, and automatically with every such announcement other prices everywhere, quoted by everybody, Corporation and independent mills alike, follow these announced prices. For a time no one made any pretense of abandoning or of modifying the Pittsburgh basing plan in its application to mills east of Pittsburgh, and eastern mills selling to the west simply adjusted their prices in conformity with the new schedule in western territory. On December 7, 1927, however, the Bethlehem Steel Company announced a series of mill bases for several of its recently merged mills in the eastern territory. The merger was at the time under attack by the Federal Trade Commission, with the certainty that the basing-point policy would be made an important issue. The Daily Metal Trades Service declared the importance to the trade of this change took "second place only to the announcement several years ago of the abandonment of Pittsburgh-Plus." The Service declared that it "appears to relate to far deeper causes than merely temporary sales policies" and broadly hinted at growing "tightening of the territorial" competition between the Bethlehem mills and "the ClevelandPittsburgh district." In view of this, the Youngstown-Bethlehem merger (pending at this writing) takes on more significance as against law and public interest; but the Department of Justice at Washington lifts not a finger.
No Free Steel Markets
There is a woeful lack of specific information available to the public regarding the adjustment of prices to various delivery points in relation to the various basing points. What has been established appears to be a system of multiple basing points with identical delivered prices (similar to that long used in the cement industry), (18) involving denial of freedom of access at each mill and discriminatory treatment of customers, absorption of freights, cross shipments, virtual conspiracy, and the other uneconomic incidents of a single basing-point system.
The formal acceptance by the Corporation of the Commission's order seemed at the time to bring to a close another chapter in the long history of the artificial control of steel prices in America. But those best informed on the subject know well that this subtle device in restraint of trade, "conceived in sin and born in iniquity," had not really ended its career as an accomplice of monopoly in circumventing the laws of trade and of the nation, either in the steel or in numerous other industries.
Chapter XII: Sharpshoot At A Formula
The Specter At The Board
It is an intriguing question why the Steel Corporation, acting as always "under advice of counsel"—and they were the best to be had—should, in 1924, to the surprise of all the legal and the business world, have decided to accept, at least in form, the order to desist from the Pittsburgh-Plus practice, and even partially put the order into effect. For twenty-three years the maintenance of Pittsburgh-Plus had been the object of the Steel Corporation's utmost solicitude. While the complaint was pending, Mr. Gary had declared that the case was destined to be the greatest law-suit of all time; and counsel had often implied or uttered the threat that appeal would be taken to the Supreme Court from any adverse decision of the Commission. Was this mere bluster and bluff "to get on the nerves" of the Commission? Able counsel had fooled the courts before; could they not hope to do it again? No, apparently hope gave place to fear. The Corporation shrank from entering again the portals of the Court from which it had so recently escaped with a doubtful vindication by an ambiguous majority.
The full explanation of this change of front the public may never learn from any one of that little inner group of astute counselors who alone could give it, but we may venture a guess. The specter of monopoly had disconcertingly appeared at the banquet board. Repeatedly that forbidden name had been reechoed in the stages of the hearings and even in the final briefs of complainants. To appeal now from the Commission to the Courts would involve the disagreeable chance that the whole question of the nature of the Corporation and of its practices as involved in the dissolution suit might be opened up again, and with a whole new fund of facts and interpretations that before had been successfully concealed.
The suit had been brought in 1911 for violation of Sections One and Two of the Anti-Trust Act of 1890, alleging monopoly and restraint of trade as shown by the very facts of its formation and of its continuing existence. Conspiracy was not alleged, and the independents thus were not included in the action. The PittsburghPlus price policy as used by the Corporation itself was not referred to in the complaint, and the prosecution ignored it completely in the marshaling of evidence to prove restraint of trade.
A Time For Caution
A year after the conclusion of the dissolution suit, the complaint in the Pittsburgh-Plus case was issued by the Federal Trade Commission (April 30, 1921) against the use of the Pittsburgh-Plus plan of pricing for violation both of Section Two of the Clayton Act, forbidding discrimination, and of Section Five of the Federal Trade Act, forbidding unfair methods of competition. Of these two counts in the complaint the more essential one was that charging discrimination; the charge of unfair competition was thrown in merely for luck, loading the legal blunderbuss with extra slugs in the hope that by accident they might hit something. In neither the dissolution nor the basing-point case were the independents made defendants. In other essential respects the basing-point complaint differed greatly from the suit. It was brought under statutes that had not been enacted until several years after the suit was begun. (1) The Pittsburgh-Plus practice, ignored in the dissolution suit, was now made the sole object of attack, whereas monopoly (or restraint of trade), the only offense alleged before, is in the Pittsburgh-Plus complaint not even hinted at. In all its stormy career of litigation, from its formation in 1901 to 1994, the Corporation succeeded in keeping these two issues from ever being seen together in public, whereas in very truth they are identical twins, but two aspects of the same offense. "East is East and West is West, and never these twain shall meet"—such was the policy of the Corporation before the courts, regarding these two offenses, and it strove to surpass even Robert Louis Stevenson's imagination by being a Mr. Hyde all the time in its relation to the anti-trust laws, while showing always the benevolent countenance of Mr. Jekyll. However, it could, no more than did Stevenson's shady hero, succeed indefinitely in this difficult undertaking, and the real identity of monopoly with this apparently innocent price practice, of which glimpses had been caught from time, began to be more and more clearly revealed in the later stages of the Pittsburgh-Plus complaint. This was an all-sufficient reason, if it was not the only reason, why the Corporation chose not to rouse a sleeping dog by appearing again, so soon, before the door of the Supreme Court.
Chasing A Greased Pig
The position taken by the Steel Corporation in its all-but-last defense of the Pittsburgh-Plus practice will repay examination, not because of the merits of the argument "in and of itself," but for the help it may give toward the better understanding of the larger question of basing points and delivered prices, of which Pittsburgh-Plus is only a part. It would be difficult for any one lacking acquaintance with the records in this case to believe how elusive throughout the hearings was the position and behavior of the Corporation in meeting the rather simple and direct issues presented by the complaint. The distinguished lawyers of the Steel Corporation and ornaments of the American Bar interposed four successive lines of argument, each charmingly inconsistent with all the others: (1) they denied the existence of any such practice; (2) they admitted the existence of the practice as a mere form of quotation, but denied that prices followed the quotation; (3) they admitted that prices followed the quotations, and claimed as an especial evidence of fairness toward its customers that the actual prices of its subsidiaries followed invariably the published Pittsburgh-Plus prices; (4) they argued that the complete and general use of the plan both of quotation and prices was perfectly in accord with the ideal competition (supply and demand) which is the aim of the law. Now, what could be a more complete answer than that?
It may be hard to imagine what purpose the Corporation could have hoped to accomplish by such a frivolous and self-destructive line of argument. But it served the practical purpose of evading the issue. It distracted and frustrated a large share of the attention and energies of the prosecution, compelling it to engage in the undignified chase after a greased pig instead of straightforwardly following the real issues of the case.
Now You See It
We have learned above just when and how Pittsburgh-Plus had its origin. The practice prevailed with brief interruptions and was commonly understood in the trade for at least fifteen years before the suit was begun. The Corporation in these proceedings claimed for it an immemorial origin. Mr. Gary testified in 1913. (2) that the Steel Corporation did not usually sell from any of its mills at prices which varied from those quoted in The Iron Age. He and others repeatedly declared, yea boasted, that it did not have two prices, one open and one secret. He also, in the preliminary conferences with complainants before the Pittsburgh-Plus suit was begun, (3) frankly admitted that steel was generally sold (not merely quoted) on the Pittsburgh-Plus plan. He claimed that it was necessary for the orderly conduct of the business, and also "for the benefit of the purchaser," to have "one basing price . . . something that was well understood so that every user of steel all over the country bought and used his steel on a certain basis, knowing in advance that every one else who bought steel had to pay exactly as he did" (that is, the same Pittsburgh-Plus identical delivered prices, which are exactly the same real steel prices for hardly any two buyers). (4)
The Corporation's amended answer, after a general denial, had admitted that with certain exceptions mentioned in the complaint said subsidiaries usually quote their products on what is commonly called the Pittsburgh Basis, which represents their prices for such products in Pittsburgh plus the freight to the point of sale and delivery. This is the practice among steel manufacturers generally.
Mr. Gary testified somewhat confusedly, as follows, in the hearings on this case:
“I will state that generally, since the incorporation of the United States Steel Company, we have quoted prices on a Pittsburgh base and sold them on that base but when business is dull we have absorbed a part of the freight.” (5) In other connections Counsel for the Corporation declared: "What Judge Gary himself said is of course competent and binding upon the corporation." (6) Many consumer witnesses testified that for years they paid invariably the Pittsburgh-Plus quotation of the date of sale, or in a few cases nearly that price within the small range of 5 to 10 cents a hundred pounds. (7) These statements applied almost as fully to the independents' prices as to those of the Corporation.
And Now You Don’t See It
Concurrently with these plain admissions, the very existence and reality of the practice was again and again denied by the Corporation's counsel throughout the progress of the suit. This is involved in the general denial of "each and every allegation, inference and argument" in those paragraphs describing the method of quoting and selling steel manufactured outside of the city of Pittsburgh. (8) For nearly three years counsel wrangled over the reality of the practice. What a ridiculous situation is created by this plea! At every mention of the Pittsburgh-Plus policy, hundreds of times during the taking of testimony, counsel for respondents challenged the assumption that it existed. This became a part of the legalistic ritual of the case, distracting, time-consuming, truth-defeating, and involving the waste of thousands of dollars Qf the Corporation's and of the public's money. (9)
Myth Of Its Origin
To this contradiction of admission and denial the answer then adds a false justification for a general use of the basing-point plan on these grounds:
“The practice of quoting a base price is largely for the convenience of customers and is not confined to the steel industry nor to this country but exises throughout the world, and is followed by many, if not most, of the most important lines of production and sale.”
Then comes historical misinformation to this effect:
“In the steel industry it has obtained from the beginning and became a settled custom long before the United States Steel Corporation was formed. Pittsburgh was made the basing point in the early days because at that time nearly all steel was manufactured in the Pittsburgh district. It has remained the basing point simply because, notwithstanding the construction of steel manufacturing plants in other localities, the country outside of Pittsburgh is still under normal conditions dependent upon the Pittsburgh district for the major part of its requirements for steel excepting rails.” (10)
Here is an extraordinary melange of garbled facts and fantastic theory. The Pittsburgh-Plus method of pricing and sale was not only admitted to exist, but was declared to have existed from time immemorial in the steel industry, the Steel Corporation having had nothing to do with its origin and having no part in its operation except to follow a long-established business custom, in conformity with "economic law," and followed also in the "other more important lines" of industry. Those particular lines were not further specified, but if they had been, the curious fact would have emerged that they too are, and long have been, smirched by suspicion of monopoly and restraint of trade.
Big Tent And Sideshow
The rule of Pittsburgh-Plus was admirable for the purposes of the Corporation, enabling it to name for each class of steel products a single base price at Pittsburgh, by which instantly the delivered price to be charged by all other mills (provided they played the game) was fixed, and enabling the Corporation to tell instantly whether any single independent anywhere was not faithfully conforming. But in attempting to justify, in reason, in theory, and in law, this simple working rule for.agreement among conspirators in restraint of trade, the Corporation found itself compelled to develop a rather complicated argument, having two contradictory branches, united only by the common feature that both were given the appearance of the operation of the "law of supply and demand." Coached well, no doubt by economic experts, the legal lights, Mr. Elbert Gary (no poor lawyer himself), Judge Lindabury, and their aides, learned for their purposes to parrot the phrases and ape the manners of true theory. The whole procedure may be likened to a circus; in the big tent was shown the proof that as a general formula to be used and conformed with by every mill in every part of the land, Pittsburgh-Plus was but the perfect result and expression of free competition. But such complete unity of mind and action by producers everywhere that they all sold at exactly the same delivered prices at each separate location in the United States was too perfect an exhibition. The simplest mind must suspect a trick. So it is necessary to take the audience into the small tent, where supply and demand appears in its other role of making prices vary from the formula—not much or always (for in large part the formula was unquestionably adhered to), but just a little, now and then, enough at least to suggest independence of action by each producer and the freedom of each customer to buy at "competitive" prices in his home town! The whole circus, main tent and sideshow together, was a fake worthy of the talents of Phineas T. Barnum, but hardly worthy of these eminent jurists and sworn officers of the courts.
Schoolboy Logic
An unspoiled mind might be tempted to believe that if prices were quoted on a basing point for the information and convenience of customers, only adherence to the quotations would attain that object. But no, "they are seldom adhered to strictly." Again, one might reasonably suppose that if it be a special continuing virtue of the Pittsburgh-Plus formula that it is in accord with the infallible law of supply and demand, then the more closely it was adhered to, the more strongly its use would prove competition and the greater would be its legal merit. But no, the mysterious virtue of Pittsburgh-Plus, as expounded by the Corporation, seems to be precisely this, that it is not adhered to. The Corporation's Counsel were true disciples of that schoolboy who so logically declared that "pins has saved thousands of lives by folks' not swallerin"em." The solemn proposition is that the rule of PittsburghPlus, sanctioned alike by time and by some mystic law of political economy, is to be honored in the breach rather than in the observance. So this is Messrs. Gary, Lindabury and Company's economic curiosity: the Pittsburgh-Plus price system is strictly in accord with the operation of the law of supply and demand, but non-adherence to it proves that competition as to prices is vigorous and unrestrained and that the price of "every article of production" in the steel industry in every locality is "determined by the law of supply and demand." Can you beat it? Like the old darky's wonderful trap, "it cotches 'em a-comin' and a-gwyin'."
The question of fact, it would seem, should be answerable by the evidence of actual contracts, and most painstaking studies of this kind have shown about go per cent of close agreement to the formula. Such discrepancies as occurred may mostly be explained because of differences between contract and delivery dates, temporary failure of the conspiracy, and various other details. (11) The testimony of customers that prices "varied" undoubtedly refer in most cases either to the brief transitional periods or to the periods of breakdown of the system. (12)
The Generous Lemon Vender
A special word should be said of the discrepancies from the established Pittsburgh basing point in an upward direction. These premium prices were pointed to by the Corporation as if they proved the non-existence of the system as fully as lower prices might. But they are of entirely different nature. Such premium prices occurred always, it is safe to say, in boom times, when the Corporation mills were booked up to capacity and could not give early delivery. The smaller independents are rarely, if ever, booked up as near to capacity as are the Corporation and larger independent mills. The reasons are readily understood, inasmuch as small mills are prevented by the Pittsburgh-Plus plan normally from making any concession in prices even in their own peculiar territory that would make up for a certain limitation otherwise in their facilities and service. In boom times, therefore, "the little fellows" are able to get, and often do get, a so-called "premium" for early delivery above the official Pittsburgh base. But the Corporation takes no offense at this; this is not shading the announced price or breaking the rule. Having nothing more to sell itself, the Corporation makes a virtue of keeping its old price posted for the public to gaze at. Many folks, fooled by this, have highly praised the Corporation for its generosity. It explains modestly that it is doing all it can to prevent a runaway market, to "stabilize" prices, etc. A quoted price is not really a price at all, it is merely a quotation, unless and until the trader stands ready to make delivery. The situation recalls a conversation at a fruit stand regarding the price of lemons:
"How much?"
"Thirty cent a dozen."
"But the stand around the corner sells them for twenty cents." "Why you then no buy dem dere?"
"They haven't any this morning."
"Ah, if I no have de lemon I sella dem at twenty cent too." (13)
Occasional Competition
Premiums (necessarily rare and brief) may be taken by the independents with impunity and the system of price maintenance remain intact, but let any makers of steel in normal or in slack times cut the established prices except accidentally or for more than a brief moment, and it is lese-majeste, the system is imperiled, and a war of prices may be on to bring the offenders to their senses. Here, also, in these occasional periods of the complete breakdown of the system, occur most of the cases often cited by steel producers and accepted by customers as evidence of the persistence of a state of genuine competition in the steel industry.
Again as in 1921, now in 1930, Mr. Schwab before a great gathering of the steel industry is deploring the fact that "several months ago price instability was permitted to come into our commercial structure." And Mr. Farrell "criticized unfair competition," declared "we have got to be honest," and denounced "price cutting" as "the main trouble with the steel industry." He declared that price cutting "killed business," a doctrine at variance with the usual view of the effect of lower prices in increasing sales. (l4) In December 1930, as its generous contribution to the cause of relieving the depression, the steel industry, under the lead of the Corporation, raised steel prices generally.
In its answer to the Pittsburgh-Plus complaint, the Corporation referred specifically to such an exceptional period when, as it says, “market prices are frequently materially lower than the prevailing Pittsburgh price plus the freight rate from Pittsburgh to point of destination, particularly when the supply from the territory outside of Pittsburgh equals or exceeds the demand in such territory.” This statement is partially true, but garbles the facts and misrepresents their real nature. For these departures (called frequent, but in truth rare) from the Pittsburgh-Plus prices are of a totally different nature from those mere nibblings at the official prices which the Corporation tried to prove were daily occurring. In these exceptional periods, as even the Corporation in its ingenious version of theory admitted, "the supply outside of Pittsburgh exceeds the demand." But those are times when the whole system of ofiicial Pittsburgh-Plus breaks down (no longer is "prevailing"), and invariably at such times the smaller companies return more or less fully to the plan of mill-base prices.
