The Quarterly Journal of Economics Published by Harvard University Books, periodicals, and manuscript to be addressed, EDITORS of QUARTERLY JOURNAL OF ECONOMICS, Cambridge, Mass. Business letters to be addressed, HARVARD UNIVERSITY PRESS, 2 University Hall, Cambridge, Mass. Subscription, $3.00 a year. V. THE SOCIAL POINT OF VIEW IN ECONOMICS. I F. W. Taussig J. F. Curtis Joseph A. Hil Thornton Cooke L. H. Haney H. R. Tosdal Fred Wilbur Powell II. THE BRITISH SUPER-TAX AND THE DISTRIBUTION OF III. THE DEVELOPMENT BY COMMISSIONS OF THE PRINCI- IV. THE SOCIAL POINT OF VIEW IN ECONOMICS. ПI VI. INDUSTRY IN PISA IN THE EARLY FOURTEENTH CENTURY REVIEW: Keynes' Indian Currency and Finance COPYRIGHT, 1914, BY HARVARD UNIVERSITY. A. L. Bowley Ralph E. Heilman L. H. Haney J. M. Clark F. C. Dietz Fred Wilbur Powell E. W. Kemmerer [Entered as Second-class Mail Matter. THE QUARTERLY JOURNAL OF ECONOMICS MAY, 1914 THE TRUST PROBLEM 1 SUMMARY I. Introductory. Definitions of trust, pool, industrial combination, 382. Theory that elimination of unfair competition and special privileges would rob combinations of monopoly power, 383.— Difficulty of proof or disproof from experience, 385. - Power of pools to advance prices, 389. - Trust prices, 390.- Oil, sugar, tobacco and steel trusts, 391.- Unfair competitive methods and special privileges not sufficient explanation of monopoly power, 393. The power of combinations as such to maintain monopoly prices, 395. Theoretical reasoning on the probable influence of combination and the impossibility of competition, 396. Consequent necessity of regulation or prohibition, 400. II. Possibility of preventing combination, 402. — Success of certain Federal cases against combinations, 402. - Deterrent effect of more severe penalties, 404.- Reasons for failure of certain trust dissolutions to restore competition, 405. Possibility of destroying and preventing formal trusts and pools, 408. — Weakness of informal understandings, 410. I THE NECESSITY OF PROHIBITION OR REGULATION IN these lectures, we shall confine ourselves to the consideration of trusts and pools, without attempting to cover the whole field of monopoly or of contracts in restraint of trade. The term trust will be used to describe the closely-knit combination or consolidation. 1 Lectures delivered at Harvard University, in April, 1914. The most familiar forms are three: first, the combination through the holding of stock by trustees, once so common, but now disused; second, the holding corporation; and, third, the corporate merger, in which a single company acquires direct title to the property of the combining concerns. Most people use the term trust essentially to cover combinations of these three classes, altho sometimes it is applied to any kind of combination or any case of supposed monopoly. Under the trust, the entire business of the combining plants, including productive processes as well as marketing policy, is subject to a single control. On the other hand, we shall use the term pool to designate any combination of previously competing plants which retain their independence with respect to the processes of production. Strictly speaking, the word pool implies division of output or of profits among the constituent concerns. For brevity, however, even at the expense of strict accuracy, it may be employed more broadly to include agreements as to prices, even where there is no division of the output. As a matter of fact, most price agreements involve a more or less definite division of business, since without it the maintenance of prices is very difficult. There It is customary to use the term "industrial combinations" as synonymous with trusts and pools. are, however, many combinations which possess only a minor fraction of the business in which they are engaged, which have no monopolistic intent and no possibility of exercising any monopolistic power. The trusts and the pools, in the sense in which we shall use the terms, have been organized primarily in the hope of securing monopolistic control of prices. How far they have been able to realize this purpose is one of the main questions for our consideration. In some cases, for brevity, we shall use the term "combinations" to designate trusts and pools, but when doing so, we have in mind only those combinations which have taken in a large proportion of the plants in their respective industries and have aimed at monopoly. The recent rapid growth of trusts has so focussed public attention that the importance of pools is often overlooked. The number of pools has been, and still remains, far greater than the number of trusts. They probably affect a larger volume of business. Many of the arguments as to the effects of combinations, their advantages and disadvantages, which apply to trusts, do not apply to pools. There are at bottom only three possible ways of dealing with trusts and pools. We may seek to prevent them from competing unfairly and to deprive them of special privileges giving an advantage over competitors, but otherwise leave them alone. Practically no one, I take it, would favor the plan of not even placing restrictions upon their methods of competition or seeking to deprive them of special privileges. Second, we may permit trusts and pools to exist but regulate their prices and profits. Third, we may undertake to destroy them. The broad problem before the American people is the choice among these three policies, laissez faire, regulation, and prohibition. In my opinion, the first of these policies is inadequate. I shall attempt to show in the present lecture that it is desirable either to regulate the trusts and pools, or to destroy and prevent them as best we can. In subsequent lectures I shall consider the relative merits of regulation and prohibition. Many believe, economists and others, that the trust or the pool cannot, merely by virtue of combination, maintain such monopolistic power as to injure the public. They hold that the power of such combinations, so far as it exists at all, rests mainly on unfair competitive methods or on special privileges, such as the possession of some natural or patent monopoly. They believe that in the absence of these " unfair" advantages competition, actual or potential, will serve to hold the prices charged by trusts and pools at a reasonable level. All we need is to draw the teeth of the combinations. The combination may indeed maintain excessive prices for a time. Before long, however, competitors will arise and force prices down again. Ultimately, continues the argument, the combination will either lose its controlling proportion of the business, or it will adopt the policy of maintaining prices so low that competitors will not be tempted to come into the field. Experience lends some support to this position. Many a pool has gone to pieces in the past as the result of the attempt to maintain exorbitant prices. Not a few among the trusts have a smaller proportion of the business in their fields today than they had at the time of their organization. Others have maintained moderate prices. It is perfectly true, moreover, that the trusts which have been most powerful have been those which used unfair competitive practices or possessed natural or patent monopolies. The Standard Oil Company, for example, has almost continuously been able, throughout the greater part of the country, to extort prices far above a normal competitive level. The Standard Oil Company has probably outdone every other combination in unfair competitive practices. It has also been aided by the element of natural monopoly in pipe-line transportation and in tank-wagon delivery. It must be conceded, then, that the power of a combination, merely as such, to maintain monopoly prices is not without limit. Competition is a restraining |