Published in Collier's Weekly, September 14, 1912.

Leaders of the Progressive Party argue that industrial monopolies should be legalized, lest we lose the efficiency of large-scale production and distribution. No argument could be more misleading. The issue of competition versus monopoly presents no such alternative as "Shall we have small concerns or large?" "Shall we have ill-equipped plants or well-equipped?"

In the first place, neither the Sherman law nor any of the proposed perfecting amendments (La Follette-Lenroot bill or Stanley bill) contain any prohibition of mere size. Under them a business may grow as large as it will or can—without any restriction or without any presumption arising against it. It is only when a monopoly is attempted, or when a business, instead of being allowed to grow large, is made large by combining competing businesses in restraint of trade, that the Sherman law and the proposed perfecting amendments can have any application. And even then the Sherman law and the proposed amendments would not necessarily restrict size. They merely declare that if there has been such a combination in restraint of trade the combiners have the burden of showing that it was reasonable, or, in other words, consistent with the public welfare; and that if such a combination controls more than thirty per cent of the country's business it will, in the absence of explanation, be deemed unreasonable.

In the second place, it may safely be asserted that in America there is no line of business in which all or most concerns or plants must be concentrated in order to attain the size of greatest efficiency. For, while a business may be too small to be efficient, efficiency does not grow indefinitely with increasing size. There is in every line of business a unit of greatest efficiency. What the size of that unit is cannot be determined in advance by a general rule. It will vary in different lines of business and with different concerns in the same line. It will vary with the same concern at different times because of different conditions. What the most efficient size is can be learned definitely only by experience. The unit of greatest efficiency is reached when the disadvantages of size counterbalance the advantages. The unit of greatest efficiency is exceeded when the disadvantages of size outweigh the advantages. For a unit of business may be too large to be efficient as well as too small. And in no American industry is monopoly an essential condition of the greatest efficiency.

The history of American trusts makes this clear. That history shows:

First. No conspicuous American trust owes its existence to the desire for increased efficiency. "Expected economies from combination" figure largely in promoters' prospectuses; but they have never been a compelling motive in the formation of any trust. On the contrary, the purpose of combining has often been to curb efficiency or even to preserve inefficiency, thus frustrating the natural law of survival of the fittest.

Second. No conspicuously profitable trust owes its profits largely to superior efficiency. Some trusts have been very efficient, as have some independent concerns; but conspicuous profits have been secured mainly through control of the market —through the power of monopoly to fix prices—through this exercise of the taxing power.

Third. No conspicuous trust has been efficient enough to maintain long, as against the independents, its proportion of the business of the country without continuing to buy up, from time to time, its successful competitors.

These three propositions are also true of most of the lesser trusts. If there is any exception, the explanation will doubtless be found in extraordinary ability on the part of the managers or unusual trade conditions.

And this further proposition may be added:

Fourth. Most of the trusts which did not secure monopolistic positions have failed to show marked success or efficiency, as compared with independent competing concerns.


The first proposition is strikingly illustrated by the history of the Steel Trust. The main purpose in forming that trust was to eliminate from the steel business the most efficient manufacturer the world has ever known—Andrew Carnegie. The huge price paid for his company was merely the bribe required to induce him to refrain from exercising his extraordinary ability to make steel cheaply. Carnegie could make and sell steel several dollars a ton cheaper than any other concern. Because his competitors were unable to rise to his remarkable efficiency, his business career was killed; and the American people were deprived of his ability—his genius—to produce steel cheaply. As the Stanley Investigating Committee found, the acquisition of the Carnegie Company by the promoters of the Steel Trust was "not the purchase of a mill, but the retirement of a man."

That finding is amply sustained by the evidence.

The commissioner of the Steel Plate Association, Mr. Temple, testified:

"They had to buy the Carnegie Steel Company. Mr. Carnegie, with his then plant and his organization and his natural resources, was in a position where he could dominate the entire situation; and had the United States Steel Corporation not have been formed about the time it was—some ten years ago—the steel business not only of America, but of the world to-day would be dominated by Andrew Carnegie."

George W. Perkins, himself a director of the Steel Trust, through whose firm (J. P. Morgan & Co.) the bribe to Carnegie was paid, confirms Temple's statement:

"The situation was very critical. If the Steel Corporation had not been organized, or something had not been done to correct a very serious condition at that time, in my judgment by this time Mr. Carnegie would have personally owned the major part of the steel industry of this country. . . ."