Under critical examination, the evidence adduced to show that, as a system of pricing, the Pittsburgh-Plus system had no existence, melts away like fog before the sun. That it prevailed most of the time as a system of quotations was undisputed; whenever it did so, it prevailed as a system of prices, adhered to by Corporation and independents alike with an exactness that is astonishing. But what if all the flimsy claims of non-adherence had been true, would they have proven the non-existence of Pittsburgh-Plus? Certainly not; merely that the adherence was in practice not 100 per cent perfect. It is not proof that a girl has no chin, to show that she has a dimple in it.
Mr. Gary Enjoys A Lincoln Story
In his testimony before the Stanley Committee in June 1911, Mr. Gary inadvertently confessed the truth that the live-and-letlive market-leadership policy of basing-point prices involved the same result as an explicit agreement. But when that keen lawyer, Mr. Martin Littleton (then a Representative and member of the Committee), restated the proposition in a way implying that it might fit the practices of the Steel Corporation, Mr. Gary drew back in alarm, as near to confusion as he ever was in his long career of elusive testimony. Here is the conversation:
Mr. Gary. “Of course if you and I, knowing exactly what the other is doing from time to time, continue to do that same thing, then the result is the same as if you and I agree to do that.”
Mr. Littleton. “You will recall—I do not recall it exactly—one of Mr. Lincoln's favorite illustrations that if four men in four counties each whittled on a piece of wood for four or five days and met at the county seat and put their pieces of wood on a table and they all fitted with each other that he would ask nobody to furnish him with any evidence of the fact that they had had an agreement in advance that they would all whittle in a certain direction and that they would meet there, and he thought that was the highest authority.”
Mr. Gary. “I am not familiar with that. I am certain in our case the sticks do not fit. They never have fitted; they have never been like anything else.”
Mr. Littleton. “Although there has been a good deal of whittling?”
Mr. Gary. “Although there has been a good deal of whittling, but that is the trouble, they have been whittling at random more or less by trying to keep posted with one another's whittling. That is a very apt illustration and I am very glad it has been suggested.” (15)
Great Marksmanship
It surely was an apt illustration, but was Mr. Gary really "very glad it had been suggested"? In any event, while his Corporation continued industriously to whittle on a pattern of prices that fitted almost exactly with that of all other steel producers, he and his legal staff performed an equal marvel during the next nine years of litigation in keeping the significance of this pattern from the knowledge of the courts.
Pricing by the various mills under the Pittsburgh-Plus plan may be likened to shooting at a target, namely, the formula of "the Pittsburgh-Plus equivalent." It was real sharpshooting, for the misses were mostly only apparent, not real, being shots intentionally a little higher (premiums), or not aimed at the target visible to the onlooker but at another target (as just when the base price has been shifted, or for extras not exactly comparable, etc.). Diagrams prepared according to this analogy show how nearly all the shots hit the bull's-eye, a most remarkable example of concerted action and of discipline strictly maintained among great numbers of rival enterprises, thus united in one grand conspiracy in restraint of trade. Now and then in bad times the temptation would become too great for the little fellows, and some would begin shooting at a different target, each at his own mill-base price. Then the Corporation would threaten to do some real shooting that would fill the hides of its small competitors with buckshot and leave them with large hospital bills and chastened spirits. (16)
Chapter XIII: Teach A Parrot
A Miracle Of Chance
It was probably Thomas Carlyle's none too gentle pen that first wrote: Teach a parrot to say supply and demand, and you have made a political economist. Any suspicion that Carlyle may have meant to refer to the spokesmen of the United States Steel Corporation is of course dispelled when one recalls that these words were penned some three quarters of a century before they began to display their fondness for the mystic phrase. But once they discovered its efficacy as a narcotic they used it in liberal doses—in Mr. Gary's public addresses, in statements before Congressional committees, in the dissolution suit, and in crescendo throughout the hearings on Pittsburgh-Plus. Never has greater faith been professed by able men in a mere jingle of words, in its power to accomplish nothing short of a mathematical miracle, unfailingly, bringing about a result which according to the theory of chances could not happen once in a million times. For this wonderful application of theory had two parts which were declared to fit into each other with the exactness of a piston in a polished autocylinder. First, "the law of supply and demand" was declared to determine in each of the different consuming localities so-called "market prices" (meaning delivered prices), varying according to the particular conditions of competition existing at each such place of delivery. But here is the miracle; the complete record and table of such delivered prices, said to be determined independently by local competition and the operation of the law of supply and demand, is found to be just that which must result if the Corporation and the independents alike, acting in perfect agreement, were using the Pittsburgh-Plus formula all over the country. (1) This system of delivered prices is exactly that which would result if all the steel produced in this country were made at Pittsburgh by one company and sold at the announced mill-base price, to which was added the freight from Pittsburgh to destination. The most miraculous aspect of this miracle is that this identity of delivered prices necessarily involves, and can only result from, the widest diversity of net mill prices charged to their various customers by each and every mill not located at Pittsburgh. For the moment that any mill began to treat its various customers alike at its own doors, the Pittsburgh-Plus pattern in that region would be erased, prices would be reduced to many customers, and shipments from Pittsburgh mills to that territory would be excluded. The significance of this will be further indicated below.
The “Marginal Theory” To The Rescue
Now let us take a look at another way in which the "supply and demand" theory was applied to explaining and justifying, economically, the whole system of Pittsburgh-Plus prices. Reduced to its simplest terms, the main contention of the Corporation throughout all the proceedings and in its final brief was this: the "demand" for the various products in western territory had been and still was, they maintained, greater than the producing capacity (this being assumed to be the supply) of the Corporation and its competitors combined in western territory; this constant deficit called, they said, for the constant shipment of steel from Pittsburgh to Chicago, and as this, of course, when delivered in Chicago or its neighborhood from Pittsburgh mills, cost the buyer the Pittsburgh price plus the freight, these delivered prices necessarily registered, or determined, the regular market prices in Chicago for all steel, whether brought into Chicago or produced there. This argument was repeated in detail with reference to each of various kinds of steel products and in relation to what was called western territory. (2) There was here presented a version of a marginal supply theory—crudely and bunglingly applied, indeed, but having a certain relative validity—as against the crude cost-ofproduction theory which more or less plainly at first (3) was made by complainants the ground of a plea for a separate base price at Chicago as low as that at Pittsburgh. (4) If, when true competitive conditions prevailed, a deficit of production at Chicago existed, a "demand and supply" price would for the time be justified in economic theory and by existing law, no matter how much above the estimated cost. Mr. Gary and others frequently admitted that such a situation was necessarily somewhat temporary, and that sooner or later "the law of supply and demand will eventually take care of the whole question" in some other way, apparently by bringing costs and prices together. (5) But before turning to that question, let us not fail to observe some other very significant features of the Corporation's supply and demand theory.
Sauce For The Gander
This deficit argument, observe, was developed only in relation to "western territory," which was treated almost entirely as if it were limited to the Chicago district twithin a few miles of the city) with occasional references to a similar situation, with a similar justification of Pittsburgh-Plus, at Duluth, St. Louis, and Birmingham. Most of the complainants (buyers of steel) were in territory neighboring to Chicago, with some from Duluth and from the south. Moreover, the complaint as finally issued was drawn only against the Corporation (to simplify the proceedings, it was said) and not against the independents, although they were just as fully participating in the maintenance and operation of the system as was the Corporation itself. Manifestly, this explanation and justification of the nation-wide system of Pittsburgh-Plus logically calls for the demonstration of a similar absolute deficit of products in the district contiguous to each mill in the country, at Pueblo, Duluth, Cleveland, Buffalo, Bethlehem, Philadelphia, Baltimore, and elsewhere, each of which regions near the mills must be shown to require constantly and regularly (except at the rare periods of breakdown of the system) to be supplied with a portion of each kind of products from the never-failing central reservoir of surplus production at Pittsburgh. The argument implies that not one of these mills, excepting rarely, had sufficient product to supply all the demand at its own doors! It would seem that if at any time steel moved from any of these outlying mills toward Pittsburgh—still more strikingly, if it moved actually into Pittsburgh, or through it and beyond—that the ingenious supply and demand theory would then show that said mill should not base its prices on Pittsburgh but become its own basing point. Why not become the basing point also for Pittsburgh? The rule should work both ways. This very movement into and past the Pittsburgh district occurred constantly while the system was operating most perfectly. There is a flaw somewhere. But slow—we shall come to this in due order.
Public Meddling And Muddling
What, used accurately, does "the law of supply and demand" signify as a matter of theory? Just this: that if competition in a market is free and effective, on the part both of buyers and of sellers, a price will result which permits the maximum number of trades possible, leaving no motive to trade on the part of any one in the market. Such a price may be said to equilibrate demand (number of units taken at the price) with supply (the number that freely competing sellers are ready to sell at that price). Applied in practice, this "law" becomes a maxim of worldly wisdom, warning against artificial meddling with the automatic process of price adjustment in free markets. Such meddling is principally undertaken by two agencies: (1) governments endeavoring to fix or manipulate prices in the interests of certain favored classes; and (2) private and corporate industries, usually acting through combinations and by conspiracies in restraint of trade. Supported by history and example, this "law" teaches that even when undertaken with the best of motives, governmental price meddling to thwart (not, be it noted, to facilitate and insure) the truly competitive market price that results from the interplay of bids by buyers and sellers is usually futile or harmful. If prices are thus raised (as often they may be for a time) above what they would have been, the demand at the higher price is reduced (substitute goods are encouraged; diversion of trade occurs), whereas the supply is increased by the attraction of increased profits, and in the long run the plight of the industry and the producers is made worse. vice versa, if prices are thus artificially reduced for the purpose of favoring certain consumers, the supply at the lower price falls off (so-called marginal producers and marginal units of product are cut off), and the demand at the lower price increases, but cannot be satisfied at that price. Either artificial increase or decrease of price results thus in destroying the equilibrium of demand (number of goods bought) and supply (number of goods offered) and actually reduces the quantity of such goods enjoyed by the members of the community. If they are wholesome, innocent, really useful goods, this presumably is injurious to the community's welfare.
Monopolistic Meddling
It is surely not necessary to parallel this explanation of the uneconomic nature of the usual type of government price meddling with a similar explanation in respect to private monopolistic restraint of trade. The same explanation very evidently applies in almost every detail, with additional aggravation of the offense against the public welfare. For higher prices resulting from manipulation by a private selling monopoly (the case of a buying monopoly is rare) not only injure the consumers by decreasing the amount of available goods, but they likewise limit the opportunities of other producers to engage with equal freedom in the industry (however, this fact may be obscured, since open price wars for the destruction of competitors have been avoided). Moreover, these private invasions of the rights of others have not the safeguards and legal justification of those undertaken by a duly authorized public agency for an avowedly public purpose. They are violations of the spirit and letter of the law, confessedly done with the motive of private profit—although, as in the case of the Steel Corporation, it is true that this action may be accompanied by generous professions of a desire to "stabilize" the industry while thwarting "the workings" of the law of supply and demand.
All this is written large in the history of Anglo-Saxon institutions and law since long before the Case of Monopolies in 1603. The thought of the essential virtue and validity of "the law of supply and demand," properly interpreted as a maxim of practical wisdom, underlies our whole public policy toward private monopoly. The anomalous case of the acceptance of private monopoly in the great public utilities and their regulation by Commissions should not confuse any one—although it often does—for in such a case monopoly has not been accepted as an alternative of free competition, but only because experience had abundantly proved that under the actual conditions competition had become ineffective or non-existent. And it is not to be overlooked that whenever private monopoly in any industry has been thus "accepted" it has, so far as price goes, been shorn of its private character and has been made subject to public price fixing. Intermediate between a condition where prices are without any public regulation, and are truly determined by the law of supply and demand and the condition of accepted monopoly with public price fixing there comes, however, a broad field of industrial action where governmental regulation of prices has to perform the most valuable function of strengthening the too feeble forces of competition and of protecting them against the anti-social attacks of private monopoly. It is in this ill-surveyed field that those problems of industrial price regulation lie, with which our whole study is pecuharly concerned.
If Sellers’ Competition Fails
The truth of these ideas on supply and demand is so fully implied in economics and the law that their restatement may seem to be a work of supererogation. But the greatest fallacies are merely distorted versions of simple truths. The omission or alteration of any one of several conditions assumed may quite falsify any conelusions to be drawn in applying this so-called law to practical cases. Let us, therefore, examine in some detail the appeal of the Steel Corporation to the authority of supply and demand in support of the use, by itself and its competitors, of the Pittsburgh basing point for delivered prices on steel not made or shipped from Pittsburgh. We shall find that it leaves unperpetrated no possible error and avoids no possible fallacy.
A most elementary error is in forgetting that the truth of the "law" of "supply and demand" assumes full, two-sided competition, the two being linked as coordinate. It is a law of competitive price and does not apply in full, if at all, where competition is restrained. If producers, whether or not by formal agreement, in fact refrain from acting independently in their bidding, while buyers continue to compete actively, the resulting price might perhaps be said to be determined by a "law of demand," but not by a law of demand and supply. This is so obvious that even Mr. Gary in his testimony declared that if for any reason either buyer or seller "is compelled to act and is not left free, then to a corresponding extent the law of supply and demand is temporarily suspended or modified," but he denied often and emphatically that any "artificial arrangement for creating supply and demand," or "any arrangement contrary to law," had been made. (6)
The origin, the history, and the nature of the Pittsburgh-Plus practice were such as to refute such a claim of innocence. The plan and practice lacks every essential mark that characterizes a real market and real market prices. For note that the truth of the law of supply and demand assumes the existence of a market place (at least a meeting of minds and of bids through some means of communicating ideas). If buyers are not permitted to come together when they so desire, and buy where the sellers are dealing at the same time with other buyers, access to the market is denied, and this defeats the action of the law of supply and demand. In such cases both supply and demand are artificially limited and controlled.
Markets Created By Legal Fiction
This is what is done by compulsory delivered prices which are a necessary condition to the successful operation of any basing-point system. Their indefensible character is revealed by the mendacious explanation that always prefaces the apology for them: that they are quoted merely for the convenience of the customer! The description given and the defense relate merely to an optional delivered price, such as is a mill-base price (open to all comers) plus the actual freight from mill to destination. The fact is concealed that the buyer never is allowed. to have this option. Instead he is told by Corporation counsel, with their tongues in their cheeks, that each locality where a single customer intends to have goods delivered is a separate market place, and that the identical artificial compulsory delivered prices which all mills, wherever located, quote to him is a true market price! The legal fiction that was strenuously defended by the Corporation's lawyers is that by the delivered price contract to which the buyer is a party, the place of delivery is the place of sale. The doctrine halts at no extreme of absurdity—thereby each distant country station. even though but one buyer be there, becomes a real market. (7)
Insult Added To Injury
Can legal sophistry go further? Yes, it can add insult to injury. At one time, while they were opposing any effective Commission control, contemptuous railway officials were wont to declare that their discriminatory rates were really competitive because, if the passenger didn't care to pay the fare, he could get out of the train and walk, and if the shipper didn't like the rate, he could use a wheelbarrow. Just so, the usually cautious Mr. Gary offered this cold comfort to the hard-beset victims of the practice of compulsory delivered prices, who were pleading for the simple right to buy in Chicago steel produced at Chicago at the same net price as other buyers.
“When the Pittsburgh basing system is in operation, the Chicago fabricator can get his steel at less than the Pittsburgh base price plus the freight by saying to the producer, "I don't propose to pay the Pittsburgh base price with the freight added to Chicago. I will wait. I will discontinue business." If the majority of the buyers feel that way, they will bring about a reduction and the freight rate will be eliminated.” (8)
So Mr. Gary's cheerful advice to the buyers to whom he denied free access to, and equal treatment in, a real market at Chicago, was that they should all commit industrial suicide, whereupon Mr. Gary and his fellow conspirators, having killed off all their local customers, would have to restore a mill base in order to re-create a body of buyers. And this is what some folks call industrial statesmanship.
Natural Vs. Artificial Prices
The words "demand" and "supply" have no definite meaning except in connection with the idea of a definite price, either as a potential demand in connection with some price that may be, or of an actual demand in connection with an actual price at the moment. Such expressions as "demand exceeds supply" (or vice versa), so frequently heard, are loose and meaningless when used apart from a specific price to which the demand (or supply respectively) relates. In a truly competitive market where the constant adjustment of price to changing conditions of demand and supply is serving each moment to equilibrate them, there cannot, except in these fleeting moments of maladjustment, be such a thing as an excess of demand over supply (and vice versa). This expression, as frequently used, is nonsensical. However, in cases of continuing lack of balance between demand and supply resulting from price-fixing by a governmental agency, supply may somewhat more truly be said to be greater (or less) than demand as this manifests itself in the form of unsold stocks when price has been fixed too high, or vice versa, in that of waiting lines of buyers or of "rationing" scanty supplies of goods when price has been fixed too low. The same phenomenon of lack of balance between demand and supply appears under conditions of private restraint of commerce. The chief cause of the breakdown of many pools and other artificial agreements has been the strong temptation presented to each member of the combine or conspiracy to sell stock that accumulates; or again, to make use of unused capacity when even a lower price would make its use profitable. Here supply and demand may for a considerable time be artificially equilibrated, but the supply is not the resultant of the choices of freely competing individual sellers. Clearly in such cases the artificial price is not a true "market" price in the sense of the law of supply and demand.
