'JNIVEh f^ORNlA LOS ANGt XXIV — 1 MODERN BUSINESS A SERIES OF TEXTS PREPARED AS PART OF THE MODERN BUSINESS COURSE AND SERVICE OF THE Alexander Hamilton Institute Modern Business Uolumes 1. Business and the Man 2. Economics — The Science of Business 3. Business Organization 4. Plant Management 5. Marketing AND Merchandising 6. Salesmanship and Sales Management 7. Advertising Principles 8. Office Administration 9. Accounting Principles 10. Credit and Collections 11. Business Correspondence 12. Cost Finding 13. Advertising Campaigns Corporation Finance Transportation Foreign Trade and Shipping Banking International Exchange Insurance The Stock and Produce Exchanges Accounting Practice and AuDITIlfc Financial and Business Statements Investments Business and the Government editor-in-chief JOSEPH FRENCH JOHNSON managing editor ROLAND P. FALKNER ASSOCIATE EDITORS T. CouLSTON Bolton, Ralph D. Fleming, Leo Greendlinger Charles W. Hurd, Theodore H. Rand-McNally WRITERS AND CONSULTANTS {_ See list on page v of Volume I 3 BUSINESS AND THE GOVERNMENT WKITTEN FOR THE ALEXANDER HAMILTON INSTITUTE BY JEREMIAH W. JENKS IN COLLABORATION WITH JOHN HAYS HAMMOND MODERN BUSINESS VOLUME 24 ALEXANDER HAMILTON INSTITUTE NEW YORK COPYRIGHT . 1917 . I918 . 1919 . 1921 BY ALEXANDER HAMILTON INSTITUTE COPYRIGHT IN GREAT BRITAIN 1917 . 1918 . 1919 . 1921 BY ALEXANDER HAMILTON INSTITUTE The title and contents of this volume as ivelt as the business groiuing out of it, are further protected by laivs relating to trade marks and unfair trade. All rights reserved, including translation into Scandinavian. REGISTERED TRADE MARK • REG. U.S. PAT. OFF. MARCA REGISTRADA • M. DE F. MADE IN U • S • A hf PREFACE The traditional relation of business and the govern- ment in the United States finds its best expression in the aphorism that the best government is that which governs least. Yet even in the period preceding the Great War there had been a very general if some- what reluctant admission, that in certain matters the welfare of the people as a whole required a certain regulation, even restriction, of the activities of the individual. With the coming of war came a reawakening to the worth of our country and a recognition of the prime necessity of governmental dominance in times of crisis. Men yielded cheerfully, even gladly, not only to burdensome taxes, but to daily interference by government officials in the personal affairs of family Hfe. With the return of peace there has been an almost complete reversal of public opinion. The statement that at the present time "we need more business in government and less government in business" has been widely applauded. This marked drift of public opin- ion encounters certain obstacles in the legacies handed down to us from the war period. Readjustment is not yet complete, and how far the pendulum will swing backward is not yet determined. vi PREFACE In the present volume the author has sought to show the underlying principles which govern the relations of government and business. In times of peace as well as those of w^ar they are more intimately related than men often realize. Business men have fre- quently regarded government as an interloper in business affairs, and hostility rather than cooperation for the public good has been a common result. Since however government cannot exist without business, nor business without government, only good can re- sult from any effort to reach a common understanding. The Institute is indebted for the present volume to Dr. Jeremiah W. Jenks, Research Professor of Gov- ernment at the New York University and Chairman of the Board of Directors of the Alexander Hamilton Institute. ]\Ir. John Hays Hammond, the distin- guished engineer and man of affairs. Member of the Advisory Council of the Institute, has taken a deep interest in this work, and thru frequent consultation and discussion of the topics with Dr. Jenks has added elements of value which are gratefully acknowledged. The Editors. TABLE OF CONTENTS CHAPTER I BUSINESS AND THE PUBLIC IX PARTXERSHIP SECTION' PAGE 1. The New Phase of an Old Condition .... 1 2. Business Is the Foundation upon Which CiviHza- tion Is Built 2 3. Business Men as ^Members of Organized GoA^ern- ment . 3 (^4. Business Men Are Guided by, and Themselves May Guide, the State 4? 5. The Government ; the Committee or Agent of the State ^ 5 6. Influence of the Personality of Government Of- ficials 6 7. Conditions Under Which the Government Must Act T 8. Legislatures 10 9. The Executive and the Judiciary 11 10. Nature of Public Opinion .13 11. Influence of Public Opinion on Business Questions 1-i 1^. The Business ^Nlan's Influence on Public Opinion . 15 13. Social and Ethical Questions 16 CHAPTER II TAXATIOX AXD BUSINESS 1. The Funds of Government 19 2. Share in Distribution 20 3. Nature of Taxation 22 vii viii BUSINESS AND THE GOVERNMENT SECTION PAGE 4. Canons of Taxation 23 5. Incidence of Taxes, or Who Pays Taxes? . . 24* 6. Forms of Taxes 26 7. General Property Tax 27 8. Modified Forms \ 27 9. Federal Income Tax 28 10. Other Income Taxes 29 11. Corporation Taxes 30 12. Excess Profits 31 13. Other Countries 32 14. Inheritance Tax 32 15. Justice and Taxation 33 16. Single Tax 34 17. Indirect Taxation 36 18. Internal Revenue Taxes ....... 36 19. Ideal System of Taxation . 37 20. Export Duties 37 21. State Taxation 38 22. Public Finance 38 23. Importance of Public Expenditures .... 39 24. War Expenditures, Loans and Taxation . . .41 CHAPTER III GOVERNMENT, NATURAL RESOURCES AND THE FARMER 1. American Land Policies 43 2. Mineral Lands 43 3. Forests 44 4. Conservation of Natural Resources » ... 44 5. Reclamation Ser\-ice 45 6. Federal Government Grants Land to States . . 45 7. Public Parks 45 8. Plans for Conservation 46 CONTENTS ix SECTION - PAGE 9. Importance of Agriculture 47 10. Fields of Government Activities 47 11. Department of Agriculture 48 12. Agricultural Colleges 49 13. Hatch Act Experiment Stations 50 14. Farm Management 51 15. Institute Work : Smith-Lever Bill 52 16. Extension Teaching 52 IT. County Agents 53 18. Marketing Problem ... 54 19. Federal Farm-Loan Act 55 20. Improvement in Rural Conditions 59 CHAPTER IV GOVERNMENT ENCOURAGEMENT OF INDUSTRIES AND COMMERCE 1. Government Methods of Encouragement ... 61 2. Tariff and Politics 61 3. Tariff Systems 62 4. ^Nlerchantilists and the Theory of Protection . . 63 5. Alexander Hamilton's Views 64 6. Conflicting Economic Interests 65 7. Classification of Products 67 8. Infant Industries 69 9. Who Bears the Burden of the Tariff? ... 70 10. How Far Should a Country Be Self-Sufficient? . 71 11. Education and Diversification 72 12. Diversion of Capital into Less Profitable Industries 73 13. Effect of the Tariff on Wages 73 14. Home Market 75 15. Do Protective Duties Cause Slackening of Indus- trial Progress? 76 16. Foreign Trade a Small Part of Total Trade . . 76 X BUSINESS AND THE GOVERNMENT SECTION PAGE 17. Tariffs Exert Small Influence on Industry . . 77 18. Chief Objection to Tariff 77 19. Machinery in Tariffs 78 20. Goods Under Bond 78 21. Kinds of Duties 79 22. Bounties 80 23. History of the Tariff 81 21'. Effect "^of the War 81 25. Dumping 81 26. Economic Independence of Nations .... 82 27. A Tariff Commission 83 CHAPTER V PUBLIC INSPECTION OF BUSINESS 1. Controversy Regarding Government Inspection . 85 2. Need of Standards in Business 85 3. Weights and Measures 86 4. Salt, Lumber, Grain and Sugar 88 5. Inspection of Meats as a Commercial and Sani- tary Measure 91 6. Inspection for the Export Trade 92 7. Pure Food Laws 93 8. Banks and Insurance Companies 96 9. Protection of the Public by Examination and Cer- tification of Certain Professions .... 96 10. Certification of Other Servants of the Public . . 98 11. Quasi-Oflicial Privileges 98 12. Limitations of Inspection 100 CHAPTER \1 PROBLEMS OF EMPLOYMENT 1. The Labor Contract 103 2. Constitutional Limitations 104 CONTENTS xi SECTION PAGE 3. American Labor Policy . 105 4. Results of Regulation 106 5. New Needs of Modern Industr}- 106 6. Extent of Losses 107 7. The Responsibility for These Conditions . . . 109 8. The Part of the Government 109 9. Extent of Requirements Ill 10. Regulation Rather than Proliibition .... Ill 11. Women and Children 112 12. Minimum Wage 115 13. Laws in the United States 115 14. Decisive Experience Still Lacking 116 15. Extent of Low Wages 116 16. Caution in Adopting the Minimum Wage . . .117 17. Present Regulations Beneficial as a Whole . .117 18. New Risks in Modern Industry 117 19. Laborer and Insurance 118 20. Social Insurance o .119 21. Life Insurance 119 22. Workmen's Compensation 120 23. Employers' Liability 121 24. Scope of Compensation Laws 122 25. Limited Benefits 122 26. Assurance of Benefits . 123 27. Simple Administration 123 28. Results of Workmen's Compensation .... 123 29. Health Insurance 124 30. Field and Scope of Health Insurance .... 124 31. Benefits Lender Health Insurance 125 32. Sources of Funds 125 33. Administration and Its Peculiar Difficulties . . 125 34. Results of Health Insurance 126 35. Insurance Against Invalidity and Old Age . . 127 36. Compulsory Old Age Insurance 128 xii BUSINESS AND THE GOVERNMENT SECTION PACK 37. Old Age Pensions 128 38. Insurance Against Unemployment 129 39. Compulsory Insurance Against Unemployment . 129 40. General Results and Prospects of Social Insurance 130 41. Federal War Compensation Laws 133 42. Soldiers' and Sailors' Insurance 134 CHAPTER YII PROBLEMS OF EMPLOYMENT (Continued) 1. Labor Organizations 137 2. Labor Unions; Syndicalism (I. W. W.) : Social- ism; Bolsbevism 137 3. Syndicalism (I. W. W.) 139 4. Socialism 140 5. The Relations to Government 143 6. The Boycott, Picketing 145 7. Injunctions in the Control of Unions .... 146 8. Financial Liability of Members of Unions . .146 9. Public Inspections 147 10. Industrial Commissions 149 11. Results 149 12. Immigration 150 13. Americanization 154 CHAPTER VHI PUBLIC SERVICE CORPORATIONS 1. Public Service Corporations Need Special Recog- nition 156 2. Why Different from Other Industries 157 3. Meaning of Natural Monopyoly . ." . . .158 CONTENTS xiii SECTION ^ _ ^ PAGE 4. No Reasonable Competition Between Railroads in Same Territory 159 5. Public Service Corporations Tend Inevitably To- ward Monopoly 159 Characteristics of Public Service Enterprises . . 161 Substitution Impossible 161 Competition Impossible 162 Assisted by the Government in a Peculiar Way . 162 Bad Practices in the Past 163 Public Service Character not Recognized . . . 163 Systematic Regulation a Recent Matter . . . 164 Powers of Regulating Commissions .... 165 Commissioners, How Chosen 165 Commissioners Must Possess High Qualifications . 166 Status of Regulating Bodies 166 State Versus Local Regulation 166 Advantages of State Regulation 167 Optional Home Rule 168 Achievements of Regulating Bodies .... 169 Powers of Commissions 169 Net Income and Distribution 170 Valuation of Properties 171 Points in Dispute 172 Regulation of Security Issues 173 Regulation of Public Utilities Still in Develop- mental Stage 173 CHAPTER IX LOCAL PUBLIC UTILITIES 1. Multiplicity of Municipal Activities .... 175 2. Municipal Ownership in the United States : Water- works 176 3. Electric Light Plants 176 xiv BUSINESS AND THE GOVERNMENT SECTION PAGE •i. Gas Works 177 5. Street Railways 178 6. Municipal Ownership in Europe 178 7. The Issue: Regulation or Ownership .... 178 8. Why Municipal Ownership Is Undertaken . . 179 9. Moral Aspect of Municipal Ownership . . . 180 10. New Point of View 180 11. Favorable Interest Rates Secured 181 12. No Dividends on Watered Stock 181 13. Expense of Regulation 182 14. Better Labor Conditions Under Municipal Owner- ship 182 15. Great Betterment in Social and Political Condi- tions Claimed 183 16. European Conditions Different from Those in the United States 184 17. Municipal Ownership in France 185 18. Policy of Favoring Workmen by Reduced Rates . 189 19. Poor Systems of Municipal Accounting . . . 190 20. Modern Development Effects Advantages of Mu- nicipal Ownership 192 21. Development of Holding Companies . . . .194 22. Municipal Government Still Inefficient . . . 194 23. Municipal Ownership Advisable Where Health, Sanitation and Public Safet}'^ Demand It . . 195 24. Where Profit Is the Predominant Motive, Private Management Is Better 195 25. Issue Must Be Settled by Experience . . . .196 CHAPTER X TRUSTS AND COMBINATIONS 1. No Clear-Cut Government Policy Recognized . .197 2. Definition of Trusts and Combinations . . . 198 CONTENTS XV SECTION " PAGK 3. Why Government Interferes 198 Policies Followed by Germany 200 Policy Followed by England 201 Canadian Policy 201 Methods of Regulation Under the Canadian Act . 202 Considerations in the Canadian Policy . . . 203 Beginnings of American Anti-Trust Movement . 203 Sherman Anti-Trust Act 205 "Monopoly" in the Sherman Act 205 Reasonable and Unreasonable Restraint of Trade 205 Standard Oil and Tobacco Decisions .... 206 United States Steel Corporation Decision of 1915 20T International Harvester Company Decision of 1914 208 Sound Business Principles Recognized .... 209 Affirmative Decision by U. S. Supreme Court Rec- ognizes Honest Business Methods . . . 210 The Real Question Involved 210 Public Interest as Shown by Facts . .211 Attempts to Clarify the Sherman Anti-Trust Law 212 Powers of the Federal Trade Commission . . . 212 Readjustment of Business and Prescribing of Ap- propriate Decree in Equity Courts .... 213 Power of Investigation 21^ Power to Require Reports and Classify Corpora- tions 214 Power to Prevent Unfair Competition . . . 214 Advantages and Disadvantages of These New Laws 215 Increasing Power of Federal Government . . .216 Distinction Between Commerce and Manufacturing 21T Federal Incorporation or License for Interstate Commerce 21T Present Situation 218 XXIV— 2 xvi BUSINESS AND THE GOVERNMENT CHAPTER XI THE POSTAL SERVICE SECTION PAGE 1. Importance of the Postal Service 220 2. Development of Postal Service 221 3. Activities of Post Office Constantly Expanding . 223 4. Particular Reasons for Government Management of the Post Office 223 5. Possibility of Governmental Revenue .... 224 6. Social Aspects Prominent in the Post Office . . 225 7. Should Be Run Efficiently and Economically . . 225 8. Financially a Failure 226 9. Proper Accounting Methods Lacking .... 227 10. Other Factors Causing Inefficiency .... 228 11. Reasons for the Parcel Post 230 12. Parcel Post Introduces a New Principle . . . 230 13. Post Office Has Never Determined Costs . . .231 14. Government Urged to Take Over Telegraphs and Telephones 232 15. Unprogressiveness of Government Plants . . . 234 16. What Guiding Principles Should Be Followed? . 235 17. Government Should Act on Basis of Accurate Knowledge 236 18. Special War Services 236 CHAPTER XII SHOULD PUBLIC MANAGEMENT BE EXTENDED? 1. Government Management not a Panacea . . . 238 2. Advantages at Times Greater than Disadvantages 238 3. Importance of Health 239 4. The War and the Extension of Public Management 239 5. Extension of Government Management in the United States 240 CONTENTS xvii SECTION PAGE 6. What Will the After-Effects Be? 241 7. Extension of Post Office Work 242 8. Dishonest Financial Methods Must Stop . . . 243 9. Government Management of Railways in Canada a Failure 244 10. Government-Managed Railroads in France not a Success 246 11. Conditions Under Which Government Management May Be a Success 247 12. Many Erroneous Statements Made as to Costs . 249 13. Fallacies in Government Figures 249 14. Why Private Management Is More Efficient . . 252 15. Private Business Dynamic 253 16. Government Management Seldom a Source of Revenue 253 17. Dangers of a Large Civil Service 255 18. Could Dominate Country Thru Vote .... 257 19. Questions to Be Asked 257 20. The Public Must Be Sure of Facts . . . .258 21. A Remedy to Be Sparingly Applied .... 259 22. Fundamental Principle Is Public Welfare ... 260 CHAPTER XIII THE GREAT WAR: ITS EFFECTS, ITS INFLUENCE, ITS LESSONS 1. War Cuts Deep into Economic Life .... 262 2. War Preparations 262 3. Economic Control Born of War Conditions . . 264 4. The United States Becomes a Creditor Nation . 266 5. American Purchase of Foreign Enterprises De- sirable 268 6. Inflated Prices and Credits 269 7. Profiteering 272 xviii BUSINESS AND THE GOVERNMENT SECTION PAGE 8. Labor 273 9. Industrial Changes 276 10. Railways 277 11. Food and Fuel 279 12. Securing Popular Cooperation 281 13. Growth of Real Democracy 284 14. Art and Literature 285 15. Growth of National Feeling 286 BUSINESS AND THE GOVERNMENT CHAPTER I BUSINESS AND THE PUBLIC IN PARTNERSHIP 1. The new phase of an old condition. — Five thou- sand years ago the emperor of China was beheading the sellers of distilled liquors while wine sellers flour- ished unmolested. Even at that far distant date gov- ernment was exercising control over business. Within the bounds of the history of business as it exists today in its complicated and interlocking rela- tionships, government influence has always been a paramount consideration. Altho recognized in the past, such influence has attained its present strength only within the last few years. The Great War and the period of readjustment that has followed it have brought to most of us a new idea of government and the part it has to play in our business life. The mighty grasp that it took, from saying who should fight and who should work — from compelling a per- mit for the importation of a banana or the sale of an ounce of butter to the limitation of profits by fair price commissions and excess profits taxes, has led 2 BUSINESS AND THE GOVERNMENT us to question and halt between two opinions, at every business move. We cheerfully revolutionized our at- titude toward govermental activities in the face of the dire dangers that threatened our civilization. It is time that we attempt to picture to ourselves the moral relations of business and the government under the new normality that is springing from the marriage of our new ideas with our former conceptions. Now as heretofore, of course, business is a type of social activity, a dealing of man with man. In this volume the viewpoint is that of the business man look- ing upon himself as a citizen in the state and upon the state as a prominent, in many respects, even in times of peace, a dominant factor in determining his activi- ties as citizen and as business man. 2. Bimness is the foundation upon which civiU- zation is built. — Architecture, music, literature, mor- als, even religion, all have in greater or lesser degree a business basis essential to their development. Wit- ness the need of organization and money -getting skill in secretaries and executive heads of all types of phil- anthropic and other kinds of social organizations. James Russell Lowell, in characterizing the value of a state as "the amount it has contributed to the knowl- edge, the moral energy, the intellectual happiness and the spiritual hope and consolation of mankind," never- theless spoke of material success as good, as the neces- sary preliminary to these better things. The whole business game, too, is a form of social action and re- action, an intertwining of forces, of wills and of con- THE PUBLIC PARTNERSHIP 3 ditions out of which grows, thru the likeness of men and the community of their interests, an orderly busi- ness society and normal social development. It is the basis of civilization. 3. Business men as members of organized govern- ment. — Owing to the normal differences of nefeds, opinions and judgments of the different individuals in a community, men have necessarily organized them- selves for the purpose of regulating their social activi- ties for the good of the whole. The State is all of us organized for the purpose of ruling. "Scientific Anarchists" who are disposed to rebel against the checks put upon individual activities by the force of government believe that merely a voluntary organi- zation for specific purposes is sufficient to satisfy social needs. They believe that the ideal state needs no other than voluntary groups like Sunday schools, engineering societies or private business firms to pro- mote business, recreation and all other types of social activities. But recognizing, as we must, the hamper- ing influence which actual governments exert at times upon the legitimate and even noble aspirations of the good, we must likewise recognize the presence of the evil doers among us. We must note also that even the very good have differing views and that the best men are at times driven by their consciences into un- jnelding stubbornness, so that if society is to be or- derly, and if the community as a whole is to move toward practical accomplishment, force must needs at times be employed. There must then be this or- 4 BUSINESS AND THE GOVERNMENT ganization for purposes of ruling; and the business man is constantly coming into contact with the organ- ized community either in town, or state, or nation. 4. Business men are guided by, and themselves may guide, the state. — The organized community in times of peace affects the business man in various ways. Sometimes it assists him directly, as when, thru the establishment of lighthouses, the Government enables him to guide his ships safely thru tortuous channels or makes known to him the existence of hidden reefs. Sometimes the state regulates his ways of doing business, as when the Federal Government controls the acts of our railways or when the Public Service Commissions of our different states decide upon the accommodations that must be furnished by street rail- way companies to their patrons. Sometimes the state itself appears as the owner and manager of certain classes of business, as when the United States Post Office Department manages an important phase of the transportation business, or when certain cities manufacture and sell to the inhabit- ants gas or electricity, or provide their citizens with their water supply. In all these and in many other ways all of us in our organized capacity as ruling power are assisting, controlling, directing or man- aging each of us in our unorganized capacity as individuals. In the instances cited the state is di- rectly affecting the business man in his business life. Likewise thru the police departments or health de- partment, it controls his personal acts in other ways THE PUBLIC PARTNERSHIP 5 and in case of need thru the military power — neces- sarily placed in the hands of the state — it takes away, temporarily, his personal liberty, compelling him to sacrifice his business for the sake of the community or even to yield up his life for the conmion good. The business man, however, is not merely passive and acted upon by his fellow citizens. He is himself under all forms of government, especially in a repub- lic, an active member of the state, and as such he helps to direct its work. Just criticism has been leveled at business men on account of the little attention that they have often heretofore paid to their privileges and their duties as citizens. The experiences of the war, when rightly heeded, have put into our citizens a new public spirit that will impel more of our most competent citizens to put their business gifts at the disposal of the government and to insist that the gov- ernment do its work in more business-like ways. 5. The government, the committee or agent of the state. — Whenever any group of individuals desires to take common action, it is usual for it to select a few to do its active work. Eveiy business corporation, every church, every literary or scientific association, every social club, is organized with its board of direc- tors, its officers, its chief executive, to put into effect the determinations of its members. Likewise the state — society as a whole organized for the purpose of ruling — has its grand committee to formulate and put into effect its will. That committee we call the government. The si)ecial subcommittee that formu- 6 BUSINESS AND THE GOVERNMENT lates its rules of action is the legislature — to a slight extent, the judiciary — while the executive puts these regulations into effect. Our Government is thus a definite group of men who have a task to perform for us and who can be held strictly responsible to us. There is no way for the state effectively to express its will save thru the government. The individual members of the state by public addresses, newspapers and books may speak their individual wills, but in their organized capacity they can act only thru their government. When Great Britain makes a loan, a small committee of its executives with the approval, given, usually in most general teiTns, by its parlia- ment, makes the bargains and issues the bonds. When the President of the United States in his offi- cial capacity deals with the Emperor of Japan act- ing officially, the act is that of all of us, citizens of the United States, treating with all of the citizens of Japan, tho thousands or even millions of individuals in both countries may be protesting not only most bit- terly in their hearts but vociferously with their tongues. The government in action is no lofty abstraction. It is a few human beings, usually men of capacity. But if it be one dominating will like Napoleon or the mad Nero, its acts are still the acts of the state and all the citizens must share the responsibility. 6. Influence of the personality of government offi- cials. — Too often individual citizens have spoken of the government as if it were some far off, superior. THE PUBLIC PARTNERSHIP 7 abstract being which does not come into direct contact with ordinary individuals. The war has brought the government into closer touch with most of us. We see that it is made up of men with whom we deal personally and it makes a great difference in the acts for which we are all responsible whether a Buchanan or a Lincoln, a Jackson or a Polk, a Roosevelt or a Wilson, a Jefferson or a John Adams occupies the Presidential chair. Possibly of even greater signifi- cance in times of peace than the personality of the president is the local town official. Is he a progress- ive, liberal-minded man or a stingj^ ignoramus? It is the will of such a one that determines the qualifica- tions and the salary of the country school teacher and that is of prime importance to the ordinary citi- zen. In the one case the character and development of his children ma}' be at stake; in the other it may be only an unnoticeable change in the form or amount of his taxes. In any event, whatever the grade of the official, he stands for us; and we as business men may determine whether or not he represents our wills and our wishes and whether he is a man of the type to represent us. The business man needs therefore to consider his relations with his government as a prac- tical human study. 7. Conditions under which the government must act. — Few people who have not taken an active part in government or who have not been thrown into practical contact with government officials, have a clear conception of the conditions under which these 8 BUSINESS AND THE GOVERNMENT officials must do their work. This ignorance often leads to most mijust criticism. To meet the condi- tions suggested by such criticism at times would re- quire supermen, not human beings. Every business man knows the value of time. The head of any large corporation must count his minutes. The time of interviews with subordinates must be carefully allotted in proportion to the importance of the decisions to be reached ; the time for seeing visitors must be restricted. But consider the circumstances of the President of the United States even in times of peace. Most presidents have felt that it was de- sirable to see practically every visitor who wished to call, altho in many cases the only business was to satisfy personal curiosity. jMembers of the cabinet or persons not belonging to the government whose views are required or those who have most important dealings with the government must be given sufficient time — possibly several interviews. Arrangements must be made for such individuals, or for representa- tive delegations dealing with important matters, to have time for discussion. Hundreds, even thousands, may come in one day. The president's secretaries, learning in advance the people and their business must allot this precious time — a thoro interview for some, a few minutes' conversation with another, time for a one or two-minute decision with a third, and for a throng who have called "merely to pay their respects," an opportunity to walk past in line and in a whirling THE PUBLIC PARTNERSHIP 9 second to shake the president's hand and look into his face. Reahzing how enormous is the burden of responsi- bihty when a wrong decision may involve the country in war, or the approval of a wrong internal policy may change the entire structure of the government for good or ill, the business man may see how imperative it is that the president's work be well organized and that he surround himself with counsellors of the most practical, wisest type, both in his cabinet and in his personal secretaries and aids, for they must in prac- tice make many decisions for which he must bear the responsibility. Again, when one notes the great mass of corres- pondence that must be handled by the president's office, or that of any of the heads of departments, it is seen that these higher officials like the heads of great business corporations can give attention only to the matters of highest import. The largest part of the work must be left to subordinates ; and even on matters requiring action by the highest officials, the burden of detail in gathering information and fram- ing replies, even when great events are at stake, often falls upon subordinates. Most citizens do not realize these conditions. The business man should realize them and in consequence should see to it that there is no begrudging higher officials every assistance needed in order to lighten their tasks; nor, on the other hand, should he spare 10 BUSINESS AND THE GOVERNMENT any effort to see that only those with executive quah- fications and sound judgment on business as well as on political affairs, occupy the higher positions. A clear conception of government both in spirit and working method, if thoroly instilled into the minds of the business men of the country, would sound tlie knell of the demagog's hopes and end his pernicious activities. 8. Legislatures. — The business community finds itself under restrictions built around it by laws. In consequence the methods of lawmaking as well as the character of the lawmakers should receive atten- tion. Doubtless Ihe character of our legislators and our legislative methods have greatly improved, but these are matters of the gravest significance and our lawmakers are rarely experts. We would not think of intrusting a banking business to one not trained as a banker, or the erection of a great building to one not trained as an architect; but the making of tax laws — a process touching the fortunes and the welfare of millions, a process more complicated in its possi- bilities for good or for evil to a community than the erection of manj^ buildings or the failure of dozens of banks — we do in part intrust to men utterly un- trained in the principles of taxation. Of course, the leading men on the important committees of Congress have acquired some training by experience, but this differs materially from scientific training. Thru methods of formal procedure largety judicial THE PUBLIC PARTNERSHIP 11 in nature the British Parliament has succeeded in largely uprooting corruption in legislation. With us, investigations that have appealed to the people's sense of honor and to public sentiment thereby aroused have accomplished much the same end as regards corruption. But these means still leave very much to be desired from the viewpoint of thoro, scientific investigation and decision. The whole matter of legislation in business affairs is felt by many business men to be an uncertain, costly procedure from which they can expect little in the way of benefit or of certain security against harm. There are many improvements that can be made in legislative methods. The most noteworthy improve- ment now under consideration is that of a national budget system to coordinate revenues and expendi- tures. 9. The executive and the judiciary. — The work of the executive whether president, governor or mayor, has usually affected the business man in a much less di- rect way, except in so far as these executives determine legislation. Beyond that, their influence upon busi- ness has been largely seen in making appointments, in accepting information which might determine the interpretations of legislative action, the method of the enforcement of the laws, or even in the granting of privileges, the awarding of contracts, the doing of business in connection with routine work. 12 BUSINESS AND THE GOVERNMENT Perhaps the chief criticism of the higher executives has come from the fact that they have failed to give protection to business interests, especially those abroad, or to make appointments of officials who would conduct the government's work, where it affected business, by methods that were reasonably economical and efficient. In most of these lines, especially in connection with municipal govermnent, there has been great improvement of late years, tho much remains to be desired. The chief remedy for these evils is to divorce politics from business and see to it that appointments are made thru merit rather than as a party reward. And, of course, the business men can see to it that the executives get sound in- formation on business questions whenever they so de- sire. The evils of inefficiency were in many depart- ments greatly increased during the Great War, tho probably the cause was primarily the enormous and sudden increase of work and the consequent use of inexperienced officials rather than either corruption or partisan influence. In the interpretation of the law by the judges, it would, of course, be improper for the business man to attempt to influence the opinion of the judges ex- cept by seeing to it that suitable and accurate informa- tion is furnished, whenever opportunity offers, either in the presentation of cases before the court or thru the public press. Judges wish to form their opinions accurately upon evidence and to base their decisions upon law ; but aside from the technical evidence there THE PUBLIC PARTNERSHIP 13 is always a mass of information accessible to the pub- lic, and to the judges as part of the public. This more or less unconsciously shapes the opinions of every man — and fortunately even judges are human. 10. Nature of public opinion. — The opinion of the public usually determines the acts of legislators and of executives, if that opinion is decided and clearly expressed. We are all of us largely influenced, either consciously or unconsciously, by those with whom we come in contact. Very many of the discussions re- garding public opinion overlook the fact that the en- vironment of most individuals is distinctly limited. Each man numbers among his friends and acquaint- ances only a few; and his opinions, his judgment, his course in life are determined chiefly by the judgment of those few. Here and there the opinion of a team- ster may be affected by the word of a distinguished lawyer, but only rarely and indirectly. The opin- ion of the teamster is likely to be that of other team- sters, those who come under similar influences and have similar associations. Likewise, the judgment of the housemaid as regards clothing, social proprie- ties, the natm'e of the service, is. the public opinion of the housemaid's society, not that of the mistress. And when it comes to industrial action determined by legislators, the opinions of each member of the great voting groups is likely to be swayed in the same way as that of his fellows in his own social and busi- ness class. Political leaders are not mistaken in their methods XXIV— 3 14 BUSINESS AND THE GOVERNMENT of dealing with different classes of individuals. They work upon trade unions thru trade union officials, upon members of certain nationalities, Italian, Pol- ish, Bohemian, thru influential individuals of those nationalities, especially thru those who come into per- sonal contact as members of the class that it is desired to reach. Public opinion is not one opinion; it is a kind of composite picture of various types of opinion built up from the conversations and influences of mem- bers of each one of the separate social groups. 11. Influence of public opinion on business ques- tions. — How influential this public opinion is may often be seen in connection with matters affecting the business welfare of the community. If prices are rising and the cost of living is rapidly increasing, most classes in the community are affected and there is likely to rise in a short time a demand for investigat- ing commissions, for direct action on the part of mayors and governors, for legislative acts to be passed by state legislatures or by Congress. In most cases such demands are made, as can readily be seen by noting the nature of the bills introduced, without any fundamental knowledge of business principles. What seems at first hand to be a cause of the high prices such as high freight rates or profits of middle- men, are taken up, attacked, discussed and possibly legislative action is taken, even tho there has been no wrong or unbusinesslike action on the part of any of the parties mentioned, and altho the legislative action can have no good effect. The action has been THE PUBLIC PARTNERSHIP 15 a reflection of the unenlightened opinion of un- trained groups. It should be always remembered that ignorance plus ignorance does not equal wisdom. On the other hand this same public opinion strengthened by a feeling of justice on the part of employers of labor often leads to increases in wages, properly earned and greatly needed. At times, how- ever, the pressure of this public opinion acting thru legislatures, possibly even upon courts, brings broad- est injustice. Still again, such opinion often has a decided influence upon the outcome of strikes or other disputes between great classes in the community, the general sentiment in the main being probably right, altho, frequently, in minor matters, mistaken. 12. The business man's influence on public opinion. Probably nine-tenths of the questions that affect our social life most intimately have their origin in business. All matters of wages, of prices, of freight rates — everything that has to do with our material life touches business. The business man, therefore, if he is broad-minded, intelligent, conscientious, is really the authority that should be consulted. He is the man who should make an effort to give to the public the information which he himself possesses, and to give it in such a way that it may have due influ- ence in shaping public questions. For example, the action of many of the railroads in printing at their own expense in the public press definite statements of fact and positive conclusions regarding matters pending before legislatures, is only to be commended, 16 BUSINESS AND THE GOVERNMENT as long as they give the facts accurately and fully. An active part in public matters by business men will prove to be of the greatest value to business itself and from that viewpoint alone it is justified. On the other hand, govermnent officials are usually desirous of securing accurate information, of making right judgments on public matters. They, there- fore, welcome any information given either directly or thru the press, so long as that information is accurate and fair. We should realize that by far the largest part of the time of most men is devoted to business, i. e., to getting a living and supporting those dependent upon them. While we should always keep in the fore- ground the development of our higher interests, in- tellectual, moral, religious, we should never lose sight of the fact that by the great majority of the people chief attention must be given to earning a living and conducting business affairs. Under the stress of war we saw thousands of able business men from pa- triotic motives gladly sacrifice their personal inter- ests to serve loyally the government in its time of need. But even in time of peace it seems clear that one of the chief duties, if not the chief duty of the business man, aside from conducting fairly his own daily work, is to keep himself informed on all ques- tions that vitally affect the public interest thru poli- tics, and to exert his influence in politics by all fair means. 