And Herbert Knox Smith, Commissioner of Corporations, after elaborate investigation, declared:

"The conclusion is inevitable, therefore, that the price paid for the Carnegie Company was largely determined by fear on the part of the organizers of the Steel Corporation of the competition of that concern. Mr. Carnegie's name in the steel industry had been long synonymous with aggressive competition, and there can be little doubt that the huge price paid for the Carnegie concern was, in considerable measure, for the specific purpose of eliminating a troublesome competitor, and Mr. Carnegie in particular. This, it may be noted, was the interpretation generally placed upon the transaction in trade and financial circles at the time."

The price paid for the Carnegie Company, about April 1, 1901, was $492,006,160 in United States Steel Corporation securities—of the then market value of $447,416,640 in cash. The value of the actual assets of the Carnegie Company on December 31, 1899, as sworn to by Carnegie, had been only $75,610,104.06. The total assets of the concern on March 1, 1900, as shown by the balance sheet, were only $101,416,802.43. And Commissioner Herbert Knox Smith, making a very generous estimate of the net value of the tangible assets of the Carnegie Company on April 1, 1901, fixes it at only $197,563,000. The bribe paid to eliminate Carnegie's efficiency was thus at least $250,000,000. It was paid, as the Stanley Committee finds, to prevent a contest "between fabricators of steel and fabricators of securities; between makers of billets and of bonds." It was paid to save the huge paper values which George W. Perkins and others had recently created by combining into eight grossly overcapitalized corporations a large part of the steel mills of America. No wonder that J. P. Morgan & Co. were panic-stricken at the rumor that Carnegie was to build a tube mill which might reduce the cost of making tubes $10 a ton, when those bankers had recently combined seventeen tube mills (mostly old) of the aggregate value of $19,000,000, had capitalized them at $80,000,000 and taken $20,000,000 of the securities for themselves as promotion fees. The seven other similar consolidations of steel plants floated about the same time had an aggregate capitalization of $437,825,800, of which $43,306,811 was taken by the promoters for their fees.

As Commissioner Herbert Knox Smith reported to the President:

"A steel war might have meant the sudden end of the extraordinary period of speculative activity and profit. On the other hand, an averting of this war, and the coalition of the various great consolidations, if successfully financed, would be a tremendous ‘bull’ argument. It would afford its promoters an opportunity for enormous stock market profits through the sale of securities."

So Carnegie was eliminated, and efficiency in steel making was sacrificed in the interest of Wall Street; the United States Steel Corporation was formed; and J. P. Morgan & Co. and their associates took for their services as promoters the additional sum of $62,500,000 in cash values.


The second proposition—that conspicuous trust profits are due mainly to monopoly control of the market—is supported by abundant evidence equally conclusive.

The Standard Oil Trust stood preeminent as an excessive profit taker.

When Commissioner Herbert Knox Smith made his report to President Roosevelt in 1907, the trust had for a generation controlled about eighty-seven per cent of the oil business of America. It had throughout that period been managed by men of unusual ability. And yet Commissioner Smith reports:

"The conclusion is, therefore, irresistible that the real source of the Standard's power is not superior efficiency, but unfair and illegitimate practices...

"Considering all the branches of the oil industry together, the difference in cost between the Standard and the independent concerns is not great...

"It is true, that taken as a whole, the Standard Oil Company is a more efficient industrial machine than any one of its competitors. Nevertheless, careful estimates based upon data submitted by a number of independent concerns as to the cost of pipe-line transportation, refining, and distributing oil, as compared with the Standard's cost for these operations, indicate that the total difference in efficiency between the Standard and the independent concerns is not very great...

"The difference between the operating cost of a number of Standard refineries and a number of independent refineries was shown to be substantially nothing. It is possible, however, that some of the larger Standard refineries are able to reduce their costs a little further and that there may be some difference in the amount required for profit per gallon. The Standard may also be able to secure somewhat better yields from the crude. It is improbable, however, as already stated, that the superior efficiency of the Standard with respect to both refining costs and yields would on the average represent a difference of more than one-fourth of a cent a gallon. The outside figure would be one-half cent per gallon.

"It has been shown further that the difference in marketing costs between Standard and independent concerns in large cities is almost negligible...

"As already stated, moreover, the argument, from a comparison between the costs of the Standard and the costs of the present independent concerns, does not fully show the fallacy of the Standard's claim to have reduced prices by its superior efficiency. The present independent concerns are by no means so efficient as those which would have come into existence in the absence of the restraints imposed by the monopolistic and unfair methods of the Standard. Had the oil business continued to develop normally, it is practically certain that there would have been in the United States to-day a limited number of large oil concerns, the efficiency of which would be considerably greater than that of the present independents."