So, when Mr. Gary, justifying the maintenance of PittsburghPlus prices at Chicago in 1914 at a time when most of the Chicago mills were shut down, stubbornly insisted "that the law of supply and demand was operating because the goods were sold at what the seller was willing to take and what the purchaser was willing to pay, and that makes the law of supply and demand," he was just talking nonsense. (9) Such facts do not "make the law" or prove that it is operative, for it is equally true that whatever be the price that the most effective monopoly may be able to maintain, the goods are sold only to such purchasers as are "willing" to pay, and by such sellers as are "willing" to take, that price. The buyers, however, represent at that time an oppressed demand, and the sellers a suppressed supply, and this is not the workings of "the law of supply and demand," for it can truly operate only in a free market.
Price Resulting From Competition
Price, demand, and supply may be suggestively described as having a functional relationship, a mathematical analogy with those numbers which vary in certain relationships with each other. But the analogy becomes misleading if competitive price is assumed to be equal and coordinate with demand and supply, as a causal factor in "the law of supply and demand." Rather supply and demand, taken together, each expressing and resulting from the willingness of traders, without conspiring, to trade on one or the other side of the market, under the existing conditions, are the only truly causal or active factors. Competitive price is the result of the interplay of supply and demand. Once under way, the market is a going concern, and comes to have a "going price," or rather a continuous series of going prices, spaced by brief intervals between transactions, much as are the separate pictures on a movie film, but which in like manner leave a continuous impression on the eye. All that any one buyer or seller (if not a monopolist) does or can do when acting independently is to decide whether himself to buy or to sell (respectively) at the going price; or if he is not quite willing to do so, he may announce by bid or offer how near to it he is willing to trade. While thus each trader viewed separately may be said to have his demand (or supply, respectively), i.e. his contribution to either, according to his valuation, yet, in the broader view, the collective demand and supply may truly be said to determine the going market price; whereas market price can never truly be said to determine demand and supply, taken collectively, in a competitive market.
The case, however, is otherwise where the conditions are not really competitive. Conspirators in restraint of trade usually reverse the order of events, begin by fixing some price other than that prevailing, and then later undertake to make such necessary adjustments of supply, by withholding or increasing goods, as will suffice to maintain the artificial price. Just here comes the acid test of the effectiveness of any conspiracy in restraint of trade, and many of them (especially the looser forms) fail to meet it fully or for long.
A System Of Local Discriminations
And just here, in the simple and effective method which the basing-point plan provides for limiting the amount which each conspirator shall add to the supply, lies much of its ingeniousness. The basing-point method of restricting supply is not by crudely fixing an absolute maximum for each mill, but by requiring and permitting any surplus to be "dumped" at lower realized prices in other territory. This involves, and results in, an elaborate scheme of discriminatory prices for steel charged to the various customers of each mill. The temptation of the mill to increase its sales (supply) in its best-paying sales-territory near it (and thus to reduce its prices, through the workings of the law of supply and demand) is not stopped with a jolt by an inflexible price (net receipt) but is allowed to be indulged, so to speak, on a downward sliding scale of net price realized, graduated according to the distance the product (steel) is shipped to the customer's destination in the direction of the basing point, and freight "absorbed." The invention of this ingenious device (around the '80's) and its perfection by Messrs. Carnegie, Schwab, et al. after many experiments in illegal restraint, opened up after 1901 a new era of monopolistic practices and monopolistic profits in the United States, while the public, the government, and the courts looked on uncomprehendingly. An independent mill, at any location outside of Pittsburgh, selling for delivery at and near its mill at the full plus, without absorbing any freight, is making a highly profitable sale. (10) The fly in the ointment for the independents is that by the system, the Pittsburgh mills and mills everywhere else in the country are able to deliver in that same territory at exactly the same price (steel plus freight), and no mill dares, on penalty of breaking down the plan, to shade its prices to any one in its most profitable territory.
This inability of the independents to make any price inducement gives to the great Corporation, with its great resources and ability to shift orders, some great advantages over the smaller independents, as evidenced by the regularly higher percentage of the Corporation's bookings to its capacity, a fact which, because of the well-known effect of overhead costs, signifies that the Corporation has here a great and regular cause of extra profits.
Two Prices In One Quotation
The key to the riddle of this sort of discrimination is simple. A delivered price is not really a steel price at all, but is the sum of two prices, the price of the steel and the price of transporting the steel to the customer. In nearly every case the freight (price of transportation) is actually paid to a common carrier, and when the mill is said "to absorb the freight" what it is doing is in fact to reduce by that amount its net receipt for the steel, the only thing it is really selling. If, however, the steel mills owned the common carriers, the price theory would not be altered in any essential way. As common carriers with rates subject to regulation, they clearly would be discriminating either in their steel prices or in their freight charges when selling on a Pittsburgh base and "absorbing freight." If they are not common carriers but delivering by truck, just as clearly they are engaging in the transportation industry in addition to running steel mills. In giving to some customers of steel any costly incidental services, or services in varying amounts, a mill is in effect discriminating in its steel prices. Steel is steel, and freight is freight, and a so-called "delivered price" for steel is not either alone, but the sum of both. This conclusion is inescapable.
Dumping—this is the name for this process of selling goods at a distance at a lower net price than on sales nearer the mill. This important subject calls for a fuller discussion, which is reserved for a later chapter (Ch. XXI).
Maximizing Monopoly Base Prices
An interesting question in regard to the Pittsburgh-Plus system of pricing is how the Corporation fixes upon the particular base price for each kind of products, whose weekly proclamation, like a command to a well-disciplined army, is sufficient to bend every will and to make every foot in the great ranks of steel move in unison. After the warning trust-busting decisions of 1911 the Corporation abandoned the clumsy, incriminating devices of central price committees and of Gary dinners, and adopted the simpler and more effective device of having the basic price itself named without consultation outside its own organization by the one dominating market leader. By this easy change it succeeded beyond all earlier hopes in "getting by" the public guardians of the law. An incidental but not unimportant feature in the operating of this new plan was no doubt the more enlightened self-interest with which such a single small executive body, as compared with the older type of representative committee, would perform the delicate task of selecting a base quotation for each standard type of steel products, a quotation that had the marvelous power of determining the delivered price of steel at every little remotest cross road and in every hamlet between the two oceans. It was a task calling for a broad view by the committee of the self-interest and profits of the steel industry as a whole, so largely coincident with their own. Undoubtedly such men will naturally strive more for stable prices and stable profits and be longer-sighted in their pursuit of profit than were the earlier cruder combinations. None could perform this task so well for their purposes as could the past-masters in the art of monopoly, the inventors of this very ingenious system. None knew better than they that the power which they exercised of a dictatorship over prices was tempered by the dangers of rebellion. None better than they knew, from long experience, how to foresee and to measure the forces of latent competition. They knew well that these forces, and the temptations to break away from the agreed system, grew greatly as the price rose (relative to costs) and also as mill capacity remained unutilized. To the constant temptation of each independent to poach a little upon the areas of relatively high local prices (involved in the scheme of discriminations), they dared not add too great an additional temptation of a too high base price which lifts the whole level of delivered prices at every location in the land. Occasionally, with all their astuteness, they overestimated the strength of discipline in the ranks and the tremendous force of the temptation in slack times to independents facing bankruptcy and booked up far less nearly to capacity than was the Corporation. But generally, the skill with which this fixing of the base price was performed by "the market leader" in steel is evidenced by its remarkable success in keeping the system of Pittsburgh-Plus in operation for a quarter of a century without the use of the older, cruder devices. This skill cannot but call forth admiration from all those who think that sort of thing is admirable.
Teach A Monopolist
Surely, though, no one of any intelligence could, at this stage of our study, believe that such a shrewdly calculated base price, though undoubtedly "limited" and "affected" by competition and by the fear of competition, is a price fixed by the law of supply and demand. It is no doubt "all the traffic will bear," not perhaps with reference to the moment and in particuIar localities, but so far as these most skillful price-fixers are able to determine, it is "all the traffic will bear" in the long run and with a view to stable conditions. Indeed such basing-point prices and the whole system of artificially related local discriminations are monopoly prices, altogether the most striking and stupendous example of them in this nation's industrial history. In the interests of truth, therefore, Carlyle's epigram must be amended. Neither a parrot nor a trust magnate, by merely repeating the phrase "the law of supply and demand," becomes truly a political economist. The one is still just a parrot; the other is a great captain of industry parroting phrases to befool the public and the guardians of the law in the interest of his corporation's treasury.
Many competent political economists have always admitted, certainly today admit, the essential justice of Carlyle's bitter epigram. Indeed, Carlyle's resentment was mostly directed not against the views of academic and scientific students but against the misuse by British business men in his day, for their private profit, of the phrase "supply and demand" without even an attempt to understand it. Used understandingly, it has always expressed and still expresses a truth; but carelessly used, it is meaningless—or worse. It is an edged tool, dangerous in the hands of law-breakers.
Chapter XIV: Close Harmony In The Brass
Mr. Ryan Wishes To Be Heard
In the midst of the hearings on trust legislation held by the Committee of the House preliminary to the passage of the Clayton Act, Mr. John D. Ryan, not unknown to financial hme and hailing from Butte, Montana, was introduced February 9, 1914, as one wishing "to be heard on pending anti-trust legislation.'' (1) The Amalgamated Copper Company, of which Mr. Ryan was the head, produced then in this country about one-fifth of the copper, while four other companies produced another two-fifths. The witness began by expressing general approval of the provisions of the bill relating to discrimination "as far as they apply to domestic trade," declaring them to be "in the interests of the whole country and in the interests of the large and small manufacturers, miners, and producers." But he quickly proceeded to alter this opinion into strenuous opposition. He suggested that the anti-discriminatory provisions, "in effect, that the price of any commodity shall be the same, taking rates of transportation into consideration, for every section and community, is an unworkable provision, especially if it relates to foreign business." But upon being assured by the Committee that "it is not intended to relate to foreign business," Mr. Ryan emphatically opposed the provision forbidding such discrimination in domestic prices.
Mr. Ryan Begs For Freedom To Compete
He then proceeded, somewhat indirectly, to explain and justify the basing-point system of selling copper then and still in operation in the copper industry. In answer to the question, "How would yout criticism apply if the bill is simply to relate to the United States?" he said:
“We are refining and making copper ready for the market in Montana and we are making it in New Jersey. Frequently, when we make a sale of an amount, large or small, to a domestic manufacturer we do not know where we are going to deliver that copper from, whether it is to come from the Montana works or from the New Jersey works, because it all depends upon how business is in the West, whether the Montana plant is overloaded or how business is in the East, . . . we must meet the competition of the Michigan copper mines. We sell copper 1,500 miles from our own refineries and 500 miles from the Michigan refineries . . . On copper shipped from Montana we could not make a rate that would comply with this provision [forbidding discrimination] and at the same time meet competition in other sections. We would have to surrender the intermediate field to another producer who was nearer that district, because it would be absolutely impossible for us to compete with him. However, when we get farther East he is on the same footing, practically, that we are.” (2)
Weeping For His Victims
Mr. Ryan then made an appeal "to take off all restraint and absolutely all the ties, bonds, and fetters from American producers and manufacturers in their foreign trade." Apparently he wanted legal sanction for American copper producers to combine ad libitum in the sale abroad of their product, an object pretty nearly achieved later by the Copper Exporters' Association under the Webb- Pomerene Act. In pursuing this argument the witness was treading on dangerous ground, and although he picked his steps with great care, he confessed at times that "You gentlemen are confusing me a little; you are getting me a little tied up" with questions about the control of the copper industry in the United States. But on the whole he succeeded in throwing his questioners off the main trail, which would have led them straight to the evidence of the discrimination practiced by American copper producers in their sale to American consumers. He strangely complained that "over a period of 12 or 13 years" American copper had been sold to American manufacturers, on the average a half cent a pound higher than to foreign manufacturers, placing upon them a burden of "at least $10,000,000 a year on account of their inability to buy as well as the European manufacturers." Here the argument became more confused, as Mr. Ryan declared himself to be, while he deplored the sad plight of his fellow countrymen, forced by competition to pay him and his fellow copper producers higher prices than foreign fabricators paid him for the same copper. He declared that this was not "dumping," for it was his novel idea that dumping was the sale abroad, more cheaply, of a tariff-protected product, whereas he stated copper had not "had any protection for 16 or 17 years." He repeatedly expressed regret that the law forbade American consumers of copper to combine, seemingly so that they could force him to sell copper to them as cheaply as he did to foreign buyers. When “trade was dull the European buyers combined and forced the unloading of large quantities of copper [i.e. at the lower prices], and the domestic manufacturers were not able to combine; they had to trade in competition with those foreign manufacturers who were able to combine . . . (3)—here shifting the thought from competition at home in the sale of refined copper to the quite different competition abroad in the sale of fabricated copper products. Again the same need of combination among American consumers of copper, as buyers, is suggested by him in his explanation of the success of copper-fabricating industries abroad: “the manufacturers of the world are able to combine and have understandings and agreements and do all the things that domestic manufacturers are not permitted to do, they are able to buy this material to better advantage.” (4)
He declared that among other reasons why so much copper was fabricated abroad the foreigner can buy it better . . . we penalize the domestic manufacturer by permitting the foreign manufacturers to combine and buy the raw product to better advantage than he can buy it.” (5)
So the fault lies in our laws, not in Mr. Ryan and his friends, that American copper is sold at dumping prices in Europe.
American Consumers Forced To Pay
It is a strange notion that the American people "permit" foreigners to combine. Of course the Anti-Trust Act cannot apply to Furopean territory. It does apply, though, to the territory of the United States and, if properly enforced, should have prevented the extortion which Mr. Ryan proceeds to confess in these words: “When we sell that copper in Europe—to Germany, England, and France—we have to sell it to combined buyers. Repeatedly and regularly the dealers or consumers of Europe have combined to force American manufacturers of copper to unload, especially at times when business conditions were not good and when a surplus was accumulating. At those times they have almost named their own price . . . in 14 years, from 1901 to 1913, [raw copper was sold in] foreign countries, mostly in Europe, at a sacrifice of half cent a pound as against the price secured in the sale of the product to domestic manufacturers. I am speaking now of our own business.” (6) By what mysterious power were the American buyers of copper prevented from buying at these lower prices? If this was not dumping American copper abroad, there is no such thing as dumping. Further to the same effect Mr. Ryan said:
“When the concerns here had large quantities of copper to sell and the trade was dull the European buyers combined and forced the unloading of large quantities of copper, and the domestic manufacturers were not able to combine . . . they paid a half a cent a pound more for their copper and started with a handicap . . . of at least $10,000,000 a year on account of their inability to buy as well as the European manufacturers.” (7) Here again spoke the sympathetic heart.
It is hard to believe that Mr. Ryan really meant to confess, as he did, that American copper producers had been collecting since 1901 a tax of $10,000,000 a year from American customers in excess of that charged to foreigners. In the desire to emphasize his particular point, he may have exaggerated. In any case, this same system of selling to the domestic trade has been in operation ever since that time, and still is.
A curious expression this—the American producers were "forced" to unload; it sounds as if they were held up by highwaymen. If what really happened is duress or coercion, then every seller of "surplus" stock at a time of a business slump is "forced" to sell when he accepts a price which, under the circumstances, he is glad to get! In truth, it was the American consumers who were "forced" to pay more for American copper than the producers were getting for it abroad.
Moreover, there is no truth in the impression which Mr. Ryan's words convey, that European buyers of various countries combined in a single buying corporation. At most, the German buyers, or some of them, may have had a buying cartel for themselves—but that the buyers of all Europe combined, sinking national differences, is simply a fantastic notion. The United Kingdom and Germany (of recent years) each has taken about 10 per cent; France, Holland, Belgium, and Italy, nearer 6 per cent each; and Sweden about 3 per cent of American copper.
Dumping Still Remunerative
What really distressed Mr. Ryan was that despite the very large measure of control of the sources of supply by his company and a few others, they still found, when it came to selling their "surplus" abroad, that the European markets were in pretty large measure open, and copper from mines throughout the world could be freely sold there in competition with American copper. And what he was yearning for—as for the flesh-pots of Egypt—was for compliant legislation not to enable the American manufacturers and their customers, the American people, to escape from his control and to pay less to him for copper in this country, but to enable him and his associates to deprive the European buyers also of the semblance of real copper markets.
Not that the prices received in Europe were unremunerative. For in answer to the question, "Do the copper operators sell all of their material abroad at a loss? Do they not make a profit out of it?" Mr. Ryan promptly replied, "Certainly they do." What he really was seeking was not to reduce prices to American copper consumers, but to raise European prices still higher, to a level with those paid by Americans. Thus, generously, he would have given to his fellow citizens prices not lower absolutely than they had been, but lower only relatively to the increased prices which he proposed to exact from European users of copper. Hunger for higher profits is revealed through his phrases of generosity.