13. Social and ethical questions. — A very consid- THE PUBLIC PARTNERSHIP 17 erable part, however, of our influence upon society is exerted directly upon the pubhc and not indirectly thru the politicians. Strikes are more likely to be settled, not by legislation or political action, but by both the strikers and their employers feeling that the interests of the public must not be forgotten in their private conflicts. Honesty and fair dealing in mer- chandising, while affected by the criminal law, is still more affected by the fact that a reputation for unfair dealing is likely to prove unprofitable in business. The social condemnation of one's associates has far more to do with moral, upright living than any acts of the legislature, however severe on the one hand or encouraging on the other. We should see to it then that on all questions of business that are matters of right and wrong the business man not only forms for himself a sound judgment, but that he gives vigorous expression to that judgment thru associations to which he may belong, thru the press, thru conversation with his fellows, until, in fact, his shaping of public opinion creates and maintains the highest moral and ethical standards. REVIEW In what departments of business does a man most need an inti- mate knowledge of human nature in order to insure success ? Think out carefully the number of peojile of all classes who take any part in the production of silk neckties, from the begin- ning of the production of the raw silk to its purchase by the wearer. What are the forces that bring these various grouj)s of pro- ducers into such relations that the finished necktie is the result? Consider carefully the various places and ways in which any government affects the acts of any of these producers. 18 BUSINESS AND THE GOVERNMENT Distinguish clearly the meanings of the words: society, state and government. How far and in what ways is it right for a private citizen to attempt to influence the opinion of judges? Of the President of the United States? How far ought members of the legislature to yield their judg- ments regarding action on any public measure to the wishes of their constituents? CHAPTER II TAXATION AND BUSINESS 1. The funds of government. — In times of peace as well as in war the work of government must be car- ried on by men and women. These men and women must be supported. To do its business the govern- ment must have buildings, apparatus, machinery, transportation, laws. It must at times have legal ad- vice. It must employ examining physicians ; it must engage scientific experts ; it must supervise costly ex- periments. It must make huge expenditures to meet its needs. It must respond to insistent demands to promote the public welfare. For the carrying on of its work, therefore, the government must be provided with funds. Inasmuch as every citizen in the com- munity has a share in the benefits of government and inasmuch as all governments are of necessity in a posi- tion to enforce their will, it has become customary to exact contributions from their citizens. In earlier, cruder times these contributions took the form of gifts to the rulers, and these gradually became mere mat- ters of custom presented only when asked for and assuming the form desired by the ruler. From this system of enforced gifts have gradually grown up the various types and methods of taxation. 19 20 BUSINESS AND THE GOVERNMENT 2. Share in distribution. — The annual cost of gov- ernment in the United States, in times before the war, was about $4,000,000,000, tho not all this sum was raised from taxation. Part was secured by the sale of public lands, by licenses, the Post Office, conduct of public utility corporations and similar activities. We need, therefore, to recognize the difference between income from taxation and from other entirely differ- ent sources. Among the highly civilized nations taxes are high, but the returns from them in the way of protection, care of property, prevention from in- jury to the person, administration of justice and other conveniences, are correspondingly great. It was reported in 1914 by the Interstate Com- merce Commission that the railroads of the United States which have an annual income of $1,000,000 or more, paid taxes which averaged $53 more per mile than in the previous year. Everywhere the burdens of government increase with the modern de- mand for greater social service. What the average percentage of taxes to business incomes may be it is impossible to estimate accurately, but it is not unusual for individuals and some business concerns even in peace times to pay as much as 10 per cent of their in- come for the support of government. In war times they pay vastly more. The California Tax Commis- sion in 1906 estimated the percentage of taxes to the true value of farm property' at 1.14 per cent; the per- centage of taxes to gross returns at 6.88 per cent and the percentage to net returns including the farmer's TAXATION AXD BUSINESS 21 compensation at 9.88 per cent. In contrast, the com- mission showed that in the manufacturing industries of the state, the percentage of taxes to net product was a httle more than two per cent. High as some of these figures seem, they are much less than those found in other countries. In India, for example, in rural districts it used to be common for the farmer to be compelled to give one half or even more of his net crop (i. e., crops less cost of production) for govern- ment use. Sometimes 20 per cent of the gross crop was taken as an equivalent. Under the British ad- ministration the general policy of taking about 2.5 per cent of the net crop as a tax has been fairly well es- tablished. As we know, under, the pressure of the world war, some govermnents took even as high as 80 per cent of the excess profits gained in the muni- tions plants. These figures show inequalities of taxation. But they are cited here primarily to emphasize the point that the payment of taxes is an important element in the cost of doing business. Taxes constitute one of the shares of the product which the state takes from all. Every one pays taxes in some way, and since the governments by their methods may either stimu- late or discourage, or even destroy business and in- dustry, one sees that the importance of the tax prob- lem can scarcely be overestimated. The absolute necessity of the Government securing its income, the vital fact that the Government affects for good or ill practically every activity of all citizens, 22 BUSINESS AND THE GOVERNMENT and the constructive or destructive influences of taxing methods emphasize the gross injustice of tax dodging, the duty of paying just taxes wilKngly, and the im- perative need of intelligent study of tax problems. The State's income must be secured. If, thru cheat- ing, I evade paying my share of taxes, my neighbor who is honest must pay more than his proper part, and morally speaking, I might as well pick his pocket. 3. Nature of taxation. — Professor Bastable in his "Public Finance" defines a tax as "a compulsory con- tribution of the wealth of a person, or body of persons, for the service of public powers." While a tax may be levied upon property, it always falls upon a person who must ultimately, pay for it. The power of shift- ing the burden of taxation from the shoulders of the taxpayer upon others makes it extremely difficult in many instances to determine what is the best fomi of taxation. The impairing of national capital by wrongly placed taxation may ultimately result in the breakdown of national efficiency. The real source of the payment of taxes is income. The levying of any taxes out of proportion to the income of any group is a great error, leading either to fraud or to business ruin. When, under the general property tax, the owner of a bond of which the rate of interest is four per cent, must yield one half this income in taxation, it is evi- dent that gross injustice is done. The income of a widow or child taxed to this extent is unduly and wrongfully burdened. TAXATION AND BUSINESS 23 It should always be made clear in justification of any tax, that the public good secured by the tax over- I)alances the hardships of the individuals who pay it. "If taxation requires restriction of the necessary ex- penditure of the citizen and a lowering of his standard of living, it is certain that the money had best be left in his hands. When aggregate enjoyment is secured at the expense of the industrial efficiency of the unit, it needs no argument to show that such taxation is unwise." 4. Canons of taxation. — Adam Smith, the father of modern political economy, in his "Wealth of Na- tions," written about 1776, laid down rules of taxation Avhich have been generally accepted. They were: 1. Equality. "The subjects of every state ought to contribute toward the support of government as nearly as possible in proportion to their respective abilities." 2. Certainty. "A tax ought to be cer- tain and not arbitrary." 3. Convenience. "Every tax ought to be levied at the time and in the manner most likely to be convenient for the contributor to ])ay it." 4. Economy. "Every tax ought to be so contrived as both to take as little and to keep out of the pockets of the peo])le as little as possible over and a})ove what it brings into the public treasury of the state." To these established canons others have been added. For example, Bastable says, "Taxation should be ])roductive, . . . taxation should be justly distrib- uted . . . and a tax system should be elastic." 24 BUSINESS AND THE GOVERNMENT 5. Incidence of taxes, or who pays taxes? — It has already been suggested that the man who first pays the tax does not always bear the burden. For example, a tax levied upon a building may be shifted by the owner upon the landlord, who rents it. He, in turn, may shift it upon his tenant and the tenant in turn may shift it, if he is a merchant, upon the purchasers of his goods. Three conditions may be presented to* show how the pajTnent of taxes may be made by different gi'oups. 1. If an industry has reached a certain point in its development when the advantages of a large scale organization have been secured, the manufacture of the product will continue at substantially a constant cost as, for example, in many branches of the textile industry. The selling price of textiles is ordinarily the cost of production plus a small margin of profit. Competition holds the returns at about this point, and under present conditions a tax levied on that industry would be added to the cost of the goods and made a part of the price. Therefore, the consumer would pay the tax in his prices. If the demand should fall off, it might well be, that to get rid of a temporary oversupply, the tax would be assumed by the pro- ducer thru a lowering of the price, altho this might result in the forcing out of business of the least suc- cessful producer. 2. To a large group of commodities, especially the jDroducts of the farm, forest and mine, the so-called "law of diminishing returns" applies; that is, increas- TAXATION AND BUSINESS 25 ing production of such articles beyond a standard quantity is possible only under a more than propor- tionately increased cost. A land tax under such cir- cumstances becomes part of the cost of the product to the man at the margin of cultivation; that is, the man who can just survive economically and carry the burden of the tax. It is the cost of production, in- cluding the tax, by this man which really marks the limit of the market price. Those whose land is more productive or who for other reasons produce more cheaply will naturally make a larger profit as they will sell at the same price. If, thru a lessened de- mand, this marginal producer at the gi'eatest cost is called upon to assume the tax thru lowering his price, he may be forced to sell out. The tax might thus fall upon the producer who takes his place, and thus again be passed on to the consumer. 3. At the other extreme are the "industries of in- creasing returns" in which an added amount of capital will frequently give a more than proportionate return in product. These industries, as, for example, street railways, electric lighting plants or manufacture of patented articles, are monopolistic. If his business is conducted purely for profit, the owner will fix the price at the point where he will get greatest net re- turns. An increase in price will weaken the demand ; a decrease in price will strengthen the demand. Ex- periment will show the point at which it is unwise to lower the price further because the demand does not increase enough to add to the total profit. If at this 26 BUSINESS AND THE GOVERNMENT point a tax is levied it increases the price and reduces the demand. Under these conditions the monopohsts may find it most profitable to assume part or all of the tax so as not to decrease the demand too much. A monopolist controlling the salt supply of a coun- try, a necessity, could probably shift the tax upon the consumer, since the demand is established and sub- stantially constant. The owner of a monopoly of a luxury would find it more difficult to shift the tax since the increased price would more readily check the demand. In cases where the price is fixed by custom or by convenience in making change, as is a street car fare, the monopolists would find it extremely difficult to shift the tax and must therefore bear the burden. From these examples it is seen that the strength of business groups, fixed largely by social conditions, determines who finally assume payment of the taxes. 6. Forms of taxes. — Taxes are usually classified as direct and indirect. The direct tax is paid by the person upon whom it is levied. The indirect tax is levied on commodities or persons producing com- modities with the expectation that the owners of the commodities will be able to shift the burden to some- one else. The direct form of tax has some advantages. It is easier for the tax officials to estimate the revenue and to provide for the collection. But, direct taxes are generally unpopular. They frequently encour- age fraud. Indirect taxes are popular, since the TAXATION AND BUSINESS 27 burden is concealed. The indirect taxes, however, are often difficult to collect; they lead to government extravagance in expenditures because the income is uncertain, and they often lay a heavy burden upon in- dustr^^ The most common direct taxes are the gen- eral property tax, the income tax, the inheritance tax and the excess profits tax. The most typical forms of indirect taxes are the tariff and excise taxes. 7. General property tcuc. — In earlier times when the chief forms of property were land and personal property in the forms of animals, tools, weapons and household goods, a general property tax could be levied with a reasonable degree of certainty that there would not be grave injustice done in the inequality of tax burdens. Abihty to pay would be measured rea- sonably well by the values of the property thus esti- mated. Since, however, many forms of wealth have become intangible in the forms of stocks and bonds, mortgages and other legal claims, it is practically im- possible to know the amount of any man's wealth and thus to assess it fairly. JVIoreover, few assessors have any fair judgment of the value of many such proper- ties. Practically, all tax authorities of the present day condemn the general property tax. 8. Modified forms. — To avoid some of the difficul- ties, certain modifications have been introduced; for example, mortgages are taxed when they are regis- tered ; public service corporations are taxed upon their gross earnings; corporations are taxed upon their stocks and bonds. 28 BUSINESS AND THE GOVERNMENT From all these various examples it becomes evident that the general property tax has been largely dis- credited, and that there is need for a reorganization of the taxing system in most of om* states. A suggest tion frequently made is that the government exempt entirely personal property and that there be a com- bination of income tax and an inheritance tax with a tax on land or land values for local revenue. 9. Federal income tax. — It is generally believed that by taxing incomes we can approach a fair degree of equality in taxation, altho there is usuall}'- strenu- ous objection in this country to the income tax as be- ing too inquisitorial. There can be no question that the income tax is, for a considerable period after its introduction into any country, very difficult to ad- minister. It is extremely puzzling to determine the net income from the gross income. Usually certain distin'ctions are made regarding the character of the incomes, describing them as salaried incomes, profits and dividends, or, as in England, "earned and unearned incomes." Generally also an exemption is made of a minimum income which re- lieves a large proportion of the people from the pay- ment of the tax. During the Civil War, the United States Govern- ment levied an income tax of three per cent on all in- comes^ over $800. Later, modifications were made in the exemption features and a graduated plan was devised for larger incomes. This tax was not success- ful. Our basic law of September 6, 1916, follow- TAXATION AND BUSINESS 29 ing the model of the original law of October, 1913, had a normal tax of two per cent on all incomes in excess of $3,000 for single and $4,000 for married persons, also an additional tax of from one to 13 per cent upon any excess of income above $20,000. Octo- ber 3, 1917, a sweeping amendment to the act, called the War Income Tax reduced the exemptions to $1,000 and $2,000 and levied an additional rate of two per cent on all net incomes. This makes a two per cent rate on incomes from $1,000 or $2,000 up to $3,000 or $4,000. It also levied a further addi- tional tax of one per cent on all incomes above $5,000 rising on an increasing scale to a maximum of 50 per cent, thus giving a total maximum on incomes above $2,000,000 of 63 per cent. In 1918 was passed a still further amendment originally designed to raise some $2,400,000,000 to meet war needs but after the signing of the armistice somewhat modified so as to reduce the yield. In this act the normal rate for in- comes under $4,000 is four per cent. All income in excess of $4,000 pays a "normal" rate of eight per cent with a graduated surtax on incomes from $5,000 to $1,000,000 rising from one per cent to 65 per cent giving a possible maximum rate of 73 per cent. 10. Other income taoces. — Outside of the income taxes levied by several of the states of the Union, the most important for our consideration is that of Great Britain. There the tax dates back to 1798, and with a few months excepted has been continuously in force. For purposes of taxation income is divided XXIV — 4 30 BUSINESS AND THE GOVERNMENT into five classes, namely, (a) that derived from owner- ship of lands and buildings, (b) from the occupation of land, (g) from investments in public funds, (d) from the trades, professions and employments, (e) from the emoluments of public offices. A rate of 6s. in the pound sterling (30 per cent) is applied to all corporations and non-residents but for residents within the United Kingdom a sj^stem of graduation and differentiation is employed. Under this scheme the rates on all taxable incomes under c£2500 are scaled downward while those on incomes of over <£2500 are increased by supertaxes. Since 1918 the rates thus established range from 2s. to 5s. 3d. in the case of earned incomes and from 3s. to 6s. on unearned incomes between £130 and £2500. The supertax starts at the rate very slightly in excess of the normal and reaches a maximum of 4s. 6d. in the pound on sums of £10,000 or over. In March, 1920, the Royal Commission on the In- come Tax made a voluminous report, which up to the time of the final revision of this volume had not been acted upon. 11. Corjyoration taxes. — In many of the states a tax on corporations was earlier levied only under the general property tax, or in the forai of fees on incor- poration. In 1868 Pennsylvania levied a tax of 3 per cent on net earnings. Since then several states have levied special taxes sometimes on earnings, net or gross, sometimes on capital stock, on franchise, etc. In 1909 the Payne Aldrich Act levied a special TAXATION AND BUSINESS 31 excise tax on corporations. Since 1913 corporations have been taxed under the federal income tax law. In 1916 the rate was fixed at 2 per cent of the. income with an additional 10 per cent on undistributed sur- plus. In 1917 the rate was made 6 per cent. In 1919 the rate was fixed at 10 per cent on net income. 12. Excess pi'ojits. — Owing to the special changes wrought in business by the war, and the belief that many corporations had won undue profits from the war a special tax was levied upon excess profits based on profits before the war in 1911, 1912 and 1913. In 1917 the law fixed the rates on a sliding scale pro- portioned to the percentages of net income. In addition to the regular corporation tax an additional levy was made on net income in excess of 8 per cent of invested capital plus $3,000. The minimum was 20 per cent for income not in excess of 15 per cent of invested capital, the maximum 60 per cent on income exceeding 33 per cent of invested capital. In 1919 the rate was increased on a new basis of reckonino-. For that year and each taxable year thereafter the rate was fixed at 20 per cent of the net income in excess of the excess profits credit and in excess of 20 per cent of the invested capital. Net income in ex- cess of 20 per cent of the invested capital is at the rate of 40 per cent. In Great Britain also an excess profits duty has been levied as a war measure, the rate running as high as a maximum of 80 per cent of the so-called excess profits over a rate based on the pre-war period. 32 BUSINESS AND THE GOVERNMENT 13. Other countries. — ]Most of the British colonies and other countries such as France, Ital}^, Sweden, Switzerland, Japan, Holland, Denmark, have gradu- ated income taxes. After the outbreak of the war supertaxes were added and in a few cases, as South Africa, Canada, Denmark, France, Norway, excess profits and war profits taxes are also found. 14. InJieritance taoc, — The inheritance tax, called death duties in England, is rapidly becoming one of the most important forms of taxation in the United States as elsewhere. The advisability of the state tax- ing inheritance is based ujDon (1) the fundamental right to curtail or control bequests, (2) the possible wisdom of checking the growth from generation to generation of large estates and (3) the fact that the tax is easy to collect. Usually the rate of the inheritance tax increases inversely to the nearness of relationship of the heir to the deceased. Cousins, for example, pay a higher rate than children, who are often exempt. Again, the holders of small estates are usually exempt from taxation. In many states the exemption is as high as $10,000, in New York, $5,000 for the near kin, $500 for others. The rates of taxation vary. The average is between 15 per cent and 20 per cent for large inlieritances, a smaller percentage for small amounts. As a legacy increases in amount, the tax usually increases progressively. In New York State the rate is one per cent on $5,000, increasing until it reaches from four to eight per cent on all inheritances TAXATION AND BUSINESS 33 of $200,000 or more. In other states it reaches 25 per cent or even 30 per cent. So heavy a tax en- courages the distribution of a large estate before the death of the owner. JNIoreover, so great a burden encourages owners to fix their legal residence in states where the burden is lighter. Many ingenious de- vices on the principle of the holding company have been worked out to avoid such heavy legal exactions. As a war measure in 1916 the Federal Government levied a tax on the transfer of the net estate of the decedent (not on the heirs) at a rate graduated, not at all on nearness of kin of heir, but solely on value of estate. The rates ran from one per cent on estates not exceeding $50,000 to 10 per cent on estates above $5,000,000. In 1917 the rates were increased one- half per cent on the lowest rate to 10 per cent addi- tional on estates above $10,000,000. For 1919 the plan was changed to a tax upon the amounts received by the separate beneficiaries and the rates run from one per cent to 25 per cent. 15. Justice and tcuration. — It is evident that noth- ing more than rough justice can be attained in any scheme of taxation. On account of the unavoidable inequalities of assessment and the fact that incomes vary amazingly with different types of property, the general property tax clearly ought to be abolished. Many questions naturally arise when one attempts to furnish a substitute. Ought taxation to be used as a means of modifying social conditions; for example, to limit in any way tlie growth of large fortunes? Is 34* BUSINESS AND THE GOVERNJUENT ability to pay proportional to the amount of the in- come? For instance, under existing conditions in the United States is a man with an income of $100,000 able to pay more than ten times as much as one with $10,000 or a man with $10,000 able to pay more than ten times as much as one whose income is $1,000? It is thought that sacrifice of personal comfort is prob- ably less, proportionately, as the income increases. It is for this reason usually that progi*essive taxes are levied. Owing to the indirect system by which our laboring men are taxed thru their use of tobacco and play- ing cards under our internal revenue laws and thru their use of clothing and ordinary articles of home use under the tariff, they are generally exempted from the payment of the property and inheritance taxes owing to the minimum exemptions. 16. Single tax. — The single tax, first made a po- litical issue by Henry George in "Progress and Pov- erty," is based upon the assumption that the increase in the values of land is due solely to increase of popu- lation and progress of civilization, and is a source of income unearned by the owner of the property. Single taxers have generalh^ assumed that a tax ujDon land value would be sufficient to meet all the expenses of government, even tho in many cases it would not need to be confiscatory of the entire amount of the unearned increment. The discussion of this theory has led to a more care- ful study of the causes of the increase in the values TAXATION AND BUSINESS 35 of land and to a keener analysis of the entire question of unearned increments of value in other fields. The chief objections to the single tax theory are ordinarily : (1) That the amount received from such a tax would vary most unevenly in different localities, not at all in proportion to the population and often not at all in proportion to the ability to pay taxes. (2) That in very many instances the tax would not be sufficient to meet the needs of government. (3) That inasmuch as many other sources of in- comes besides land have likewise an element of un- earned value in them, being brought about largely by increase in population and in civilization, the tax levied on land values alone would be unjust. Incomes, for example, of many merchants, of lawyers, of phy- sicians, of stock brokers, of bankers, are similarly af- fected with little or no reference to the question of real estate holdings. (4) No provision is regularly made for decreases in taxation, altho there are very many instances of de- crease in land values; and finally (5) The present holders of land in very many in- stances have already paid full value therefor and have in consequence paid the penalty of the unearned increment. It would be unjust and morally wrong for these land holders to be deprived of their prop- erty without compensation, whetlier or not one were to agree with tlie general principle of the unearned increment in land values. 36 BUSINESS AND THE GOVERNMENT 17. Indirect taxation. — The existence of a dupli- cate forni of government such as is found in America in our Federal and State Governments has made it seem advisable to separate as much as possible our forms of taxation. Until late years the Federal Gov- ermnent used only indirect methods of taxation for raising its revenues — tariff duties and excise duties. There have, however, been several instances of other taxes in emergencies; for example, the income tax during the Civil War and in 1894. Again, in 1912, under the new Administration, an income tax was taken up as a matter of permanent policy. The Federal Government by the efficiency of its administration has in many ways offset some difficul- ties connected with indirect taxes. The most impor- tant of these taxes are the customs duties and the ex- cise or internal revenue taxes. The customs duties will be discussed at length in the following chapter. 18. Infernal revenue taoces. — Besides the tariff, the United States had for years selected a limited number of domestic articles of luxury or those of minor im- portance as objects of an excise tax. These are chiefly tobacco, and formerly spirits and fermented- liquors. From these the income in 1914 was $304,- 000,000. From the revenue viewpoint these have been admirable objects of taxation as is shown by the large income, the steadiness of the income and the ease with which the tax is collected. At various times, especially in emergencies, such as the Civil War and especially the Great War, other excise taxes TAXATION AND BUSINESS 37 have been added, such as heenses for theatres, mov- ing pictures, stamp taxes upon patent medicines, upon legal documents of various kinds and fees required from certain types of bankers and brokers. 19. Ideal system of taojation. — It is not possible to fix any ideal system of taxation any more than one can plan an ideal form of government. JNIuch is de- pendent upon local conditions; much is dependent upon the form of government; much upon the need for revenues; much upon the work required of the government. A countr}' so constituted or situated that it must maintain a large army and navy^ must necessarily bear a heavier burden of taxation than is otherwise required. 20. Export duties. — A country possessing a sub- stantial monopoly of articles much needed in other countries may wisely levy an export duty. Some of the Federated jNIalay States thus secure a large revenue from an export duty on tin, the entire burden of which must be borne by foreign consumers, inas- much as this tin is needed to supply the demand. In like manner, no satisfactory substitute for Manila hemp in the making of ropes for the use of ships hav- ing been found, an export duty on the products of hemp yields an excellent revenue to the Philipi)ine Islands without imposing any burden upon the in- habitants. Such conditions exist in only a few coun- tries. For our purposes, our internal excise taxes seem to have worked admirably. Our tariff taxes, owing 38 BUSINESS AND THE GOVERNMENT largely to our political conditions, may be very se- verely criticised. They doubtless can be greatly im- proved, if our tariff commission can be given a free hand and shows the judgment to put them gi'adu- ally upon a scientific basis. An income tax, with all its drawbacks, is still an excellent source of revenue. When experience shall have improved the methods of reckoning and collecting, custom shall have lessened the repugnance to its inquisitorial features, and an adjustment to the burden of other taxes shall have been secured, this is likely to become a valuable tax. 21. State taxation. — In our states, the inheritance tax and proper fonns of the corporation tax are to be recommended. The personal property tax, as it now stands, should probably be abolished. The land tax, with proper distinction between land values and improvements on land, may well be retained. If more revenues are needed than would come from the sources named, together with fees and licenses, it is probable that there may also be added as has already been done in some states either a state income tax which could be based in part on returns made to the Federal Government, or a presumptive income tax based on rentals and salaries. These, in whole or in part, would provide to advantage and with a rea- sonable degi'ee of justice, adequate sources of income. 22. Public finance. — The Government is a perma- nent agent for the satisfaction of human wants. It has long been agreed that protection of property and person can be better provided thru the medium of TAXATION AND BUSINESS 39 the Government than by the individual. Various other wants of the individual can also be better satis- fied by the Government than by the individual thru private action. How far any government shall be- come the agent of its citizens in promoting the com- mon welfare depends entirely upon the stage of civil- ization, the circumstances of the community and the will of the j)eople themselves. Public finance is the name given to the collecting of revenues and their expenditure for public pur- poses. Consequently, taxation is one phase of finance, public expenditure tlie other. The rapid growth of public finance is shown by a statement of the amounts expended. In the year 1810, the United States government spent $8,474,000; in 1914, $914,- 000,000 exclusive of debt charges and, of course, be- fore special war charges began. Since the war these expenditures liave increased enormously and there seems little likelihood of a marked decrease for years to come. The expenditures of states and cities show similar growths. According to late reports, in 1902 the cities in the United States of over 25,000 in- habitants were spending more than $469,000,000 ; and in 1912 they spent $900,000,000 in addition to sums borrowed. 23. Importance of jmhlic expenditures. — Between 10 and 15 per cent of the national income is spent in times of peace by public agencies. Federal, state and local, for education, roadways, care of defectives, sani- tation, mihtary and naval programs, and other objects 40 BUSINESS AND THE GOVERNMENT included in modern state expenditures. Many pro- jects of great social importance are proposed that would increase this expenditure still more, but the burden upon the citizens who themselves often have only small incomes has become so great that many proposals for protection from disease, from accidents, for better education and for proper police protection even, are neglected. Nevertheless, there is a con- tinued demand for social betterment movements and the storm center of the struggle for improvement is public finance. The state has first claim upon the wealth of the citizens, a fact particularly apparent in times of war, but good sense lays down certain restric- tions in regard to public expenditures. It is clear that the collection of taxes should be made just as in- expensive and as effective as possible and that expen- ditures should be carefully guarded. Altho efforts have been made to fix principles of government expenditures there is no definite rule by which the amount may regularly be determined. The state should return a real value for what it expends. The economic and political value of the individual citizen should be augmented by the social expenditures for education, sanitation and protection. The social surplus, that the members receive, beyond the neces- sary elemental cost of maintaining life in the house- hold, should be maintained. The growth of civiliza- tion is dependent upon this social surplus. If the state is absorbing this surplus too rapidly or is actu- ally preventing the saving of capital for future eco- TAXATION AND BUSINESS 41 nomic enterprises, then the public expenditure is too large. Careful and constant investigation thru well- equipped statistical bureaus, manned by highly trained men, can alone furnish an adequate solution of public finance. 24. War expenditures, loans and taxation. — In the fiscal year 1913-1914 the disbursements of the Fed- eral Government barely exceeded one billion dollars. For the fiscal year ending June 30, 1918, the Gov- ernment needs amounted to some twenty billion dol- lars including necessary war credits to the Allies. These simple figures are eloquent of the sacrifices which modern warfare requires, and indicate the pro- found changes which war has wrought in the relation of the individual to the state. Such an enormous expenditure has meant a com- plete realignment of the relations of private wealth and the Government now and hereafter. In the sudden emergency of war great sums are needed before it is possible to increase the revenue adequately by new taxes. This need is usually met by government loans of various forms. In our own experience in the great war we made five loans, the largest in the world's history. At the same time, as we have seen, the revenues have been enormously increased from slightly less than $1,000,000,000 in 1914 to a sum in excess of $4,000,000,000 in 1919 which was planned for $8,- 000,000,000 if peace had not come. Such enormous sums are not needed in peace. Congress limited its 42 BUSINESS AND THE GOVERNMENT estimates to about $4,000,000,000 for 1920. Yet we shall never return to the old standards. The burden of our huge debts of some twenty-five billions is to a considerable extent borne by our recent allies to whom we granted credits of some nine and one half billions. From this source, to be increased, we shall obtain an income of some $500,000,000 a year. Our net debt deducting these loans is some $15,000,000,000 and to carry this, even tho its burden should be taken up later thru long term obligations by the next genera- tion, we shall need large revenues. iMoreover, a new era has come. Army, education, public enterprises like public lands, water powers, navigation, have taken on new aspects. In this new world, government will doubtless play a greater part. We must look ahead to heavy permanent taxes, accompanied, I believe, by an increased prosperity that will lessen the burden. REVIEW How did the practice of taxation arise? By what principles ought a government to fix the maximum and minimum limits of taxation? What are the chief defects of the general property tax? \\Tiy is the inheritance tax easy to collect? Does it conform to Adam Smith's third canon of taxation? Why is it not practicable to frame an ideal system of taxation ? What is the distinction between direct and indirect taxes and what are the merits and disadvantages of each? What should be the general relations between taxing systems of national, state and local government? During the progress of a great war how would the amounts of special government income for war purposes be normally distrib- uted between government loans and taxation ? CHAPTER III GOVERNMENT. 'NATURAL RESOURCES AND THE FARMER 1. American land policies. — From the foundation of our Government until within a few years, its policy was to rely for the development of our country's re- sources, mines, forests, farms, upon the initiative and self-reliance of individuals. Only in great permanent improvements, like canals and roads, that must be public in use, did either state or nation rely upon the government. The first great step taken to develop our agricultural resources took definite shape in the great Homestead Act of 1862, which in amended form is still in force. By this act 160 acres of surveyed agricultural land were given to adult citizens and heads of families upon proof of five years' residence and cultivation. No charge was made with the ex- ception of certain fees ranging from $20 to $.50. To this liberal land policy was due the settling of the Middle West and the development of this hitherto unparalleled rich territory. In the development of the arid lands that recjuired irrigation or dry cultiva- tion the laws have been modified, but the underlying purpose is much the same. 2. Mineral lands. — At first mineral lands were re- 43 44 BUSINESS AND THE GOVERNMENT served from sale and leased for royalties. But later they too were almost given away under the agricul- tural settlement laws. The priceless iron deposits of Minnesota now held by the United States Steel Cor- poration were originally sold for a nominal sum. The state of INIinnesota, from the small tracts given to it for educational purposes, has already realized a vast education fund and will probably net in royalties at $.25 per ton not less than $250,000,000 from its iron ore deposits. 3. Forests. — Timber lands also were first taken up under the settlement laws. The wonderful white pine forests lying around the Great Lakes passed under private ownership at nominal prices, and for imme- diate private profit were sacrified to the axe or in many cases were destroyed by fire. Much of this land, however, has since become valuable for agricul- tural purposes. 4. Conservation of natural resources. — Our gov- ernmental policy toward not only agricultural land but toward our other great natural resources as well, has of late years changed from one of sole reliance upon unrestricted private interests, w^hich in many in- stances led to wasteful exploitation, to one of conser- vation. As a result of a popular demand for conser- vation of natural resources President Roosevelt in May, 1908, called a conference of governors at the White House and later appointed two commissions to study the subject. Since that time steady prog- ress has been made in furthering the work. GOVERNMENT AND THE FARMER 45 5. Reclamation service. — In 1902, the Federal Reclamation Act was passed providing for the con- struction and operation of works for the irrigation of arid pubhc lands in the West. This Act was amended in 1914 by the Reclamation Extension Act, which made radical changes in the sections pertaining to the use of funds and the methods of making pay- ments. Settlers may now repay the cost in twenty annual instalments. 