Next to the Standard Oil, the Tobacco Trust is, perhaps, the most prominent of the excessive profit takers. A single one of its many constituent companies, W. Duke's Sons & Co., "valued in 1885, under competition, at $250,000," yielded to its owners "up to 1908, in securities, dividends, and interest" $39,000,000, or 156 times the value of this particular business in 1885. In 1908 (the latest year reported on by Commissioner Herbert Knox Smith) the profits of the Tobacco Trust equalled 39.5 per cent of its total tangible assets. But there are many different departments of the tobacco business; and the rate of profit was by no means the same in all in any one year. And in the same department the profits varied greatly during a series of years. In 1908, for instance, the profits of the cigar department were only 4 per cent on the value of the tangible assets, while the profits of the subsidiary smoking tobacco companies were 103.5 per cent of the value of the tangible assets. What is the explanation of this great variation in profits? The company was efficiently managed. The same able men supervised all of the departments. The same huge resources and trade influence were at the service of each of the departments. Commissioner Smith's elaborate investigation solves the riddle. It brings out clearly the following features:

"Very high rates of earnings on the actual investment in most departments.

"A marked coincidence of low rates of earnings and a low degree of control where the latter occurs.

"A remarkable increase in the rates of earnings as the combination became more effective in its control."

In 1908, when the trust earned only 4 per cent on its cigar business, it controlled only about one-eighth of the cigar business of the country. When it earned 103.5 per cent on its smoking tobacco subsidiaries, it controlled three-quarters of the smoking tobacco business of the country.

"The most striking feature of the entire preceding discussion," says Commissioner Smith in concluding, "is the almost invariable association of high rates of profit with a high degree of control, or with monopolistic conditions, and of lower rates of profit with a lesser degree of control or active competition...

"The combination's ability to establish and maintain prices without much regard to competition in the principal branches of the business, it may be repeated, is vividly illustrated by the fact that when the internal-revenue tax on tobacco was reduced in 1901 and 1902, the combination maintained its prices at the level which had been established when the tax was increased some years earlier. As a result of this policy it appropriated practically the entire reduction in the tax as additional profit in succeeding years."

That is the kind of efficiency in which trusts particularly excel.

As to the Steel Trust's extraordinary profits, the Stanley Investigating Committee finds:

"The enormous earnings of the Steel Corporation are due not to a degree of integration or efficiency not possessed by its competitors, but to the ownership of ore reserves out of all proportion to its output or requirements, and to the control and operation of common carriers, divisions of rates, and the liberal allowance obtained from other concerns through inequitable and inordinate terminal allowances."


The third proposition—that trusts are not efficient enough to hold their relative positions in the trade as compared with the independents without buying up successful competitors—is also supported by abundant evidence.

The Steel Trust furnishes a striking example of this. Corporation Commissioner Herbert Knox Smith, reporting on the operations of the Steel Trust for the ten years following its formation (1901-10), says:

"Notwithstanding the great additions made by the corporation to its properties from earnings, and the acquisition of several important competing concerns [including the Tennessee Coal and Iron Company], its proportion of the business in nearly every important product, except pig iron and steel rails, is less than it was in 1901...

"This table shows that, whereas the Steel Corporation in 1910 had fully maintained the share of the country's total production of pig iron it held in 1901, its proportion of the production of nearly all steel products had declined, and in most cases sharply declined. The only important exception was steel rails. The maintenance of its proportion here is chiefly due to the erection of a very large rail mill at the new Gary plant, and to the acquisition of the Tennessee Coal, Iron and Railroad Company, which had a considerable steel-rail production.

"Taking the production of steel ingots and castings as a basis, it will be seen that the Steel Corporation's percentage of the total fell from 65.7 per cent in 1901 to 54.3 per cent in 1910. This figure, perhaps, is the best single criterion by which to judge the change in the corporation's position in the steel industry from a producing standpoint...It should be noted that the decline in the production shown by this comparison of 1901 and 1910 percentages was practically continuous for most products throughout the entire period."

That was the condition in 1910. A year later the Steel Trust's proportion of the production of the country had fallen below fifty per cent.

It may be doubted whether steel rails would have been an "exception" to the steady decline in the Steel Corporation's proportion of the country's business had it not been for the steel-rail pool and the close community of interest between the Steel Corporation and the railroads. As the Stanley Committee finds:

"Of the $18,417,132,238 invested in railways in the United States, the directors of the Steel Corporation have a voice in the directorates of or act as executive officers of railroad companies with a total capitalization and bonded indebtedness of $10,365,771,833."