Copper Monopoly’s Dream Come True
Mr. Ryan's dream of linking up his already very effective domestic monopoly of copper with a world conspiracy in restraint of trade was pretty fully realized in 1926 in the formation of the Copper Institute, supplemental to and coordinate with Copper Exporters, Inc. Every large producer in the United States (except the comparatively small Miami Copper Company) joined both organizations, and the Copper Exporters included also as foreign associates nearly every large foreign producer in the world, all of whom, except the Societe de Haut Katanga, in joining, specifically agreed to limit their production when called on so to do by Copper Exporters, Inc. These two organizations really began to function early in 1977, and much of the history of copper prices in the United States for the next three years is but the story of the activities of these organizations. The domestic price in 1927 averaged 13.7 cents, in January 1928 averaged 14.09 cents; it was 16 cents in October 1928 and rose steadily and rapidly to 24 cents, March 22, 1929. From January to March 1929 there was "a runaway market." On April 15 the price was "pegged" at 18 cents, and for a whole year, until April 15, 1930, through boom times and the stock market smash of October 1929, the copper price was held unchanged. In that time when industrial activities were declining, and for months after the October collapse in Wall Street, the copper monopoly gave one of the most marvelous exhibitions of artificial control of prices of a staple product that the world has seen. At the same time, needless to say, the great resulting "additions to dividends" to the copper companies (estimated as well over $60,000,000) gave the basis for enormous increase of stockexchange capital values mounting into the billions, contributing very considerably to the orgy of speculation leading up to the smash of that year. By a miracle of discipline the pegged price of copper was maintained for nearly six months in the face of collapsing demand, but the inevitable break came, and copper prices after April 15, 1930, declined until in October the price had fallen to 9 ½ cents, a level not previously touched since 1895. The significance of this situation was recognized by everybody but the Department of Justice. Said one trade bulletin:
“It must be remembered that a handful of men, controlling 75 per cent of the production of copper in the United States, sit around a table and decide what price copper should sell at and any prognostication as to the future price of copper is in reality only a conjecture as to what is in the minds of those gentlemen.” (8)
In view of the news of agreements being entered into between foreign and American copper producers at this writing (December 1930), it would seem to be a good time to administer Mr. Ryan's own prescription, expressed in these words: “if domestic manufacturers combine with foreign manufacturers to fix up trade so that there can be no reduction in prices to American consumers they ought to be put in jail.” (9) This would make a large and distinguished addition to our already crowded prison population of bootleggers.
The Trail Of The Serpent
To our subject and for American readers, the more important (though unintended) revelation of Mr. Ryan's testimony on that day relates not to European but to American conditions in the sale of copper. For what he there describes and seeks to justify, as the fair and competitive mode of selling copper in the United States, is the basing-point method, still in vogue, by which discriminatory treatment of buyers of copper is universal throughout the country. He neglected to mention the fact that New York City is the basing point used, with some modifications, for a curiously complex system of local prices. Copper, no matter where it is produced in this country, whether in Arizona, Montana, Michigan, New Mexico, California, or Tennessee (mentioned in the order of their smelter production of recent years), is sold from New York over a large area much as if it were mined out of the rocks underlying the skyscrapers of our financial metropolis. Thus Manhattan Island is poetically assumed to be the location of the chief copper mines and refineries on the continent. When Mr. Ryan speaks of his Montana producers "meeting competition" of Michigan and other producers, he really means that each is alike quoting (modified) New York basing-point delivered prices everywhere, and therefore they are truly "meeting" competition with each other nowhere. Neither all the profit from this device nor all the odium of its creation belongs to Mr. Ryan and the Anaconda Copper Company. The origin of the practice has, no doubt purposely, been kept in obscurity. But one thing is certain: it is not an immemorial business custom, the result of a "natural" economic evolution.
Now Some Facts
The essential facts were set forth in a statement submitted to the Ways and Means Committee of the House in 1913 during the hearings on the then pending tariff legislation. The writers were men of the greatest experience and competence in the history and sale of these metals, being members of the "Committee appointed at conferences of American Manufacturers of Metal Products, held at New York City, November and December, 1910, relative to the Tariff on Lead and its products." We freely epitomize their statements, adding a few data taken from authoritative sources. The metal named throughout is lead, but the statements of facts, so far as they have to do with the adoption of the basing-point system, apply in large measure also to copper, zinc, and other non-ferrous metals.
Merger Stifles Free Markets
Until the end of the nineteenth century the smelting industry in the United States was conducted by various independent smelting and refining companies located in the various states and territories. Some of the most prominent of these smelting companies were located at San Francisco, Pueblo, Omaha, Kansas City, St. Louis, Pittsburgh, etc. They were all competitors in the markets of the western mining states for the product of the mines of those states, and it was under such free competition that the great western mines Iwere opened up and produced and made the fortunes of their owners, and that the smelting companies had become markedly successful. Any one could purchase lead from those independent smelters f.o.b. their works, Omaha, Pueblo, Aurora, Ill., St. Louis, Kansas City, Pittsburgh, etc., and could exercise the right to do with it whatsoever he wished—use it himself to manufacture anything anywhere, or sell it and ship it to any one anywhere who wished to buy it. In those days delivery could be taken by the buyer at any point in the United States to which he desired the metal transported, and it would cost him the purchase price (that is, the current uniform mill-base price) plus the actual freight.
April 4, 1899, the American Smelting and Refining Company was formed by the Guggenheim interests, and within a year had acquired thirteen important corporations, and soon owned and operated under leases many other mines. It was announced as having "a capacity to smelt and refine the entire product of all the mines east of the Rocky Mountains producing smelting ores." Three weeks later, April 27, I 899, was incorporated by Daly-Rogers-William Rockefeller interests the Amalgamated Company (a holding company) which at once purchased controlling interests in many important companies, the chief of which was the Anaconda Copper Mining Company (Mr. Ryan's) which had been incorporated in 1895. Together these two great mergers boasted a capitalization at that time of $140,000,000. (10)
More And More Mergers
Important as concentrating control of the whole lead industry of the country in the hands of one group were successive mergers: in 1891, the National Lead Company, uniting 16 independent manuhcturers of lead products; in 1903, the United Lead Company, organized by the A. S. & R. Company, by absorption of 17—nearly all—of the remaining independent manufacturers of lead products; in 1905, merger of the United Lead into the National Lead, which thus became far the largest buyer and user of pig lead in the United States, with four members of the Board of Directors of the A. S. & R. Company on its Board. Thus the dominant group of smelters and the important fabricators of lead be came de facto the one medium through which most of the lead of the country passed from its primary production to the consuming public. Following the revelations in the tariff hearings of 1908, the A. S. & R. Company directors soon after disappeared from the Board of the National Lead Company, but who is so foolish as to think that this made any practical change in the situation?
It may be observed in this connection that a similar movement in the vertical merger under the proprietorship of a few closely affiliated great corporations of the metal-producing and of numerous fabricating plants has been steadily in progress since 1920 in the copper industry. As a result there is little in the form of copper or brass products that any one can buy that does not pass through the hands of this same group.
Curiosities In Free Contracts
To return to the story of the basing point in the sale of lead.
“Shortly after the mergers occurred around 1899, the system of selling non-ferrous metals on a refinery base, generally prevailing up to that time, was abruptly abolished, and sales began to be made on a price plan which provided for the prepayment of freight by the smelting companies, the price being invariably a delivered one. Dealers (brokers and jobbers) were no longer permiKed to purchase at a refinery for delivery to any place that they chose, but only at the points where they had their offices or warehouses and then only in such quantity as the producers prescribed. This prescription of quantity was made also a feature of the plan for ultimately controlling the manufactured products, for very shordy the consumer was wont to be told that he could have but a part of the quantity which he wished to buy.
Presently, buyers were permitted to buy only under a new form of contract in which the price was not mentioned. Nobody had ever heard of anything quite like this before. A contract had always been deemed to be the reduction to writing of certain specific details as to material, quantity, time, point of delivery, and price theretofore agreed upon by a buyer and a seller. As to delivery the new form of contract was less favorable to the buyer and more favorable to the seller in that the latter was no longer obligated to a specific time of delivery, but only ‘for shipment within 30 days or as soon thereafter as possible’; as to price, the strange thing is that this contract omits mention of any specific sum whatever, but reads only: ‘the price to be that of the American Smelting and Refining Company, on date of shipment,’ or in some cases, ‘on date of delivery.’”
Teeth Painlessly Extracted
The exceeding value of this delicate mode of expressing the amount to be paid for the metal by the immediate buyer (and ultimately, by the American people ) is apparent when viewed in connection with the fact that any real open markets for these products in the United States had suddenly ceased to exist and that prices now were fixed privately somehow, at such time, and at such level as some shadowy committee of the management of this great corporation might determine. To particularize. If, any day, when "the price" of lead is 4 cents per pound, this committee of sellers, unknown to the public, meet and determine the price of lead to be 4 ½ cents, this price is announced to the public and simultaneously a hundred million or more people commence buying and using lead on that basis.
The miners of lead ore (many of them with small, independent mines), sell their ore under what is called their smelting contract. Who writes it? The smelters. What is the price named in the contract for the lead content of the ore? Mere wlgar figures are omitted, and the price is to be that for New York delivery (that is, New York lead price less freight to New York) at the time when the ore, bullion, etc., is delivered at the smelting works or refinery. It is easy to see that, under such conditions, the influence making the price of lead to the public is whether the ore people are, on their elastic contracts, shipping larger quantities to the smelters than the latter on their elastic contracts are selling to the public. Suppose that for two weeks the New York lead price has been 4 cents per pound; that, less freight to New York, is what the lead ore producer gets for all his lead delivered during the period. Then the mysterious committee advances the New York price to 4 ½ cents per pound, and the public pays that price. Who benefits by the operation? Not the lead miner. What power lies in human hands to manipulate supply, and market conditions, and prices, both those paid to miners of ore and those exacted from buyers and the consuming public!
By Means Of Laughing Gas
The efficient device by which the non-ferrous metals monopoly puts its power into play is the basing-point practice. Thereby it is able to assume the function of the common carriers and can deny to buyers of its metals free access to markets. It is able constantly to do that which if done by a railroad would be a violation of the long- and short-haul clause. In further restraint of commerce, it can refuse to sell to those who persist in reselling to certain competitors of its allied producing corporations. It can misuse the right to choose its own customers—a doctrine born among competitive conditions as a safeguard to individuals, but now converted into a weapon of injustice in the hands of monopoly. The year 1899 witnessed a veritable revolution in the system of pricing the metals. Uniform treatment of customers at the mills was ended, while millions of imaginary freight began to be deducted from the prices paid by the great combination to scattered independent miners of ore, and other millions were added to the prices paid for these metals by helpless disunited consumers. (11)
Brothers Under The Skin
It was by no mere chance that the regular use of the basingpoint plan began almost simultaneously about 1899 in the nonferrous metals and in the steel trades, after it had for some years been tested out experimentally, through the use of pools and agreements, by Mr. Schwab and his associates. In manifold ways the commercial fortunes of these various metals were interlocked, through directors, corporation plants (the U.S. Steel always has been in a minor way a non-ferrous metal producer), and possible substitution in uses. When the basing-point plan proved its superlative merits as a means of destroying real markets in the sale of steel, it was at once adopted by the chief producers of the other metals, and no doubt greatly hastened and strengthened their monopolistic control. Of Messrs. Schwab, Morgan, Guggenheim, and Ryan, it might be said that in their adoption of the basingpoint policy they were "all souls with but one single thought, all hearts that beat as one." For thirty years, while the Steel Corporation was twice legally arraigned, once in the Federal Courts on the charge of monopoly and once before the Federal Trade Commission on the charge of discrimination by the use of the basing-point system, the non-ferrous metal producers all but escaped the attention of the legal departments of the Government and never were called before our highest Court. Doubtless, if so accused, they would, taking their cue from the Steel Corporation, have argued that the basing-point system was the result of natural economic evolution, a business custom extending back beyond the memory of living man. They would have sought to prove that, during these three decades, interstate commerce in these metals had been unrestrained, and the prices simply those arrived at in the normal way in the open markets according to "the law of supply and demand." If ever these practices in the kingdoms of Guggenheim and Ryan are challenged by the drowsy guardians of our public welfare, so long asleep at their posts, it will be interesting to see whether such arguments will still impress judicial minds. The Steel Corporation had the temerity to point to the pricing system in the sale of nonferrous metals as a proof that the basing-point practice was the normal method of business competition and was in accord with the law of "demand and supply." The old adage of the pot calling the kettle black was inverted. The black iron pot pointed to the corroded copper kettle and exclaimed, "I am just as fair as it is! "
A Pot Full Of Gold
The enormous profitableness to a few men of this system of restraint of free domestic commerce in these metals is patent to the eye. In the one direction the small producing mines find themselves in the grip of a buying monopoly; in the other direction the consuming public is exploited by the same monopolists turned sellers. Copper, lead, zinc (not to discuss aluminum), are directly a part of the daily purchases of every humble citizen for his private use, and indirectly through their extensive use by public utilities, whose legalized rates to the public for all future time are increased by every dollar of additional present costs of construction and maintenance. Even though the base price breaks now and then, through monopoly's overreaching itself, its gains in the meantime are great. At all times, the local price relationships are artificially distorted, and the free flow of interstate commerce is impeded. The beneficiaries of these practices are flouting the very spirit as well as the letter of our laws and the essential conditions of private property and of private enterprise. At this moment the daily journals abound in news items telling of the arrival of foreign copper producers to arrange a world-wide restriction of production, evidencing the combination of American producers under the Webb-Pomerene Act with foreign competitors. The papers are telling too of the refusal of domestic producers to sell to any one at the current price more than the amount of his current needs. Such inquisitorial methods reveal the lack of any free market in domestic copper. Every man in the street knows that this is the case, and that the law is openly defied. One law for the rich and another for the poor is a dangerous situation in a democracy. Not more laws, but the simple enforcement of the existing laws, is the need. Such practices, continued thirty years unchallenged by the executive guardians of the public rights, mean the breakdown of the system of economic liberty in domestic commerce.
Part IV: “New Competition” And Old Tricks
Chapter XV: The White Robe Of Statistics
Open Price Associations
The fortunes of the basing-point method became in 1920 strangely intertwined with the judicial adventures of a new and rising form of business organization called "the open price association." Regarding this there was, for five years, waged in the Federal courts a very interesting conflict of legal opinions, brought to a provisional close by two notable decisions of the Supreme Court in 1925. The name and in large part the idea of the "open-price association" seem to have been the invention of Arthur Jerome Eddy. A successful lawyer, he was well versed in corporation law, and was author of a treatise on The Law of Combinations. (1) A man of wide reading and cultural interests and of attractive and persuasive personality, he for years preached by word and pen and with kindling enthusiasm his doctrine of "the new competition." His book under that title (2) became the Bible of a new dispensation in wide circles of industry, and until his death in July 1920 the talented author was busy organizing, advising, and counseling numerous associations formed on the model he had invented.
The Eddy plan no doubt was in some respects in harmony both with the lessons of the history of markets and with contemporary needs for re-creating effectual competitive conditions. The territorial decentralization of large units of industry with accompanying changes had long since sadly shattered the local market situation of handicraft days. (3) "Access to the market," an adequate measure of "common knowledge" of conditions, including that of prices in actual sales in the same market, and other conditions in which real (truly uniform) market prices emerge, had all become weakened or almost destroyed. Certain features of the Eddy openprice plan were shrewdly calculated to remedy some evils of the new situation and partially to restore something much more nearly fulfilling the old ideal of true market conditions. But its author's cast of thought was, probably in a far greater degree than he was aware of, molded by his long service as private counselor to industrial corporations whose insistent problem is to secure higher prices and larger profits. His conception, as well of the existing evils in modern sales methods as of the benefits to be expected through his "Plan," was thus colored repeatedly and unconsciously by an advocate's bias. He saw vividly the evils to the sellers in some contemporary selling practices; to the very existence of other evils to the buyers and to the public he had closed his eyes.
An Enemy Of Competition
This habit of a lifetime explains also his two-faced attitude toward competition. Much of the time he professed a purpose of making competition finer and better to perform worthily its great function; he seemed to condemn only "cutthroat" competition and "brutal" competition. But again he denounced competition in general as "war, and war is hell." He condemned as "unhuman" the survival of the fittest in industry, and advocated a thoroughgoing displacement of competition by coaperation. Said he: "Rightfully viewed, there is not a single good result accomplished by man in . . . economics . . . that should not be attained by intelligent and far-sighted cooperation." (4)
His cure for the trust evil he compressed into a half-jocular and paradoxical phrase: "Compel them to make money." (5) This spoke his belief in the new policy of live-and-let-live, whereby the smaller independents would all be allowed to make "fair" profits, while the greater combinations naturally would obtain still larger profits. Through the simple expedient of keeping all prices high and all profits ample, all the sellers would be happy, but the unfortunate consumers had no place in this picture of industrial bliss.