6. Federal Government grants land to states. — New States have regularly received land for the sup- port of common schools, and since 1850 some 60,000,- 000 acres of swamp lands have also been granted to the several states to be reclaimed. Even larger tracts have been given in aid of canals, turnpikes, levees and other public works, especially raih'oads. Coal and iron lands pass with railroad grants. Other mineral and saline lands are usually reserved from gi'ants and preemptions and are sold. 7. Public parks. — One of the most important uses that have been made of the public lands by the United Sta;tes Government has been the reservation of some vast tracts, as pubHc parks, usually those containing some of the noblest and most beautiful mountain scenery in the country, with the expectation that the primary use to be made of these parks shall be for recreation. Most of them contain scenic wonders, in some cases archaeological ruins, and in many instances also important mineral deposits. In 1906, an Act of Congress authorized the President to reserve by proc- XXIV— 5 46 BUSINESS AND THE GOVERNMENT lamation as national monuments such public land as contained historic landmarks and other places of his- toric and Scientific interest. Under this Act there have been brought under the control of the United States such natural wonders as the petrified forest of Arizona, the Grand Canyon of the Colorado and Mount Olympia in Washington. 8. Plans for conservation. — Franklin K. Lane, formerly Secretary of the Interior, made during his tenure of office, a ver}^ careful study of the conserva- tion situation. The government adopted a progres- sive policy as a result of these investigations and steady, rather than spectacular progress has been made toward its realization. In January, 1920, fur- ther legislation gave strength to the efforts of the Departments of the Interior and of Agriculture in their efforts to conserve natural resources and reclaim non-productive land. An outstanding feature of the Lane conservation policy is that of leasing natural resources such as coal, oil, and gas lands, water power sites, and irrigation projects together with the con- servation of the radium bearing soils. Already a large measure of success has been achieved along all these lines. In October, 1920, the coal mining in- terests of a number of the railways were permanently divorced from the operating administrations. At the end of 1920 a total of nearly seven millions of acres of desert, swamp and cut over timber land had been irrigated, drained or in other ways prepared for human habitation and productive use. Homestead- GOVERNMENT AND THE FARMER 47 ing has been greatly encouraged by the waiving of royalties. Water power has been more efficiently used and plans perfected for still greater utilization of the nation's "white coal" under private administra- tion and thru the employment of private capital. It is realized that the nation has as yet made only the beginning of progress along this line of endeavor and that still greater achievements lie in the future. Cooperating with the Federal government in these ef- forts are many of our public-spirited private associa- tions such as the Chamber of Commerce of the United States as well as the official departments of a large number of the states. 9. Importance of agriculture. — Agriculture has al- ways been the most important single industry in the United States, totaling in value of product for the year 1919, $14,092,740,000. Under normal condi- tions a bumper crop or a failure reacts upon all kinds of business and for this reason the attitude of the gov- ernment toward agriculture is vital. The assistance given to the farmers by the state governments in the last fifty years is a concrete illus- tration of the almost limitless possibilities that may follow intelligent action systematically carried out for the benefit of industiy. The manner in which state aid has been given to agriculture is somewhat complicated, as the work may be carried on either jointly or separately by Federal, state and local governments. 10. Fields of government activities. — Government 48 BUSINESS AND THE GOVERNMENT activities in the field of agriculture may be divided into three groups : ( 1 ) those dealing with the aliena- tion of public domains; (2) those dealing with scien- tific production; (3) those which endeavor to solve the social and economic problems which have come with the transition from a self-sufficing industry to a business type of farming. In making these divisions, it must be kept in mind that the three types of activity may be going on at the same time, and do not neces- sarih" represent successive stages. Not only has the Government been active in bring- ing the land and the farmer together, but its interest has extended to the cultivation of the soil. The former feeble and unorganized efforts to improve agriculture gave way in 1862 to a definite, systematic and wide-spread movement that came as a response to the growing demand for better agricultural con- ditions especially in the older states which found themselves in keen competition with the New West whose products were seeking the eastern market made accessible by the extension of means of trans- portation. 11. Department of Agriculture. — In 1862 the De- partment of Agriculture was created. Its impor- tance and possibilities were gradually recognized and some years later, 1889, the head of the department was raised to the rank of a cabinet officer. In the earlier period attention was directed almost wholly to pro- duction. To increase the quantity and quality of farm products was the immediate problem to be GOVERNMENT AND THE FARMER 49 solved, and various bureaus were created to attain this end. The Bureau of Animal Industry was established to handle problems of eveiy kind relative to live stock. This bureau has performed very effective work in investigating diseases among cattle, in making in- spections of dressed meat and in furnishing valuable information of various kinds, the introduction, the breeding and care of animals that may prove indus- trially valuable. The Bureau of Plant Industry per- forms a somewhat similar service in plant produc- tion. Its work has been especially valuable in check- ing plant diseases and in introducing many previously unknown fruits and vegetables to the United States. 12. Agricultural colleges. — The passage of the Morrill Act in 1862 made possible the creation of agricultural and technical colleges by providing for an amount of land to be apportioned to each state equal to 30,000 acres for each Senator and Repre- sentative in Congress under the census of 1860. This endowment was further increased in 1890 by an annual cash payment of $25,000 to be applied for instructional purposes. While considerable attention was given in these colleges to the application of science to agricultural production, one of the most important functions of the college was to give practical instruc- tion. In the main the methods of farming that pre- vailed were those inlierited from former generations, in many cases applied under totally different condi- tions. The purpose of agricultural education was 50 BUSINESS AND THE GOVERNMENT twofold: one, to afford a type of instruction having educational and cultural value; the other to familar- ize young men and young women with the basic sciences and scientific methods of farming. The col- leges have more than met these expectations. By adapting courses to meet the needs of the students, by instituting short courses during the winter for those unable to attend for a longer period, and by adding the regular college courses they have developed a very much higher type of farmer, not alone in respect to his methods of tilling the soil, but in his general man- ner of living. 13. Hatch Act ecvperiment stations. — As the im- portance of scientific farming became more apparent, greater interest was manifest in extending investiga- tions to every branch of this industry. To meet this need the Hatch Act was passed in 1887 which estab- lished experiment stations in connection with the ag- ricultural colleges. Congress appropriated $15,000 annually for each station, which amount was later in- creased to $30,000 by the Adams Act of 1906. The object of the experiment stations is given in the en- abling act as follows : That it shall be the object and duty of said experiment stations to conduct original researches or verify experiments on the physiology of plants and animals ; the diseases to which they are severally subject, with the remedies for the same ; the chemical compositions of useful plants at their different stages of growth; the comparative advantages of rotative cropping as pursued under the varying series of crops ; the capacity of new plants or trees for acclimation ; GOVERNMENT AND THE FARMER 51 the analysis of soils and water ; the chemical composition of manures, natural or artificial, witli experiments designed to test the comparative effects on crops of different kinds ; the adaptation and value of grasses and forage plants ; the com- position and digestibility of the different kinds of food for domestic animals ; the scientific and economic questions in- volved in the production of butter and cheese ; and such other researches or experiments bearing directly on the agri- cultural industry of the United States as may in each case be deemed advisable, having due regard to the varying con- ditions and needs of the respective states and territories. 14. Farm management. — Agriculture required the same careful management necessary in other indus- tries, but there were no data which could be used. To secure information that would enable the farmer to conduct his business as other business men do, the gov- ernment created the division of Farm Management. The division has carried on experiments covering a period of years to determine the best methods of farming. It has also tried to secure the desired in- formation from successful farmers who typified all conditions and combinations of farming. Sun'^eys have been made covering certain areas, and results show how much the farmer has realized on the year's operations; the size of the unit; the amount of live stock and kinds of crops and the general type of farming conducted. From these data covering a large number of farms conclusions are drawn which determine the proper method of farming under given conditions. A second and third survey is usually made to verify these deductions. As a result it has been possible to work out general principles that will 52 BUSINESS AND THE GOVERNMENT guiC 3 the individual farmer in determining what kind of farming he should engage in, the amount of land necessary for the most efficient unit, and also the amount of capital required in the form of live stock, machinery and equipment. 15. Institute work: Smith-Lever Bill. — It has been the policy of the agricultural colleges to carry on institute work. The great possibilities for good that might come from carrying the results of the work of the colleges and experiment stations to the farm- ers themselves led, in 1914, to the passage of the Smith-Lever Bill. The purpose of the law is to dif- fuse among the people useful infomiation relative to agriculture and home economics. To finance this co- operative extension work Congress set aside $480,000 from which a sum of $10,000 is to be paid to each state that will appropriate an equal amount; either state, county or agricultural college funds to be ex- pended in cariying on the extension work in that state. This sum of $480,000 is to be increased each year for seven years to a total of $4,580,000 yearly appropria- tion. 16. Eocte7ision teaching. — In planning the work of extension teaching, the widest interpretation is given the words Agriculture and Home Economics. These terms include all problems pertaining to the welfare of agriculturalists either in the home or in the field. A trained force of teachers selected especially for this type of work are conducting lecture and demon- stration tours over the states all the time. The GOVERNMENT AND THE FARMER 53 demands for their visits are still greatly in excess of their ability to meet them. The farmers gather in great numbers and are eager to learn better methods. The housewives are taught better ways of preparing food. One lecturer may devote his entire time demonstrating a cheap and efficient method of fur- nishing running water in every household, which will greatly lessen the burden of the housewife. The extension work has expanded to include rural engineering, dealing with 2)i'oblems of power on the farm, proper sanitary equipment, rural architecture applied to houses and barns and economic and so- cial problems, such as marketing, rural credit, rural organization and the socializing activities of a rural community. 17. County agents. — Still another method of help- ing the farmer in a practical way is thru the county agent, who advises the farmer on all methods per- taining to the conduct of his business along lines approved by the best authorities. These agents may be college professors or successful farmers. It is not an easy task to persuade the average farmer to aban- don his inherited method of farming for some book theory. Most of the agents have brouglit about the desired changes, not by insistence, but by the patient, tactful, persistent pressure of illustration and exam- ple. It is the duty of the expert to advise on matters of health of stock, of the policy to pursue on farm crops, of farm management and a mass of details con- nected with the particular types of farm enterprise 54 BUSINESS AND THE GOVERNMENT found in the farmer's count3\ The agent is especially helpful in arranging for extension work and in en- couraging boys' and girls' clubs and school fairs. The gap between the college and the farmer is thus bridged by the man who is trained in the college and who brings that training directly to the farmer. He is not content with telling the farmer how, but shows him how and helps him until he masters the art of improved agi'iculture. 18. Marketing problem. — Within the last few years the task of marketing farm products economi- cally has become increasingly difficult and is now con- sidered one of the most serious questions in agri- culture. The gains that have been made thru im- proved methods are lost to the farmer because of poor and inadequate methods of marketing. With a view to improving methods, a division of market- ing was formed in the Department of Agriculture in the spring of 1913. The first work to be undertaken was the establishing of standard grades. With the exception of agricul- tural products almost every article which is bought and sold conforms to some standard. In agriculture only a few things such as wheat and other grains have been standardized. Studies have also been made of supply and demand for certain products at given points. During the shipping season a force of reporters work in the more important market centers of the country in an effort to divert shipments to points of greatest demand. GOVERNMENT AND THE FARMER 55 Transportation and storage problems have been care- fully studied in an effort to avoid seasonal fluctua- tions of perishable commodities and to furnish a more even supply. The department has carried on experi- ments in marketing by parcel post and express in an effort to bring producer and consumer closer to- ffether. It has determined the zones within which marketing is profitable, the kinds of produce to ship and how to prepare them. Extensive investigations have been made in the systems of marketing dairy products, live stock, and animal by-products for the purpose of suggesting ways and means by which they may be improved and the cost reduced. Since a large percentage of the expense and waste in the distribution of food products occurs in the retail markets, the work includes also an investigation of all commercial methods of distributing and marketing food products in the cities. 19. Federal Farm-Loan Act. — The providing of proper capital for farming enterprises has been for a long time a difficult question for the farmer to solve. In the past credit facilities have existed primarily for commercial enterprises and loans have been granted to undertakings in which the capital was ordinarily released within a comparatively short time. Agricul- ture, on the other hand, requires a long time before capital expended gives any sure return. In order that the farmer might obtain capital just as easily and as freely as the man in any other industry the Fed- eral Farm-Loan Act was passed by Congress in 1916. 56 BUSINESS AND THE GOVERNMENT The general purposes of the Act are set forth as follows: "(l) to lower and to equalize interest rates on first-mortgage farm loans; (2) to provide long- term loans with the privilege of repayment in instal- ments thru a long or short period of years, at the borrower's option; (3) to assemble the farm credits of the nation, to be used as security for money to be employed in farm development ; ( 4 ) to stimulate co- operative action among farmers; (5) to check land monopoly by making it easier for tenants to get land ; (6) and to provide safe and sound long-term invest- ment for the thrifty." The Act constitutes a Federal Loan Board, consist- ing of four members and the Secretary of the Treas- ury as chairman, which exercises supervision over the entire system, and authorizes the establishment of two distinct kinds of farm loan banks. There are, first, twelve Federal Land Banks in which the government is a stockholder, and second, an unlimited number of Joint-Stock Land Banks. The number of banks of this latter type grew from nine in 1918 to thirty in 1919 and as the close of the fiscal year 1920 ap- proached it was stated that the rate of increase had been commensurate with the carrying of the objects of the act, altho no statement of the actual number of banks was available. The growth of the system is shown by an increase of $15,356,785 in the business of the Federal Land Banks and of $46,836,487 in the joint-stock banks in 1919 and the indication by un- official figures obtained about a month before the end GOVERNMENT AND THE FARMER 57 of the fiscal year that there had been equally satisfac- tory operation in 1920. National farm loan associations are the local organ- izations upon which the Federal farm loan system is based, in so far as the operations of the Federal land banks are concerned. There are now about 3900 as- sociations in existence and they have an average mem- bership in the vicinity of thirty. Together the mem- bers must apply for loans aggregating $20,000 or more. Five per cent of each loan shall be subscribed and paid for capital stock in the association, and the association in turn shall subscribe for an equal sum in the Federal land bank in its district. When the stock subscriptions of the associations reach $100,000 in any one bank the control of that bank passes from the five directors temporarily appointed by the Federal Farm Loan board to a new board of nine directors, each holding office for three years. Six of these are elected by the National Farm Loan Association which therefore has control. The other three are appointed by the Federal Farm Loan Board. The joint-stock land banks were authorized for carrying on the l)usiness of lending on farm mortgage security and of issuing farm loan bonds and are con- trolled entirely by officers and directors chosen by their stockholders. Like the Federal I-.and Bank each is empowered to appraise land and accept and indorse mortgages for its stockholders ; receive and deliver the proceeds of loans to its borrowers ; acquire and dispose of property necessary for the conduct of its business ; 58 BUSINESS AND THE GOVERNMENT issue certificates of deposit at 4% for terms up to one year which may be invested in farm-loan bonds ; and receive and transmit to the Federal land bank, pay- ment of interest, principal, etc. Loans can be made by the association on first mort- gages of land within its district, for 5 to 40 years. The interest rate shall be fixed at one per cent above the rate borne by bonds for which the mortgages shall be exchanged. The range of loans to any one shall be from $100 to $10,000 and no loan shall exceed 50% of the land value, plus 20% of the value of improvements, which shall be duly insured. Loans must, under penalty, be used to purchase farms, equipment, live stock, to erect buildings, or to clear the farm of encumbrances provided the applicant is a member of the first association organized in the coun- try. Finally, no loan shall be made except to a farmer or person about to become a farmer. The shares of stock ($5) are assessable for ex- penses, carry double liability and may be held only by borrowers. Surplus and dividends will be devel- oped from the % of one per cent commission allowed the association out of semi-annual interest payments. The capital, surplus, bonds and mortgages are exempt from all taxation. During the last quarter of 1920 the lending operations of the whole Federal farm loan system were suspended owing to litigation pending before the Supreme Court. The purpose of this liti- gation was to test the validity of the tax exemption provisions applied by the Federal Farm Loan Act of GOVERNMENT AND THE FARMER 59 1916 to farm loan bonds from which the loanable funds of the system are derived. This suit was re- argued in October, 1920, but no decision had been promulgated up to the time of the final revision of this volume. 20. Improvement in rural conditions. — Xot con- tent with giving help in business and financial matters, the Government has created a division of rural organi- zation, the work of which is to create better social, educational and religious conditions in rural commu- nities. The desire to leave the country and move to the towns and cities is very strong in a large part of the farming population. The main reasons given for abandoning the farm are the absence of attractions in the country, poor schools, bad roads and hard work for men and women. Efforts are now made thru existing agencies to enrich the social life of country districts by organizing societies to stage plays, ar- range debates and to provide for social gatherings which shall break down the isolation and distrust so prevalent in the country. Labor saving devices are being demonstrated for use on the farms. The work of the government rural engineers is directed toward the improvement of country roads. Experts are drafting systems of education that will meet the needs of the agricultural population and the state colleges are holding special sessions for country ministers to give them some of the gospel of rural economy and to make them leaders in the economic, social and reli- gious life of their respective comnmnities. 60 BUSINESS AND THE GOVERNMENT REVIEW Why did it become necessary in the United States for the Federal Government to take positive action regarding the con- servation of natural resources? What steps were taken in that direction by President Roose- velt? To what extent should our natural resources now conserved in our forest and land reservations be opened to private individuals for exploitation and use? Under what conditions should private individuals be permitted to make use of these natural resources ? Agriculture is frequently spoken of as the most important indus- try. From your study of economics what reasons are there, if any, for considering it more important than manufacturing, or transportation, except the number of persons engaged and the investment ? What are the main provisions of the Morrill Act and in what ways has this Act been conducive to the development of agricul- ture and to military training? Does the work of the extension teachers and the county agents have any effect toward pauijerizing the farmers as a special class ? Outline briefly the main provisions of the Farm-Loan Act. CHAPTER IV GOVERNMENT ENCOURAGEMENT OF INDUSTRIES AND COMMERCE 1. Government methods of encouragement. — Aside from the measures mentioned in the preceding chapter to promote agriculture and industry and the special legislation February 23, 1917, establishing the Fed- eral Board for Vocational Education, the National Government has done little to promote directly indus- \.YY and commerce, save thru the temporary sugar beet bounties. Indirectly, the Departments of State and of Commerce thru their valuable reports and the ac- tive support of their officials in foreign countries have given valuable assistance to our business men in the development of our trade abroad as was fully devel- oped in Volume 15 on Foreign Trade and Shipping. In jDromoting home industries the tariff has been the method that has been chiefly in the public mind. It has naturally been the subject of heated political debates. 2. Tariff and politics. — The fact that the tariff has been likewise one of the chief sources of revenue has only tended to confuse the issue and at times to em- bitter the controversy. As long as special classes of the population would seem to benefit directly from XXIV— 6 61 62 BUSINESS AND THE GOVERNMENT the tariff, others would surely oppose whether wisely or unwisely. Wherever the protective tariff exists, however firmly fixed in the policy of the country, such contests are sure to arise. In free trade countries there are always industries wishing protection, so that the subject is one of perennial and universal interest and importance. 3. Tariff systems. — It will serve to clarify the dis- cussion if we note at the beginning the three systems commonly recognized. (a) The single tariff. Under this system only one schedule of duties is imposed, no discriminations being made among countries. In exceptional cases like China there may be only one rate for all imported articles, the country having bound itself by treaty. Before China was accustomed to foreign trade she agreed with foreign nations to levy a duty of onlj^ five per cent ad valorem. These were then converted into specific duties. With the rise of prices, the yield fell to less than three per cent. After China entered the war an international commission was set at work to bring the rates to an effective five per cent. The rule is of course a multiplicity of rates. The United States with a great variety of duties, many of them at very high rates, nevertheless retained the single tariff until the year 1909. (b) The general and conventional system. Many important countries have made concessions to certain others in their commercial treaties. Thru the appli- cation of a "most favored nation" clause, lower rates INDUSTRIES AND COMMERCE 63 than those agreed upon in general schedules are given to certain countries. Other countries outside this group pay the rates named in the general schedule. Germany applied this system from the year 1891 till the outbreak of the war. (c) The maximum and minimum system. This consists of two schedules like the general and conven- tional system. The maximum tariff corresponds to the general tariff, the minimum to the conventional one. The difference lies mainly in the minimum schedule, and the authority by which it is applied. The minimum schedule is composed of a fixed list of rates of duty determined by law, not by the treaty- making power. In negotiations with other countries the executives, in making a commercial treaty, may not go below this minimum schedule, but they may apply that to countries entitled to "most favored nation" treatment. This system was adopted by France in 1892, and from 1909 to 1913 with some modifications by the United States. 4. Mercantilists and the theory of jirotection. — The origin of the theory of protection is to be found as early as the sixteenth century when England and the other countries of Europe were each endeavoring to secure a favorable balance of trade. This economic policy centers around what is known as the mercantile theory, under which it was considered that it was highly important to possess and keep within the coun- try a large amount of the precious metals; that for- eign trade ^ was of more value to a country than m BUSINESS AND THE GOVERNMENT domestic trade; that the manufacturing industries were of more importance than the extractive ones, and that a dense population is an element of strength to a country. It was believed further that manufacturers make possible a dense population, lead to an export trade of large value, and offer unlimited opportuni- ties for business enterprise. In order to further this policy, the mercantilists ( as statesmen, merchants and other believers in this theory were called) considered state action in the form of protective duties, bounties, restrictions or other artificial aid necessary for the development of manufacture and trade. 5. Alexander Hamilton s views. — Alexander Ham- ilton was the originator of the protective tariff system in the United States. In no case, perhaps, do we find a better illustration of the political influences that often enter into an economic question than in this one. Hamilton, as we see from his celebrated reports on public credit and on a national bank, was too clear- headed to accept in full the doctrine of the mercantil- ists as it applied to money. In his report on manu- facturers, presented to Congress in 1791, he noted the difficulty that an industry has in meeting competition from abroad, especially if foreign competitors have an advantage in previous possession of the ground or aid from their government. In another part of the re- port, he definitely recommended the grant of bounties, free admission of raw materials, and general protec- tion to manufacturers within the country. In his arguments, however, he had chiefly in mind INDUSTRIES AND COMMERCE 65 the political policy of strengthening the central gov- ernment by bringing to its support the great business interests. Probably, therefore, the main reason which led to his recommendation was political. In common with Washington, he considered it of the utmost im- portance that the central government be firmly estab- lished. The debates in the Constitutional Convention had shown clearly the reluctance of very many citizens to yield any of the sovereignty of the separate states to the central government. To give the nation the standing that he knew to be essential in order to secure proper respect abroad and to establish it on a sound foundation for future growth, it was desirable to win to its support the intelligent business interests of the country. The adoption of the protective system would immediately rally to the nation's support those who would benefit by such a tariff and these would normally include a large proportion of the men desired. 6. Conflicting economic interests. — In later discus- sions thruout our history the direct business interests of the various parties likely to be affected by the tariff are always seen. With the single exception of the slavery question, the tariff more than any other has tended to divide the country on sectional lines. The southern states until after the Civil War were almost entirely agricultural, producing ])rincipally cotton for export or for shipment to the North, As there was practically no import of cotton and other goods that would come into competition with their products, they 66 BUSINESS AND THE GOVERNMENT needed no protection. Any tariff would tend toward increasing prices of the articles they consumed with- out having any effect toward raising the price of the goods that they produced. Therefore, they were free traders. In the Xorth, manufactures were rapidly developing, even the manufacture of cotton. These manufactured goods were subject to competition from Europe, and the new industries had to overcome both the difficult conditions of building up new industries with small capital and of doing this in the face of vigorous competition. The Xorth, therefore, desired protection. The division is not one between agriculture and manufacture, as is often assumed, but between articles not subject to competition and those in competition. Farmers demand protection where they must meet competition. The Corn Laws in Great Britain were not abolished by the will of the farmers, but against the farmers' wish by the influence of the great manu- facturers in ^Manchester, Birmingham and Leeds. It should be remembered that Cobden and Bright, with all their patriotic eloquence, were cotton manufac- turers representing manufacturing districts. In Germany the farmers have been protected against the competition of America by protective duties, and the German agitation against the importation of pork from America had economic protection as well as defense against trichinae as an impelling motive. Pohtical principles are often born of economic advantage. The sincerity or the patriotism of those INDUSTRIES AND COMMERCE 67 who advocate measures which tend to their business advantage^ is not questioned in the least; but human intelligence is limited, the range of most men's ex- perience and political vision is narrow; a man natur- ally sees his own interests more clearly than those of his neighbor. It is but natural for him to assume that what benefits him will benefit the community at large. Usually it is only those without direct economic interest in a public question who see that question in all its bearings. Such men are few. It is therefore desirable that in our legislative bodies, members standing for all interests be present so that the opinions represented will be approximately those of the entire nation. No system is all right or all ^\Tong; there is a middle course. It will suffice to present a few fun- damental principles generally accepted by the im- partial authorities who have no interest in partisan controversy. 7. Classification of products. — For the considera- tion of the tariff it is well to divide the goods produced in any country into three classes : (a) Goods produced to better advantage in the home country than in any foreign countiy. Such goods, it is evident, need no tariff for protection, nor would a duty levied upon them yield a revenue of importance. Only when some foreign territory is so situated that it cannot find another market for such goods will they be sent into this country, and such cases are very rare. A tariff levied on such goods is usually purely political, in- 68 BUSINESS AND THE GOVERNMENT tended to afford them protection when none is needed. (b) Goods pix)duced in the home country only under conditions permanently unprofitable. As yet it has not been found practicable to produce com- mercially, tea, coffee, cinchona bark or rubber in this country. A duty levied on such goods, therefore, would have practically no influence toward building up an industry. It would be a duty that would yield a large revenue provided the articles such as those mentioned were practically necessities. Goods of this typ'e make the best basis for a revenue tariff. (c) Goods adapted to production in this country but also produced as cheaply or possibly more cheaply for a time at least, in foreign countries. Import duties levied on goods of this type will produce a revenue unless the rate is so high as to prevent impor- tations entirely, and they will also furnish protection to the industries established l>ere, inasmuch as they tend strongly to check importations and thereby lessen competition. All discussions on the tariff, therefore, center upon this third class of industries. jNlost of the leading arguments on both sides have a certain degree of validit3^ The policy to be adopted by any country is not simply for or against protection. It is multi- form, the validity of the argimients varying with every schedule, with almost every article considered. No two different articles are produced under exactly the same competitive conditions. To attain the ideal sys- tem therefore, each article w^ould need a separate treatment. As a matter of practical legislation, how- INDUSTRIES AND COMMERCE 69 ever, only an approximation to the ideal can at the best be secured and schedules must be constructed, therefore, for great groups of articles more or less similarly situated. 8. Infant industries. — In the early days of manu- facture in this country a favorite argument was that infant industries should be protected. In the begin- ning of an industry there are large expenses in ob- taining capital, the training of the labor force, the securing of a market, the building up of good-will and other like difficulties. JNIen argued that an industry should receive support by checking foreign competi- tion for a time, and that when the infant grew up the protective hand might be removed. The oppo- nents, of course, called attention to the fact that the protected industries were never ready to surrender the tariff. How high should such a tariff be? How long should it be continued ? In what way should it be re- moved ? Clearly the same rate would not apply in all industries. The rate should be high enough to over- come the advantages of the foreign competitor or the principle of protection would not apply. But a tariff high enough to divert capital from investment in old established industries into one new and untried must insure profits from the beginning. Under these circumstances it is certain that some establishments will be built in the most advantageous places; others will be set up where conditions are less favorable and sometimes they will have less skilled management. 70 BUSINESS AND THE GOVERNMENT In these circumstances even after the difficulties of the beginning have been overcome there will still be estab- lishments with little or no profit, even tho those best situated are reaping high profits. The demand for the lowering of the tariff, therefore, is bound to be vigorously opposed and the cry that its removal will close factories, throw men out of employment, cause suffering, is jDcrfectly true. Herein lies the difficulty under our system of legislation. Doubtless the diffi- culties of establishing a new industry are such that a country might well pay higher prices for a time to secure later the benefit of a self-sustaining industry that would need no further help. Cities often gladly pay a bonus to secure a new industry. But, with our system of passing tariff laws, it is often difficult to withdraw the aid. 9. Who bears the burden of the tariff? — Some ex- tremists have asserted that the tariff is a tax which the consumer pays. This is true for goods not pro- duced in this countiy ; the tariff tax is regularly added to the regular price of the goods. It is generally not true to the full extent in other cases. Extremists on the other side assert that the tariff is a premium paid by the foreign producer for the privilege of selling in this country. This has been true in certain cases where the foreigner had to enter this market, either to dispose of a surplus stock or to avail him- self of the one possible market. Some years ago, before the Canadian railways were built, the producer of wheat in M.anitoba had to market his crop in this INDUSTRIES AND COMMERCE 71 country. The market price wa^ fixed within our country by local conditions and, therefore, wheat with the tariff at $.25 a bushel sold at $.25 less on the Manitoba side of the boundary than in Minnesota. Thus the foreigner paid the duty. Certain other classes of goods, such as woolens, are manufactured here in part; in part they are im- ]:)orted. In these cases the foreign producer in order to force his way into our market against our competi- tion, has usuallj^ to lower his price somewhat, altho generally not to the full amount of the tariff. The burden is thus borne in part by him, in part by the American consumer. How the burden shall be divided depends upon the relative demand and supply. If, for any reason, our supply is short so that prices go up and we must have the goods to meet our needs, the American consumer will pay most if not all of the tax. If, on the other hand, our market is fairly well supplied by the home producer and the foreign pro- ducer has a surplus, he must cut his prices in order to get into our markets. He will then be carrying most or all of the duty. The changing conditions of the market shift the burden, but it is fair to say that speaking generally the consumer bears a considerable part of it. 10. How far should a country he self-sufficient? — Many argue, however, that even tho the tariff be a burden upon the consumer, it is wise to bear it in the case of many products, in order that the coun- try may be self-sufficient, especially in time of war. 72 BUSINESS AND THE GOVERNMENT This was one of the arguments given thirty years ago in Germany for maintaining the duties on grain as well as for building up many diversified industries. This is an argument advanced now in this country for government ship-building yards, munition plants, establishments for the building of armor plate, powder mills and numerous other plants. The argument received great emphasis from war experience. 