The Sugar Trust, also, furnishes striking evidence of the inability of trusts to maintain their position in the trade without buying up successful competitors. In 1892, after acquiring the Spreckels Company of the West, the Sugar Trust alone produced ninety percent of the sugar refined in this country. It had vast resources. It had strong political affiliations. It sought by every means, fair or foul, to maintain its control. It secured discriminating rates from railroads. It cheated the Government by false weights and undervaluation. With the bankers' aid it crushed competitors through tricky control of credits. But in 1912—at the end of twenty years of oppression—its own production of refined sugar had fallen to forty-two per cent of the country's production. And, in spite of buying up from time to time stock in so-called independent cane sugar companies and beet sugar companies, it controlled in 1912 (according to the statement of President Van Hise in "Concentration and Control") only sixty-two per cent of this country's production of refined sugar.

The dominating position of the Tobacco Trust was likewise maintained only through its policy of buying up competitors, as Corporation Commissioner Herbert Knox Smith so clearly shows:

"Despite enormous expenditures for advertising and in ‘schemes,’ and despite frequent price cutting by means of its so-called ‘fighting brands’ and its bogus independent concerns, there has been in several branches of the industry a constant tendency for competitors to gain business more rapidly than the combination, and thus to reduce its proportion of the output. This tendency has been overcome only by continued buying up of competitive concerns. Many weaker concerns have been virtually driven out of business or forced to sell out to the combination, either by reason of the direct competition of the latter, or as an indirect result of the vigorous competition between the combination and larger independent concerns. In the case of the larger and more powerful concerns which it acquired, however, the combination has usually secured control only by paying a high price. The immense profits of the combination have enabled it to keep up this policy.

"This great disparity in size [between the factories of the combination and those of the independents] is not due to lack of enterprise or capital on the part of the independent concerns, but is essentially due to the constant transfer of the largest concerns from the ranks of the independents to those of the combination...

"The output of individual concerns that remained independent, however, has increased in most instances. The resultant tendency to increase the entire independent output was offset by the combination's continued policy of buying up and absorbing the larger and more successful competitors."

Even the Standard Oil Trust, which relied mainly upon its control of the transportation systems and other methods of unfair competition to crush competitors, is shown by Commissioner Smith to have been unable to quite maintain its relative position in the market, despite its continued buying up of competitors.


Of the truth of the fourth proposition, stated above—that most of the trusts which did not secure monopolistic positions have failed to show marked success or efficiency as compared with the independent competing concerns—every reader familiar with business must be able to supply evidence. Let him who doubts examine the stock quotations of long-established industrials and look particularly at the common stock which ordinarily represents the "expected economies" or "efficiency" of combination. Take as examples:

The Upper Leather Trust (American Hide and Leather Company—a combination of twenty-one different concerns), with common at 5 1/4 and preferred at 26 3/4.

The Sole Leather Trust (Central Leather Company—a combination of over sixty tanneries), with common at 26.

The Paper Trust (International Paper Company—a combination of twenty-three news mills), with common at 10.

The Paper Bag Trust (Union Bag and Paper Company—a combination of seven different concerns), with common at 6 5/8.

The Writing Paper Trust (American Writing Paper Company—a combination of twenty-eight different concerns), with preferred at 28 1/2 and common at 3 3/4 —almost below the horizon of a quotation.

But perhaps the most conspicuous industrial trust which was not able to secure control of the market is the International Mercantile Marine. That company had behind it the ability and resources of J. P. Morgan & Co., and their great influence with the railroads. It secured a working agreement with the Hamburg American, the North German Lloyd and other companies; but it could not secure control of the Atlantic trade, and in the seven years since its organization has not paid a dividend on its $100,000,000 of stock. Its common stands at 5 1/8, its preferred at 18 7/8, and they stood little better before the Titanic disaster. On the other hand, the $120,000,000 stock of the Pullman Company, which has like influence with the railroads but succeeded in securing a monopoly, stands at 170 3/4.

Efficient or inefficient, every company which controls the market is a "money-maker." No, the issue of "Competition versus Monopoly" cannot be distorted into the issue of "Small Concerns versus Large." The unit in business may, of course, be too small to be efficient, and the larger unit has been a common incident of monopoly. But a unit too small for efficiency is by no means a necessary incident of competition. And a unit too large to be efficient is no uncommon incident of monopoly. Man's work often outruns the capacity of the individual man; and no matter how good the organization, the capacity of an individual man usually determines the success or failure of a particular enterprise—not only financially to the owners but in service to the community. Organization can do much to make concerns more efficient. Organization can do much to make larger units possible and profitable. But the efficacy even of organization has its bounds. There is a point where the centrifugal force necessarily exceeds the centripetal. And organization can never supply the combined judgment, initiative, enterprise and authority which must come from the chief executive officer. Nature sets a limit to his possible achievement.

As the Germans say: "Care is taken that the trees do not scrape the skies."

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