Such was the man and such the book that awakened something of the spirit of a crusade among the leaders in many industries where a medley of fair and unfair competition was always disturbing the peace and depressing the hope of secure and generous gains. Loud were the praises of "cooperation" heard on every hand, and a spirit of universal brotherhood (limited) reigned whenever big business gathered at the banquet board. Open-price associations began to be organized around 1911; then the movement was halted cautiously—"by advice of counsel"—through fear of further arousing public resentment against trusts in the campaign year of 1912 and in 1913 while new legislation was under discussion. Then the movement gained momentum as numerous new associations were organized and attained their greatest activity after the close of the war in 1919 and 1920. What would be the verdict of the Federal courts as to the legality of this form of agreement among producers? The five-year period from 1920 to 1925 gave the answer in a peculiar series of four cases which reached the United States Supreme Court on appeal from as many district decisions.
The Court Condemns
The Supreme Court began (1921) by condemning the Hardwood Lumber Association but did so by a divided vote of 6-3. It followed this in June 1923 by a surprising unanimous condemnation of the Linseed Oil Association, flatly reversing thus a district judge in Illinois, who made an unlucky guess six weeks before the higher Court's Hardwood decision. It was then, when all doubt seemed removed as to the mind of our final repository of judicial truth, that in two Federal districts, New York and Michigan, two associations of this kind were unhesitatingly condemned. It must have seemed to the judges as easy as using a rubber stamp. But this was not the end of this winding judicial lane, and somewhat less than two years later, June 1, 1925, the Supreme Court reversed the District Courts and vindicated the open-price plan in principle and in practice, this time again by a divided vote of 6-3. (6)
In the Hardwood Lumber case was for the first time presented to the Supreme Court the question of the legality of the "Open Competition Plan" and of the "open price associations." (7) As the Court said, there was "very little dispute as to the facts," so that the legal issue was presented as simply as possible. Yet the majority and minority opinions could hardly be more directly conflicting both as to the legal and economic significance to be attached to those facts and as to the appropriate verdict. The majority believed that “Such close cooperation . . . as is provided for in this "Plan" is plainly in theory, as it proved to be in fact, inconsistent with that free and unrestricted trade which the statute contemplates. . . . To call the activities of the defendants, as they are proved in this record, an "Open Competition Plan" of action is plainly a misleading misnomer. . . . This is not the conduct of competitors but . . . clearly that of men united in an agreement, express or implied, to act together and pursue a common purpose under a common guide. . . . The "Plan" is, essentially, simply an expansion of the gentlemen's agreement of former days, skillfully devised to evade the law . . . the fundamental purpose of the "Plan" was to procure "harmonious" individual action . . . concerted action . . . tacit understanding. . . . In the presence of this record it is futile to argue that the purpose of the "Plan" was simply to furnish those engaged in this industry, with widely scattered units, the equivalent of such information as is contained in the newspaper and government publications with respect to the market for commodities sold on boards of trade or stock exchanges . . . these reports go to the seller only; and [there are other differences]. . . . Convinced, as we are, that the purpose and effect of the activities of the "Open Competitive Plan" . . . were to restrict competition and thereby restrain interstate commerce . . . we agree with the District Court that it constituted a combination and conspiracy in restraint of interstate commerce. . . . (8)
The majority thus believed that despite all professions of mere desire to make knowledge of market conditions open and public, the true purpose and the effect of the plan and activities were plainly bad. Thus thought and spoke Justice Clark, with whom concurred five of his colleagues (Chief Justice Taft, who was the most recent appointee to the Court, and Justices Day, McReynolds, Pitney, and Van Devanter).
The Plan Finds Friends At Court
But what is all so plain to the majority cannot be seen at all by the minority, Justices Holmes, Brandeis, and McKenna—strange judicial bedfellows. They, on the contrary, felt that the majority decision was plainly erroneous and involved great evil consequences. Justice Holmes, in one of his delicious epigrammatic and ironical dissenting opinions (with which no one else expressed concurrence, although he concurred with "the more elaborate discussion by brother Brandeis"), was all for freedom of speech and freedom of action and for the public distribution of information which he believed had been fully realized under the "Plan." He believed these liberties would be invaded by the majority verdict, and the noble old Roman, here as always, was strong for the under dog—or the cur he thought was under. He declared that even the fact, if it be assumed, that the acts have been done with a sinister purpose, does not justify "excluding mills in the backwoods from information." He plainly voices his belief that the Association did not "attempt to override normal market conditions" but merely "to conform to them . . . the most reasonable thing in the world." This was the crux of his opinion, most plainly implying that he would have gladly joined in condemning the Association if he had been convinced that it did more than merely "to equalize" prices (seeming to mean preventing violent "temporary" fluctuations resulting from ignorance of market conditions) or that it really raised prices so as "to override" normal conditions.
Justice Brandeis in his much longer dissenting opinion (and Justice McKenna concurring with him), in failing to express concurrence with Justice Holmes' statements, possibly indicated unwillingness even to imagine that the Association might have acted "for a sinister purpose." Justice Brandeis entertains not a doubt regarding the blameless record of the accused. To him “the Plan is not inherently a restraint of trade, and the record is barren of evidence to support a finding that it has been used, or was intended to be used, as an instrument to restrain trade. . . . The cooperation which is incident to this Plan does not suppress competition. On the contrary it tends to promote all in competition which is desirable. . . . The evidence in this case, far from establishing an illegal restraint of trade, presents, in my opinion, an instance of commendable effort by concerns engaged in a chaotic industry to make possible its intelligent conduct under competitive conditions.” There is much more of fact, legal citation, and reasoning in the opinions, but these laudatory passages contain the essential conclusions. Many have seen here a violent head-on collision in matter of principle; others see in it, however, merely a difference in interpretation of the facts. It is the story of the six blind men of Hindustan, reporting their ideas of an elephant after a groping examination; one thinks it all trunk, another tusk, and so on to the tail.
More Emphatic Condemnation
Barely a year and a half later, June 4, 1923, a decision was rendered by the same court on the Linseed Oil Association. The defendants were really twelve corporations with places of business in six States, engaged in the industry of crushing and selling linseed oil and by-products. The Association came into the Supreme Court with an almost fulsome certificate of good character from Judge Carpenter of the Illinois District Court. But now a completely unified Supreme Court reversed his charitable decision with a bang that echoed throughout the legal world. The opinion, delivered by Justice McReynolds, consists mainly of a detailed account of the rules and activities of the Association, concluding with a summary condemnation of the Eddy Plan and "the new competition."
“The obvious policy, indeed the declared purpose, of the arrangement was to submerge the competition theretofore existing among the subscribers and substitute "intelligent competition," or "open competition"; to eliminate "unintelligent selfishness" and establish "100 per cent confidence"—all to the end that the members might "stand out from the crowd as substantial co-workers under modern cooperative business methods" . . . Certain it is that the defendants are associated in a new form of combination and are resorting to methods which are not normal . . . In the absence of a purpose to monopolize or the compulsion that results from contract or agreement, the individual certainly may exercise great freedom; but concerted action through combination presents a wholly different problem and is forbidden . . . the ordinary practice of reporting statistics to collectors stops far short of the practice which defendants adopted. Their manifest purpose was to defeat the Sherman Act without subjecting themselves to its penalties. The challenged plan is unlawful . . . (10)
Thus the opinion concludes with the united bench against this thoroughly typical open-price association, and naturally this was taken by the public to mean a condemnation of the trade-association plan in principle. The leading precedent on which this decision was based was the Hardwood Lumber case of two years before. Although three new justices, Sutherland, Butler, and Sanford, had meantime replaced Clark, Day, and Pitney of the former majority, this was no factor in the decision, as the newcomers united in this similar verdict. It has, however, occasioned surprise that the trio formerly supporting the association plan and principle, Justices Holmes, Brandeis, and McKenna, now united with the former majority in condemnation. Either to their eyes some special circumstances (which we cannot detect) differentiated the Linseed Oil case from the Hardwood case; or they believed further dissent on this subject to be futile in view of the fixed position of the majority.
If ever an issue of economic policy appeared to be finally adjudicated, this was one. Two judges of the Federal district courts thought so, and four and five months later in their courts they in quick succession turned thumbs down unhesitatingly on associations in two other leading industries, Cement and Maple Flooring. Then no doubt they awaited with perfect confidence the day when the Supreme Court would approve their judgments. But with another boom, both opinions were blown sky high on the same day, when the open-price associations were triumphantly vindicated.
Again The Court Divides
Justice Stone, who had just replaced Justice McKenna in the Court, delivered the prevailing opinion in both cases (reading first that on Maple Flooring). Concurring with him were five of his colleagues, Holmes, Brandeis, Van Devanter, Butler, and Sutherland, all five of whom had recently joined (however gingerly the first two) in the condemnation of the Linseed Oil Association. Now all united in vindicating two other Associations, certainly of the same kind. Justice Van Devanter, who twice before had condemned such associations, now voted in their favor. The three now composing the dissenting minority were Taft, McReynolds, and Sanford, the first two consistently through all four cases outlawing the new type of association, and Justice Sanford also in the three decisions in which he voted.
“Mr. Chief Justice Taft and Mr. Justice Sanford dissent from the opinions of the majority of the Court in these two cases on the ground that in their judgment the evidence in each case brings it substantially within the rule stated in the American Column Co. and the American Linseed Oil Co. Cases, the authority of which, as they understand, is not questioned in the opinions of the majority of the Court.” (11)
In a separate and longer opinion Justice McReynolds fully agreed with this view and, moved by righteous indignation, spoke words of a severity rarely heard in judicial halls. Asserting his belief that the principles laid down in the opinion delivered by himself two years before applied fully in the circumstances of these cases, he said:
“United States v. american Linseed Oil Company; 262 U.S. 371, states the doctrine which I think should be rigorously applied. Pious protestations and smug preambles but intensify distrust when men are found busy with schemes to enrich themselves through circumventions. And the Government ought not to be required supinely to await the final destruction of competitive conditions before demanding relief through the courts. The statute supplies means for prevention. Artful gestures should not hinder their application. I think the courts below reached right conclusions and their decrees should be affirmed.” (l2)
The Supreme Court in these twin decisions reversed the lower courts with respect to the particular open-price associations at the bar, and the interpretation put upon the decisions in legal and business circles was that the Court had reversed itself. This was flatly asserted by the three dissenting justices. Justice Stone, however, in his Maple Flooring opinion, attempts to distinguish the decisions in the Hardwood and Linseed Oil cases from those in the two cases at the bar. In so doing he repeats essentially the same arguments vainly offered four years before by Justices Holmes and Brandeis, who now join him in reaffirming and vindicating their earlier judgment. He recites the evidence as to rules and acts in the earlier cases in such a way as to imply merely that they were different from the cases at the bar. (13) In the Cement opinion, of which the greater part consists of a mere description of the Association, no differentiation whatever is attempted. But twice, briefly, near the end of the Cement opinion, reference is made to the Maple Flooring opinion "for reasons stated more at length" for holding such activities not to be in themselves unlawful. (14)
The decisive feature in the Hardwood case pointed to by Justice Stone was that the record there “disclosed a systematic effort . . . to cut down production and increase prices. . . . The opinion of the court in that case rests squarely on the ground that there was a combination on the part of the members to secure concerted action in curtailment of production and increase of price, which actually resulted in a restraint of commerce, producing increase of price.” (15) Here Justice Stone is seeing things through the eyes of the majority in the Hardwood case; but Justices Holmes and Brandeis, now agreeing with Justice Stone, had protested at the time that they saw no evidence whatever of such effects, on which ground the majority opinion squarely rested. And Justice McReynolds, who did see such effects in the Hardwood case, is equally sure that he now sees those same effects in the cases at the bar: "men busy with schemes to enrich themselves."
Justice Stone declares the decisive feature in the Linseed Oil decision to have been the belief of the Court that activities of that Association "could necessarily have only one purpose and effect, namely to restrain competition among sellers." (16) He cautiously declares that "each case arising under the Sherman Act must be determined upon the particular facts disclosed by the record," (17) but he points to no "particular facts" that are specifically different in the two sets of cases. Instead of indicating them, Justice Stone turns directly to declare as not "open to question" the desirability and benefits of the very activities generally understood to be condemned by the earlier decisions. (18)
These "reasons," which Justice Stone fixes upon as differentiating the later cases from the earlier, lie not so much in the objective facts but in the subjective condition of the judicial minds and the inferences drawn by them from the same essential facts as to the objects and results of trade-association activities. From the same type of factual evidence a majority of the Court now draws a different inference as to the probable results. Yet, as will be shown later, certain facts should have suggested illegality more plainly in the last two cases than in the first two.
Views In The Cabinet
Going with a high reputation from a distinguished academic position to the rescue of a sadly embarrassed administration after his predecessor had been driven from office, Justice Stone had served a scant eleven months, from April 4, 1924, to March 2, 1925, as Attorney General before taking his place on the Supreme bench. (l9)
A remarkable division of sentiment and policies existed in the Harding-Coolidge Cabinets in respect to this discordant question of open-price associations. This had become something of a political sensation. While the Department of Justice under Mr. Harry Daugherty was for a time making a show of vigorously prosecuting them, though really accomplishing nothing, the Department of Commerce under Secretary Hoover was championing their cause and cooperating with them.
In his report under the date of September 20, 1922 (after the Hardwood decision), Secretary Hoover had made an extended plea (20) for a modification of "the restraint of trade acts," the working results of which, under the interpretation given by the courts, "in some directions are out of tune with our economic development." His well-poised argument, recognizing, but distinguishing, the possibilities of abuse from the numerous cooperative activities which "are in the interest of . . . the community at large," may well have served as the subconscious basis for Justice Stone's reasoning three years later.
Judicial Opinion Transformed
But this voice from the outer world had not penetrated into the judicial chambers when, in June 1923, the Supreme Court unanimously condemned the Linseed Oil Association without distinguishing between the good and the bad in its activities. So again Secretary Hoover, under date of November 1, 1924, returns to the charge; but this time, apparently hopeless of aid from the courts, he pleads for a new "legislative definition" of these matters. (21) While still incidentally recognizing (without specifying) that "a small minority of these associations have been in the past used as cloaks for restraint of trade," he describes in more detail at least ten of the twenty-odd functions of cooperative action which, as before, he declared were praiseworthy.
As Secretary Hoover was writing these words, Attorney General Stone was sitting with him as a colleague in the Cabinet, and seven months later the sentiments and words of the Secretary's argument seemed to find an echo in the opinions delivered by Justice Stone (though somewhat less cautiously, as to the danger of abuse). Mr. Stone had gone from his distinguished deanship of law to Washington, no doubt, with pretty definite convictions regarding certain economic and social issues in the law. As has since been shown in numerous dissenting opinions, his thought was in large degree in harmony with that of Justices Brandeis and Holmes. His scholarly views had been further shaped, no doubt, by his brief public administrative career. His appearance as a member of the Court effected a transformation of judicial opinion and a judge-made revolution in this feature of the law without the long delay usually attending legislative changes.
Two Aspects Of The Truth
We have not at this point meant to raise the question whether the later decisions were right or wrong as matter of law or of economics, so far as they relate strictly to the truth-divulging, publicity aspects of the open-price associations. There were, to be sure, sound economic grounds on which to base the major part of the decision thus carefully limited and safeguarded in scope and meaning. In the interest of truth and sound practice it was bound to come. What we would emphasize is this: that these cases involved not one but two major issues, the one the reasonableness of the cooperation practiced in collecting and publishing data on past and present prices and on production, and the other the legality of the entangling alliance of this (in itself, as was said repeatedly) innocent sort of cooperative activities, with some other activities in restraint of trade and in manipulation of prices, not so "open" to the light of day but practiced in a dim twilight.
If this is so, then the remarkable schism within the Court may be more easily explained. From the first some members of the Court, taking (shall we say) a more abstract and doctrinaire view of the merely informational work of the Associations, saw in them no evil. The other members of the Court, viewing the Associations more realistically, shrewdly sensed the presence of illegal purposes and behavior, the evidence of which had never been lucidly presented to the Court. Each group within the Court saw an aspect of the truth, but neither saw at once both phases: cooperative exchange of price data and the basing-point method, used in combination to thwart effectively a genuine competition in prices.
Chapter XVI: Trade Associations Become Suspect
Grounds Of The Hardwood Decision
That obscurer influence which some members of the Supreme Court sensed as affecting prices in the open-price association cases was in fact the basing-point device. While the counterfeit publicity given to price data no doubt had other incidental advantages for the sellers, its greatest advantage for the manipulation of prices was as an auxiliary of the basing-point system of identical pricing.
In the first of the four Association cases (1) not a word was said about the basing-point method by counsel on either side or in the judicial opinions. So far from its being a part of the Government's complaint that "the defendants conspired to fix uniform prices" (either mill-base or delivered), the prosecutor's brief expressly disavows any such charge and asserts on the contrary that prices were not uniform and that therefore there could have been no agreement in fixing them.