11. Education and diversification. — Other indus- tries have in themselves a cultural or educational value aside from advantage in times of conflict. It is, how- ever, always a question whether a country gains more by excluding foreign competition and attempting to supply itself or by getting the benefit of foreign train- ing thru the removing of obstacles to the influx of foreign ideas by the importation of foreign products. Our artists and lovers of art smile disdainfully at a tariff on pictures, and our highest protectionists have not ventured to limit the importation of ancient or medieval art. But even those who would admit free art and artists, including operatic stars (for they are exempt from the provisions of our contract labor law) , would often not argue for the free admis- sion of even the most artistic modern furniture or porcelain or indeed of any series of such products. And yet highly skilled artisanship tends to stimulate invention and to produce competent and adaptable workmen whose services will fill a genuine need and increase many times, perhaps, the productivity of their labor. Diversified industries not only satisfy a wider INDUSTRIES AND COMMERCE 73 range of human needs, but by furnishing an oppor- tunity of employment to all kinds of talents doubtless increase the productivity far beyond what is possible among people practically all of whom are engaged in like lines of activity. 12. Diversion of capital into less profitable indus- tries. — If a protective tariff is really needed for any industry in order to enable the producers to secure higher prices than would be possible in competition with foreign goods, capital is drawn from industries normally yielding high profits into some making lower profits before the duty is levied. Provided, however, that the industry is well chosen as one adapted to the country and having only to overcome the difficulties of starting production, and provided further, that the tariff is scientifically levied and in due time removed, it is probable that a new industry will be established that raises the total productivity of the country. 13. Effect of the tariff on wages. — The wages that can be paid in any industry are directly dependent on the economic productivity of that industry. If it is run with low profits, wages must be relatively low in cost however high in money rates. If the gains are high, wages may well be raised. In ac- cordance with the principles of a protective tariff, it is clear that as long as a protective tariff is really needed to prevent the failing of an industry, that in- dustry is not raising the total economic product of the country. That is not saying that the protective tariff may not be justified. The industry may be 74 BUSINESS AND THE GOVERNMENT new and this condition merely temporary. The in- dustry'- may be one needed for the country's defense, or for its education, or other good reasons may be found for its maintenance. But, if the tai'iff is needed for the industry's maintenance, it does not for the time being increase the country's total economic product. Again, an increase in the price of one product, such as will be caused temporarily at least by a pro- tective tariff, increases the cost of living of all per- sons in the community who consume that product. Taking industry as a whole and wage earners as a whole, it is not possible for the reason just given that a protective tariff can raise the general level of real wages (that is, the goods purchased with the money wages) so long as the tariff is needed to main- tain the industry. It is true that a tariff may enable the economic product of any one industry to be de- cidedly increased and the money wages or even the real wages in that industry may be increased, but the general level of all real wages, it is evident, cannot be thus increased. The chief causes for high wages in the United States have been: (a) The influence of our free land for agricultural development. The large profits derived from agri- culture set a standard for wages in other industries. (b) In certain industries American labor is excep- tionally efficient, especially on account of the intelli- gent use of machinery and the standardization of the products. High wages do not necessarily mean high INDUSTRIES AND COMMERCE 75 cost of production; frequently the opposite. We can, therefore, compete against foreign labor in many instances in the production and exportation not only of grain and meats but also of agricultural imple- ments, boots and shoes, typewriters, and sewing ma- chines and many other products. The determining factor in the high average of wages paid in the United States is not the tariff, but free land and high productivity of labor. Nevertheless, the tariff is the reason for high wages in a large number of separate industries, and it might well be that a sud- den change in the tariff would throw thousands out of employment and bring about widespread disaster. 14. Home 7narket. — The home market theory of protection has been handed down since the days of Hamilton, Madison and Monroe. One argument of Hamilton's, common also today, was to the effect that the surplus products of American farmers should be absorbed thru the creation of a home market. It is true that the checking of imports creates a home market. But the market created is not an addi- tional market, tho it may well be a better one since foreign trade and labor are saved and profits are spent at home. It is a different one. With the crea- tion of the home market comes the dwindling of the foreign market, unless there has been an increase in output, since exports are always paid for directly or indirectly with imports. Home exchange is thus made to take the place of foreign exchange with, as said above, a presumable savir^ of freight and quite 76 BUSINESS AND THE GOVERNMENT possibly of labor. There may, however, be a net gain. Whether there is a net gain will depend upon relative prices and relative productivity of labor. 15. Do jjrotective duties cause slackening of indus- trial progress? — Again, from the standf)oint of prog- ress made in industry many claim that protection thru the removal of competition tends to make industry stand still ; that it removes the spur of incentive ; that equipment which would be scrapped and methods which would be abandoned under the competitive methods of free trade are kept under a policy of pro- tection. Such a condition overlooks domestic com- petition which is usually strong, unless there is a monopolistic combination. Then it may be right. But this principle of constant improvements is fol- lowed by the best producers at any rate, regardless of competition, either domestic or foreign, when it is clearly shown that costs of production can be lowered. 16. Foreign trade a small jmrt of total trade. — In any consideration of the tariff it must be remembered that the foreign trade of any country forms a com- paratively small part of its whole trade. Estimates of the ratio of domestic to foreign trade have been as low as 100 to 1, and have rarely exceeded 100 to 10. These estimates were made in a time of peace, and, of course, the war raised the ratio of foreign trade, and t*he fact that the United States is now a strong creditor nation will keep the ratio higher than before. The fact still remains that the domestic trade of this INDUSTRIES AND COMMERCE 77 country caters to the wants of far more than one hundred milhons of people, so that the trade between our several states constitutes the greatest free trade area in the world. 17. Tariffs exert small influence on industry. — Moreover, the utmost effect which tariffs can exert is relatively small. The English economist Nicholson says: "Protective duties and bounties at the best can only direct the employment of a comparatively small amount of the labor and capital of a country; the greater part will be employed according to the natural and acquired advantages of the country rela- tive to those of other countries." These uncertainties render our tariff system un- reliable as a source of income and make it advisable that we have some tax that can readily be varied in order to act as a balance wheel. This is necessary in order to adjust our revenue to our necessary expendi- tures so as to balance our budget from year to year. The income tax has been the English balance wheel, as a slight increase or decrease in the rate can enable the Chancellor of the Exchequer to increase or decrease his income by very exact amounts to meet his needs. Our internal revenue taxes might have been so used, but we seem more likely to follow the English exam- ple and use our income tax. 18. Chief objection to tariff. — Perhaps the chief ob- jection to our tariff system is not so much the burden on the taxpayer as the effect at times upon our indus- trial development of the unscientific levying of the XXIV — 7 78 BUSINESS AND THE GOVERNMENT tariff under political pressure and the log-rolling sys- tem that under the circumstances is almost unavoid- able. The establishment of our tariff commission ought to go far to remedy this evil by furnishing more accurate knowledge regarding conditions of produc- tion and demand, both in this country and abroad, than it is possible for congressional committees to secure in the short period in which they must complete their work. 19. Machinery in tariffs. — The collection of duties on commodities entering the United States is en- trusted to the customs service. For this purpose the country is divided into a large number of customs districts, in e'ach of which there is at least one port of entry where are stationed the collector of customs, appraisers, surveyors, inspectors, special agents and in some cases a naval officer. Other ports of entry are designated if the needs of business make it neces- sary. New York is the largest port of entry; about one- half of our foreign commerce comes thru this port alone, at which the customs service employs more than thirty-five hundred men. Goods imported are examined and appraised at the custom-house, the public stores or appraisers' ware- house. In cases of dispute, arrangements are made for proper appeals to see that exact justice is done. 20. Goods under bond. — In case the importer does not care to withdraw his goods at once he may de- posit them under bond in a warehouse for any time INDUSTRIES AND COMMERCE 79 up to three years, and defer the payment of duties until the withdrawal. If the importer wishes to put his goods in a manu- factm'ing warehouse he is permitted under bond to do so. There he can manufacture articles made from imported materials subject to revenue tax. The goods manufactured, however, must be re-exported. This system corresponds to the "free-port" system of some European seaports and has proved to be a great stimulus to our export trade. It should doubtless be supplemented by the establishment of a few free ports in this country. A drawback is a refund of the whole or part of the duty paid on importation in cases where the merchan- dise is subsequently re-exported within three years in the original package of importation. 21. Kinds of duties, {a) Ad valorem duties. — In the collection of duties three methods may be fol- lowed. Duties may be levied at a named percentage of the value of the goods imported. These are known as ad valorem duties. The successful operation of this system requires col- lectors of tested honesty and efficiency and importers of high integrity, for there are many instances of at- tempted undervaluation, and just valuation requires a large and highly trained body of men, as inspectors and appraisers, who keep constantly informed regard- ing foreign markets and importers, both by study and by the use of skilled detectives. (b) Specific duties. — Specific duties are used much 80 BUSINESS AND THE GOVERNMENT in Europe, but little in the United States, except in combination with the ad valorem duty. Specific duties are based on units of measurement, number or weight — a certain amount of dollars or cents per yard or gross or pound, and so on. The tariff under this system must be framed with greater care for detail than under the other, but once framed is, of course, easier to enforce by collection officials. (c) Compound duties. — The third system of duties, which was much in use in the United States until the passage of the Underwood Tariff Act in 1913, is the compound duty which consists of the specific duty to which is added a supplementary ad valorem duty. This method endeavors to secure in combination the advantages of both systems and possibly may disguise the amount of protection given in the duty. This form of duty adds to its collection the difficulties of both systems, and thus both the making and the work- ing; of the tariff schedules become more cumbersome and costly than under either of the other systems. 22. Bounties. — A bounty is as a premium paid by a government to encourage some branch of production or industry. A bounty policy is often considered im- politic but is sometimes justified as a measure of state. The best known example of a bounty granted by the United States in recent years was the sugar bounty established under the ^IcKinley Tariff Act of 1890. The question of subsidies to shipping might well be considered in this connection, but this will be found INDUSTRIES AND COMMERCE 81 fully treated in the Modern Business Text on "For- eign Trade and Shipping." 23. History of the tariff. — A thoro discussion of the tariff problems in any developed country should include a detailed statistical history of the effects of various schedules. The question is so complicated that it is impossible to predict with certainty what the result of any rate will be. Experience, however, maj^ serve as a guide, and such experience should, of course, always be sought by legislators and students of the problem. 24. Effect of the war. — The abnormal conditions created in this country by the war served to stir afresh certain phases of our tariff controversies. The revenues were abnormally small. The opponents of the tariff, therefore, claimed that the tariff had been unwisely levied. The Allied nations at the Paris Economic Conference of June, 1916, took counsel with one another with reference to the protection of their common interests after the war was ended. At that time radical discriminations in favor of the Allies were decided upon. Since that date the changes both economic and political have been so vast that the peace conference in Versailles found it neces- sary to consider the whole matter anew. It is entirely ])ossible that final measures of international coopera- tion, not only political and military, but also economic and financial, will entirely change the world outlook upon this vital problem. 2.5. Dumping. — In many lines of industiy foreign 82 BUSINESS AND THE GOVERNMENT governments accumulated large stocks. They are naturally attempting to break down certain of our new industries and to regain their lost markets by "dumping" upon this country these surplus stocks at prices below our cost of production. It is claimed that this was the policy followed by Great Britain after the War of 1812. Why should not such a policy follow this war? Fearing such a contingency provi- sion was fully made in the revenue act of 1916 for adequate protection. 26. Economic independence of nations. — The war has brought home to all countries the necessity of being able to feed and clothe their citizens and soldiery, and to meet war emergencies of all kinds. Even prior to the war England and Germany were debating how means might be found to raise cotton so that they would be less dependent upon the United States for their supply. Since the war, in cases where the United States has been the source of supply for countries of Europe, the countries with colonies are encouraged to produce foodstuffs and other neces- sary commodities. They are also endeavoring to get control by purchase in other countries of sources of important materials such as oil and rubber. The countries without colonies will make earnest and re- peated efforts to raise such supphes -at home. The slogan for all will be "self sufficiency." Even the United States is feeling the need. The Government shortly before our entrance into the war took stock of our industries to see how they could be best used to INDUSTRIES AND COMMERCE 83 produce munitions. Some of our great business houses are aiming to secure a sufficient supply of rub- ber under American control. Other industries like oil, copper, and abrasives are at work in the same di- rection and the question has brought up the tariff arguments. 27. A tariff commission. — For some years, leading men in both the great political parties have advocated "taking the tariff out of politics" by the appointment of a non-partisan scientific tariff commission. Ow- ing to partisan strife in a late Republican adminis- tration, a permanent tariff commission could not be created, but an appropriation was made for the ap- pointment of a Tariff Board to perform somewhat similar services and to make recommendations to Congress. When the opposing party came into power it was eager to give immediate effect to its own tariff prin- ciples: the Tariff Board failed to receive its sup- port and went out of existence. The same party, however, appointed a Tariff Commission which is making a careful study in this country and abroad of industrial conditions with reference to specific in- dustries in such a way that it may regidarly supply trustworthy data for the use of Congress. Such a board, with a conservative, trained personnel may well accomplish great good. Its aid was never more needed and probably at no time has public opinion been more ready to accept its recommendations. It is to be hoped that it will be properly supported and 84 BUSINESS AND THE GOVERNMENT its recommendations properly considered. This is likely to be the chief factor in any solution of our tariff problem. REVIEW What are the three leading types of tariff systems? Who were the Mercantilists ? What was Alexander Hamilton's chief reason for advocating a protective tariff? Why did the southern states oppose a protective tariff? W^hat classes of goods are best suited to a revenue tariff? How far is the argument in favor of promoting infant indus- tries by protective duties sound? What are the reasons why a country should be economically self-sufficient ? Analyze briefly the common arguments to the effect that a protective tariff increases wages. Explain the duties of the United States- oflScials in connection with the importation of goods. What is a bounty as contrasted with customs duties? Indicate briefly the effect of the recent European war on tariff sentiment in the United States. Should the Tariff Commission be limited to making reports to Congress or should it be given definite powers over tariff" rates? CHAPTER V PUBLIC INSPECTION OF BUSINESS 1. Controversy regarding government inspection. — Bitter controversy has raged at various times over the question whether the Government, either Federal or State, should officially inspect, examine and certify to qualities of goods, to safety of business organiza- tions, to qualifications of individuals. The subject is one of grave import, in business, in sanitation, in so- cial organization. 2. Need of standards in business. — It will be readily conceded by all that in many lines of busi- ness, standards must be set up which can be easily tested and recognized. These may be standards of size or weight or time; standards of quality as re- gards goods; standards of fitness in the case of men or women who have duties to perform which require skill and knowledge and where ignorance might well cause great private or public loss. Some of these needs have long been recognized in all the leading countries of the world. The question, nevertheless, frequently arises whetlier or not government inspec- tion is better than private inspection as regards ac- curacy and public confidence as well as expense. A moment's thought upon the wide extent of the field 85 86 BUSINESS AND THE GOVERNMENT of inspection will also show that it covers business and activities of so divergent a character, ranging from purely physical matters to personal character- istics and the moral influence which certain activities may exert, that the whole question demands careful analysis and presumably the setting up of principles on which may be based different methods suitable to different cases. 3. Weights and measures. — Everything that is to be measured must have the measurement expressed in terms of some unit or standard. The standard of length in Great Britain and the United States is the yard, which, in Great Britain is the distance at 62° F., between two plugs of gold sunk in a bar of platinum, preserved in London. In the United States the yard, in accordance with our law, is taken from the prototype meter in the National Bureau of Standards at Washington and is derived from it in the ratio of-^^. The international standard of length is the meter, from which the United States standard rs taken. That standard is preserved in Paris. It was established by the French Republic in 1801. The unit was intended to be one ten-millionth part of the distance from the pole to the equator. Remeasure- ments proved that the meter had been made slightly too short, so that now it is defined as the length of a certain bar of iridio-platinum (ten per cent iridium). The original meter in this form is preserved in the Bureau des Archives at Paris. Certified copies of the same form and material are owned by all civilized PUBLIC INSPECTION OF BUSINESS 87 nations, that of the United States being preserved at the Bureau of Standards, Washington. Since it has been proved that this meter is not exactly the one ten-milhonth part of one-quarter the circumference of the earth, as had been intended, it is no better than the yard or any other standard that might be taken. Inasmuch, however, as its multiples and sub-multiples have been fixed on the decimal system, it has been made the general international standard. In estab- lishing the meter as a standard the French govern- ment related the measures of area, weight and volume to the meter and also to the most universal feature in nature, water. For example, the gram (unit of weight) is the weight of one cubic centimeter of water; the liter (unit of volume) is the volume occu- pied by a mass of one kilogram of water (measured in both cases at the point of its maximum density — 4= C). From these illustrations it will be seen what great care and trouble have been taken by all leading na- tions to determine these standards by which we buy and sell goods of various kinds. To prevent cheat- ing on the part of merchants by the use of short meas- ures or inaccurate weight scales, there are appointed government inspectors of weights and measures with authority to make comparison with the standard at any time at their will of the weights and measures used by any business man. If a dealer uses inac- curate measures he may be severely punished. In like manner governments set up certain stand- 88 BUSINESS AND THE GOVERNMENT ards of value. For example, in the United States, the dollar is 1.672 grams of gold .900 fine. In a similar way in Great Britain the £ sterling is 7.988 grams of gold .916% fine. In Germany the mark is .398 grams of gold .900 fine. In France the franc is .3226 grams of gold .900 fine. At times, how- ever, in places where the Government has not by authority defined standards, private individuals or companies have done so. On account of the uni- versalit}^ of their use, people very generally do not realize what infinite pains have been taken by gov- ernments to establish and maintain these standards unvarying, in order that business may be safely done. Without such standards the business world would be chaos. 4. Salt, lumber, grain and sugar. — INIany com- mon articles of consumption must be bought and sold according to standards of quality when from the na- ture of the merchandise the quality is not readily dis- cernible by an untrained purchaser. (a) Salt is sometimes mined, being taken from the earth in the form in which it enters into commerce. In this country it is usually found in solution with water (brine), and the salt is secured by evaporation of the water. In a similar way, a veiy large propor- tion of the salt manufactured and used in China is secured by the evaporation of sea water. In all these cases it is practically impossible for the ordinary purchaser to determine the quality of the salt, excepting in the most general way. The PUBLIC INSPECTION OF BUSINESS 89 governments of various states have therefore ap- pointed inspectors whose business it is to test the salt and certif}^ as to its quality before it is put into the market for sale and purchase. ( b ) Lumber is prepared for the market by sawing it into boards, planks and beams of various sizes and shapes to meet the needs of purchasers. Of greater importance still, however, is the quality of the wood as regards the species of the tree from which it is derived, its soundness and its freedom from knots and rot. In earlier days, men familiar with the quali- ties of lumber or timber fitted for various purposes inspected the lumber as it came from the mills to be shipped to the great lumber yards for distribution to the users. These men, by practice and associa- tion one with the other, acquired a rare degree of skill, so that the inspection by different men at dif- ferent places showed on the whole suffcient uniformity to enable them to do business. In certain places, however, an attempt has now been made to determine standards by government, and government inspection assists the dealers. (c) Wheat, oats and corn are not sold by the meas- ured bushel only. The bushel itself is usually of late years determined by the weight of the grain rather than by the bulk, inasmuch as the varying qualities for a standard bushel in bulk differ greatly in weight, and the quality of the kernels themselves vary. Moreover, the wheat or oats may have mixed with them various quantities of seeds from weeds or other 90 BUSINESS AND THE GOVERNMENT substances because the grain has not been carefully cleaned. Custom among the grain dealers had early fixed many quality standards, but now many of our states have set up local standards and have provided government inspectors. This practice of classifying and grading grain is distinctly American in origin. The Board of Trade of Chicago began it in 1858. State inspection was begun by Illinois in 1871, fol- lowed later by Missouri, jNIinnesota, Indiana and Kansas. Now most of the states and markets east of the Rockies have a substantially uniform practice. An Englishman of prominence in the grain trade has said that of all the inventions of human ingenuity in the grain business the American system of grading is the greatest. (d) Sugar bought in large quantities by the great refineries has also been standardized, the standards varying somewhat in the different countries ; but they are so well known that there is little difficulty in mak- ing comparisons. For example, in the United States standard raw sugar is 96° centrifugal, polarization test, and with this as a basis, the various grades of raw sugar are worked out. The refined sugar is rep- resented by the granulated sugar. These and for- eign standards are substantially uniform and can be readily applied by all the large manufacturers and dealers. Inasmuch as the sugar trade is to a con- siderable extent in the hands of a relatively few large producers, their gradings are accepted by the mass of dealers. It can readily be seen how absolutely PUBLIC INSPECTION OF BUSINESS 91 essential such a standardization is in these and many other lines of industry. 5. Inspection of meats as a commercial and sani- tary measure. — To provide clean, wholesome and healthful meats for all is one of the problems of civ- ilization. Altho in the past when farmers provided their own meats and when local butchers supplied villages and cities it was possible for individuals to have some supervision of their supply, that is no longer possible in our large towns and cities. There must be some careful inspection and this inspection in part has been taken over by the Federal Govern- ment. The states have not yet undertaken the in- spection of meats on a wide scale, altho in many states, as in Xew York, great care is taken to protect herds from tuberculosis, foot and mouth disease, and other diseases affecting meat-producing animals. In spite of many sharp criticisms of the Federal inspection service, fraud and carelessness having been charged from time to time by magazine writers, much has been accomplished. Inspectors see the animals when alive, are present when they are slaughtered and inspect them afterwards. The Federal authorities, however, inspect only about one-half of the supply. Probably two per cent of the supply is diseased and should be condemned. Naturally, the diseased cattle are likely to be shipped to places where there is no inspection. The Federal inspection service covers the packing establishments whose products go into interstate commerce, some eight hundred in all. In- 92 BUSINESS AND THE GOVERNMENT asmuch as these great packing houses are mostly in the West and the cattle are those taken from the ranges, the probability is that the cattle slaughtered in these establishments are those less subject to dis- ease, and the dairy cattle in the East are more likely to be infected with tuberculosis. 6. Inspection for the export trade. — A prominent influence in estabhshing and maintaining our meat in- spection law was the action taken by some foreign governments, especially Germany, against the impor- tation of American meats, the alleged ground being that the meat was diseased. There was at the time more or less trichinae in American hogs. Numerous cases were found in the American population as well as some in Germany, and it is probable that some of the cases in the latter country were those of people who had eaten American pork, it being customary in Germany to eat uncooked ham. Aside from the fact that there was some ground for believing that American meats were unsanitary, was the considera- tion that German farmers, especially the great land owners, were feeling the competition of American im- ported meats, so that the exclusion of American pork was based largely on commercial grounds. The prompt action of our Federal Government in creat- ing an inspection bureau that could be well enough organized to control absolutely all exported meats gave our Government the opportunity to bring pres- sure to bear upon Germam^ to revise its laws and to permit the importation of American meats. PUBLIC INSPECTION OF BUSINESS 93 The study of the problem by scientific experts has made it possible to prevent comjilete loss, even when animals are afflicted with certain diseases. Some dis- eases being purely local in their nature, the greater part of the meat is not tainted by them. Other dis- eases which render meats unfit for food, do not destroy their utility for certain manufacturing processes. All these facts, however, merely emphasize the need of skill in inspection, such inspection to be universal, and rigidly enforced. 7. Pure food laxjcs. — In the United States no ef- fective food laws were passed until 1883 when the state of Massachusetts passed an act containing what have since become the fundamental principles of the food and drug acts of the various states and of the Federal Food and Drug Act. In 1905-06 public sentiment was greatly aroused by exposure of food frauds resulting in the passage by Congress of the Food and Drug Act, which was ap- proved June 30, 1900. From the standpoint of pub- lic health as well as public honesty, the act is one of the greatest importance. This act is intended primarily to prevent the adul- teration of food and drugs. Dinjgs must not vary from the standard recognized in the national formu- lary unless the degree of tlie strength, quality and purity is stated on the container in which it is offered for sale. Food is adulterated if any substance has been mixed witli it so as to reduce its quality or strength, or has been substituted wholly or in part XXIV — 8 94. BUSINESS AND THE GOA ERNMENT for the article itself. It is also adulterated if any valuable constituent has been abstracted or if it has been so treated as to conceal any damage or infe- riority, or if any injurious ingredient has been added, or if it consists in any degree of filthy or decomposed animal or vegetable substances or any portion of an animal diseased or that has died otherwise than by slaughter. Preservatives may be applied externally to food products if directions for their removal are printed on the package. Articles may not be mis- branded b}^ placing any design, device or statement on the package or label which shall be misleading in any particular, and misbranding is to be prosecuted the same as adulterating. The dealer is not held liable if he can show a guarantee from the seller re- siding in the United States that the goods are not adulterated or misbranded. The Bureau of Chemistry, Department of Agri- culture, is the tribunal to decide whether any speci- fied food substance is deleterious. The enforcement of the law has doubtless been very helpful in restricting greatly the use of many patent medicines, injurious in their character. On the other hand, by compelling manufacturers to label their goods so as to disclose clearly their contents, it has enabled consumers to buy with full knowledge of their purchases and is tending to benefit honest manufac- turers of wholesome products. In this way it has been promotive of trade of the better sort. Again, by its rigid enforcement it has been protective of the PUBLIC INSPECTION OF BUSINESS 95 honest manufacturer and dealer, and has freed hiiii largely from the pressure earlier brought upon him by his competitors to deceive his customers. It is thus promotive of wholesale honesty. It would be a great advantage in an ways if we could have one uniform system of pure food laws that should be enforced thruout the country, instead of a burden of laws varying from state to state. Of course, there is an added burden of cost in pure foods. Cleanliness costs, but for that the con- sumer is glad to pay. ^Moreover, when one reads accounts of the deceptions that have been practiced in the production of many common articles of food, such as canned fruits and vegetables, one sees the advan- tage of rigid laws rigidly enforced. In certain re- ports printed in the Scientific American we learn that cannery waste such as skins, cores, decaj^ed parts of tomatoes, partly spoiled fruits and similarly spoiled material can be worked up into catsups and soups by dosing them with chemicals, sj^icing, coloring and flavoring them and otherwise preventing them from fermenting. Against such abuses the public ought to be protected and sliould be glad to pay the cost of protection. Perhaps no other single question in connection witli the food supply has caused more discussion than that of securing a fairly safe milk supply at a cost not prohibitive. The problem has not yet been solved, but any energetic and efficient board of health can accomplish much. Herds of cattle can be inspected, 96 BUSINESS AND THE GOVERNMENT the milk itself can be regularly tested and measures can be taken to prevent the consumption of any milk containing injurious germs. Probably the Health Department of New York has done more to insure a safe milk supply than the board of any other city in the world. Its work sets a standard for others. 8. Banks and insurance companies. — Entirely dif- ferent in nature is the inspection of various types of business establishments to see that they carry out pro- visions of the law made for their regulation. In the Modern Business Texts on Banking and on Insurance will be found the main provisions of the laws regulat- ing the issue of bank notes, the holding of necessary reserves, the checks upon investments of savings banks and life insurance companies. Both the Federal Government and most state governments have pro- vided for the inspection of such institutions in order to see that their patrons are duly protected. It is impossible, of course, for the average depositor in a bank to guard his own interests. He is not able to investigate, nor has he the technical knowledge and skill required. 9. Protection of the jJuhlic hy examination and cer- tification of certain professions. — Among peoples in earlier stages of advancement, individuals have usually been free to make their own reputations and to use any means that they thought wise to get them- selves before the public. Medicine men, soothsayers, fakirs, holy men, by various devices have attracted and secured the confidence of others. They have used PUBLIC INSPECTION OF BUSINESS 9T or abused this confidence. They have benefited or wronged those who trusted them. They have pros- pered or suffered and have caused their customers to prosper and suffer without interference by the proper government authorities. At times heads of the state or tribe have been their chief patrons; and sometimes in case of discovery of gross malpractice these same, patrons have inflicted swift vengeance. Even in our own country until a late day there has been but scant regulation of physicians, lawyers, teachers. Any one could practise if he could find patrons. At the present time, however, all civilized states at- tempt to protect the public against fraudulent prac- tices. jNIost states, largely at public expense, pro- vide for the training of doctors, lawyers and teachers. Physicians are not permitted to practise and to earn their living thereby until they have been duly ex- amined by properly constituted governmental authori- ties and have been certified as duly qualified both by learning and by character to practise their profession. Similar examinations must be taken before lawyers can offer themselves for pay as formal legal advisers to the public. Teachers also must pass examinations as determined by law and be duly certified before they may be engaged by the public authorities to teach. In most of our states, private schools are sub- ject to inspection by the educational authorities; and, if the results of such inspection show that the school has not attained certain standards of excellence, its methods and teachers must be changed or the chil- 98 BUSINESS AND THE GOVERNMENT dren attending will not have fulfilled the legal regula- tions regarding school attendance. 10. Certification of other servants of the public. — In order to protect the public this work of examina- tion and certification has been widely extended in many directions. Persons are not permitted to run steam-engines, nor to act as pilots in our harbors with- out licenses given as a result of examinations. In most states chauffeurs are required to submit to tests and receive a license to run a motor car. In certain states barbers are not permitted to practise their pro- fession until after due examination and license. The tendency seems to be to extend the laws to practically all kinds of occupations where malpractice or mistakes may result in injury to the health of individual pa- trons who are themselves for any reason unable to make proper investigation as to the qualifications of those whom they employ. Altho protection to the public is the reason usually assigned for such laws, the promoters are often men in the trade or profession who wish to lessen competi- tion b}'^ excluding all those who cannot pass such ex- aminations. The commercial spirit doubtless in many instances works under the guise of the promotion of public safety. 