“The Government's evidence showed at the outset that disparity of prices existed among the defendants . . . The complaint was that the defendants conspired to maintain and enhance prices by suppressing competition and substituting in its place cooperation and agreements having the purpose and effect of maintaining and enhancing prices. . . . When different prices are being charged there are obviously no agreements fixing prices, but there may well be agreements having the purpose and effect of enhancing prices, such as the agreements among the defendants in the present case to carry on the cooperative activities under consideration.” (2)
The case was argued and won by the prosecution on this ground. It is true that there was no "uniformity" of prices as in real markets, but there was an identity of delivered prices—that is, fixed somehow at each destination—possible only through agreement (explicit or tacit), to which the prosecution was quite blind. The majority opinion appeared to be a clean-cut condemnation of the "open-price," reporting, statistical, publicity aspects of the Association's activities, as having some such purpose and effect. Justice Brandeis thought they did not have such purpose or effect, and based his dissent (with which Justices Holmes and McKenna concurred) very directly on the mistaken assumptions that "no . . . monopoly was sought or created"; "no . . . division of territory was planned or secured"; "no . . . uniform prices were established or desired," and "it was neither the aim of the Plan, nor the practice under it, to regulate competition in any way."
Hardwood Basing Points
And yet—believe it or not—if the reader's curiosity leads him to examine the Record he can there find'8 buried in a mass of facsimile documents and tables, a perfect description of a basingpoint price system, never given a moment's attention in the briefs or by either the majority or the minority of the Court. There it is, with many details, a system of delivered prices, with not one basing point but two (called, with unconscious humor, "natural" gateways), one at Cincinnati for the Eastern Territory, and one at Cairo, Illinois, for what is called the Southern Territory. The line dividing the two territories (unseen by the usually keen eyes of Justice Brandeis) was boldly drawn from Chicago to New Orleans. The differential allowed between the Cincinnati and Cairo basing-point prices ranged between $3 and $10 a thousand feet of lumber, varying according to kinds and grades; and some special basing rates (not specifically described) were evidently allowed in all the region south of Memphis (analogous to the Birmingham differential in the steel industry). Lumber cut in northern Ohio and shipped direct to Boston or Philadelphia, and lumber cut in West Virginia and shipped directly east to Baltimore and Washington, was supposed to pass through the "natural gateway" at Cincinnati, this to the substantial advantage of the seller's pocketbook. Of course none of the so-called "prices" thus printed were the actual prices realized by the sellers of lumber. The "uniformity" sought and in large degree attained was that of basing-point delivered prices, while the net realized prices of each dealer to his own customers showed the greatest diversity.
More Sharpshooting
It is a very charming play of imagination by which discriminatory prices were called uniform; and though this case has long passed into history and on to the junk heap, its reperusal still has much of interest to the student of economics and of judicial processes. As a guide and ever-pricking conscience there was sent to each member a weekly report of actual sales ("sent only to members") in which the actual delivered price of each sale was "audited" back to the basing point by deducting the official railtariff between the destination and the fictitious gateway. The arithmetical result (which is absurdly called "average price to destination") stands alongside another figure in a parallel column called "average price gateway." By a miracle of mathematics (one chance in billions), this "average price," presented by the facile manager of statistics as based on "actual transactions," was always in even dollars, a fact which should have been sufficient warning that it was just a fake figure. It probably was the amount set in the Memphis office as the official basing-point price to which members were to conform by an agreement plainly implied.
And in view of the variations in quality and of the lack of perfect standardization of grades (greater at that time than more recently after the valuable work of Herbert Hoover as Secretary of Commerce), the measure of agreement attained was remarkable enough. In this game (as in Pittsburgh-Plus), anything above the official "gateway" price is a perfect hit, the very best of bull's-eyes, since the agreement relates only to a minimum base price. Here, for example, in a list of 11 sales, sellers ring the bell 9 times, and the misses in the other two sales amount to only three-tenths of I per cent of a total perfect score.
What a sense of injustice these 333 producers and sellers of hardwood lumber (and their lawyers) must have felt when, four years after they had been enjoined as illegally "cooperating," two other Associations, essentially identical in character, marched triumphantly out of court. Had the Hardwood conspirators not been equally innocent and praiseworthy? Yet they got a kick instead of a compliment. Their chagrin must have been aggravated by the thought that they had lost despite their skillful concealment of the basing-point device, whereas the Associations in the later cases had won despite the glaring presence of that device of agreement.
Linseed Oil Emulates Steel
Next comes the Linseed Oil case in 1923, (4) in which the Supreme Court unanimously overruled the District Judge and declared the Association of 12 corporations, called "crushers" of oil, to be a combination in violation of the Sherman Act. In this case, in contrast with the Hardwood case, the presence of a basing-point system was plainly apparent. It was thus described by Justice McReynolds:
The United States were divided into eight zones for price quoting; and it WaS stipulated that each member should quote a basic price for zone number one and should add thereto one, two, four, six, seven, eight and eleven cents, respectively, for the others. (5)
Beyond this mere mention of "a basic price," nothing in the opinion suggests that the Court gave any special weight to it as a proof of combination, or that the decision would have been any different if no such feature had appeared in the Association plan, and the Court evidently did not comprehend its real character and effect. Yet here for the first time the basing-point system had not only been mentioned before the Supreme Court, but (in the words of the defendants' brief) the prosecution "laid great stress on the matter, and endeavored to portray the use of such zones as a plan or scheme by which the crushers were enabled to fix prices and control production."
Glimpse Of Discrimination
Indeed the brief on behalf of the United States in this case, filed in October term, 1922, evinced a more nearly correct understanding of the real part played by the basing-point device than is to be found anywhere before or since in anti-trust pleadings. Doubtless this reflects the influence of the Pittsburgh-Plus complaint which had then been in progress for two years, attracting much attention in Washington legal circles. The astute Mr. James M. Beck, who as Solicitor General represented the Government, broke a record in that he saw that the sale over in Ohio (Zone Two) of oil manufactured at Buffalo and New York (in Zone Three) at one cent a gallon less, although the freight was the same or even more, was a "discrimination." He justly declared that "no one attempts to give any reason for this," and "there can be no excuse whatever" for it. In broad terms he maintained that “The adoption of this zoning system was, in itself, an unlawful agreement in restraint of trade, because, while it did not fix the base price to be charged by each of the manufacturers, yet it did obligate them to observe these fixed differentials, and prevented them from meeting special competition that might exist in other zones.” (6) The Government's brief concedes the defendants' assertion that this zoning system-is used in a number of other industries, but declares the method to be wrong wherever used. "The real purpose of its adoption is the same in every instance." Then, showing further that this makes the execution of an agreement regarding prices as simple as "a child's problem in arithmetic," the argument concludes:
“Thus by agreement, of which a record was made, the defendants have departed from the custom of adding to the price at the point of manufacture the actual freight to the point of delivery, and have adopted arbitrary rates applicable to all of them.” (7) Though this does not demonstrate a perfect insight into the differences between uniform mill-base and delivered prices, nor complete the analysis, it was the highest point of understanding yet reached in a court proceeding. Yet this part of the prosecution's argument was imperfectly developed and presented, and stood somewhat apart from the main contention of illegal combination which the Court took as the basis for its unanimous decision, and apparently it was not given the slightest attention by the Court.
A Bewildered Judge
The defendants, too, evidently expected (or feared) that considerable weight might be given to this aspect of the case, and their briefs marshaled all the familiar arguments in its defense: false history, confused explanation, and erroneous inferences. It was repeatedly asserted in the briefs and by witnesses that the zoning system as actually used made prices no different from what they would have been without it, presumably under a normal millbase price system. (8) Here is involved the not uncommon illusion that when widely different figures are statistically averaged, the differences vanish for practical purposes. Further, zoned freight rates from an actual mill base are confused with zoned rates from an artificial basing point. The zoning of rates over such enormous territories must materially change the delivered cost to multitudes of buyers (as compared with actual freights) even with prices quoted on a mill base, but the difference it makes to the public in that case is small compared with that when the zones are related to an artificial basing point. The latter practice often quite reverses real geographical relationships, making the freight higher for the shorter distance (or the net price of the goods—take your choice). Judge Carpenter in the District Court was completely taken in by these fallacies, and though the Supreme Court in its decision on the Linseed case implied its rejection of Judge Carpenter's views, Justice Stone, in the Maple Flooring case, really adopted them fully in respect to the intelligence and fairness of averaged or zoning rates when related to a basing point. It seems worth while, therefore, to analyze this confusion with care in the Appendix to Ch. XVI.
Lo, The Poor Farmer!
Briefly summarized, the differentials above the basic Zone One were 20 to 30 per cent less than real average freight rates for the second and third zones, but for the other five zones were in excess from 12 to 133 per cent. The amounts charged for delivery were relatively higher to the agricultural sections than to the industrial sections of the country (and thus discriminatory), instead of being a fair average, according to the professed purpose of the plan. And the more distinctively agricultural the zone, the greater was this discrimination against it, when the farmers bought back the linseed oil made from the flaxseed they had grown. Whereas the marked industrial sections of the country were taxed less than real average freight, the southeastern Atlantic coast region was taxed 12 per cent more than the real freight, the southeastern largely agricultural States 50 per cent more, the Pacific and mountain States 66 per cent more, the great Southwest from Louisiana to New Mexico 80 per cent more, and the region of the great plains and eastern slope of the Rockies from Kansas to Montana 133 per cent more. Where the farmers raised the flaxseed and sold it to the linseed oil crushers on the open market, there, when they came to buy back the oil to paint their tools, furniture, houses, and barns, they paid two and a third times the actual average freight to get it delivered to them. Page Senators Norris, Borah, Brookhart, and other tribunes of the people. But the average results were mere child's play compared with some of the extremer cases of discrimination within these grotesquely exaggerated "zones." Here was Topeka, Kansas, the real freight rate on oil to which (from Minneapolis) was equivalent to only six-tenths of a cent a gallon more than the average freight in the Minneapolis zone; yet the proverbially patient Kansan was made to pay 7 cents imaginary freight added to the wholesale price for every gallon of oil he bought to paint his house and barn with the proceeds of his farm crops sold on the world's open markets. A mere disparity of 1000 per cent in this zone freight schedule which a judge on the bench charitably declared to be so intelligent and so fair! But enough of these harrowing details. More might start a new political revolution when next the western Senatorial champions gather in Washington with the worthy purpose of redressing the wrongs of the agricultural sections of the land.
The Customer’s Fictitious Option
The defense repeatedly asserted that "each buyer is at liberty to pay his own freight and buy at the lower price." These and similar expressions (9) give the impression that the basing-point system had no real existence or distinctive character, or at least that it existed only at the option of the customer in each case; and that the difference between it and a mill-base system of prices was so slight as to be negligible to the buyer. We have met this hoax before. Judge Carpenter was completely misled, as is shown by his confident declaration that "every buyer had the option of purchasing f.o.b. point of manufacture or f.o.b. point of delivery, and I must assume that the buyer would choose that f.o.b. point which seemed most to his advantage." (10) He impatiently sweeps the whole problem aside as a case of de minimis non curat lex. A careful examination of all the statements in the Record carrying this suggestion of the buyer's option shows that they always mean something else than Judge Carpenter takes them to mean. (11) No one with an understanding of the true nature of a basing-point system of prices can find in any of the testimony the slightest ground for believing that the buyer was ever permitted to reduce the delivered cost to himself by choosing to buy at a real millbase price. What the witnesses are describing is a merely imaginary shift in accountancy practice; the buyer might have the bill submitted in two items instead of one; but the sum of the two items would be exactly the same as the amount of the one; namely, the basing-point delivered price. The "f.o.b. mill" would not be a real mill-base price determined first, and uniform to all similar buyers, but would be a special discriminatory price on each sale, calculated by subtracting actual freight from the delivered price deduced from the formula, which is an artificial base plus imaginary freight. The basing-point delivered price is the primary and decisive figure; the figuring of a so-called "f.o.b. mill price" would merely primary-school arithmetic. It is all transparent.
The Unwritten Chapter Of Linseed
All this ingenuity (to call it by no harsher name) was wasted, and the case after all was decided in the Supreme Court adversely to the Association, in disregard of this issue. Dissolved as illegal in 1923 in obedience to the Court's injunction, the linseed oil group has not publicly reveled in the liberty granted by the subsequent decisions in 1925 in respect to price-rigging activities. It has made at least an outward show of living soberly and modestly, shunning the rude gaze of men. Linseed oil nowhere appears among the so-called open-price commodities in the list published by the Federal Trade Commission in 1929. He would be a rash man, however, who would conclude that linseed oil has since been, and is today, sold on a normal mill-base plan, rather than by zones, or basing points, or some other artificial device.
Chapter XVII: The Invisible Accomplice Of “Open Prices”
Once More Into The Breach
The Maple Flooring and the Cement Protective Association cases were so alike in the main issues presented that the Court heard them and decided them much as though they were one. They were alike too in that both were plainly marked by the basing-point feature. Counsel for the defense evidently expected and feared that the basing-point issue might loom large. In the short year and a half between the adverse decision of these cases in the District Courts (late autumn 1923) and their oral argument in the Supreme Court (March 1925), while the briefs were in preparation, the Pittsburgh-Plus practice had been discountenanced (July 1924) by the Federal Trade Commission, and the Steel Corporation had unexpectedly bowed to this decision without appeal to the Courts. These circumstances, together with the adverse position taken by the Supreme Court in 1903 toward the open-price practice, spurred the distinguished counsel of the defendants, led by Mr. John W. Davis, to a final desperate effort to win a favorable verdict. They enlisted the aid of academic advisers from noted universities to analyze the economic materials, to prepare propagandist literature, to go upon the witness stand, or to shape the arguments of the briefs on points of an economic nature.
Government counsel, on the contrary, either heedless or too confident in the authority of the Hardwood and Linseed Oil decisions, and over-confident from their easy successes in the preliminary skirmishes in the two District Courts, appear to have no expert economic counsel to offset the special efforts which they knew the defense was making, and the decision, so far as it might have depended on the treatment of the economic issues, went by default. The voluminous record presented to the Supreme Court by Government counsel seems ill arranged and confusing.
The Maple Flooring Basing Point
The basing-point device was a part of the open-price plan of both the Maple Flooring and the Cement Associations. All but were located in Michigan and Wisconsin, in which States they represented nearly 90 per cent of the total production, and nearly nine-tenths of this was produced in Michigan. In essentials, the basing-point features in selling maple flooring were like those in the Hardwood case, except that but one common basing point, Cadillac, Michigan, was used for the whole country. Prices were always “delivered,” and a freight book was issued showing freight rates from Cadillac to between five and eight thousand points tn the United States.(1)
These books formerly showed also what was called "delivered cost" (as in the Hardwood case), but after the suit was started, that was omitted, the only change being that the Association member now had to "make his own addition"—a very simple task. Defendants' answer admits 2 that this compilation was for their "convenience . . . to enable them . . . to quote delivered prices," but says that they are not under "any constraint, duty or obligation" to use it; and it denies that there is "any understanding or agreement . . . to be guided or controlled by the said list." There is no denial that the list did serve as a guide; the denial is only as to "constraint" or "obligation." Of course there could be no legal obligation, as any "agreement" or "understanding" would be illegal. Ah, there is a poser. No "understanding" about it? If its meaning was misunderstood, was unintelligible to those to whom and for whose use it was intended, then why was it issued? But this doubt does not trouble the Court.
Again The Fallacy Of Averages
The defense explained that the Cadillac rate represented the "average" freight rate from all the mills, and the delivered prices seem to have been the sum of "average costs" and "average freight rates," not, except rarely by mathematical chance, actual individual costs or actual freight rates. (3) Here again we see the Court under the simple illusion that averaging differing sums in some magical way puts an end to the differences. Friends of ours, professors of statistics and of history, respectively, went out duck-hunting, and the statistician reported the results as follows:
“Every time a duck flew by I shot six feet in front of it, and the historian, being more interested in the past, shot six feet back of it, so on the average we killed every duck. Statistically it was a great success, but historically it was a failure.”
Here is the very similar statement of Justice Stone, seeming to echo the previously neglected reasoning of Judge Carpenter: “the freight-rate book served a useful and legitimate purpose in enabling members to quote promptly a delivered price on their product by adding to their mill price a previously calculated freight rate which approximated closely to the actual rate from their own mill towns.” (4)
The second half of the statement contains two factual errors; first, the freight rate was not added "to their mill price" or to any real mill-base price, but to a so-called "average cost," which was not the actual cost of any one of the mills; and secondly, this so-called "calculated" freight rate was in many cases far from a close approximation to the average, and much less to the actual freight rates from the particular mills to many destinations. The actual conditions were grotesquely different from what the Court understood them to be. A few specific examples are given in the Appendix to Ch. XVII.
The Legalistic Shell Racket
It is an odd "approximation to the actual rate" that compels the Minnesota public to pay to the lumber mills 130 per cent more for freight than the amount which the common carrier may legally charge. We trust there is no impropriety in gently calling this situation to the attention of that distinguished citizen of Minnesota, the Hon. William Mitchell, Attorney General of the United States.
Of course the overburdened Supreme Court justices could not take the time to make these calculations. This was a neglected duty of Government counsel. With the proper analysis of these figures before him, Justice Stone surely would have had misgivings about the purpose being merely to promptly quote delivered prices, and even about such "delivered prices" being "legitimate" at all. Justice Stone and the majority of the Court in this case were the victims of a sort of legalistic shell racket, for while their eyes were focused upon the innocent gathering of statistical information, they missed seeing the basing-point device which was securing that "concerted action with respect to prices" which the Court, in concluding, declared would have put the whole case in a very different light. Recognition of the common action in devising, maintaining, and administering this price-fixing plan, surely would have resulted in a verdict of illegality for the Association and its activities. This issue was not touched by the decision, which in the final paragraph is cautiously limited to a vindication of the open and fair dissemination of information, "without reaching or attempting to reach any agreement or concerted action with respect to prices," though tacit agreement and de facto concerted action were plainly present.
Multiple Basing Points For Cement
In the Cement Manufacturers' Protective Association case, the use of the basing-point device was somewhat more plainly set forth in evidence and briefs, but the majority of the Court quite failed to see its significance as an instrument for price control. The Cement Association has a membership of manufacturers in the States of New York, New Jersey, Pennsylvania, Maryland, and Virginia. It appears to be one of some ten or more similar cement associations which among them cover the whole territory of the United States. It is probable that in each of these territorial divisions a system of basing points and of delivered prices has for years been in force, in all essentials like the Pittsburgh-Plus scheme for steel.
This multiplication and greater decentralization of basing points for cement compared with the plan in selling steel no doubt is due mainly to the greater weight of cement in proportion to its value. Moreover, the materials and necessary conditions for its manufacture are more widely distributed than are those for steel. Cement, therefore, far more even than steel, is "a zone business," as the cost of freight soon becomes a large fraction of the mill price. Indeed the use of a single basing point within the combined area of five States must lead to as great discrimination among buyers of cement as does a single basing point for the whole continent in the case of the steel industry. Therefore, while the Atlas Mill at Northampton, Pennsylvania, was the main basing point, several other basing points at Hudson and Alsen, New York, Fordwick, Virginia, and (in sales to the west) Universal, Pennsylvania, were used by the mills in the territory of the five States covered by the Association. A similar plan appears to be in operation now in all other parts of the country; for example, California, being a very large State, is divided into two districts by the cement companies. In the southern part, the California Portland Cement Company at Colton (Riverside or Crestmore) is the basing point, and in the north the Davenport mill at San Juan. Every buyer, public or private, receives identical bids for cement delivered. (5)
The more general use of basing points for cement was not referred to in the case now considered, but the use of basing-point delivered prices in the five States was virtually conceded by all parties to the suit. It was a part of the "substantial uniformity of trade practices in the cement trade," which had prevailed, as the Court said, "before the organization of the present association," that is, before January 1916. These conditions included: “The selling of cement f.o.b. delivery. Using freight basing points in the quotation of prices. Including in all quotations for sale of cement, a freight rate from a basing point to the place of delivery.” (6)
Garbling The Facts And Issues
The complaint against the Cement Association was not directed against the use of basing-point practice or any other specific price-regulating device, and the defense skillfully handled this issue so as to reduce to nearly nothing its importance in the eyes of the Court. The Court felt justified in saying: “here the Government does not rely upon agreement or understanding, and this record wholly fails to establish, either directly or by inference, any concerted action other than that involved in the gathering and dissemination of pertinent information with respect to the sale and distribution of cement.” (7)
Reduce the issue to that form and the decision follows almost automatically. But how had it been possible for the Court to avoid seeing in the basing-point device itself the direct, not merely inferential, evidence of that concerted action whose presence, the Court indicates, would have set the case in an entirely different light? The main facts accounting for this judicial blindness seem to be the following:
In the garbled version of the facts as understood by the Court "the custom," as the Court calls it, “in the cement trade of selling cement at a delivered price which includes the mill price, the price of the bags and freight charges, was an established trade practice before the organization of the defendant association.” This misunderstanding was strengthened by other evidence assumed to show that similar lists of freight rates . . . were . . . used by individual manufacturers before the organization of the defendant association; [and] the basing points from which the freight rates were calculated were not selected by the Association, but were the same as those . . . [used by individuals before the formation of the Association]. Justice Stone took these ideas and expressions almost literally from the defendants' brief; (9) and he also fully accepted certain other misleading assertions and contentions. of the defendants' brief in the same connection that "there is here no arbitrarily established basing point and all rates furnished are the actual rates between actual points of shipment and delivery." Did the astute lawyers not know perfectly well that the purpose of the freight books of rates from arbitrary basing points was to name identical delivered prices for the mills not actually shipping from those points or paying those actual rates?
An Artificial Device
Here and repeatedly in the opinion, the basing-point policy is viewed as a truly competitive "custom" and not an artificial device brought about originally by agreement. It is represented as being essentially the same as the mill's own base price; being "established," the practice continued automatically and naturally, without any aid or connivance through the activities of the Association (engaged solely in the innocent pursuit of statistical information! ) It followed, therefore, in judicial reasoning, that the condemnation and dissolution of the Association would be a futile and irrelevant act.
The Court overlooked the illuminating "History" set forth in the Government's brief (10) "Of events leading up to the organization of the defendant Cement Manufacturers' Protective Association." Various earlier organizations in the cement industry had been abandoned because of fears of investigation or of prosecution. Their illegal nature is really not open to question. Bald agreements as to prices were entered into. Justice Stone incautiously assumes that the basing-point practice grew up innocently and naturally while these illegal organizations were functioning. After their abandonment, the Association, constituted of the same men and the same corporations, was formed for the same general purpose. The Court was in a very trustful mood that day when it pronounced its judgment.
Cement Taught By Steel
The assertion that the use of basing-point prices has long been an established business custom in the particular industry is itself an established custom, a part of the approved technique of hokum, in the defense of anti-trust cases. In fact, the general use of basing points dates (after brief periods of experimentation) from the period of giant trust formation. As Pittsburgh-Plus (and a similar practice in the non-ferrous metal industry) became well established about the years 1898 to 1900, SO the closely related building material, cement, first began in those years to be sold by the dubious practice of delivered prices. It is more than a mere coincidence that the U.S. Steel Corporation at its formation in Igor acquired with the Illinois Steel Company two cement plants. In 1906 the Universal Portland Cement Company was incorporated as a subsidiary of the U.S. Steel, taking over all its cement plants and building others, one in the Pittsburgh district at a railroad station named Universal, which then became an important basing point for cement. The recent acquisition by U.S. Steel, in December 1929, of the entire business and numerous plants of the Atlas Portland Cement Company is but another step in the same policy of merging the domination of the cement and the steel industries. From the first, in adopting the newly invented "custom" of using basing-point prices, the cement industry had the guidance of the master hand of the inventor of that custom.
A Mushroom “Custom”
The truth as to the date when the cement industry adopted the basing-point practice was revealed in an unguarded moment by one who should know. In an article printed the very week that Justice Stone ascended the Supreme bench and the oral argument of the Cement case began, occurs this statement: (11) "Twenty-six years ago cement manufactured in the Lehigh Valley almost invariably was sold on a mill price." That fixes the date of the general use as not earlier than 1899. Between 1900 and 1912: virtual agreement and suppression of competition in the cement industry were in considerable measure attained by bogus patent claims and finally in 1909 by an Association of Licensed Cement Manufacturers making and enforcing license agreements. The patent which was used as the weapon to enforce compliance with this comprehensive scheme was disallowed in successive decisions in the District and Circuit Courts (1910-1910), and the Association was dissolved. As was said in the Government's brief in the Cement Protective case: "It is perfectly manifest that the Hurry and Seaman patent was used as a mere cloak to conceal the real purpose and intent of the parties." (12) A most essential part of that purpose and plan was the operation and enforcement of a basing-point system of prices in cement. Then, between 1899 and 1911, and not in the immemorial past, the basing-point practice was made a so-called "custom" of the industry, by means of artificial and illegal devices.
Escaped In Petticoats
An economist testifying as an expert in price theory in the Cement case had maintained (on the alleged authority of numerous economic texts) that the basing-point identical delivered prices in the sale of cement exemplified that "uniformity of price" which "will inevitably result from active, free and unrestrained competition." (13) The learned Justice, usually clear in his economic views, was unfortunately misled by this testimony into a confusion of identical basing-point prices with uniform market or mill-base prices. It seems best to postpone the further discussion of this false identification to a later chapter. (14)
Springing from this confusion is another error accepted by the Court, that the use of a basing point is "the natural result of the development of the business within certain defined geographical areas," indeed, that competing mills "must" use the rate from a given basing point "in order to compete with the mills located in the vicinity of [a] chief point of production.'' (15) Here is judicially sanctioned the popular notion that, in order to be really competing with each other, each of two geographically distant mills must be selling everywhere in the other's natural sales territory, with all that this entails as to wasteful cross freights, discriminatory treatment of customers, and sales unprofitable to the mills, a sum total of social waste and injustice. This problem, too, will be fundamentally treated later.
Justice Stone's two now famous majority opinions on open-price trade associations concluded for the time this comedy of errors, in four acts and eight scenes. A blunder four times repeated was made by the Department of Justice in founding the complaints against the open-price plan upon the merely superficial activity, in itself harmless, of collecting statistics. Twice, to be sure, the Supreme Court, guided by sound intuitions rather than by direct proof of other incriminating acts, upheld the defective complaints; but when skillful defense counsel, favored by a change in the personnel of the Court, succeeded in other cases in reducing the issue to the bare fact of statistical inquiry, the weakness in the whole theory of the prosecution bore its inevitable penalty. A simple stool pigeon was indicted as the principal in these offenses, while the guilty accomplice, delivered prices, always inconspicuous if not invisible to the Court, though really the chief offender, escaped scot free, concealed under the skirts of its paramour.
The Mills Of The Gods
The Court's main conclusion was:
“We decide only that trade associations . . . which openly and fairly gather and disseminate information . . . as did these defendants . . . without, however, reaching or attempting to reach any agreement or concerted action with respect to prices . . . do not thereby engage in unlawful restraint of commerce.” (16) The clause beginning "without" qualified very essentially the Court's sanction of the open-price associations; it still left them (as their attorneys ruefully discovered) subject to the full penalties of the law if, and when, any collusive price activities were to be disclosed. More than a thousand important open-price trade associations, including nearly all leading industries in interstate commerce, are in full swing in this country. (17) In itself, gathering statistics is as harmless as a game of ping-pony. The one really mischievous feature of this decision lay in the Court's assumption that basing-point prices were merely uniform market prices, the outcome and the evidence of perfect competition. That the basing-point practice will be found in most, if not all, of the thousand or more industries organized in open-price associations is a probability. Besides the industries mentioned elsewhere in this book, the basing-point plan appears to have been used in the asphalt shingle and roofing industry, industrial alcohol, fertilizers, sewer pipe, range boilers, hollow building tile, expanded metal lath, bolts, nuts and rivets, sugar, various other branches of the lumber industry, and others. One who has widely observed the price practices of many of the most important industries declares that "it is decidedly the exception rather than the rule to find one in which there is that freedom of market competition which the law contemplates." How much longer can the Courts ignore the economic truth that basing-point prices evidence "concerted action with respect to prices," and therefore are in illegal restraint of trade?
Part V–That elusive Ideal–Free Markets
Chapter XVIII: Markets Wane As Factories Wax
Seeking Firm Foundations
Our main theme is the basing-point plan of delivered prices. This is "the masquerader" who has led a charmed life amid many vicissitudes, and who still is at large, flouting the law. But the story of the basing-point policy is interwoven since 1900 with that of other phases of monopoly and restraint of trade in interstate commerce, and with that of the largely futile efforts to enforce the anti-trust statutes meant to maintain or to restore conditions of competition.
Our survey thus far of the problems of price arising in the sale of industrial products, though limited to the state of facts presented by but a few leading cases in the courts, has taken a wide range. We have now before us a formidable mass of evidence and judicial opinions bearing upon almost every essential phase of our subject, and although we might easily amass many other similar data from the volumes of reported cases, we should thus but multiply instances of practices abundantly illustrated already. What is needed now is not more heaping up of repetitious facts but the clarification and more systematic interpretation of the facts at hand.
We have approached our subject in its more concrete setting, as the practices and problems of prices have actually appeared in judicial proceedings. In the reported cases and transcripts of records are preserved the richest existing stores of testimony and of arguments on this large subject. We have sought to analyze and criticize the evidence and opinions step by step as they have occurred in actual cases. While our references to economic history and our use of economic principles have, we trust, served to throw some light upon many obscurer issues, the order of our theoretical criticism has necessarily been somewhat unsystematic and opportunistic. We shall attempt now in these concluding chapters to give the whole subject a more systematic setting, to view it first against a larger historical background, and then to outline and lay down the firm theoretical foundations upon which alone consistent judicial opinions and sound public policy can be erected.
Competition Linked With The Markets
Anglo-American law, as shaped by Parliament, by Congress, and by the courts, became increasingly, from the fifteenth until the nineteenth century, pervaded with the idea that competition in business is in the main a good thing for the public, and that its converse, whether this be called merely restraint of trade or private monopoly, is a bad thing, to be either destroyed or publicly controlled. But what is meant by competition? What is its nature; by what signs can it be recognized; under what conditions can it be maintained?
Instead of trying to answer these questions at once with abstract definitions, let us turn first to a historical survey of markets, for this will give us a picture of economic competition in action. Actually, economic competition appears at the point in place and time when goods come to be sold and bought; that is, when goods of any kind, services, or wealth, become articles of commerce. Just then is when the competitive comparison is made as to service, quality, and price, although the efforts of men, it is true, have been earlier stimulated by the anticipation of having to meet this competition on the market. This is likewise the point at which almost all the legal questions arise in regard to competition, so that there is hardly a legal or economic phase of competition that does not involve the consideration of the nature of markets, market conditions, and prices in markets. Economic competition began with markets, and grew as markets grew with the increasing use of money and of better means of transportation. Therefore ( not strangely) the existence and vitality of competition in trade is essentially bound up with the existence and reality of markets. It seems well, therefore, to take a look at the more concrete visible facts of markets and their history, before involving ourselves more deeply in the more abstract definitions and concepts of competition and monopoly.
What Is Happening To Them
The aim of the law and of the courts for centuries has been to preserve in business in a real way the conditions making competition possible. This has never been an easy task. Competition, we find, far from being a natural thing (as is so often assumed), automatically brought about whenever private citizens are left to do as they please, seems rather to have been constantly destroyed by the self-interest and efforts of individuals and to have been maintained as an artificial condition only by the efforts of public authorities (if, indeed, they were not themselves hampering such competitive action as there was). This, we may see, was true even in the rural and manorial social organization of the Middle Ages, when conditions were much simpler in many ways than they are today. The peculiar difficulties of those times in the way of competition, some created by public charters and some by custom—gild privileges, special grants, franchises, etc.—have largely disappeared, but in the three-quarters of a century since 1850 the swift growth of industry and transportation has made possible new business practices and created new problems and difficulties in the way of true competition. These changes have shifted and greatly modified the meanings that can be and must be attached to the words competition, restraint of trade, and monopoly, as used in economics and in the law. As a result, popular opinion, the law, and the courts, find themselves in a maze from which only sound theory based on a study of the new facts can extricate them.
Early English Markets; Market Towns
Markets had their origin in antiquity as meeting-places on the borders between tribes or villages, where traders met to exchange goods. The Latin name mercatus thus came, in the Germanic languages, to have the meaning of boundary (mark). Market meant first the place where the traders met, but it came to mean in the legal sense also the franchise or liberty of holding a market. This right to hold a market or fair was the result of a grant from the king (or of a prescriptive right presumed to have originated in a grant) to a neighboring nobleman or to a religious house such as an abbey or to the town authorities. There were two types of early periodical markets: town markets and regional fairs. Some regular markets existed in England in Saxon times as early, possibly, as the year 700. Their number slowly increased, and many others were founded soon after the Norman Conquest in 1066.
In several hundred good-sized villages and small towns, called market towns, in medieval England, town markets were held once or twice a week or oftener. To these central points of the neighborhoods the products both of town and of country were brought for sale. The owner of the market right (whether the town corporation or some other corporation, religious or educational, or some individual) had the duty of maintaining the market places and the right to collect moderate fees, or tolls, from the traders.
Fairs As Markets
Regional fairs were held in many places, usually just outside the limits of some important town, once or twice or four times a year and in rare cases oftener. The franchise was held by some abbey, bishop, nobleman, or private person, never by the near-by town authorities—an interesting detail, seemingly designed to insure fuller competition. Thus the fairs must have exercised a steady competitive restraining influence upon the prices in the market and in the gild-merchant towns. Several hundred such fairs were chartered in England in the Middle Ages. Most of them were of merely local importance, little greater than town markets; but some of them attracted producers, merchants, and buyers not only from all parts of Britain but from distant lands. Certain of these fairs came to be the chief national market places for special products, very like to certain great grain, cattle, cotton, wool, fur, and other produce markets of the present day.
In these fairs and in the local markets, after they were opened and the moderate prescriptive tolls were paid, exchange took place with a remarkable degree of effective competition. It is evident that when population was sparse, when roads were poor and travel usually very difficult, when few could read or write and there were no newspapers or other means of transmitting exact information as to business conditions, these gatherings at markets and at fairs were remarkably well designed to bring together the largest possible number of traders from a trading area, and to give them, before they began to trade, the largest possible commonly shared knowledge of conditions of "demand and supply," to use a more modern phrase.