11. Quasi-official privileges. — Certain classes in the community by virtue of the fact that they have cer- tain certificates granted them either by the Govern- ment or by boards recognized by the Government are given privileges that are semi-official in their nature. PUBLIC INSPECTION OF BUSINESS 99 Men who have been licensed to preach by the con- stituted authorities of their church, whatever its de- nomination, are thus recognized by the state. Mar- riage in the United States under our laws is a civil act, whatever its religious character may be in the minds of individual citizens. Because the marriage ceremony has very generally been considered neces- sary for the social welfare, it has seemed wise to the state to give the power of uniting a man and woman in marriage to certain govermnent authorities, such as justices of the peace, aldermen or mayors of cities, steamship captains on the high seas and consuls abroad, as well as to ministers of the gospel. These men are required to make returns to the proper public offices for record after performing marriage cere- monies. Their act of performing the ceremony is recognized in the United States as sufficient to make the marriage valid. In many countries, for instance Germany and France, the minister is not given such power. The legal ceremony must be performed by a government official. The religious ceremony, usu- ally performed in the case of people of the well-to-do classes, is purely a ceremony for the satisfaction of the parties concerned and has no legal validity. Such grants of power are, of course, beneficial in many ways, primarily, however, in that they afford personal satisfaction to large numbers of people in the community and serve also to encourage the main- tenance of religious feeling. It is a good thing to have the sanction of the church. On the other hand, 100 BUSINESS AND THE GOVERNMENT however, persons who have other business besides per- forming such formal legal duties, are often very re- miss in carrying out the legal work. It is desirable that proper records be kept in public offices of births, deaths and marriages. Physicians whose duty it is to register births and deaths, and ministers who should record marriages are often careless in making re- turns, and in this way public interests suffer. Gen- erally speaking, business is better performed by a man who devotes his time to it instead of by one to whom it comes as a mere incident. 12. Limitations of inspection. — As has already been intimated, government inspection of late years has been greatly extended and seems likely to enter many fields that have hitherto been considered strictly private. Sanitary inspectors enter our houses to look over the plumbing; our children are submitted to ex- amination of eyes, teeth and skin in school; our births, marriao-es and deaths are recorded and certified to by public authorities. Where shall the limit be? It seems clear, in the first place for business reasons, that in order not to hamper individual initiative, but rather to stimulate invention and creative thought, govern- ment supervision and inspection should be limited as much as can be done without detriment to the public welfare. On the other hand, the interests of indi- viduals are so intertwined in business ; and, especialH' in the great cities, the acts of each individual are so likely to affect the welfare of his neighbors without any possibility of their defending themselves against PUBLIC INSPECTION OF BUSINESS 101 infection and other forms of injurj% that public wel- fare demands inspection wherever carelessness or the vicious intent of individuals may seriously injure others. Not only business and health demand careful con- sideration whenever the question of public inspection is raised, but social and ethical reasons require care no less. The privacy of the individual is a right that should be protected as far as possible. The intimacy of the home ought not to be unnecessarily invaded. An individual cannot grow morally any more than he can grow physically if he is continually hampered and if he is not allowed the free exercise of judgment and decision — and yet he must not be permitted to injure his fellow men. The rule for a limitation of govern- ment inspection must insure public welfare while at the same time attaining the best development of indi- vidual citizens. REVIEW Explain the need of standards in buying and selling; also the business need of the standard of time. How are the records of the standards of length, weight and volume determined and preserved? \Miat is a dollar? Is it essential that standards be maintained by governments or may individuals or associations of business men fix and main- tain them? In what way does the inspection of meats affect the export trade of the United States? What are the essential provisions of the United States Food and Drug Act? Why do the provisions of pure food laws increase the cost of foods ? 102 BUSINESS AND THE GOVERNMENT Ought Christian Scientists to be permitted to treat sick people ? Why? Ought teamsters, accountants, salesmen, grocers and street cleaners to be compelled to take out a government license before doing their work? Ought clergymen to be permitted to marry people until they have secured a marriage license from duly constituted authorities ? What limitations vpould you place upon governmental inspec- tion of business ? CHAPTER VI PROBLEMS OF EMPLOYMENT 1. The labor contract. — Sir Henry Maine, one of the greatest authorities on social conditions, has said that the profound difference between societies in early days and at present is that then they were based upon status, now they are based upon contract. Formerly, people were born into their positions, duties and rights ; now they choose them. Then custom decided their relations to one another, now contracts decide. Practically all of modern life is based on contracts, leases, purchases, marriage, banking, railroading, manufacturing, and not the least important, the re- lations of employers and laborers. The values di- rectly involved in American labor contracts cannot amount to less than ten billion dollars yearly. These figures, however, give little idea of the far-reaching importance of the labor contracts. They affect wages no more than they affect health, social conditions, morality. It is scarcely too much to say that upon the wisdom, fairness and fidelity with which labor con- tracts, formal and informal as regulated by law and custom, are framed and carried out depends the con- tinuance of civilized social life. The determination of wages, work and hours are directly stated in the 103 104 BUSINESS AND THE GOVERNMENT contract, while the varied conditions of work, respon- sibihties of the employer, physical environment, and such matters, are indirectly stated. After all it is the smaller part of the contract that is stated form- ally ; other parts are read into it by natural conditions and laws. 2. Constitutional limitations. — The legal regulation of the labor contract, orwing to changes in public opinion and at times to wrong motives of the parties, is of the greatest importance. Generally speaking, the policy of foreign countries has covered the field of industrial relations more completely than that of the United States, and is genei'ally less bound by con- stitutional limitations. In the United States, at the time our earlier con- stitutions were framed, there was a great jealousy for personal liberty and rights. The hands of gov- ernmental officials were rather firmly tied. More- over, in accordance with the American view of the desirability of self reliance, and self responsibility of the individual, the American courts have generally shown an inchnation to interpret these constitutional limitations rigidly. In consequence, many attempts to promote the welfare of adult male laborers in ways that seemed to limit the right of individual contract have been declared unconstitutional. From another point of view, the courts have upheld the right to assume control over services of many kinds, thru the power granted Congress to regulate interstate commerce, even upholding a law excluding PROBLEMS OF EMPLOYMENT 105 children from a great part of industrial employment by prohibiting the carriage of their products in inter- state commerce, the purpose being to uphold the rights of children too inmiature to defend themselves against unscrupulous employers. Again, under the so-called police power of the states and of the Federal Government, many kinds of in- dustries have been placed under rigid control to secure the welfare of the people even tho the liberty of con- tract is thereby limited. By governmental action buildings are destroyed to check fires; diseased ani- mals are killed ; persons liable to spread contagion are quarantined — sometimes for long periods. 3. American labor policy. — Only lately has Amier- ica become the leading industrial country. Even now we cannot be said to have any uniform labor policy, tho one seems to be gradually forming. The Fed- eral Government forbids the importation of aliens un- der contract ; some states forbid their employment by the state government. Other laws forbid the employ- ment of the intemperate or the color-blind in certain callings. Wages must generally be paid in lawful money, and the time, manner and even the place of payment are regulated. So necessary, however, for the development of the individual is the assumption by him of personal responsibility, that it has been deemed wise to move slowly in the direction of limit- ing freedom of contract, exceptions being made gen- erally only in connection with the employment of women and children. It should still be kept in mind 106 BUSINESS AND THE GOVERNMENT that liberty does not mean necessarily the mere free- dom from control by governments and laws. We are dealing also with natural forces, with other individ- uals, and often certain regulations by law may really enlarge liberty. Traffic regulations and the warning hand of the traffic policeman really increase the free- dom of movement thru city streets. Like restraints increase the freedom of exit from burning theatres or factories. 4. Results of regulation. — On the whole the results of regulation in most countries have doubtless been good, tho not in all respects. Usually the most rigid restrictions are found in states with the greatest economic advancement. For example, ^Massachusetts and New York have not suffered generally in competi- tion with other states. It is not good business to waste laborers. It is good business to take the best possible care of them. It is desirable that in a country like the United States the regulations be made more nearly uniform either by concerted action among the states or by the transfer of power to the National Government. Usu- ally the better plan has been regulation by industrial commissions that have had a rather wide discretion than by severe laws enforced by mitrained officials. 5. New 7ieeds of modern industry. — The great changes in modern life, especially those brought about in the latter half of the eighteenth century and the first years of the nineteenth in the so-called "industrial revolution," have created many new perils as well as PROBLEMS OF EMPLOYMENT 107 new needs. People now have greater resources, greater opportunities for the development not only of their bodily but also of their intellectual, aesthetic and spiritual needs, and yet with these new oppor- tunities have come many new dangers. In those days little was known of public sanitation; surgical skill was rudimentary ; the nature of the germ diseases was unknown. Modern improvements in these directions have doubtless increased the length of the average hu- man life by a nuinber of years. A century ago wage earners had no abundant supply of wholesome water, no serums for the cure of diphtheria or lockjaw, no antiseptics in surgery, no public hospitals, but they lived more simply, they worked more slowly, they were not so liable to industrial accidents from complicated machinery or railway trains. Yet it is certain that these increased perils of modern life have been more than offset by the additional preventives and protec- tions against disease. This fact, however, is of course no reason why these protections should not be ex- tended and our modern life continuously improved. Such improvements are desirable not merely fi»om the humanitarian and social point of view, but also from that of good business. Accidents and disease are expensive. Safety, sanitation, good health are profitable. 6. Extent of losses. — It is impossible to give an ac- curate measure of the losses still suffered thru care- lessness, but some indications of the extent of these losses may be noted. According to some of the latest 108 BUSINESS AND THE GOVERNMENT estimates, not, less than 23,000 people are killed each year at their industrial work ; 500,000 are seriously in- jui'ed, and the number suffering minor accidents runs to at least 1,500,000. Mining, railroading and con- struction work are responsible for many thousand fatal accidents each year. Altho the proportion is less in agriculture, owing to the larger number em- ployed, the total number of accidents is likewise large. The loss thru sickness among the wage earners and their families is probably even greater. One of the most carefully prepared estimates of the yearly cost of sickness among wage earners placed the figures at not less than $750,000,000. If this estimate was cor- rect and the same sickness rate continues the wage loss today must be far higher. Allowing for the increase in the number of workers and assuming that in 1920 wages and costs were double those of 1910, the figure on the same basis would be approximately $1,750,000,000. However, not all of this can be charged against employment; a large part is doubt- less due to unliealthful conditions outside. Aside from the immediate monetaiy loss running into the hundreds of milhons of dollars a year, the pain and grief of the sufferers and their families should like- wise be reckoned, for after all the real importance of monetary gain and loss is either directly or in- directly to increase the comfort and satisfaction of human beings. And these satisfactions, social, in- tellectual, even moral, are largely dependent upon economic and physical conditions. We must not be PROBLEMS OF EMPLOYMENT 109 misled. Modern conditions are doubtless better than those that preceded. Today records are kept, yester- day they were not. We understand conditions better today. All the more reason why we should make greater efforts to improve them still more. 7. The responsihility for these conditions. — The last few years have seen a marked change in the views of the most careful observers regarding the responsi- bility for these unfortunate industrial conditions. Doubtless, in many cases, the workman is responsi- ble, thru his carelessness, for accident; or thru his ignorance, for disease. But when accident or disease arises from the conditions of the factories or of the work-shops, it is primarily the employer who is respon- sible. This does not necessarily imply blame for the employer. It does show that improvements should be made thru him. 8. The part of the Government. — It was doubtless normal in the earlier days of modern industry for the employers to leave the risk to be borne in' large part by the workmen. It takes time to adapt new im- provements to living conditions. Moreover, the ex- igencies of business competition often prevent the best meaning and the kindest hearted men from living up to their own standards. To instal safety devices meant outlay and often a financially dangerous in- crease of expenses. The competitor, therefore, who cared least about the safety of his workmen might be- come the strongest competitor in the market. The more kindly emj^loyer might give warnings when XXIV— 9 110 BUSINESS AND THE GOVERNMENT financial considerations would not permit him to bear the expense of assuring safety. Under these condi- tions the government needed to intervene. Naturally there was not at first any conscious adoption of a new policy. As a definite evil became evident a specific requirement of change was made. Only in the course of time did these changes become so numerous that general principles were recognized. In England, as the first prime seat of modern industry, the practices were first perceived and the first protections taken with the hearty cooperation of the best employers. The British Factory Acts, it is commonly stated, began thru the Health and Moral Act of 1802. This required the whitewashing of the rooms occupied by apprentices in textile mills and a few other simple pro- visions for the health and decency of the young work- ers. Thereafter, gradually, always to meet a specific evil, these Factory Acts developed into an extensive system of requirements for the safety of all classes of workers in all kinds of industry. One by one different nations followed in England's footsteps. In the United States, where perhaps more than elsewhere principles of individual liberty and in- dividual responsibility caused delay, the change came first on a large scale in the years following the Civil War. Since then steady progress has been made. In most instances, as has been intimated, the new leg- islation has been opposed as an unconstitutional viola- tion of the guaranteed liberty of the employer or of the workman. The laws for health have, however, PROBLEMS OF EMPLOYMENT 111 generally survived hostile criticism. JNIost of them liave proved their worth. Employers now in many cases go far beyond the legal requirements. 9. Extent of requirements. — The most minute re- quirements have been found generally in mining. The work in darkness underground and the wholesale character of some of the accidents bring that industry vividly before the minds of the people. Again, the processes of the industry are less varied than those of many kinds of manufacturing so that they lend them- selves more readily to regulation. ComparatiA'ely little has been done in agi-iculture. Naturally it is the frequency of accident in proportion to the num- bers employed that brings about regulation. Farm- ing, altho it involves ;small risks, owing to the num- bers employed, kills in the aggregate more persons in a year than does mining. At first it was assumed in Great Britain, and to a considerable extent is still assumed in the United States, that the adult male workman can take care of himself. JNIany more laws, therefore, are fomid mak- ing provision for female and youthful workers than for men. Nevertheless, especially in making provi- sion against accident, both voluntary and compulsory measures have been taken for tlie protection of the adult male. 10. Regulation rather than prohibition. — Gener- ally speaking, processes are not forbidden, but there are some exceptions. In the United States as well as in foreign lands, the employment of poisonous 112 BUSINESS AND THE GOVERNMENT white phosphorus in the match factories has been for- bidden. In certain cases women and children are ex- cluded from certain types of work in which they might suffer either bodily or moral injury. For example, they are forbidden to work in mines, and to engage in certain classes of work during the night. Sometimes for their own sake or for that of the public, they are excluded from the cleaning of moving machinery. In- temperate, inexperienced, or color-blind persons are excluded from railway train service ; inexperienced or unlicensed men from positions as mine foremen. But generally, instead of prohibition we find regu- lation, so adapted as to eliminate the dangers and re- tain the benefits of former processes. As a rule, pro- tection from accident rather than from disease has been chiefly in the minds of those shaping the policies, but of late years much more emphasis than formerly has been placed upon protection from the so-called occupational diseases, such as those coming from the use of phosphorus, from lead poisoning, from the use of compressed air, or from illy-ventilated, poorly- lighted workrooms. Sometimes also special emphasis is laid upon provisions for the care of the general health and strength of workmen. There are many provisions for ventilation, sanitation, toilet conven- iences, seats for operatives whose tasks permit sitting, against eating and sleeping in workrooms, against too long working hours. 11. Women and children. — So general and ex- tended are the provisions regulating the employment PROBLEMS OF EMPLOYMENT 113 of women and cliildren that special note should be made of these. Before the industrial revolution, in the days of the household industries, there were many instances where the employment of women and chil- dren was not an evil. Tasks were suited to their ca- pacities, their strcngth and skill without depriving them of a reasonable amount of healthful relaxation. Usually they were working in the household, not regu- larly for wages. With the development of the factory system, how- ever, conditions changed. The work of women and children threatened the wages of men often to so great an extent that family earnings rather than individual earnings were in danger of becoming the standard. As the need for regulation developed, specific re- strictions adapted to the cases were imposed. Shorter liours was one of the first provisions, interruptions of labor for definite periods at meal times, prohibition t)f night work in certain instances, the forbidding of the employment of women for a definite period before and after child-birth, the fixing of the age limit for children at fourteen, or in certain cases, at sixteen years, educational requirements, sucli as proficieney in elementary English subjects, separate dressing rooms and toilet conveniences for women, these and other provisions have all been made with the purpose of improving the general condition of society. The improvement of the liealth and personal qualities of the women and chil(h-en makes, not only for tlie pres- ent, but also for the future, better producers, better 114^ BUSINESS AND THE GOVERNMENT citizens, better men and women. Special emphasis has been placed, and rightly, upon the unregulated employment of married women and mothers of young childi'en. The interference of unregulated employ- ment with the home has oft-en been the source of most harmful social evils. It is doubtful too, whether the industrial gain from the steady employment in industry of women and chil- dren is so great as has at times been thought. Natur- ally, there are many individual instances where there is no male supporter of the family, or where, owing to special reasons, the father's wages are insufficient to cover the family needs in which the supplementary earnings of wife or children are of distinct benefit. The general opinion of the most careful students of the subject, including the best employers, is, however, to the effect that tho temporarily there might be some economic gain in hiring children and women for low wages, such gain cannot be realized permanently by society if it is made thru an impairment of the quality of the men and women who work. Farmers do not put their half -grown colts to plow. They know there would be double folly in working thus early the ani- mals from which they expect to breed for future use. War conditions naturally increased very largely the numbers of women engaged in business and wid- ened greatly the range of those employments. From present indications in both Europe and the United States this experience is likely to result in a marked PROBLEMS OF EMPLOYMENT 115 change. We know better now than ever before the range of adaptabilitj^ of women and children in in- dustry and this experience will have its permanent effect. Nevertheless, the general principles will doubtless remain that while there are certain gains, at least temporarily, from such employment, there is danger of enormous social loss, and societ}^ must see to it, thru proper governmental regulation, that abuses are prevented and that society makes the gains with- out suffering the losses. 12. Minimum wage. — jNIost prominent among the new movements to aid women workers is that for the minimum wage. The movement originated abroad in the Australasian Colonies in the nineties, followed by Great Britain in 1909, and France in 1913. In England and her colonies, the laws aimed to secure for workers — men and women — a living wage. In France they began with trades where wages were very low — with the sweated trades. Xow they have gradu- ally extended until they include the best paid with the lowest paid workers. 13. Laws in the United States. — In the United States, they began in Massachusetts in 1912. In the next year, Nebraska followed, as did also California, Colorado, Minnesota, Oregon, Utah, Washington and Wisconsin. In 191.5, Arkansas and Kansas passed laws, while New York, Ohio and Michigan have been carefully investigating tlie subject. Ohio's constitu- tion in 1912 authorizes the legislature to enact a 116 BUSINESS AND THE GOVERNMENT minimum wage law covering all classes of employes. In all our states, however, the laws are strictly limited only to women and children. In Massachusetts and Nebraska, the Boards make recommendations, but have no powers of enforcement. Public opinion is relied on. In the other states, pro- visions are made for enforcement. In Utah and Ar- kansas, the rates are fixed in the laws. In other states, a Wage Board or an Industrial Commission determines the minimum rate. 14. Decisive ecTperience still lacking. — Present judgment upon the policy of the minimum wage must hang largely upon an analysis of principles. .In the United States, the laws have scarcely gone into effect. In British jurisdictions experience has been longer; but its teachings have not yet been ascertained con- clusivety, if indeed it can be said to have developed its ultimate consequences. 15. Extent of low wages. — I^ow wages, as readers of this volume will judge high and low in relation to the cost of living, are doubtless common even yet, and women's wages on the average before the war were only some 55.3 per cent of those of men. Of course it must be remembered that the majority of women workers live at home as members of families and relatively few must support others as well ^s them- selves. This does not prove that women's wages were and are satisfactorily high. It does prove that they are not generally working for less than a living wage, and PROBLEMS OF EMPLOYMENT 117 it invalidates the argument that generally they are op- pressed by their employers and that the industries in which they work are "parasitic." It appears that employers generally — in the United States, as well as abroad — have been disposed to give the experiment of a minimum wage a fair chance; to face temjjorary difficulties in the expectation of the favorable developments which may come. 16. Caution in adopting the 7mnimum wage. — It cannot be questioned that the policy of the minimum wage is more difficult of wise formulation and more difficult of wise or effective administration than almost any other of the industrial policies of modern govern- ments. It is not unlikely that Massachusetts has marked the wisest course, as she has in so many other questions of industrial control. The possibilities of harm are certainly least where just standards of pay are de- termined by the most capable experts available, and are then enforced by an influence no less powerful and no more rigid than a w^ell-informed public opinion. 17. Present regulations beneficial as a whole. — Ex- cept that perhaps they are rather less radical, Ameri- can regulations of the labor of women and children are substantially like those of foreign countries. Taken as a whole, they doubtless have made for the welfare of the people, even for the industry of the present generation. 18. New 7'i.s'IiS in modern indnstri/. — The (iesire to improve our industrial conditions should not blind us 118 BUSINESS AND THE GOVERNMENT to the fact that our present conditions are far better than those of any previous age. How many people reahze, for example, that in the golden age of English literature, Queen Elizabeth and King James ate meals without forks, using their fingers, and that they had no bathtubs? But the mere fact that improvements liave been made is no reason why we should not strive still more energetically for .further improvement. The modern laborer lives and works under gi-eat hazards of a type quite different from those of former times. Unemployment, for example, with its stop- page of income was formerly very infrequent, and when by unusual chance or by the turn of the seasons, wages might be suspended, a cottage with a plot of ground, with rights of common, would cany the fam- ily along. Xor w^ere there so many industrial acci- dents causing disablement, maiming or death before the era of powerful machinery. It is quite possible, liowever, that the accidents and the utter ignorance of sanitation and disinfection on land and sea caused even more illness and death. 19. Laborer and insurance. — The well-to-do in these days habitually resort to insurance as a means of covering their exceptional losses of all kinds. In this way they help themselves thru innumerable financial misfortunes. Insurance should be even more helpful to the la- borer. It is not merely the best protection against privation thru mischance, it is the only sure protection PROBLEMS OF EMPLOYMENT 119 • reasonably to be considered or advised. Insurance is a wise investment for part of a laborer's savings. It gives nothing to those who do not need it; to those who do, it provides assistance more complete than they could possibly have provided for themselves, and that at a cost small for each because paid for by all. And yet wage earners, speaking broadly, seldom seek in- surance, partly because they do not appreciate its benefits, partly because they lack money. 20. Social insurance. — All insurance is social by na- ture, but the expression "social insurance" has come to mean insurance provided or administered under pub- lic authority for the great body of the people, practi- cally all wage-earners. Then too, it is provided for its beneficiaries at a charge less than its full cost so that either society as a whole or some social group hke employers bears part or all of the expense. Such insurance ordinarily provides against several of the commonest misfortunes : death, industrial acci- dents, sickness, invalidity, unemployment. Social in- surance is a new policy but one that is rapidly spread- ing. 21. Life insurance. — Fraternal societies and mu- tual insurance associations provide a small amount of life insurance for the wage earners. The American "industrial" companies sell very large amounts to the same classes, having now outstanding nearly 42,000,- 000 policies for an amount of nearly $6,000,000,000. Insurance which is carried out by means of assess- 120 BUSINESS AND THE GO*\'ERNMENT ment is frequently unsound, and other insurance for workers is costly because collection methods are ex- pensive. Governments have done little on the whole to pro- vide simple life insurance in amounts and on terms possible for the average wage earner. A beginning has been made in Great Britain, France and a few other countries, tho there are differing opinions re- garding its advantages to society. Italy has assumed the monopoly of all life insurance. Massachusetts has fostered insurance thru publicly supervised sav- ings banks. Wisconsin has begun the issue of policies directly by the state. None of these voluntary sys- tems has accomplished much. If the cost of collection from the wage earners could be lessened much more could be accomplished by private companies. 22. Worhmcn's compensation. — Insurance against industrial accidents, commonly called workmen's com- pensation, is the most widely practiced and most gen- erally approved form of social insurance. First brought into operation in Germany in 1884, since then it has spread to nearly every advanced industrial re- gion of the world, to every quarter and corner of Eu- rope, to Australasia, Africa, Canada, Japan, Mexico, South America, Cuba. Tardily accepted in the United States in 1911, within the brief space of nine years it has passed to forty-five of the states and terri- tories, which have more than seven-eighths of the pop- ulation of the country and an even greater proportion of the industrial employment. PROBLEMS OF EMPLOYMENT 121 It has already been intimated that altho many acci- dents are caused by carelessness of the workers, on the whole, they should be looked upon as ^practically un- avoidable. It is not in human nature never to relax attention even when a second of carelessness may mean personal injury. Safety devices and attention will prevent many accidents, but on the whole, most accidents are to be looked upon as a normal risk of the industry and therefore chargeable to the costs. 23. Ernploijers' Uabiliti/. — Formerly the employers' liability laws were intended to hold employers to some measure of liability for injuries received in their serv- ice. In practice, however, they paid for liability in- surance and the insurance companies with their able legal staffs and vast resources brought it about that very few, probably not more than one in five, received any compensation, and he usually little. In conse- quence of this fact largely, the principle has been changed as indicated. Altho tlie laws vary greatly in the seventy-odd dif- ferent statutes covering this field, there are three es- sentials of a workmen's compensation law that may be mentioned. L All orchnary questions of personal responsibility for accidents must be waived and awards nmst be made for all but the most unusual injuries. 2. The sums to be i)aid for the different injuries must be fixed in advance by law. ♦3. The law must be simple, prompt and inexpensive in its administration. 122 BUSINESS AND THE GOVERNMENT As reasonable supplements to these provisions, the employer is released from any other liability for per- sonal injuries to his employes, and the employe is often safeguarded by a requirement that the prompt and full realization of his limited awards be assured him. 24. Scope of compensation laws. — There is a strong tendency everywhere to limit the compensation laws to the most dangerous occupations such as manufac- turing, mining, transportation, building, and to omit agriculture, domestic and personal service. In most jurisdictions only accidents are compen- sated, but in some, notably in the United Kingdom and in some other British territories, express provi^ sion is made for occupational diseases. Commonly benefits are forfeited only by serious or wilful fault of the injured in bringing about the accident. 25. Limited benefits. — In the way of broad gen- eralization and very rough averaging, it might be said that the total losses thru injuries are halved, the benefits covering one half and the sufferers enduring the other. But there are hundreds of modifications of this principle and departures from it. There are the most varied provisions for temporary, permanent, partial and total disabilities, for death, and for the benefit of the several classes of dependents who may be left at death, besides usually a modest allowance for the burial of those fatally injured. Nearly everywhere provisions are made for the curative treatment of the injured. And, as the com- PROBLEMS OF EMPLOYMENT 123 mon interest of employer and employe in the prompt- est and completest possible cure is recognized, these provisions are made more generous in amounts or in duration, or in both. 26. Assurance of benefits. — Commonly, and in most American states, benefits awarded are given some special security, as prior lien against employers, and exemption from attachment or other similar proc- ess. American employers, and foreign ones too, are usually required to insure their liabilities in some way; in the readily available commercial insurance companies, in specially constituted mutual associa- tions, or in accident funds carried by the state. 27. Simple administration. — In most jurisdictions administration of the laws is simplified by committing it to special boards or commissions, which are free from the technicalities of the law courts and are both allowed and required to proceed as informally and summarily as may be consistent with prompt and sub- stantial justice. 28. Results of workmen's compensation. — The ap- parent results of the workmen's compensation systems are several very great gains. Injuries are looked after much more promptly and carefully, so that their consequences are much less serious. The better medi- cal care has done a great deal to mitigate the suf- ferings of the injured, and the cash benefits relieve their families and generally reduce the evil conse- quences of uncompensated injuries. Much the best of all are the measures for prevention of accidents. 124 BUSINESS AND THE GOVERNMENT The most vigorous and helpful American movement for "safety first" is unmistakably greatly stimulated by the compensation laws. The cost for employers has been considerably greater than they had to carry under the old liability laws, varying Widely, from a minor fraction of one per cent of payroll in such occupations as silk manu- facturing to 10 per cent or more in some of the most dangerous forms of construction. 29. Health insurance. — The losses caused by sick- ness among working people are much greater than losses thru industrial accidents, being computed for the United States at no less than $1,750,000,000 yearly. Yet comparatively little has been done by way of insurance or other provision against these losses. Fraternal and mutual associations, labor unions, employers' establishment funds and private commercial insurance have done a little; but in the United States all of these together do not cover much more than one per cent of the computed losses. Ger- many early recognized the gravity of her problem, and one year before organizing workmen's compensa- tion she established a broad system of compulsory in- surance against sickness. Since then nine other E,u- ropean countries have followed her example, Austria, Hungary, Great Britain, Russia, and five smaller states. In the United States for some few years now there has been an earnest and growing agitation for the adoption of the policy here. 30. Field and scope of health insurance. — Gener- PROBLEoVIS OF EMPLOYMENT 125 ally the scope of health insurance is approximately as broad as that of workmen's compensation; even broader in so far as it often includes others than wage-earning employes. The sickness covered includes not only industrial diseases but general maladies also, and commonly the confinements of women. Indeed, Italy, not having gone so far as a general system of health insurance, has made special provisions for women lying-in. 31. Benefits under health insurance. — In a general way the benefits under health insurance resemble those under workmen's compensation. ^Medical care is pro- vided, with more or less generous allowances for med- ical supplies, trusses, crutches, and the like. Often there is an award for burial. With some important limitations, there are everywhere cash benefits, some- times half of wages, as in Germany, sometimes a higher proportion, as in Xorway, sometimes modest flat sums, as in Great Britain. 32. Sources of funds. — On the assumption that en- vironment of employment, general conditions for which the state is responsible, and the personal con- duct of the insured combine to produce disease, costs are usually apportioned to the emj^loyer, if there be one, the insured and the public treasury. Perhaps most often employer and insured pay equally, while the state pays a smaller sum than either. 33. Administration and its peculiar difficulties. — Administration cannot be made as simple in health in- surance as in workmen's compensation for accidents. XXIV— 10 126 BUSINESS AND THE GOVERNMENT Accordingly, much reliance is placed upon whatever trade or fraternal associations there may be found already in existence and adaptable to the work in hand; or special bodies of the insured are organized specifically for the purpose of the insurance. For various reasons difficulties have developed, es- pecially in the United Kingdom, in the selection of the medical staffs and the general organization of the medical care. It has proved very difficult to reconcile professional jealousies and the whims and prejudices of the sick with the necessary conditions of solvency in the funds and practical efficiency in their use. 34. Results of health insurance. — Even in Ger- many and other continental countries where the sys- tems have had time to show natural results opinions are widely divided regarding the sum and extent of the benefits. It seems probable that thru the mass- ing of large funds it has been possible, thru public loans to build certain institutions such as hospitals, sanatoriums and the like, more easily than would have been possible otherwise. In his special investigations of German social insurance Dr. Hoffman, Vice Presi- dent and Statistician of the Prudential Insurance Company of America, declares that under Germany's laws the expenditures on account of sickness have in- creased enormously and that apparently compulsory sick insurance has a strong tendency towards increas- ing malingering, as well as towards grossly exagger- ating minor complaints. In spite of the insurance or PROBLEMS OF EMPLOYMENT 127 in consequence of it the average annual sickness loss for males in Germany is more than 9.2 days, in Aus- tria 9.5 days whereas in Boston it is only 6.5 days and in Xew York only 7 days. There seems to be no evi- dence to j)rove that compulsory sickness insurance has brought about a measurable decrease, if any at all, in mortality or degenerative diseases. Even tho there has been on the whole an improvement in the general health of Germany where there is social insur- ance, the advancement of the United States has been fully as satisfactory, and even more so in regard to tuberculosis and infant mortality. The improvement then should be ascribed rather to general progress in intelligence and public education and care along these lines than to health insurance. 