Opening Of A Fair
A picture of a great English fair, sometime perhaps in the fourteenth century, may serve best to make this clear (and the local markets had within their several spheres essentially the same effects). The hour for the opening of the fair arrives. From many parts of England have come stewards of great estates, bringing for sale such products as wool, leather, hides, salt, dried fish, and metals. Artisans with their handiwork and shopkeepers with their wares are there from far and near. Merchants are there not only from the great towns of England but from those of the Continent, bringing the luxuries of Flanders, of the Baltic Hanseatic towns, of Italy, and of the Orient, all eager to sell their wares and in turn to buy the crude products and the rougher textiles of England. On long tables and in rows of booths, the goods are laid out for inspection and for sale. Every one has been keenly watching these preparations, and soon both buyers and sellers know pretty well the quality of the goods and the amount of the stocks compared with the number and probable needs of those who have come to buy.
Market Compulsion Upon The Trader
But as yet not a sale has been made or could lawfully be made. Buying outside the actual market bounds within several miles of any fair or market was a crime; it was "forestalling" or "engrossing," crimes long illegal by the common law and later repeatedly forbidden by parliamentary statute. (1) One of the evils of forestalling was the creation of a temporary local monopoly in a commodity by the large merchant buyer—"cornering the market," in modern phrase. Hence the offense of forestalling was closely connected with the other offenses of engrossing (buying large amounts of goods) and regrating (re-selling goods in the same market). These were the chief devices by which a limited monopoly power in those days could be obtained temporarily without a royal grant. These laws were, to be sure, designed in part to prevent the evasion of tolls to the injury of the owner of the market franchise; but undoubtedly, under the conditions of those times, they served also the larger public purpose of creating real markets and the possibility of real market prices. In markets or fairs the great merchant buyers of native products had to buy openly in the presence of the whole group of sellers assembled from far and wide and were subject to the competing bids of other buying merchants, instead of being able to take each small seller into a corner and deal with him separately. Likewise merchants coming from many lands and climes competed openly in the sale of their wares. Under conditions of that time, when the small traders would otherwise be isolated and in ignorance of the general situation, a real market could be created and maintained only as a somewhat artificial institution, a place to which the traders were, as a condition of trading at all, legally compelled to come together to trade at one time and place.
Law Of The Market
From the moment that a fair was formally proclaimed, trade was suspended in the neighboring towns and it was illegal for the town merchants to buy or sell outside the boundaries of the fair. The lord of the fair took over the functions of the town authorities, and a merchants' court was in continuous session to settle summarily all disputes according to the "law merchant," a special code of business laws and customs (in some respects the prototype of our Federal Trade Commission). Money-changers were present, and official measurers, weighers, and other public officials. For a day in a local market, and for one or two weeks or longer at fairs, buying and selling went on freely and openly. Every person could judge at each moment the state of the market as to amounts of goods remaining, number of buyers, and the prices at which goods were being sold. At the legally fixed hour for closing, sales had to stop and the booths had to be cleared of all goods and to be shut. (2) This must have meant usually the "clearing of the market," that is, the sale, at whatever price it would bring, of everything brought for sale (excepting such rarer and more precious wares of light weight as merchants could more profitably carry away).
Oases Of Fair Prices
In the midst of the conditions of feudal caste and status on the land and of the rigid organizations of merchant gilds and of craft gilds with their various artificial restraints in the towns, such markets with their open and active buying and selling must often have appeared like competitive oases in the midst of deserts of more or less monopolistic privileges and prices. Often, undoubtedly the various gilds of merchants and of craftsmen, with their jealously guarded group privileges within the towns, looked with hostile eyes upon these sanctuaries of free trade created by royal grants outside their own little realms, as they were forced to moderate their own restrictive policies because of this periodic open market competition. As late as the fourteenth century, but in slowly decreasing measure thereafter, fairs were "the seats of most of the inland trade of the kingdom," (3) that is, of the larger inter-municipal and foreign trade; while the local markets were the seats of nearly all neighborhood barter and sale. Such markets, even with their slight tolls and taxes, fostered a relatively free competition and "fair" prices in trade far beyond their borders in the larger areas from which traders came. A growing freedom of commerce within and among the towns between 1300 and 1500, going along with the increasing use of money and greater division of labor, favored the growth of a freer social organization, helped powerfully to break down feudalism, caste, and status, on the land, and eventually also, after 1500, with the strengthening of national power under the Tudors, to break down many of the selfish privileges of the merchant and artisan classes in the towns themselves. Thenceforth, for three centuries, freedom of trade steadily widened within the national boundaries.
Gild-Merchant Towns
Along with the regional fairs and town markets created by special grants of the king as just described—both of them periodic markets—there existed in England from the time of the Conquest (if not before) some towns where groups of buyers and sellers could meet at all times under conditions of competition somewhat resembling those of the markets and the fairs. Two types of these can be pretty clearly distinguished. Of the first type were the gild-merchant towns, usually of medium size, larger than the typical market towns, but not so large as the great towns of the kingdom. Here ideal market conditions and competition were imperfectly realized. In each such town a gild of merchants had (also by grant) a "group monopoly" of trading, not to be condemned outright by us today as without some real reason of public weal and necessity in the conditions of that day. However, trade by outsiders was subject to severe restriction in the gild-merchant towns, and the policy of the merchant gilds was often so selfish that, especially after the fifteenth century, it drove trade away and caused the decay of once flourishing centers of trade. (4)
Perpetual Market Towns
Trading centers of another type were the so-called "free trade" towns, which included from the earliest times London, and later Birmingham, Manchester, and Leeds. They had no merchant gilds, but were "perpetual markets," having the legal character of markets "overt." The conditions in the "perpetual" market towns gradually came to be those of all larger English towns between the sixteenth and the middle of the nineteenth centuries. Here production was in numerous small shops with hand tools rather than by the mass production of the later nineteenth and early twentieth centuries. This size of the shop unit is a matter of great significance in our present subject. Even in medieval times in the larger towns, it was customary for all or nearly all the shops of the same craft to be grouped on certain streets. There, all customers wishing to buy goods of that sort could come, and there, even outside of fair times, they had great opportunity to pick and choose from well-stocked shops, or to give special orders, according to materials, patterns, workmanship, and prices. The privileges conferred by craft-gild membership related to learning and practicing the craft and did not extend to the right to combine in price fixing. Although there were doubtless often tacit illegal restraints of competition among craftsmen, there were on the whole in the larger towns, and in a less degree elsewhere, the main conditions of perpetual markets in each kind of goods. The growth of town population, of handicrafts, and of transportation, gradually made these conditions normal throughout the greater part of England by 1800 (and usually in the colonies and in the United States before 1865) and led to the almost complete decay of the old markets and fairs—though some of them still survived with merely trivial importance.
Source Of Modern Competitive Ideal
The conditions and method of buying and selling in the medieval markets is undoubtedly the main original source of the ideas of modern law, as well as of economics, regarding the nature of markets and the effects of competition. The price fixed in the earlier medieval markets gave a standard for the "just price" at other times and places, a standard highly prized by the medieval mind. The conditions of the medieval markets, somewhat idealized, and later those of the perpetual market towns with their numerous small shops, became the norm tacitly used by moralists, by jurists, and by the new science of political economy in the eighteenth century, in judging of the existence of markets and competition. About 1750, the eve of the mechanical industrial revolution, the grouping of independent small artisans and merchants in towns had become the regular situation. Adam Smith in 1776 and the contemporary French Physiocratic economists alike advocated the abolishment of the medieval hang-over of special gild privileges of the artisan and commercial classes. In their thought, the ideal conditions for efficiency and justice in commerce were those of the independently competing merchants and handicraft shopkeepers of the larger towns. The reality was undoubtedly approaching this ideal in England for generations before the date when the railroad became a success, about 1830, and in some aspects continued to do so until about 1850. In the century between 1750 and 1850, both in England and in America, a condition of local perpetual markets, of small independent shops, and of truly competing handicraft producers was probably more nearly realized than ever before or since. As a result of this, and without much special intervention and control by public authorities, free market conditions then generally prevailed and competitive prices were the rule.
Early Nineteenth Century Competition
Each New England village had its "green" around which were the stores and the craft shops, serving as late as 1860 as a real market center for all the countryside within driving distance. As settlement moved westward after the Revolution, each new county west of the Alleghenies had its "county seat," with a "market square," which was the main market place of the region for miles around. Before 1860 it was still the rule that several local shops and local mills for grinding grain, sawing logs, weaving cloth, making wagons and carpets, furniture, shoes, and iron tools, were found in any town of considerable size in the United States, and they sold their products (or services) to every buyer coming to their doors. Blacksmith shops, the originals from which developed all factories fabricating iron and steel, were at every important crossroads so that two or more of them were within a day's driving distance of nearly every farm. Little local iron blast furnaces and forges by the hundred dotted the countryside in many regions. Almost universally under these conditions, the buyers of goods came in person to the mills, shops, and stores, and carried away the goods in their pack saddles or their wagons. The shop or the mill was the place of sale, and there was a well-understood prevailing price in market towns, and at each mill usually a price posted on the door, the same to all customers. Many buyers had access to two or more buying centers where were groups of independent artisans, mills, and shops, to which also many other buyers came. Each somewhat isolated mill, shop, or store, in order to attract buyers, had, in fixing the price at its doors, to reckon on interregional competition with other mills, shops, or stores not far away. Even when the goods were shipped by common carrier, either in freight wagons using the public roads or on sailboats or steamers on sea, lake, or river, it was always the buyer who either himself transported the goods or hired the transportation. Moreover, the conditions were largely those either of true competition or of uniform rates in transportation. The old law of common carriers always sought to compel equal treatment of shippers and localities on the public highways in a way preventing the exercise of monopoly power in freight charges.
A Thing Of The Past
These were the conditions, present in larger measure in the first half of the nineteenth century than ever before or since, of that effective competition resulting from the freedom of the individual to trade honestly where, when, and how he pleased, which even from the days of medieval privileges and customs had been the subject of an almost sentimental solicitude on the part of the law. It is of trade in these circumstances (not of much trade today) that it might truly be said that "freedom of contract" is "the essence of freedom from undue restraint on the right of contract." (5) It was this state of affairs that the economists of the epoch of Ricardo and J. S. Mill (from 1815 to about 1860) had before their eyes when they assumed that free competition among numerous independent producers was both the normal and the desirable condition of business. The corporate form or organization was still infrequent in manufacturing, and outside of a few lines (textiles and iron) shops were still small and numerous. It was this state of affairs which, too, the courts of that period had in mind as, in many decisions, they wrote ever more deeply into the law the doctrine of freedom of competition as the rule of equity between individuals and as the palladium of the social good. It is this state of affairs, we are sadly forced to think, that many lawyers and judges, more learned in legal precedent than in the understanding of current economic events and changes, have assumed still to prevail as they reasoned high on competition, freedom of contract, and restraint of trade. How swiftly the stream of economic change (not always moving toward greater justice between man and man) carried commerce away from this organization, still largely prevailing in America before 1860, and brought it into the very different regime that began to show more clearly its ominous outlines by the decade of the ‘80'S in the nineteenth century!
Law Loses Contact With Reality
After the middle of the nineteenth century, events fast crowding upon each other began to destroy piecemeal the real competitive conditions of true markets in many lines of industry. This was even more the case in America than in England. The courts and the economists alike began to lose their bearings and, in the actual conditions, were left without a compass of normality as to price such as that found in the old ideal of the typical market. It is this ideal or some new one to replace it that society is groping to attain under the complex and difficult conditions of modern industry.
The economic evolution of the United States since 1865 has been so swift as to be catastrophic, whereas legal evolution has been so slow as to be calamitous. Great economic changes have been wrought since the Civil War by growing forces which had begun to operate one, two, or three generations earlier. These changes have been manifest in every direction and in every part of our industrial life, but nowhere more than in the conditions affecting commerce, markets. competition, and industrial prices.
Revolutionary Changes In Commerce
As we survey these events, seeking for some explanation of causes, we undoubtedly find it first in the rapid spread of the great mechanical technical inventions in transportation and manufacture. The new labor-saving machinery was brought together with many workers to produce in one factory an output equaling that of many formerly competing little shops. Before 1800 the turnpikes and canals, by 1807, steamboats, and by 1830, railroads, were assured successes, though their economic effects were not to become very clearly manifest for a generation or two later in each case. Factory machinery and railroads, as they were improved and extended, combined to make production on a progressively larger scale possible and inevitable. This meant larger units of production, fewer of a kind in any one locality, and the shipment of goods farther and farther from the shops and mills. Many local markets became less producing centers and more mere retail distributing centers. The wide adoption of improved machinery and of better means of transport are but two phases of one great movement. They made possible greater mass in production, which means ever larger and ever fewer physical plants or establishments, separated, often isolated, by great distances, and shipping their products farther and farther from the points of physical production and economic origin. The greater the efficiency and cheapness of production on a large scale compared with that on a smaller scale, the greater are the distances that the goods can be transported even with the old carrying agents and still undersell the local stores. The market area of each factory becomes greater. Likewise, the more efficient the means of transportation become, the wider the area over which goods can be distributed from larger factories, and this offers an inducement to invent and adopt more specialized and better factory equipment and to enlarge the unit of production further until again the limit of advantage is attained as to size of factory and breadth of market area.
It is only after these technical, mechanical agents have resulted in larger production that there appears another agency of a very different nature, not to be confounded with the others; that is, financial combination or merger of physically separate and geographically distributed plants. The motive leading to financial merger appears to have arisen after large production and distance carriage had broken down the old ideas and practices of local markets and of competition.
Railroad Monopoly Appears
The confusion and evils as to rate or price policies, connected with this rapid growth of market areas, appeared first most distinctly in the practices of the railroads, suddenly beginning after 1830 the mass production of transportation, replacing competing freight wagons and stage coaches. Factories still for a time continued to be mostly small and local. It was in transportation that the breakdown of the old rules of competition, even supported as they were in some degree by the old law of common carriers, became first glaringly manifest. Public opinion was unenlightened and did not see, as a few minds of clearer vision saw almost from the first, that a railroad is necessarily a monopoly, or it may be better to say, has a considerable measure of locally limited monopolistic power. The transportation services, which are the railroads' products, are sold to locally separated shippers whose alternative mode of shipment (e.g., pack mules, wagons, etc.) is usually not to be compared with the railroad in technical efficiency. In most cases, therefore, there was at any one point but one seller of efficient transportation, and though the buyers might be several, they were a small, unorganized group. Thus at most stations there was no true market for transportation services, and no true market price for rail transportation could become established by competition. In that case each rate for a particular kind of goods, to particular shippers, at particular points of shipment, is the price of an isolated sale and not a real market price. The monopolistic power of the railroad extends to much of the traffic it carries, to most shippers, and to all those stations along its lines that are not served directly by any other railroad.
Regulation Of Railroad Competition
It was four-fifths of a century after the beginning of railroad history in the United States in 1830 that the amendment in 1906 of the Interstate Commerce Act of 1887 began an effective regulation of railroad rates by Commission control and curbed railroad monopoly. In this period the public had been slow to learn, but it at last had learned some lessons. Stubbornly it had persisted in putting faith in unregulated "competition" between railroads—a misnomer for unregulated monopoly power. It hoped to get real and effective competition by the building of more and more trackage, always ahead of the population and traffic needs, by the paralleling of lines between the great terminal markets, and by the construction of new roads radiating from the few large manufacturing and commercial centers. For nearly a half century, until the decade of the '70's, although popular discontent against the frightful inequalities of rates was steadily growing, the railroads were actually left to do pretty much in the matter as they pleased; or as the men in control chose to do in the conditions. They were forced (at least it seemed so to them), at points of intersection with other roads, to carry goods at rates so low that it would be ruinous to apply them to all the traffic. They were pleased at other points to charge every cent that the shipper could be made to pay rather than use a cart instead of the cars. Competition? Yes, a doubtful yes, at competing points and on some kinds of goods, but competition unregulated, excessive, destructive, not only to the industries and localities at every other place excepting these competing points, but to the railroads themselves. Yes; a few students of the subject early saw, though the public did not, that in respect to most shippers and shipments the conditions of "a market for transportation" were non-existent, and that each railroad inevitably had a large measure of monopoly power. Important lessons surely may be drawn from this experience with railroad monopoly that are helpful in solving the problem of local monopoly in industries.
A New Breed–Industrial Trusts
Between 1850 and the end of the century there occurred, at first slowly, then with accelerating speed, a veritable revolution in market conditions, more remarkable in America than anywhere else. This involved increased size of industry, mass of production, extent of market area or tributary territory, and average length of haul of many commodities, all being but different aspects of one great movement. The changes in these respects in these fifty years were greater than those of the preceding millennium. While the industrial world was undergoing these rapid physical changes, the very. nature of the economic, legal, and social problems associated with markets, competition, monopoly, and prices was also being transformed. First this became apparent in respect to the railroads, and already in the last quarter of the nineteenth century their local monopolistic character was recognized and active st