35. Insurance against invalidity and old age. — Quite distinct from accidental injuries and from dis- ease is that invalidity, or incapacity for self-support, which may come in earlier years but comes with very sad frequency in old age. Figures too gloomy for comfortable reading have been prepared to show what great numbers of working people, in this age of strenuous demands upon workers, are early incapac- itated for self-support and pass into a period of com- plete or partial dependence. Ilei-e and there, within narrow fields, adequate remedy has been provided by great corporations and other wealthy employers who have pensioned their aged and incapacitated employes. Voluntary systems of saving under government supervision or administration have jDroved insufficient 128 BUSINESS AND THE GOVERNMENT in Great Britain, as in Massachusetts and Wisconsin, if these states may be cited. Substantially the same have been the results in lands where government has undertaken to add to the sums which may be laid up by the poor, as in France, Belgium and Italy. 36. Compulsory old age insurance. — By an act of 1889, not many years later than her laws for work- men's compensation and health insurance, Germany established a system of compulsory insurance against invalidity and old age, making it thus one of the three parts of her political plan of social insurance. In its most general aspects the third system is like the other two. Employers, beneficiaries and the state con- tribute to funds which are administered by district as- sociations under governmental supervision. France and a few smaller countries of Europe have somewhat similar systems. 37. Old age pensions. — As distinguished from old age insurance, to the support of which beneficiaries contribute, old age j^ensions are commonly under- stood to be payments without previous contributions by the pensioners. Old age pensions of this character are provided by laws in France, the United Kingdom, Denmark, Belgium, Australia, New Zealand, Ari- zona and Alaska. They are variously limited, and the payments are usually very small. For these reasons their beneficial results have not been marked. For us the recent adoption of this most radical policy in the United States has a peculiar interest whichever way it may result. It appears that the Arizona law PROBLEMS OF EMPLOYMENT 129 is in a fair way to be finally adjudged unconstitu- tional. 38. Insurance against nnemploymeni. — The suf- ferings of the working classes thru the involuntary idleness of their breadwinners are too well known to need emphasis. There are, however, extraordinary difficulties in devising even a moderately helpful method of insurance against unemplo^Ttnent. Many labor unions by their out-of-work benefits may be said to have provided a sort of insurance; public grants in addition to such benefits, first given in the Belgian city of Ghent in 1901 and thereafter in many other European cities, mark the introduction of a govern- ment social insurance against unemployment. Such voluntary insurance against unemployment has not developed widely enough to have an appre- ciable effect in reducing the evil against which it has- been directed. Moreover, in the judgment of many, if not most publicists, it is dangerous in operation and likely to do great harm at times. This fact does not prevent the state from direct action in the way of providing work in times of industrial depression. That action seems clearly advisable at times. More- over, it is a custom often followed by private employ- ers in times of depression, to do work without profit, often even at a tem})orary loss in order both to avoid suffering and to maintain the organization at its full efficiency. 39. Compulsory insurance against unemployment. — Compulsory social insurance against unemploy- 130 BUSINESS AND THE G0VERN:\IENT ment, after a brief and unsuccessful trial in the Swiss city of St. Gall, has come to a recent broader trial under the British National Insurance Act of 1911. It applies to some 2,500,000 employes in the mechani- cal trades as well as to a considerable number of less well organized trades and occupations. Employers, employes and the stat€ contribute the funds, which may be drawn upon to provide benefits of not more than seven shillings a week for a period of not more than fifteen Aveeks in any year. There are very elab- orate conditions laid down for the prevention of frauds. Opinions as to the results of this scheme are not uniform. Labor organizations have argued that it has a paui^terizing tendency and there has been a continuous protest from certain types of workers against the stamp sale method of collecting the so- called contributions — the premiums. 40. General results and prospects of social insur- ance. — Far more important evidence of the practical value of unemployment insurance was given by the post-war unemployment allowance system in Great Britain. Under this scheme, which, by the way sus- pended payments but not collections under the In- surance Act of 1911, civilians and ex-service men ranked alike except as to the length of time during which they were entitled to the allowances. The original intention was that for civilian workers a pe- riod of thirteen weeks would be the longest allow- able and all such unemployed would return to tlie provisions of the Insurance Act on November 24, PROBLEMS OF EMPLOYMENT 131 1919. Ex-service men were to be allowed to draw the Insurance "doles" for any period not exceeding twenty-six weeks during the first year after demobili- zation. Conditions that developed later, however, warranted the continuation of the scheme to a later date. The weekly rates of these post-war allowances were as follows : adults, male 24s. ; adults, female, 20s. ; dependent child, first under fifteen years, 6s. ; each suc- ceeding child, 3s.; juveniles (over fifteen and under eighteen years of age), male, 12s.; female, 10s. To- ward the end of 1920 the British Ministry of Labor stated officially that the results obtained were con- sidered satisfactory by the government. Inmiedi- ately after the war England faced a serious social condition. Industries converted to a war basis were no longer needed. Reconstruction to peace time work had not taken place. Unemployment reached as- tounding figures and prophesies of social upheaval were of every day occurrence. During 1919 the un- employed civilians reached a total of 758,982 and 409,959 ex-service men were out of work. In spite of these conditions England avoided the threatened storm and conditions of unemployment have been steadily improving ever since. In spite of the occur- rence of a few sporadic riotous demonstrations, the opinion is freely expressed both in government circles and by labor leaders that tlie unemployment allow- ances were of prime imjjortance in preventing social unrest during the most trying period of national re- construction. 132 BUSINESS AND THE GOVERNMENT So far in spite of the rather long experiences in Germany, Austria and other continental countries, the results of social insurance still seem decidedly doubtful. There have been certain developments foretold in fact by thoughtful students of such sub- jects in Germany itself thirty-five years ago that are not to be welcomed, malingering, increased complaints of minor sickness, considerable weakening of self-reli- ance, and an occasional handicap for industry. On the other hand, doubtless in many individual cases beneficial results can be seen and as has already been indicated tire government has been able to make pub- lic use of the large funds coUected in connection there- with. It seems probable that when the experiences of the war come to be fully known the use of funds will be found to have been at times diverted from the original purpose but of that there has been as yet no information available. In the United States at present there is a sharp conflict of opinion and activi- ties. Certain social reform organizations are actively advocating social insurance even that of a compulsory type, basing their arguments largely upon the alleged results of such insurance in Germany and other con- tinental countries as well as in Great Britain. On the other hand, there stand positively, not to say bit- terly opposed to all forms of compulsoiy insurance, the American Federation of Labor and practically all the other conservative and yet not reactionary labor groups, together with other important organiza- tions which have been in the habit of promoting social PROBLEMS OF EMPLOYMENT 133 welfare work in connection with labor groups and the wage-earning class generally. 41. Federal war compensation laws. — The statutes of the United States provide compensation to Federal employes injured by accident and the principle has been given enormous extension in recent legislation growing out of the war. The first step was the provi- sion for compulsory insurance against accident of all seamen on American vessels, which went into effect in June, 1917. Rates for such insurance w^hich is ad- ministered by the War Risk Insurance Bureau of the Treasury Department vary with the hazards growing out of the war for different voyages. The insurance was a charge against the owners of the vessel. Much more impressive was the extension of the compensation principle to the military and naval forces of the United States. Generous allowances in the case of death or injury in the service are provided by law. The indemnities established were payable monthly. Pensions of course are not new, and while the recent legislation bears a considerable resemblance to the disability pensions of former days, yet the spirit in which the law was conceived and the methods by which rates are fixed show clearly the influence of com- pensation legislation. These indemnities were part of a general scheme for the welfare of the soldiers and sailors of the United States, in which were included allotments from the soldier's pay, in some cases com- pulsory, and additional amounts as allowances to the dependent families of the fighting men. These need 134 BUSINESS AND THE GOVERNMENT not concern us here, but a brief notice may well be taken of the fourth feature of the legislation — the provisions for soldiers' and sailors' insurance. 42. Soldiers' and sailors' insurance. — In order to encourage the officers and enlisted men of the military and naval forces of the United States to provide for the future of their dependents and themselves, the government issued insurance to a maximum amount of $10,000, on a yearly reviewable term basis. Pre- miums are low because the insurance is furnished at cost on the basis of the American Experience Table of Mortality, are payable monthly and do not include any charge for medical examination or the cost of ad- ministration of the business. Furthermore, the extra risk involved in military service was assumed by the United States Government. The Government con- tinues the insurance after the insured's discharge from the service for a period of five years at the same rates as before. During this period of five years after the discharge the insured has the privilege of changing the original policy into a permanent form of insurance without being required to submit to a medical exami- nation. The new forms are now issued. The gov- ernment will continue to be the insurer and the rates charged are estimated to be about 20 per cent less than those charged for like insurance by standard private companies. Aside from the cheapness in cost, the government policy contains practically all the liberal provisions which are found in policies written by Old Line Insurance Companies. One outstanding fea- PROBLEMS OF EMPLOYMENT 135 ture which government insurance provides, without cost, is payments in case of total permanent disabilit^^ This disability feature is exceptional as compared witli several comj^anies as the policy may become pay- able on account of total permanent disability, irre- spective of the age at which the insured becomes dis- abled, whereas private companies whose policies con- tain a disability clause in no event extend this feature beyond the age of sixty-five years. It is possible for those who have allowed their gov- ernment insurance to lapse to become reinstated by the payment of two monthly premiums, that is the pre- mium for the month it was lapsed and for the month it is reinstated. If reinstatement is made within eighteen months after discharge a written statement that the insured is in as good health as when he was discharged is necessary. In case the insured has failed to reinstate his insurance within eighteen months after the date of discharge he may do so up to January 1, 1921, provided he can furnish evidence of insurability, that is, pass a medical examination. Of the four million and one-half of men and women (nurses, etc.) who were entitled to take insurance, policies were written, it is estimated, for 95 per cent. The insurance I'isk assumed by tlie government was in excess of forty billions of dollars, doubling the amount of life insurance in force in the world. The average policy was reported to be slightly in excess of eight thousand dollars, which indicates that most of the applicants took advantage of the maximum permitted. 136 BUSINESS AND THE GOVERNMENT Since the armistice approximately 75 per cent of the insurance has lapsed and for this reason the govern- ment has made very liberal rulings for the insured to reinstate his insurance. REVIEW "What are the main provisions regarding the hours and times of employment of women and children? How do they differ from that of the men? Is the regular employment of children ever to be commended as a means of preventing idleness and as a means of encouraging industrious habits ? Does the employment of women and children have any appre- ciable effect upon men's wages ? Consider this question in detail. What is the special need for delay and for caution in the adop- tion of further minimum wage laws in the United States ? In what ways does the article of the United States Constitu- tion giving the central government the power to regulate interstate commerce affect the labor contract? What are the reasons why compensation to workmen for acci- dents should be made a burden upon the industrial plants con- cerned ? What is meant by the Industrial Revolution in England? Compare briefly the times before and after the revolution. Indicate the character of the industrial commissions established in the United States and their duties. Wliat are the benefits and evils of industrial insurance? Define workmen's compensation and outline the main provisions of compensation laws. What are the main objections to old age insurance? To insur- ance against unemployment? CHAPTER VII PROBLEMS OF EMPLOYMENT (Continued) 1. Labor organizations. — So significant has been the part played in all problems of employment, even those intimately connected with governmental activi- ties, by voluntary organizations of laborers, and so enormously increased was the exercise of this power both in Great Britain and in the United States by the events of the great war, that a brief account re- garding their organization and activities should pre- cede further discussion of the work of government in that field. 2. Labor unions ; Syndicalism (/. W. W.) ; Social- ism; Bolshevism. — In current discussions, even at times in the public press, so much confusion exists regarding the various types of activities, largely pro- moted by the wage earners, that it is desirable to em- ploy careful discrimination. Grave injustice is often done thru failure to discriminate. The labor union is a voluntary association of work- men formed for the purpose of promoting the interests of its members. Tho frequently associated with the well-known trade or craft guilds of mediaeval Europe, labor unions are not compara})le to them, for these were associations of masters rather than of work- 137 138 BUSINESS AND THE GOVERNMENT men and had also other important objects besides the industrial advantage of their members. The real trade unions, altho they began in the eighteenth cen- tury, acquired no special significance until the great inventions and discoveries of the industrial revolution late in the eighteenth and early in the nineteenth cen- tury had revolutionized production and employment thru the establishment of the factory system and like methods of production. Then for the first time the laborer was thrown upon his own resources. His position was no longer that of status. It was fixed by contract. Under former conditions, a skilled man with the certain prospect of becoming a master-work- man could bargain satisfactorily with his employer. When hundreds or thousands of workmen of the same class are so organized that their different personalities do not come to the direct attention of their responsible employer, the situation is entirely changed. Natu- rally, without imputing blame to any one, thru the normal difficulties of change of both customs and mental attitude, the workmen often suffered. Few provisions were at first made for the comfort or health or safety of the workmen. Neither masters nor men knew the ways of safety. Neither knew the dangers of the new industry. The workers suffered for the common ignorance. Wages were low. Hours were long. Conditions needed improvement. Inevitably a struggle for relief began. The formation of the unions naturally followed. These unions became organizations within the separate trades or crafts — PROBLEMS OF EMPLOYMENT 139 trade unions. Altho these separate unions have their distinct organizations and work independently largely in settling their own problems, it is natural that for their larger common aims, especially in the way of promoting legislation or of conducting on a great scale some organized movement like a great strike, some further organization should develop. This has been brought about thru federation. In the United States the American Federation of Labor is the chief repre- sentative. The organization is strictly a federation as its name implies. The various local unions organized tliemselves into unions of the craft or trade and these again federated into the central organization, the rep- resentatives of the different trades being their national presidents. The Federation is strictly a representa- tive body with the final authority even in such matters as strikes resting with the local unions. The officials of the Federation, contrary to a common opinion, have no dictatorial power over the individual workmen or their acts. 3. Sj/ndicalism {I. W. TV.). — With the accentua- tion of working men's problems and the growth in power of the trade unions, it was perhaps not unnatu- ral that efforts should be made to weld into one organ- ization of great power which might act as a unit, all types of working men. In the late '70s and '80s the Knights of Labor developed such an organization, in- cluding men and women also from various trades, an organization which numbered at one time probably 800,000 members. 140 BUSINESS AND THE GOVERNMENT Of late years the Syndicalists, in France especially, but also in other countries, have followed out the same principles. In this country, the Industrial Workers of the World are organized on the same basis. The organization is not by crafts or trades, but whole industries. In these later organizations, however, certain prin- ciples have been adopted which are so diametrically opposed to the practices of the ordinary trade unions, as represented by the American Federation of Labor, that trade unions form an effective check upon the extreme activities of the Syndicalists. The Syndical- ists declare an inveterate war upon capitalists, assert- ing that their purpose is to destroy the industries until the owners are ready to abandon and put them into the hands of the working men themselves. To accom- plish this end they advocate sabotage, violation of con- tracts, the breaking of the laws. Their leaders have been repeatedly arrested and punished for these ille- gal practices, including personal violence and, during the period of the war, disloyalty. On the other hand the trade union leaders have often given notable in- stances of loyal service and hearty cooperation with the governmental authorities. 4. Socialism. — Inherently, socialism has nothing directly to do with trade unionism or syndicalism as a labor movement, but so large a proportion of syndical- ists and so many individuals among trade unions have adopted socialistic doctrines and so frequently do the ill-informed group all together, that socialism needs PROBLEMS OF EMPLOYMENT 141 definition here. Socialism is primarily a political pol- icy, that the Government should own and in the way deemed best to itself, manage all industries requiring fixed capital to any large extent. It has had many phases. Its various leaders have adopted various plans, but the fundamental political idea is Govern- ment ownership and management of industry. This governmental policy is usually based upon the economic doctrine most clearly formulated by Karl Marx which affirms that the wages which capitalists pay do not represent the full value of the product of the working man's labor utilized by the capitalist. There is a remainder which the capitalist retains, it is thought. This "surplus value" as Marx calls it, really of normal right belongs to the working man and its existence inevitably precipitates class war be- tween capitalist and worker. This economic doctrine is generally rejected by leading economists of all countries who place more emphasis upon the produc- tivity of skilled management of capital itself and of the influence of the employers than do the Socialists. In the United States the leading trade unionists are among the most active opponents of socialistic doc- trines. The Bolshevists and Anarchists represent the ex- treme types of opposition to formal, strong, govern- mental organization. The scientific anarchists, often personally estimable characters with pliilanthropic tendencies, believe that voluntary organizations formed by individuals for the promotion of common XXIV— 11 142 BUSINESS AND THE GOVERNMENT aims, private and public, would suffice for social or- ganization without the repressive influence of a gov- ernment which employs police methods. With these are frequently, perhaps always, associated, whenever an attempt has been made to put such doctrines into practice, the lawless, the criminals and others who feel the restraining hand of organized government. Such groups and such doctrines normally find their most active expression in times of revolution, such as in the French Revolution in 1789 and the present Bolshevist regime in Russia. Sovietism means literally merely an organization of societj^ by industrial " Soviets" or councils, quite similar to the theory of the syndicalists, but in Russia the methods followed have been those of revolutionary brutal tyranny. With the rise of modern industry, trade unions have gro^vn with remarkable rapidity. Now they number millions of well-organized members; they have large accumulated funds; many leaders of high character and great ability; and especially since their patriotic activity in war time, they have enjoyed a large meas- ure of popular approval, weakened in many cases by the domineering inclinations of certain influential leaders and individual unions, where they have had the advantage in the industrial situation as was the case during and immediately after the Great War. In spite of the widely extended organization, however, the unions include in the United States but a small minority of all the workers, probably not far from 10 per cent of those who work for wages. Agricultural PROBLEMS OF EMPLOYMENT 143 workers, personal and domestic servants, from the circimistances of their employment, are not widely organized. 5. The relations to Government. — A century ago, the organization of the unions in Great Britain was looked upon as a public menace. The British Con- spiracy Laws, enacted chiefly for the protection of trade, were applied to them, and this principle, holding that combinations for the purpose of securing higher wages were punishable as conspiracies, prevailed for nearly one hundred years. Later, how^ever, with the growth of popular political power and the better un- derstanding of conditions, these laws were gradu-ally done away with until, since 1906, all restrictions upon the natural and customary activities of the unions were abolished and the members were held only as individuals for any personal violations of law. In the L^nited States, where the British common law has formed the basis of our legal system, a similar policy was instituted but, as issues of gi'eat importance had not earlier arisen, little was done before the time of the Civil War. Following tliat period labor unions multiplied rapidly and their aggressive policies pro- voked sharp hostility in employers and public author- ities. Statutes were enacted to h-amper their activi- ties. Anti-monopoly laws were drawn so as to cover combinations of laborers. Finally, the Federal Anti- Trust Law, the so-called Sherman Act, which had been passed apparently with sole reference to capital- istic combinations, was so construed by the United 144 BUSINESS AND THE GOVERNMENT States Supreme Court as to cover combinations of laborers also. As the methods of the unions have become less ob- jectionable and especially as the "labor vote" has acquired influence, there has steadily developed a strong movement for the relaxation of many of the legal restrictions. Several statutes have been enacted to limit anti-conspiracy laws in their application to labor unions. The most far-reaching of these statutes is the Clayton Act of 1914 which aims at exempting combinations of laborers from the application of any and all Federal anti-trust laws. Under present conditions the existence of unions is probably not seriously threatened altho, if they were incorporated, it has been thought by some authorities that they might be dissolved under the anti-trust act even in spite of the apparent safeguard afforded by the Clayton Act. The union, however, is rarely attacked in the courts ; it is rather some activity of the union that comes under court action such as the strike, the boycott, the picket. This distinction should be kept in mind. Every union is secure in its existence as long as it limits itself to purposes of whose lawfulness there can be no question. In this field the unions have undisputed rights to ac- tivities of great importance such as the maintenance of systems of mutual benefits; the collection and dis- tribution of information of trade and labor conditions ; the support of legislative measures; the making of PROBLEMS OF EMPLOYMENT 145 collective trade agreements with employers and many others. The strike is the miion man's final weapon of offense and defense. Upon this issue American courts have been divided. The New York Court of Appeals has held that the right of one man or of many together to quit work is absolute and that the reasons for quitting cannot be questioned by others. More often it has been held that the quitting of work may be permissible or not according to conditions or circumstances, but motives and results must be considered. If the strike interferes with interstate commerce, it is unlawful. A strike designed to injure an employer is unlawful, aside from boycotts, pickets and other such methods. It is, however, difficult to draw the line between workmen's gain and injury to employers, and it is lawful to strike for the striker's gain in wages, hours or other conditions of employment if strikes have sev- eral motives. The chief cause of guilt has been not so much the quitting of work as the methods followed by the men after quitting. 6. The boycott. Picketing. — There has been much confusion of thought about the boycott, that is, the turning of business away from the employer whose men have struck, and possibly from others who have dealings with him, in order to help strikers. In most states boycotts have been condemned as conspiracies. In some others they are not illegal. The principle toward which governmental policy seems to be shap- 146 BUSINESS AND THE GOVERNMENT ing is tliat while those directly involved in the strike may turn their patronage from and to whomsoever they choose, they may not combine to force others into helping them by boycotting the others. Likewise as regards picketing, strikers may post pickets to inform any who come that there is a strike or gently to per- suade them to remain away. When, however, picket- ing develops into intimidation and coercion by em- ploying threats, it is generally condemned. 7. Injunctions in the control of unions. — As many of the activities of unions may impair the material or immaterial property of an employer, and as employes ordinarily are not financially responsible for damages they may have caused, American courts have adopted the practice of restraining strikers and their sympa- thizers from doing this thing or that, from striking, from boycotting, from picketing, or from doing other and more specific things; as publishing certain state- ments or going here or there. As the restraint is ef- fected by the formidable agency of an injunction, disobedience of which is punishable by imprisonment in the most summary manner, workmen have become very bitterly opposed to it. By an act of Congress in 1914, the Clayton Act, and by similar statutes in several states there has been a beginning of legislation to restrict the issuance of injunctions in labor dis- putes. 8. Financial liability of members of unions. — By the decision of a British court in the famous Taff Vale Case in 1901, individual members of trade unions were PROBLEMS OF EMPLOYMENT UT held financially liable for the acts of their unions ; and by the decision of the United States Supreme Court in the so-called Danbury Hatters' Case, finally de- cided in 1915, this same principle is established in this country. The situation is made especially serious for the union men by the fact that, under the Federal anti- trust laws, triple damages may be assessed for any financial injury which their acts may have caused an emploj^er. There can be little doubt that the American policy is equal rights for all. The difficulty is to apply that policy in specific cases. Employers, employes and the courts are all feeling their way in that direction. Not only must there be legal equality, but gradually there will develop also actual equality. The condi- tions that have been brought about by the war will doubtless continue to modify profoundly the pre- existing conditions as they will develop under the pres- sure of national need. Voluntary, harmonious action under the supervision and cooperation of government has attained most remarkable results. It is to be ex- pected that many of these results will be maintained after the period of readjustment has passed. 9. Public inspections. — Aside from the relief of abuses afforded by the courts, it is essential that most regulations affecting the welfare of working men, cov- ering matters of sanitation, hours of labor, protection of machinery and similar matters, be enforced by officials especially appointed for that purpose. At first it is essential that provision be made for 148 BUSINESS AND THE GOVERNMENT reports of accidents and of such diseases as may be clearly charged to the employment. That this may be properly carried out there must be careful definition of "accident" and provisions must be made for ascer- taining the degrees of seriousness of accidents that come under official notice. Improvements have been steadily made in this direction but there is still much to be desired. At present it is customary in practically all states with proper legislation on these subjects, to have pub- lic inspectors appointe-d to make careful investigations and reports and to see that proper measures are taken for the enforcement of the laws. Previously, public inspectors of work places were inadequate and they were Hot infrequently chosen for partisan reasons rather than for their technical knowledge and ability. It is still not infrequently charged that inspectors, for example, of building departments, of tenement house departments, of health departments and others, are not always above receiving bribes to hasten their work and to fail to see things that are unpleasant for the employer or owner. There has, however, been a marked improvement in the quality of inspection. The powers of entry and access of inspectors have been enlarged. Nevertheless, notwithstanding the fact that the employers show much greater readiness to respond to the legal requirements than formerly, it is still essential that there be a corps of competent inspectors whose services are greatly needed in sug- gestion and guidance if not in enforcement of law. PROBLEMS OF EMPLOYMENT 149 10. Industnal commissions. — In many of the states, provision has been made for the estabhshment of in- dustrial commissions to which are entrusted the gen- eral administration of the labor laws and particularly the development and application of the rules affecting safety. The essential function of the new adminis- trative power is continually to study enforcement of the law. Legislatures may prescribe in law many of the conditions of occupation. They may, for exam- ple, specify adequately the contents of first-aid kits for every variety of occupation, but it is inconceivable that the best of known instruments and appliances at any specific date will remain the best until the legisla- ture can convene again and act. If laws are to be kept adjusted to the rapidly changing conditions of the time, there must be an administrative board with a considerable degree of discretionary power. Legis- lators should lay down only general principles of regu- lation, the detailed requirements and administration should be committed to a permanent board which will develop in its permanent technical staff the best and latest knowledge and skill. This principle has been adopted in the most progressive states with marked success. 11. Results. — Altho much still remains to be ac- comi)lished, there can be no doubt that there has been a decided improvement. As yet the safeguards and rules are imperfect. They are still imperfectly ac- cepted and applied. Macliinery is becoming ever more powerful and more rapid, but accidents are now 150 BUSINESS AND THE GOVERNMENT noted and recorded better than before and society has made great progress in the care it takes. It is just to keep in mind that many employers not only obey the laws but are even well in advance of the laws. Many of the large corporations maintain spe- cial safety departments, they have safety committees on which workmen and officials unite to promote the safety of the workmen, for which purpose they spend many thousands of dollars a year. The percentage of accidents is steadily decreasing. It is certain that progress will continue. The world cannot destroy its working men without losing, it cannot preserve them without gaining not only in personal satisfaction but also in wealth. In earlier days the function of government seemed to be primarily protection and, more largely, protec- tion against attacks by hostile states, highwaymen, assassins, or thieves. At the present time, murderers, robbers, invading armies ( in spite of the lessons of the Great War) are, in normal times at least, far less dan- gerous than microbes, contaminated water, unguarded cog wheels, unfenced belting, smooth and unrailed stairways, imperfectly insulated wires and projecting set screws. JNIore knowledge and more public spirit will impose more rigid standards of safety, and the most enlightened employer, both from thoughtful self- interest and from inclination, will not only follow laws but will actually outstrip them. 12. Immigration. — Inasmuch as business is vitally interested in the numbers and character of its people, PROBLEMS OF EMPLOYMENT 151 the question of ininiigration becomes one of prime im- portance. It should be kept in mind also that the question is not only industrial in character but it in- volves likewise religious, social and political questions of every kind. Our futvn-e citizenship will consist largely of the descendants of the foreign born. Before the outbreak of the war in 1914, the annual average of immigration into the United States was some 1,250,000 or more. In the earlier days the ma- jority of the immigrants came from northern and western European stock. In later years the immi- grants were primarily from southern and eastern Eu- rope, representing many different races with varying racial characteristics. We need, of course, to avoid race prejudice and not to think that differences in customs imply either inferiority or superiority. Some of these races will doubtless be of greater economic value than others. Some will become assimilated quickly, others slowly and still others perhaps not at all. These facts have led the United States as well as Canada, Australia and New Zealand to take certain special measures regarding races widely different in characteristics from our own, such as the Asiatics. The normal tendency of human beings to seek those of their own language and characteristics increases the likelihood of the formation of social and political cliques that check or prevent assimilation in the United States and that may create dangerous political and social problems. For example, in 1914, 44 per 152 BUSINESS AND THE GOVERNMENT cent of the total Slovak immigration went to Penn- sylvania. Between 1900 and 1910 the native born population of Pennsylvania increased only 16.9 per cent while the foreign born increased 46.4 per cent. Again, while earlier immigi-ants went as skilled labor- ers into the principal trades and industries, or as farm- ers purchased lands in the East while American farmers became enterprising settlers on the Western frontier, now a larger proportion of the immigrants settle in the great industrial centres of the East, form- ing racial colonies in the cities and competing on lower standards with American workmen. These facts and other similar ones make the immigration problem seri- ' ous. The immigrants must be assimilated and steps must be taken to check the tendency to lower the standard of living. Thoro researches of the United States Immigration Commission proved beyond ques- tion these evils and dangers. To establish firmly an American standard of work and living; to guarantee a proper distribution of the benefits of our marvellous natural resources and our wonderful industrial prog- ress, and at the same time to maintain the spirit of enterprise, industrial progress and efficiency, it seemed necessary to the Commission to restrict immigration, at least temporarily, and that the country take steps to assimilate the immigrants industrially, to educate them to proper standards of living and to give them the economic, intellectual and moral aspirations of the native Americans. This policy has been fully justified by the experi- PROBLEMS OF EMPLOYMENT 153 ence of the war. The fact that, altho immigration was cut off by war conditions, the United States has l)een able to increase its production in ahnost every line of industry to unprecedented totals, clearly indi- cates that there must have been here a large amount of slack labor which needed to be taken up before any real shortage of labor could exist. The labor unions, a very large percentage of the scientific students of the subject and overwhelming majorities in Congress justified this contention, so that on Februaiy 1, 1917, a restrictive immigration bill was passed by the House of Representatives over the veto of President Wilson, and four days later the Senate took the same action. This bill provided for a reading test, with seyeral exceptions to prevent undue hardship. During 1920 an unprecedented rush of immigration took place and all the facilities were taxed far beyond their capacity. The literacy test together with more thoro medical examination reduced the speed with which the newcomers could be passed into the country even tho the former seems to have been very laxly applied in many instances. The total number of im- migrants for the first half of the fiscal year 1920-21 gave good reason for a })elief that the greatest influx in our history had begun. Italians and Polish Jews formed the larger part of the arrivals in 1920; the smaller part was composed of Knglisli, French (some from Europe and some from Canada), Spanish, Por- tuguese and Mexicans. 154 BUSINESS AND THE GOVERNMENT Immigration from Asiatic countries is much more strictly controlled than that from Europe. The measures that have been in force for several years amount to practical exclusion of all Asiatics except Japanese. Steps undertaken during the war to have the so-called "gentlemen's agreement" with Japan abrogated and equal restrictions applied to all Orien- tal countries were for a time discontinued because of the international situation. This agitation was strongly revived during 1920 especially by the provi- sions of the California Land Act adopted by a refer- endum vote of about two to one on November 2, 1920. This, act rigidly restricts the use and ownership of farming lands by the Japanese in California. Heretofore the Government has taken measures to restrict Asiatics much more rigidly on account of the difficulty of assimilation. This is practically exclu- sion. 13. Americanization. — For business, as well as for social and political reasons, it is extremely desirable that immigrants, who are to make their permanent home here, become Americans in mind and heart as soon as possible. The greatest evils of immigration are found in our large mining and industrial centers. Movements to secure a better distribution of the immi- grant, especially as farmers upon the land, should be encouraged. The majority of those coming from Italy and Austria-Hungary have been farmers. They should be encouraged to become farmers here. Again, they need to know the English language, to PROBLEMS OF EMPLOYMENT 155 understand American political institutions, to learn American customs of living and working that they may become an integral part of our nation. Efforts are being made by private citizens, by voluntary asso- ciations, by governmental action, thru schools and bureaus, to accomplish these results. The influx of such large numbers of immigrants em- phasizes the necessity of redoubled efforts toward their Americanization and proper distribution to insure their location where opportunities are best for them and where they will contribute most to the agricultural and industrial develo^jment of the country. REVIEW Where and why did labor unions originate? Give an estimate of the extent of labor unions in the United States at the present time. What are the provisions of the Clayton Act of 1911 that affect labor unions? Indicate the attitude of the United States courts and of the state courts regarding strikes and boycotts. Wliat is the attitude of the British and American laws regard- ing the financial liability of members of trade unions? How far was the restriction of immigration during the recent war responsible for the rapid rise in wages? If immigration continues at the high rate established in 1920. wliat effect may it be expected to have upon the American stand- ard of living? Why do we openly pass an exclusion law against the Chinese and not favor one against the Japanese? What are the really sound reasons for the exclusion of both, if any exist? CHAPTER VIII PUBLIC SERVICE CORPORATIONS 1. Public service corporations need special recogni- tion. — In the business field, there is a group of public sei-idce activities which, even in normal peace times, require special recognition and consideration on the part of the Government. First are the transporta- tion interests, including steam railroads, ships and boats, street and interurban electric railways and other common carriers both of passengers and property. Second, and of nearly equal importance, are the indus- tries for the transmission of intelligence such as the telegraph, wireless telegraph and telephone ; and third come the light, heat, power and sanitation utilities, including gas, electricity, water and drainage. Closely allied with these are such other industrial lines as docks, warehouses, grain elevators and cold-storage plants. War always introduces new elements into the busi- ness life of a people. Winning the war becomes of paramount importance, and when the success of the national arms is at stake all other interests must step aside. Such a necessitj?^ prompted the Government of the United States, whether wisely or not, to assmne direction of the railroads of the country. Early in the 15G PUBLIC SERVICE CORPORATIONS 157 war, the Navy Department had taken over the man- agement of wireless stations, and later, when a serious strike was threatened, it took over the operation of the telegraphs and telephones. Finally, shortly after the signing of the armistice on November 11, 1918, the Government took over also the management of the international cables. Aside from directing these pub- lic utilities, the Government exercised a control over our industrial life which became in many respects, as we shall see, very stringent until the end of the war. This war control was doubtless looked upon as a tem- porary phase in the management of public utilities. This did not obliterate their fundamental relations to the public and to the Government. Yet the experi- ences of the war have certainly greatly modified these j'elations. To understand these relations it is best to discuss in this chapter some of the basic principles involved. 2. Whi/ different from other industries. — In a number of ways, the relationship between these public service industries and the public is different but more intimate than that in other lines of business. In gen- eral, these industries are mono])olies, based on legal sanction or natural conditions. jNIonopolics may be classified as legal monopolies, natural monopolies and capitalistic monopolies. At the present time, we have two general kinds of legal monopolies. Our patent system and the copyright system, which applies to books and printing, both give monopoly for a specified term of years. Public franchises, such as the privi- XXIV— 12 158 BUSINESS AND THE GOVERNMENT leges granted to urban railways for the use of certain streets, also create legal monopolies. These rights are generally granted to a single corporation and are frequently perpetual. 3. Meaning of natural monopoly. — By natural mo- nopoly, we ordinarily mean a business enterprise of such a nature that owing to the mere economic facts in the case, there is of necessity a monopoly. It is something that is not at all a matter of law, altho it may be favored with a law — it is simply the outcome of the nature of the business itself. Ordinarily the chief characteristic of a natural monopoly is that it is "an industry of increasing returns" as compared with industries of "constant returns" or industries of "di- minishing returns." While in agriculture generally successive increases of labor and capital applied to an acre of soil, do not bring proportionate returns, in the case of ordinary manufacturing or merchandizing for every increment of capital and labor added you get substantially an equal return. There is a third class of industries, in- dustries of increasing returns, in which for the addi- tion of a certain increment of capital and labor you get more than a proportionate return. Natural monop- olies are of that class. After a railroad has been built and has a certain capacity of production, it can carry a certain amount of freight and a fixed number of pas- sengers. If you wish to double the carrying capacity of the road, you do not need to double the investment of capital. In all probability you would need only to PUBLIC SERVICE CORPORATIONS 159 add the necessary number of cars and locomotives and a few more employes. To increase freight 25 per cent, you do not add 25 per cent to the grading and tracks, you put on extra cars and locomotives. This principle of natural monopoly — increasing returns — applies not only to railroads, but also to street rail- ways, to gas and electric light, and water supply com- panies. 4. No reasonable competition between railroads in same territory. — There can be no fair, reasonable com- petition with a railroad that meets the needs of a cer- tain district. A parallel line is largely a sheer waste of capital. If the first railroad cannot quite handle the traffic, increase its capacity. If a jDarallel road is built the only possible way for them to get along to- gether is to combine. If they attempt to compete, it means ruin for both, for neither can afford to stop business or to cut rates in order to increase traffic be- yond what would enable it to continue permanently in business. 5. Public service corporations tend inevitably to- ward monopoly. — From the mere fact that the rail- road is an industry of this type, it inevitably tends toward monopoly. The same principle holds witli street railways. Sen-ice is needed on certain streets. One line can occupy the street satisfactorily, but an- other one cannot be built without great disadvantage to all concerned. There is no room for two different railroads on one street. iVIoreover, two are unneces- sary. It is an industry of increasing returns. If 160 BUSINESS AND THE GOVERNMENT added service is needed, do not put in another railroad but put in additional facilities for the existing line. A natural monopoly may be also an industry of such a nature that it will be given a franchise and in that way become a legal, as well as natural monopoly. The development of water power within the last few years has added another large group of industries to the public utilities list. Compared with a water-wheel horse power of 2,471,081 in 1912, the magazine Power estimates the developed water power in 1920 at 9,823,- 000 or 16.6 per cent of the potential water power of the United States. Many charges have been made that in a number of cases, particularly in southern and western states, companies have been organized to buy up in advance and control all the water power sites so that anybody wishing to use water power has to rent that power from these companies who have a monop- oly. Even tho their rates for water power are lower than the cost of steam power, many of these com- panies, it is claimed, have enough control to prevent others from getting water power. In this way they are able to restrict development. This again is a type of natural monopoly and it raises the issue whether or not the Government should not own all the water powers. At least, direct government supervision under carefully drawn franchise agreements should be made before these water-power rights are allowed to go into private hands. Otherwise, there will result the conditions prevalent in many of our cities, where a long struggle has been necessary to get back some of PUBLIC SERVICE CORPORATIONS 161 the rights granted to public utility companies in for- mer days. 6. Characteristics of public service enterprises. — Since these industries from their very nature possess inherent monopolistic characteristics, their relation to the public is very important. In general we may note four characteristics in all these industries. The public is peculiarly dependent upon them for its comfort and its progress. Upon good water de- pends, in large part, the health of a community. Upon quick and reasonable transportation depends business and, just as important, the happiness of the people. Especially is comfort dependent upon the municipal railway system and the ability of the peo- ple, with its aid, to extend their range for homes over a wide area. The rapidity of present-day American business depends largely on the telegraph and tele- phone. Upon good service in gas and electricity, much of our city life thrives. In a hundred and one ways, modern life depends upon the service rendered by these industries. 7. Substitution impossible. — Substitution for their service and products is almost impossible. True, the jitney bus flourished for a while and in some localities is still patronized, but as a permanent substitute foi* the great mass of the people it is of little consequence. Motor trucks are being used to an increasing extent by military authorities and industrial concerns for hauls roughly up to three hundred miles in extent. While this form of transportation as a rule is no 162 BUSINESS AND THE GOVERNMENT cheaper than that offered by the rail lines it has the advantage of quickness and door to door delivery. Eventually a large part of the short haul traffic now carried by the railroads will be transported in this way, leaving to the railroads the more profitable long haul traffic. The motor truck will not displace the railroad but will become supplementary to it. 8. Competition impossible. — Competition in these industries is a practical im2:)ossibility. The value and the propriety of monopoly conditons is recognized in the public service corporations. The nature of the service rendered by them gives them rate-making pow- ers that clearly resemble the taxing powers of the Government. Legally, they are distinguished from ordinary private business as they are under recognized legal obligation to provide satisfactory service, to re- frain from unjust discrimination and to make their charges for service reasonable and just. Such restric- tions are not generally placed on manufacturing en- terprises, department stores or other such lines of business. 9. Assisted by the Government in a peculiar way. — The fact that the Government has assisted these industries in many ways in a peculiar manner thru giving them the right of eminent domain, money and land grants, and liberal franchises, including the use of city streets, undoubtedly gives to the public a moral and legal right to prevent the abuse of monopoly power or any activities inimical to the public good. The tremendous influence of these corporations on PUBLIC SERVICE CORPORATIONS 163 the standard of living and their abihty to secure the unearned increment value coming from rapid increase in population, make needful a large degree of public oversight. They must be effective instruments for the service of the individual citizen and for the devel- opment of the country. Their regulation is a neces- sity. The recognition and expansion of the principle of control of public utilities constitutes one of the most striking features of American political life in recent years. 10. Bad practices in the past. — In the early devel- opment of public utility industries, this principle was not recognized ; there was little or no safeguarding of the public's welfare. Their monopoly characteristics were not so clearly recognized. The public had had no experience with them. The future values of fran- chises granted were not clearly recognized and they •were often chartered for long periods of time or in perpetuity with little or no return. Millions of acres of land of untold value were given in grants to the railroads. City privileges essential to the future growth of a municipality were given to private com- panies with little thought. 11. Public service character not 7rcog iiized.— Muvh of the present difficulty in the proper control of public utilities comes from this lack of foresight. The public strives to win back these essentials, so freely given in the past, simply because the public service character of these corporations was not clearly recognized. It is on that account that we find in the newspapers 164 BUSINESS AND THE GOVERNMENT such expressions as war, telephone fight, electric light controversies, and other war-hke expressions. As Mr. Delos F. Wilcox has ah'eady noted, the news- papers have inadvertently assumed that the public service corporations are public enemies. This as- sumption is at any rate so frequently made by many of our papers that large numbers of the less intelli- gent readers regularly act upon that assumption. This attitude which emphasizes certain abuses really exceptional in character instead of the far-reaching benefits of their public service, has become of late a serious menace, since it has hindered and in some extremely important cases prevented the adoption of measures for refinancing in time of need, thus driving many companies into bankruptcy. Fortunately, both sides are now coming to a more reasonable state of mind. The principle of regulation is firmly estab- lished. 12. Systematic regulation a recent matter. — Sys- tematic regulation of public utilities, however, is a comparatively recent matter. It is true, of course, that in some states railroad commissions have existed for forty years or more. The Massachusetts Gas and Electric Commission is thirty years old. The Inter- state Commerce Commission Act, the forerunner of Federal regulation, was passed in 1887. In 1906, the Interstate Commerce Law was amended to give the commission mandatory, instead of merely advisory powers with respect to rates to be charged in the fu- ture. In 1907, Wisconsin and New York enacted PUBLIC SERVICE CORPORATIONS 165 their comprehensive piibhc utility laws. The number of states having such commissions is now thirty-one. The District of Columbia, Hawaii and the Philippine Islands, have each a commission. AVith the exception of Delaware and Utah, all the states now have either railroad commissions or public utility commissions or both. 13. Powers of regulating commissions. — In almost all cases the commissions can prescribe rates to be charged. They may investigate the service rendered by the utilities, and if they find it inadequate, they may direct that new standards be established. They control the accounting practices. The companies are obliged to make regular and special reports to the commissions at times fixed either by law or by rules of the commissions. Whenever such companies wish to issue new stocks or bonds, they must first get the com- mission's consent. In these and other ways, the pub- lic service commissions enter intimately into the affairs of public utility companies. They act either on the complaint of a dissatisfied consumer or on that of a municipality or an association of some kind, or they may make their own complaints and prosecute on their own initiative. 14. Commissioners , hrnv chosen. — The commission- ers are either appointe.d or elected, the prevailing method being to have them appointed by the governor of a state, subject to confirmation by the Senate. In a number of states, however, tlic mem])ers of the com- missions are chosen directly by the people at general 166 BUSINESS AND THE GOVERNMENT or special elections. The terms of office of the com- missioners are usually long enough to enable them to become proficient in their 'work. 15. Commissioners must possess high qualifications. — The duties of commissioners call for a high degree of ability. In fact, it is generally admitted that the value of any regulating law depends primarily on the ability and integrity of the commission chosen to ad- minster it. It is readily seen, however, that the ad- ministration of these laws may be closely linked with politics, and sometimes men whose chief qualification is their loyalty to a political party machine may be- come commissioners. 16. Status of regulating bodies. — The Government generally classifies these commissions as administra- tive agencies, possessing neither judicial nor legisla- tive powers. In performing their duties, however, they must satisfy the courts both as to their compliance with the authority granted them by the legislature and as to their observance of constitutional guarantees. Sometimes the legislatures have not given the commis- sions all the powers that are needed to make regula- tion entirely efficient. More frequently, however, the commissions are hindered by the courts' narrow inter- pretation of their powers. This is especially the case when there is question of determining the earnings to which a public utility enterprise is entitled. In this important function the courts have practically taken the place of the commissions. 17. State versus local regulation. — The regulation PUBLIC SERVICE CORPORATIONS 16T of public utilities by the state rather than by the mu- nicipality has been the popular program during the last few years, tho many examples of good results and progress have been accomplished under local munici- pal rule. Those arguing for municipal regulation as against state regulation claim that the latter is favored by the public service corporations who wish to write the laws and use their influence in getting appointees of the right mind ; that state regulation has not done so well as municipal regulation ; and that it has not elimi- nated the public utility from municipal politics. Per- haps the strongest argument, and one that has a great deal of good sense in it, is that state regulation has taken away from the citizens of a municipality their immediate interest in these questions and has had a disastrous effect on the quality of municipal citizen- ship. Cities, for their right development, should have a large amount of home rule and we must be careful not to break down these strong, local interests. 18. Advantages of state regulation. — On the other hand, certain outstanding advantages come from state regulation. The very form of public utility manage- ment, now changing so rapidly and in the direction of concentration, makes state control almost a neces- sity. The tendency toward centralization in owner- ship in the electric field of operation is an illustration. This has been greatly promoted by the development of the hydro-electric and central power stations which furnish power to numerous plants in certain sections thruout various parts of the country. These corpora- 168 BUSINESS AND THE GOVERNMENT tions are state-wide, powerful financial bodies and are the most important to regulate. In New Jersey, for example, if each local unit were left to regulate as it pleased the activities of the New Jersey'Public Service Corporation, rank confusion would be the result, the cost would be tremendous, and it is doubtful if, on the whole, any good results would accrue. A corpora- tion, for many good, justifiable and valid reasons, would rather deal with a strong central state commis- sion than with such a riot of regulation. In fact, few cities can afford to maintain a competent regulating bod^^ A similar controversy in many ways is found in the clash between the State and the Federal Gov- ernments. Here, again, it is growing more evident that centralization of management and capital, with the economic elimination of state lines, is breaking down more and more local state regulation with its forty-eight separate regulating agencies — a cumber- some, expensive and hampering method of operation. 19. Optional home rule. — The principle of optional home rule is one that should be given much considera- tion. Large cities, like Xew York, Chicago and Phil- adelphia, are in many ways in a better position to handle these questions than is a state commission. Various items of a regulating program may be left to the city; others can best be handled by the state. A municipality, especially if it is large, should have much to say in the granting of franchises. It may well be given much power over rates and service. The con- trol of securities and the supervision of accounts can PUBLIC SERVICE CORPORATIONS 169 perhaps best be handled by the state. For a time, at least, our regulating program should be elastic and adaptable, and we should be most careful not to break down local interest and citizenship in a quick scramble for state regulation. On the whole, however, it would seem as if present tendencies in the organization of public service corporations are making necessary the use of wider governmental units of regulation. 20. Achievemeiits of regulating bodies. — The most notable achievements so far have been the tendency toward improvement and unification of accounting systems, the elimination of unjust discriminations and the bettering of service conditions. At the same time, in most of the industries, rates had a downward tend- ency until the great increase in costs after the war forced in numerous instances an increase in rates to meet the emergency. State commissions found wide- spread discriminations in the fields of several of the public utilities. In almost every instance, the public utilities have cooperated with the commissions in put- ting an end to these practices. The Interstate Com- merce Commission has practically stamped out the discriminating practices on the railroads that pre- vailed up to a few years ago. 21. Powers of commissions. — Most laws empower the commissions to prescribe standards of service and they have done so for each of the utility industries. They have also employed investigators to supervise the application of these standards thruout the terri- tory, to the great benefit of the public generally. Kx- 170 BUSINESS AND THE GOVERNMENT cept, perhaps, in the electric traction field, the work has not been seriously interfered with by partisan politics creeping into the ranks of the commissioners. Furthermore, the courts have seldom interfered with commission regulations pertaining to service. 22. Net income and distribution. — The regulation of rates involves two important points: First, the total net income which the utilities shall be allowed to earn in each case; second, the distribution of the net income among the several classes of consumers in such a way that all may share equitably in the total cost of the service. The latter feature of rate regulation is a matter of discrimination. The public seems to feel that it is being duly protected from unjust discrimi- nation thru the commission's supervision of rate schedules. The first feature of rate regulation — the determina- tion of the aggregate net income — is in a hopeless state of confusion. From an economic standpoint, such net income must be sufiicient to attract new capital into the industries. The economist, therefore, is inter- ested, not so much in the manner of determining this amount as in the amount itself. The courts, however, have interposed, for the guidance of the commissions, a legal fiction to the effect that rates maj'^ not be re- duced below a point that will afford a fair return on the present value of the properties employed in the serv^ice. This rule has produced a conflict between the commissions and the courts, the effect of which has been to embarrass seriously the commissions and to PUBLIC SERVICE CORPORATIONS 171 create in the minds of the pubHc a distrust of the entire regulation program. 23. Valuation of properties. — The valuation of steam railroads, nearing completion under the direc- tion of the Interstate Commerce Commission, is crys- tallizing the opinions of commissioners on the subject of value. They feel that land, machinery, apparatus and equipment used for public utility purposes should be valued differently from similar properties used in competitive enterprises of a private nature. They take the position that the owners of public utility en- terprises should be protected from rate reductions only to the extent that they themselves have made sac- rifices in the construction of their plants and in the develojDment of their business. Consequently, they say that when a company has been so prosperous as to earn and set aside a substantial surplus in addition to the payment of operating expenses, depreciation and reasonable dividends, this surplus should not be used as a basis of increasing the net income to be allowed the enterprise in the future. This principle also, they say, applies equally to the increase in land values re- sulting from the growth of population and to land grants and other donations made by public authorities and private individuals for the purpose of hastening the establishment of public utilities. The courts, on tlie other hand, have decided that the constitutions, both state and Federal, forbid the state to take private property for public use without a just compensation, and that when a regulating commission 172 BUSINESS AND THE GOVERNMENT reduces rates to a point which will not permit a public utility company to pay a fair return for interest and profit on the present value of its property, this con- stitutional protection is being violated. The courts, therefore, require that in rate regulation the present value of the properties be ascertained by the commis- sions, and that the net income allowed be sufficient to pay a fair return on such value. But in this connec- tion, the courts have not made clear exactly what they mean by value. 24. Points in dispute. — By this controversy, rate regulation has been seriously hindered, and the public has come to feel that it tends not only to retard the regulation of rates, but to defeat the very purposes of the commission laws. It is becoming increasingly dif- ficult for the public to satisfy itself that the lengthy discussions of theories of value serve any useful pur- pose in determining whether the stockholders of a public utility company have received and are receiving returns sufficient to induce capital to flow freely into the business. Another point is that the uncertainty with regard to the amount of net income to which public utilities are entitled under public regulation, promotes speculation in the ownership of these public utilities. The very theory of value, that many of the leading court deci- sions seem to favor, invites investment in public utility enterprises. These are made not only for the sake of a fair return but also to enable a few individuals, usually the promoters of the enterprise, to lay stakes PUBLIC SERVICE CORPORATIONS 173 on the probability of unearned increments accruing to land value, increases in commodity and labor prices, and the surpluses from operation. Such promoters are speculators and their interest in public utility enterprises seldom extends beyond the initial period and the flotation of security issues. 25. Regulation of seciiritij issues. — The public looks to the commissions to put a stop to these prac- tices. In recent years the commissions have been em- powered to regulate the issue of stocks and bonds of public utility companies so that such issues may bear a proper relation to the investments actually made. Such su2:)ervision, however, touches only indirectly conditions that have been handed down from the past. There are many who fear that stock and bond provi- sions may result in establishing the speculative values fixed by j^romoters in earlier years. 26. Regulation of public ntilities still in develop- mental stage. — Up to the entrance of the United States into the war the public regulation of utilities was in an experimental stage. Still more radical ex- periments are the outcome of our belligerency. Some of the possible results of these experiments so far as the railways are concerned are pointed out in tlie ISIodern Business Text on "Railway TrafHc." At this time no one can forecast how extensive will be the intervention of the Government in public utili- ties of all kinds. If regulation rather than government ownership is to be the outcome, the public and the public service XXIV— 13 174, BUSINESS AND THE GOVERNMENT corporations must come to a just recognition of the claims of each other. It is often asserted that the pubhc and the utihty corporations are mutually an- tagonistic. This is not true. Many companies have found that tlie public is willing and anxious to be fair, if that feeling is reciprocated by the corporation in reasonable rates, good service and an evident desire to meet the public half way. REVIEW Why should public service corporations favor state control as against local municipal control ? If public service corporations are regulated as to rates and quality of service, are they not entitled to protection against com- petition or even undue interference on the part of the local municipalitj' ? What disadvantages would there be in New Jersey following a policy of local municipal control over the Public Service Cor- poration of New Jersey? Are franchises for 100 years justifiable from the viewpoint of (1) the company, (2) the public, (3) future generations? Give reasons for your answer. Why is it claimed that the public and the public service cor- porations are mutually antagonistic? How can their interests be reconciled? Under what conditions would you consider trolley lines sup- plementary to or in competition with a railroad? CHAPTER IX LOCAL PUBLIC UTILITIES 1. Multiplicity of municipal activities, — Xo more vital issue confronts public utilities today than the question of government ownership and management. In some countries this tendency lias already pro- gressed far. The success, as it is viewed by many writers, of English and German cities in managing street-car systems, gas and electric plants, water- works and similar utilities, is constantly brought to the attention of the American public. The American city is urged to go into every line of managerial ac- tivity, including such varied endeavors as supplying gas and electricity, running traction systems and fer- ries, managing slaughter houses, ])ublic restaurants, markets, bakeries, pawn shops, loan societies, sav- ings bank, and many others, besides providing school lunches and legal aid. ]Many of these, under certain circumstances, may be desirable activities for a city government to undertake, but as one scans the items on the ever increasing list, one naturally looks for the principles which guide their selection. The discussion in this chaj)ter must be confined to those important municipal utihties around which 'tlie main controversy centers. These include waterworks and gas and elec- 175 176 BUSINESS AND THE GOVERNMENT trie light and transit companies. European cities liave gone into the operation of these utihties exten- sively! In the case of waterworks, and to a degree in the case of electric light and gas companies, Ameri- can cities have also made considerable progress to- ward complete municipal ownership and management. Can any principles of successful operation be deter- mined which would lead one to decide whether or not government ownership and management is generally preferable to private management? 2. Mimicipal ownersJiij) in the United States: waterworks. — At the beginning of the last century there were in the United States sixteen water plants, only one of which was municipally owned. By the close of the century there were about 3,500 plants, of which more than one-half were publicly managed. Most of the larger cities of the United States now own their waterworks, the only exception being San Fran- cisco. In general it may be said that there are three publicly managed waterworks to one privately man- aged plant in the United States. Upon good water depend the sanitation and comfort of a city's popula- tion. To obtain these benefits it is necessary, espe- cially in the larger cities, for a government agency to control and to guard water sites, and they generally prefer to manage the plant — chiefly with sanitation in mind. There are, nevertheless, instances of cities wishing to return to private management after testing public management of the waterworks. 3. Electric light plants. — Next to the waterworks, LOCAL PUBLIC UTILITIES 177 electric light plants have the largest percentage of municipally managed plants. In 1917 there were 2,318 municipally managed electric light companies in the L^nited States; an increase of 85.1 per cent over the number operated in 1907. In comparison with this there were 4,224 privately owned commercial plants, with an increase of 22.0 per cent over the num- ber in 1907. These figures are somewhat misleading, however, for when we take into consideration the reve- nue of the commercial plants as compared with the revenue of public plants, we find the former's gross revenue total was $486,000,000 in 1917, as compared with the latter's $40,000,000. By far the largest number of municipal plants are in cities with a popu- lation under five thousand. Of the total of 2,318 mu- nicipally owned plants 1,940 serve such cities. JNIost of the larger cities in the country are supplied from privately owned plants. The electric light in- dustry is a recent development, so that small cities have been able to undertake to supply this public need without breaking past contracts or, in most cases, competing with private plants. 4. Gas works. — Next in order comes the develo])- ment in the field of gas production. By 1907, accord- ing to the National Civic Federation report on mu- nicipal and public ownership of })ii})lic utilities, tlicre were twenty-five municii)ally owned gas plants in tiic United States and ten in Canada. Since the gas in- dustry is much older than the electric lighting indus- try, private plants were organized early and cities 178 BUSINESS AND THE GOVERNMENT have not been able to enter the field without buying out or competing with existing private plants. 5. Street railtsoays. — The United States has had comparatively little experience with municipal owner- ship of street-car lines. The city of Monroe, Louis- iana, with only twelve thousand inhabitants, has such a line. The city of San Francisco, after innumerable difficulties, finally managed to start operating 10.9 miles of track in December, 1912. By the end of 1915, the number of miles operated was increased to about forty. The city of Bismarck, North Dakota, also operates a short street-railway line to the state capital. 6. Municipal ownership in Europe. — In Europe, the movement for municipal ownership has gone much further. Mr. Frederic C. Howe in "The British City" gave the following figures for England : ENGLAND Kind of Public Undertakings Private Undertakings Enterprise No. Total Capital No. Total Capital Water 1,045 $330,914,491 251 $197,850,964 Gas 256 173,919,089 454 375,348,459 Electricity 334 155,728,000 174 133,838,750 Street Railways 142 199,061,278 154 83,660,551 1,777 $759,622,858 1,033 $790,698,724 There are also a large number of Continental cities which operate enterprises of this character. 7. The issue: regulation or ownership. — These utilities, as natural monopolies, are marked off from the general field of industrial activity by the fact that LOCAL PUBLIC "UTILITIES 179 they cannot be effectively regulated by competition. With them the Government has one of only three pol- icies to follow: (1) to regulate; (2) to own and manage; (3) to leave alone. The last policy is a recognized impossibility under present social and eco- nomic conditions. The local government must either regulate or manage, and the real question before the American public is: Can we have efficient, thoro- going regulation of our private water, gas, electric light and transit systems so as to preserve for the city the advantages of private management and to prevent the abuses of monopoly conditions ; or is it possible to secure better or equitable conditions of public service only under a regime of local government ownership and management? This is a question whose answer involves billions of dollars and the health and happi- ness of a large part of the population of this country. So closely are these public utilities built into the life of our cities that they have become part of their nor- mal environment, really, as Mr. Wilcox has said, "supplementary to sunshine, the landscape, and the an*. 8. Why municipal ownership is undertaken. — Mu- nicipal ownership has been undertaken for a variety of reasons. In America one imjjortant reason is the alleged corruption of officials by the pubhc utihty corporations and the resulting wave of public indig- nation. On the other hand, in fairness to many accused of corruption, it must be remembered that there is much 180 BUSINESS AND THE GOVERNMENT justification for the statement made by directors and managers of public utilities, that much of the bribery and corruption came mainly from strike bills and threats by legislators and other officials. Bribery was the surest and cheapest way to secure justice and to save themselves from oppression. It is much nearer the truth to state that now the cities are largely free from a condition of general corruption. In many ways, then, the movement for municipal ownership began rather as a reform than as a business movement. With corruption eliminated, the aspects of municipal ownership in the United States would be completely changed. 9. Moral asjject of municipal ownership. — With the move to stop corruption went the idea that under municipal ownership lower rates and better service could be secured. Here again, whether justified or not, the prevalent opinion that the public utilities cor- poration had as its motto "The public be damned," added fuel to the fires of reform. Mistaken as this view often was, there is no question that in the minds of many, the advocates of municipal ownership posed, as the sole promoters of honest municipal government, and often succeeded in convincing large numbers of the public that those who were opposed to municipal ownership were in favor of gang rule. These views were often wrong; but that they existed cannot be doubted. 10. Netv point of view. — Within the last decade a broader, more equitable view has obtained, and we are LOCAL PUBLIC UTILITIES 181 now able to study the problem in a more just and reasonable way. In the eyes of the public, municipal ownership is now seen to be fundamentally an eco- nomic i^olicy, while the public utility corporation on its part has been learning that it is not only wise but remunerative to give good service, charge reasonable rates and keep out of politics. 11. Favorable interest rates secured. — Some of the economic aspects of the question are of special inter- est, particularly that of the financial advantages which are thought to come thru municipal ownership. It is claimed that under a system of government ownership a city is able, with its prestige and with its power to tax, to borrow money at a lower rate of interest than private companies can. A question may be raised, however, as to how long these favorable rates would prevail if municipalities generally went into industry, with possible liability of loss and consequent increase in taxation. It is possible tliat under such circum- stances much of this supposed financial advantage would be lost. And, again, some of tlie best corpora- tions can borrow as cheaply as many of the cities — especially the small ones. 12. No clividends on watered stock. — It is also claimed that tlie city need not pay dividends on stock issues, only interest on actual loans. In many in- stances, private companies have been capitalized far beyond actual investments and wish to pay dividends, in consequence, on watered stocks. Tender nninicipal ownership this juggling of finance, the speculating in 182 BUSINESS AND THE GOVERNMENT profits and dividends on fictitious values, it is claimed, is done away with. As a result, the consumer gains in lower prices and better service. It is a question of fact and of degree. Some cities waste as much in the wrong use of loans as would easily pay dividends on much watered stock. Moreover, not all companies have the watered stock. 13. Expense of regulation. — Another saving, and a charge which should be directly added to the cost of private management, is that of adequate regulation. If public ownership does not exist, effective regulation must be employed to overcome monopoly conditions. Effective regulation of transit lines, gas and electric light companies requires a force of experts and care- ful supervision, and the cost of such regulation is high. The advocates of municipal ownership assert that this cost is a proper charge against private management. But many experts believe that municipal management needs as much supervision as private management, and that the cost of regulation would not actually be saved. Theoretically, municipal ownership and oper- ation seem to give decided financial advantages. The supposed financial savings, however, are largely offset by other drawbacks and this line of argument gener- ally assumes that equal skill and energy will be avail- able for management, an assumption rarely borne out by experience. 14. Better labor conditions under municipal owner- ship. — On the part of labor, it is claimed that public management means better wages and working condi- LOCAL PUBLIC UTILITIES 183 tions. It is probable that in England, where labor conditions have been poor, municipal ownership has been seized upon by labor as one of the means by which these conditions may be bettered. The labor party has had great political influence in that country. It is claimed also that the inevitable tendency of pri- vate ownership is to force down wages and keep labor conditions at a low ebb. As a result constant friction, frequently culminating in a strike, has been manifest. It is asserted that municipal ownership can do away with these bad labor conditions to a large extent and that under it more equitable conditions will prevail. And yet in Cleveland a few years ago the workmen in the municipal waterworks went out on strike, and, on the other hand, many private companies meet with little or no discontent. Again, if for political reasons wages are raised unduly, the result is an injustice to the taxpayers. 15. Great betterment in social and political condi- tions claimed. — Advocates of public management in- sist that under such a policy, social, political and ethi- cal conditions are much improved. In fact, many assert that the betterment of social and political con- ditions is so great as to offset any poor financial re- sults which may possibly be shown in a comparison of private and public plants. Corruption and class struggle are said to be eliminated. Public utilities are looked upon as servants of the people and are run from that viewpoint. Housing conditions, thru city planning coordinated with the traction systems, are 184 BUSINESS AND THE GOVERNMENT improved. The temptation to control or influence the press is stopped. Yet experience in other cities seems to uphold the opposite view. Naturally conditions vary as the poles. 16. Europemi conditions different from those in the United States. — All in all, municipal ownership would seem theoretically to give many advantages, but expe- rience does not wholly support this theory. Most of the arguments for municipal oM^nership come from those who are impressed with the seemingly good re- sults shown by European cities. Here we must be careful about comparative data. We must remember that in England, Scotland and Germany a high type of city government prevails. This condition has been the result of many years of struggle and improve- ment. The aristocratic social conditions in those countries develop an extremely able type of municipal official. The form of city govermnent favors this type. Homogeneous populations are also found in Europe, whereas American cities in nearly every part of the country are struggling with a considerable per- centage of foreign-born non-English-speaking peo- ple. This difference in municipal conditions was seen in 1905, when the mayor of Chicago invited INIr. Daly- rymple, manager of the Glasgow municipal tramways, to confer with him upon municipal management of its street railways, for whicli Chicago had just voted. Mr. Dalyrymple arrived in the United States a strong advocate of municipal ownership. A few weeks' resi- dence in Chicago, however, convinced him that he had LOCAL PUBLIC UTILITIES 185 failed to allow for the complete dissimilarity of con- ditions. He opposed municipal ownership in Chi- cago. 17. Municipal ownership in France. — One also re- ceives the impression from some authorities that the European verdict in favor of municipal ownership is unanimous. In France, however, where Socialism has made much headway and where state management of industrial undertakings is to a large extent preva- lent, an entirely different story is told by Professor Paul Leroy-Beaulieu, who gives in full detail the rea- son why French cities have followed a different plan. The experience in Paris is clear, and the writer is a high authority. It is his opinion that the municipalization of city public utilities has really not gone far in France, altho many members of the Socialist party as well as the Radicals have been inclined to support it. When, for example, in the city of Paris most of the concessions for gas, electricity and water, and the street passenger traffic expired, early in the twentieth century, the INIunicipal Council would certainly have taken over tliese different services, had the sentiment in favor of municipal ownership and management been impera- tive. Instead of following that course, however, the Council made new concessions to jjrivate companies for all the different services mentioned. These con- tracts were in different forms and for varying terms of years. All of the services mentioned were in- cluded. 186 BUSINESS AND THE GOVERNMENT A striking illustration is the concession given to the Paris Gas Companj'^ which expired in 1905, after having been enjoyed for three-quarters of a cen- tury by that corporation. The municipality in this case owns the gas works, but the manufacturing of the gas is in the hands of a company which furnishes the working capital and shares the profits with the city. The city keeps control by a provision to the effect that after two years' notice, it may end the con- cession at the end of the succeeding five year period. The concession has been allowed to run on beyond its concessive periods, and there seems no reason to doubt that this policy is one most favored by 'the Municipal Council. Similar arrangements have been made with the General Water Company. Likewise in connection with the electrical, heating, light and motive power a concession of a similar nature had been running for periods of 30 years or more. The last arrangement made in 1914 conceded the city's electricity and motive power to a large financial group called the Paris Compan}- for Electrical Distribution and will continue until 1940. In this concession, the electric heating and lighting company has a monopoly, but as regards electric motive power the Municipal Council reserves the right to permit other companies to furnish the power if it so desires. Similar arrangements again have been made regard- ing the subways. Under the concession for 75 years the company does all of the work of construction, the city simply approving and supervising the plans LOCAL PUBLIC UTILITIES 187 and their execution, and sharing the profits, the share being based on the number of passengers carried. An- other concession for the older subway was made for 40 years after the completion of the work. In this case, the city assumes the cost of tunneling, the company makes the road, builds the stations, furnishes the roll- ing stock and runs the road, giving the city one third of the gross receipts and a certain portion of the in- creased traffic when it surpasses the figure agreed upon. Along quite similar lines, the city has renewed for a period of 50 years with large shares in the profits, its concession to all the tramway, omnibus and auto- bus companies. Some of these concessions to private companies extend as far as 1980. This general condition, varying with different com- panies, has brought about on the whole considerable reduction in the price paid formerly by the public for such services; and inasmuch as it gives to the city a considerable participation in the profits it seems to have met with the general approval of the public. The revenues were very considerable in 1910, for ex- ample, some thirty-five millions of francs were re- ceiv^ed from gas, twenty-eight milhons from water, eighteen millions of francs from sul)ways, and some twelve millions from electricity. Of course, as the city had to borrow for the companies to carry thru some of these enterprises, part of tliis income must be used for meeting the interest on loans, })ut pr()bnl)ly one-half of the amount now received can be added to the regular revenues. It is estimated that by thf 188 BUSINESS AND THE GOVERNMENT middle of the present century from 150 to 200 millions of francs at least will be received from the city, and probably much more than one-lialf will be net profit. jNIost of the other important cities of France have followed in this regard the example of Paris. Some exceptions are found in those towns in which the muni- cipal councils are controlled by Socialists. In this exception given, some of the utilities, especially light- ing have been municipalized. Professor Leroy Beau- lieu is of the opinion, however, that as a rule this ex- periment has not been a success. He cites the city of Elbeuf, in which the Municipal Council decided to municipalize the gas. The enterprise jDroved really disastrous, running at a decided loss to the Treasurer. This so affected the Mayor, who represented his town in the Chamber of Deputies, that on account of the unpopularity which resulted he committed suicide since the move had been made with his hearty support. A new election was held shortly afterward and as a result the new municipal council at once leased the city gas interests to a private company. Various other enterprises of a Socialistic nature have been suggested: for example the Caillaux Cab- inet authorized the Paris municipality to establish butcher shops and bakeries but the public was so op- posed to it that the Poincare Cabinet withdrew the biU. Other arrangements along somewhat similar lines show the same general facts. Along the lines of ownership of public enteri)rises have been included LOCAL PUBLIC UTILITIES 189 the cheap working men's homes, usually with the pro- vision that the town interests come to an arrange- ment with some cooperative or stock company who will borrow from the city at a low rate of interest the funds for building houses; the idea being that tlie municipality will not actually construct or manage such enterprises. 18. Policy of favoring ^workmen by reduced rates. — In comparing American and European cities even in specific and seemingly simple items, such as fares and service, great care must be taken. In consider- ing the relative advantages in fares in one country over another, one must look into the question of tlie distance and the system of transfers. Mucli, for ex- ample, is made of the fact that many European cities favor the workmen by reduced rates during tlie early morning and the evening hours. Yet under private management in the United States and in Canada this system is becoming more extended. INIontreal, tlie largest city in the Dominion, has a rate of eight tickets for a quarter, usable between five and eight o'clock in the morning and from five to seven in the evening, while six tickets for a quarter, or twenty-five for one dollar, can be bought for ordinary travel, and ten tickets for a quarter are sold to school children. American cities are adopting a similar plan. We have in this country the custom, pretty gener- ally, of a single fare. In most of the European cities it is customary to charge a variety of fares, accc^rd- ing to distance. The City of Glasgow has owned and XXIV — 14 190 BUSINESS AND THE GOVERNMENT controlled its municipal utilities for a long time. The street railways have an increasing fare. Careful studies have been made of this plan in Glasgow, and it is by no means sure that the plan is always good. In the first place, this rate of fare increasing with dis- tance, which is abnost universal in Europe, tends to congest the population within the lowest-fare area. The second point is that as a rule those cities do not have a system of transfers. When you change from one line to another you pay your fare again. So, it is argued, on the whole the average fare paid by the usual passenger is about as high as it is here. If a man transfers twice, he must pay three fares. 19. Poor systems of municipal accounting. — Again, one must keep in mind the fact that methods of keep- ing municipal accounts, especially in this country, are often faulty. Authorities generally in many of the states have seen the necessity of some governmental supervision of municipal reports. One purpose is to have the sys- tems of classification and accounting uniform in order that the utilities of the same class in one city may be compared to advantage with those in other cities. Moreover, in few of the cities is there any system that is really scientific and adequate. The Public Service Commission of the second dis- trict of the State of New York, in its fifth annual re- port of 1911, calls attention to the fact that there are two cities and fortj^-eight villages in the state that operate municipal lighting plants. Most of them LOCAL PUBLIC UTILITIES 191 were either unable or unwilling to adopt modem ac- counting methods. Frequently the bookkeeping was limited to a mere record of consumer's accounts with a simple statement of receipts and disbursements, practically no analysis or classification. In some cases, the affairs of the lighting plant were so closely related to those of the water or other departments that it was impossible to determine the actual results of the operation in either department. AVhen munici- palities embark on business enterprises they should, of course, adopt business methods, otherwise as has fre- quently happened, the citizens believe that their serv- ice is cheap, when as a matter of fact it is not. For- tunately, the State of Xew York has a good form of legislation, the full effect of which cannot probably be reached for some years. There has been, however, a decided improvement in its records, the state having imposed upon the municipalities the uniform system of accounting. According to D. F. Fggleston in "^Municipal Ac- counting," p. 24, the State of New York, in IDO^, by law i:)laced the accounts of her cities on a uniform basis. This conflicts with the statement that thci-c are 2 cities and 48 villages operating municipal light- ing plants on inadc(]uate accounting basis. According to tlic librarian of the Municipal Uefcr- ence Library, the present law regarding the uniform system of accounting for municij)alities was j)assc(i in 1908, and covered a system of accounts for gas, electric light, and telephone companies for the State 192 BUSINESS AND THE GOVERNMENT of New York. Each particular municipality, under the law, was not obliged to change its system of ac- counts until the Public Service Commission had per- sonally visited the plants and classified the accounts according to the uniform schedule. This being the case, in 1911 it is probable that 2 cities and 48 villages might still be operating under the old system of ac- counts. This statement is the one we are endeavoring to check up at present. 20. Modern development effects advantages of municipal ownershij). — One of the greatest advan- tages for a sj'stem of municipal management is that various kinds of public service plants can be coordi- nated into a single scheme of operation. In this way costs are reduced and much saving in both service and rates results to the public. On the other hand, in the private field two counter developments may be noted. In many cases, street railroads will be found supply- ing facilities such as electric light and power as well as transportation. Since the same power can be used for a number of different operations, private com- panies have likewise the opportunity of effecting a considerable money saving in the use of power thru interaction of the different plants. From the point of view of profits and ability to give low rates, this coordination offsets many of the advantages of public ownership and management. In earlier times when one private company supplied a city with gas, a sec- ond with electric light, a third with street railways, and a fourth with water, it was apparent that if the city LOCAL PUBLIC UTILITIES 193 owned all of these the power from the same sources might be used to advantage in pumping the water, in running the street cars and in furnishing the electric light and gas. To a great extent this is true and is a matter of economic significance. But if these private companies are combined, the saving will be the same. For example, the Public Service Corporation of New Jersey in 1918 was sup- plying gas and electric light and power for electric street railway service to 146 municipalities with a population of over 2,126,889 people. As a result, the quality, the price and tlie continuity of service was superior to what could be obtained from a number of small or struggling enterprises. The Pacific Gas and Electric Company of California in 1918 was op- erating in thirty counties of central California, fur- nishing electric light and power to 177 communities, besides furnishing gas, water and street sei'vice in many of these cities. The area covered was »J7.77-) square miles, and about 55 per cent of the population of California was being served. The Central Illinois Public Service Company was serving 131 communi- ties which were formerly supplied with power by 41) separate generating plants. By consolidation these plants were reduced to eight and later to four, cai)able of producing all the needed energy. The Boston Edison Company now covers an area embracing 700 square miles. This argument for municipal owner- ship, it is thus seen, is largely superseded by this mod- ern movement in the ju-ivate utility field. In fact, it 194 BUSINESS AND THE GOVERNMENT would be difficult, even impossible, for a municipally owned plant to cover such a wide area, as such plants are restricted in many ways in their extension to out- side cities, whereas a private company is able to serve a whole state, with the economies resulting from such concentration. 21. Development of holding cofnpanies. — The de- \felopment of holding companies in public utilities has recently become important. Thru holding compan- ies, unrelated properties, widely distributed — in many cases over several states — have been brought together under one central control and management. The holding companies do not, however, aim to kill com- petition thru monopoly. The nature of these business activities, w^ith their essentially local market, makes it impossible for isolated or scattered public utility companies to compete. Thru the holding company profits and losses are averaged, purchasing and op- erating costs are lessened, security issues are made eas- ier, and thru standardization an increase in service and facilities is made possible and a superior technical abil- ity can be secured. This development is bound to have a great effect in preventing the extension of municipal ownership. 22. Municipal government still inefficient. — Much is made of the financial benefits accruing to the pub- lic thru municipal ownership. Yet, despite the un- doubted great improvement in city management dur- ing the last decade, municipal management is still so inefficient in comparison with private management as LOCAL PUBLIC UTILITIES 195 probably to outweigh any financial advantages which the advocates of municipal ownership claim. Inelas- ticity of management, favoritism in appointments, in- ability of the public to see the value of paying high salaries for highly technical positions, too large a laboi- force, the inability to resist the political appeal of municipal employes or the demand of consumers, and the lack of initiative so often found, all operate as a dead weight on efficient government management. And yet, doubtless, cases may l)e found, especially in small cities, where able upright officials run a munici- pal plant on sound business principles as efficiently as a private company could. 23. Municipal ownership advisable "where healfh. sanitation and public safety demand it. — In general, it may be said that in industries in whose conduct health, sanitation and public safety are involved, es])e- cially if police protection is required, the larger ])ul)Hc interests will usually call for municipal management. This probably is the reason, especially in view of tlie larger and larger concentration of poj)ulation, ^\hy municipal management of water works is rapidly hc- coming prevalent. People generally feel that the task of securing pure water and keeping it from pol- lution, if large watersheds are to be protected, can Ix' more satisfactorily handled by governmental than l)> private agencies. 24. Where profit is the predominant motive. ])rivai( management is better. — Where profit to the munici- pality and savings to the ratepayers are the predomi- 196 BUSINESS AND THE GOVERNMENT nant motives and where effective public regulation is possible, a system of private management would seem preferable. Especially is this true where public util- ity corporations realize their peculiar position as pub- lic servants and, as a result, are willing or can be compelled to give fair treatment, good service and reasonable rates. The policy of fair treatment, good service and reasonable rates will bring its reward in financial return to any privately owned public util- ity. On both sides there seems to be a growing real- ization of mutual responsibility. 25. Issue must he settled by experience. — Every one agrees that some form of government control of public utilities must be exercised. There can be no doubt that conditions have improved under the admin- istration of public service commissions. The question of rigid public control of public utilities seems to be settled. Whether we shall eventually go fuither is something that will be settled by experience. REVIEW How and to what extent should a city try to prevent conges- tion caused by concentration of population? Is it possible for a municipally managed plant to develop as has the Public Service Corporation of New Jersey? Do you think the public will play fair with a company follow- ing a policy of good service, reasonable rates and non-interfer- ence in politics? Win*? Are there any reasons why municipal management should be more efficient than Federal? If so, what are they? Do you think a policy, like that of Montreal, of lower priced trolley tickets at certain periods of the day, a good financial proposition? Give your reasons. CHAPTER X TRUSTS AND COMBINATIONS 1. No clear-cut government policy recognized. — Altho the necessity of regulation is recognized in the public service field of business, a very different ques- tion is presented when we consider the extension of governmental supervision to other parts of the indus- trial field. Two methods have presented themselves as government policies in the treatment of pubhc serv- ice corporations — regulation or government owner- ship. In the remainder of the industrial field, a wider and less definite choice is presented. Here monopoly is not generally recognized as necessary or as even ad- visable. Competition is still thought by most people to be something to be preserved and guarded by the community. The Government has not entered into this part of the industrial field in so tangible and di- rect a manner as has been the case with j)ul)Iic utili- ties. Substitutes can often be found for the products of most industries, so that the ])ublic is not so pecu- liarly dependent upon them as n|)()n electric light, gas, water and railway service. i\gain, these other in- dustries are not generally recognized as public serv- ants. Many arguments could be advanced for a policy of 107 198 BUSINESS AND THE GOVERNMENT legalized combinations and trusts, even with monopoly conditions present, under a system of regulation, in- cluding such matters as prices, securities and public- ity of accounts ; and such a policy has been advocated by many people. But the idea of govermnent owner- ship in this modern field is not so far advanced as in the case of public utilities, where it has taken a strong hold. The public, both in Europe and this country, is still groping in its efforts to find a satisfactory method of dealing with other industries. 2. Definition of trusts and combinations. — Out- standing in this general industrial field are the great combinations. Instinctively the mind conjures up the whiskey, the malting, the print paper, the steel, the harvester, the sugar combination and a host of others. Their mere recital is evidence of the hazy definition given to the words "trust" or "combination." In gen- eral, we mean by such terms any large industrial com- bination, whether it be a capitalistic monopoly or an actual competitive corporation, whether it completely controls an industry, or is only the strongest company in any particular line, as is the United States Steel Corporation. The word "trust" is applied by the public to big business. Trusts and combinations are here taken to mean manufacturing corporations with such great capital and power that they are at least thought by the public to have become a menace to their welfare, whether or not they have monopoly power. 3. Why government interferes. — There are several TRUSTS AND COMBINATIONS 199 reasons why the American governments have seen fit to regulate or to prohibit trusts and combinations. As Professor R. T. Ely of Wisconsin sums the matter up, the public's apprehensions are due to: The fear of monopoly power The fear of industrial concentration The fear of wealth concentration. All these fears are closely connected in the popular mind. There is a widespread feeling that accumula- tion of wealth in the hands of a few, together with the enormous ramifications of corporate organiza- tions, and the ease with which combinations are now- a-days effected are used to oppress individuals and to injure the public generally. It has been a favorite line of argument on the part of the United States government prosecutors, to hold to the assumj)tion that any organization controlling a large percentage of the total output of the country in its Held is a monopoly. This argument was used in the Government cases against the International Harvester Company and the United States Steel Corporation. Hut it is l)y no means clear that monopoly can be determined by tlic percentage of the total output. The Steel Corpora- tion has had competition during the wliole of its bis- tory and its percentage of* tlic total output bas steadily declined. The International Harvester Company controlled some 85 per cent of tbe total output of tlie country in one or two lines of manufacture; but some 200 BUSINESS AND THE GOVERNMENT of the Harvester Company's competitors, when put on the stand and asked if they felt the Harvester Company's competition to be unfair competition, em- phatically answered "No." When asked if its com- petition was real competition they said it certainly was, but that they were increasing their output in spite of it. These competitors did not believe that the Harvester Company could put up its prices materially as long as they maintained their own prices, and there was no agreement among the manufacturers as to prices. Monopoly cannot be determined in this way. Nevertheless there has been a widespread general fear of these trusts and combinations and the government has felt it necessary to take decided action against them. Before taking up in detail the policy of our own government some light may be found in the prac- tices followed in Germany, England and Canada. 4. Policies followed by Germany. — In Germany no prohibitory legislation is placed on trusts or combina- tions. The Government itself is in some cases part and parcel of such organizations. Under this policy a remarkable development in trade combinations has taken place, the old combinations being continually extended and new ones constantly formed. The Ger- man "Kartell" is usually in the form of an agreement regarding output and sales with severe penalties for their violation. Agreements often cover practically an entire industry and are enforced by the courts. In this country, the courts would hold them illegal and would not enforce them. The German Government TRUSTS AND COMBINATIONS 201 has believed that good economic results come from such organizations and except in specific cases of wrong doing, contrary to the public welfare, has not attempted to prevent them. Indeed it directly en- couraged them, especially, perhaps, when the product successfully entered the export field. This, of course, is a marked contrast to the American policy. 5. Policy followed hy England. — England also fol- lows a liberal pohcy, making lier distinction on the basis of reasonable and unreasonable combination. In the earlier days, under the Houses of Tudor and Stuart, there were many monopolies granted by the kings, such as the monopoly of being the only seller of certain lines of products. Later under the Monopoly Act complete monopoly or general restraint of trade was forbidden, but under the English law from the earliest days even to the present time, there have been certain forms of legal monopoly. On the re- straint of trade the line of decision is most clearly marked. The English courts have held that a par- tial restraint of trade is not illegal unless contrary to the public interest. In other words, com!)inati()ns which do not use methods that are unreasonable or harmful are not declared invalid under English law. Business in English industry is not hampered by a narrow governmental policy; it operates under spe- cific laws against wrong doing, and rcasorjublc njcth- ods and intention are provided for. 6. Canadian policy. — Canada, with economic con- ditions similar to our own, began its policy toward 202 BUSINESS AND THE GOVERNMENT trusts and combinations in a similar manner, namely prohibition. The Dominion Criminal Code contains provisions against combinations and monopoly. Later, however, this purely negative policy was greatly modified, altho not entirely superseded, by the passage of the Combines Investigation Act of 1910. Under this law provision is made for a board of in- vestigation composed of three persons, one represent- ing the complaining party, one the defendant and the other a judge of the Court of Record. The board may be secured by any six persons who declare that a combination exists in respect to any article of trade or commerce, and that prices are thereby enhanced or competition restricted to their detriment, either as con- sumers or producers and who can present reasonable ground for such declaration. 7. Methods of regulation wider the Canadian Act. — Several methods of regulation are provided in case the charges are proved. The customs tariff may be reduced or taken off altogether on certain articles con- trolled by the combination, so as to bring about for- eign competition. Patents used unfairly may be re- voked. If the combination or person continues in a course against which the board has declared or does not carry out the recommendations made, such per- son or organization is guilty of an indictable offence and subject to a fine not exceeding one thousand dol- lars a day and costs. Where licenses under the Canadian Inland Revenue Act are used unfairly, their cancellation is possible and probable. Subsidies TRUSTS AND COMBINATIONS 203 granted by Parliament to shipping or transportation companies may be revoked. 8. Considerations in the Canadian policy. — Accord- ing to V/. L. jNIackenzie-King, former Minister of Labor of Canada/ the Dominion shapes its policy in the light of three possible considerations: First. That it is the possible inimical effects of combination and not combination as such that is to be aimed at in legislation. This is a frank admission that combination is not necessarily a bad thing, but that it is an inevitable and necessary development. Second. Canada believes that it is the duty of the government to see that the interests of the many who compose a state are not sacrificed to the interests of the few whom favors and opportunities have helped to create. Third. That there are certain evils in combinations in which publicity is more effective than penalty, and that no single remedy may be formed for all the pos- sible abuses that may arise. 9. Beginnings of American anti-trust movement. — In the United States from the end of the C^ivil War down till the late '80s, poj)ular faitli in competition unhampered by government regulation was the rule. In the '80s, many large organizations were formed. Many used reprehensible methods to stifle competition and took a tioist form of organization which, as it seemed to permit combination of ahnost uiilirnitcd iThe Canadian Combines Investigation Act, Annals AmiTicnn Arul- emy, July, 1012, Page 149. 204. BUSINESS AND THE GOVERNMENT size and power, aroused great apprehension on the part of the ^^ublic. Legislatures became agitated, so that by 1890, 25 or 30 of our states had passed laws forbidding monopoly or combination in restraint of trade. Ordinarily, the law forbade all kinds of com- binations in an attempt to keep business in the old competitive form. Had the earlier laws been strictly interpreted, it would not have been possible to do any business at all except as private individuals. The effect of these laws, however, was not great. They were recognized as having been hastily passed in response to popular outcry. In cases where the legislatures denounced them, possibly under political pressure, business men did not. In consequence, busi- ness was generally carried on as before and combina- tions were seldom attacked. On the other hand, in some of the states, notably in Missouri and Texas, an effort was made to enforce these laws rigidly. Suits were instituted and the acts were upheld by the courts. The consequence was that when it became apparent that it would be dangerous to do business on a large scale, there was either an evasion of the law or else the companies withdrew from the state. The Inter- national Harvester Company, for instance, announced that it would not violate the law and that if it were going to be attacked as a law breaker it would with- draw ; and it did withdraw from Texas. Texas after an experience of some years passed a bill practically inviting back to the state the corporations convicted under the anti-trust laws. TRUSTS AND COMBINATIONS 205 10. Sherman Anti-Trust Act. — The Sherman Anti-Trust Act was drawn in much the same spirit as some of these state laws. Indeed, Senator Sherman said that its purpose was to enable the Federal courts to "cooperate with the state courts in checking- and controlling the most dangerous combinations that now threaten the business property and trade of the people of the United States." Altho the law was passed in 1890, until 1903 it was a negligible factor, apathetic- ally enforced. At that time, however, perhaps as a result of a number of investigations alleging politi- cal corruption and unfair practices by combinations, public attention was focused upon the combinations, and a general wave of prosecutions followed under the Interstate Commerce Commission Act and the Sherman Anti-Trust Law. 11. "Monopohj" in the Sherman Act. — Under the Sherman law, "Every contract or combination in the form of a trust or otherwise, or conspiracy in restraint of trade or commerce among the several states or with foreign nations" is illegal, and "everj^ person who shall monopolize any part of the trade or commerce among the several states or with foreign nations sliall be deemed guilty of a misdemeanor." If an organiza- tion increased its business five or ten times simply thru using the most efficient means of production, it might very easily be called a monopoly, altho the organiza- tion may have had no thought of doing anything out of the way. 12. Reasonable and unreasonable restraint of XXIV— 15 206 BUSINESS AND THE GOVERNMENT trade. — In the first important cases the lawyers arffued that altho the word "reasonable" was not in the act, our law was a development of the common law and it would be the natural thing to suppose that this Act applied only to contracts in unreasonable restraint of trade and contrary to the public interest. The first important decisions that followed (especially those in the Trans-Missouri Freight Association, in the Joint Traffic Association, and in the Addyston Pipe and Steel Co. cases) rather disabused business men of this feeling. The courts held that it was not the duty of the court to read words into a law, that Congress had said that every contract along this line, even among railroads, was illegal, and that they would not attempt to take up the question whether or not a contract was reasonable. 13. Standard Oil and Tobacco decisions. — Then, in 1911 came the decisions of the Standard Oil and the Tobacco cases when a step was taken by the court that covered the chief point that had been advocated dur- ing the preceding ten or fifteen years by the people who were trying to get the Sherman Act amended. The court in these decisions said in effect that there must be adjustment of the meaning of the law to busi- ness conditions and that if Congress did not make that adjustment, it was a matter for serious consideration by the Court ; and that it would construe the law in the light of reason. These two decisions marked real turning points in the American policy toward trusts and combinations. Reasonableness was to be fol- TRUSTS AND COMBINATIONS 20T lowed in deciding upon the actions of those forming trusts and combinations. 14. United States Steel Corporation decision of 1915. — Court decisions of the last few years indicate a still more liberal and constructive point of view toward honorably conducted corporations and combi- nations. From the viewpoint of the business man, the decision of the United States District Court foi* New Jersey, in the case of the United States Govern- ment against the United States Steel Corporation, handed down June 3, 1915, was one of the most mo- mentous for many years. Later the decision of the Supreme Court, JNIarch 1, 1920, upholding the decision of the lower court is even more detailed an epoch in our business history. For manj'^ years it has been well understood by those who have followed its methods of business, that the United States Steel Corporation has been attempting to manufacture good goods at the lowest cost, and to deal fairly with its competitors, with the consumers of its products and with its em- ployes — altho, of course, there has been a decided dif- ference of opinion between the officers of the corj)ora- tion and of the labor unions as to the best methods to follow. The Supreme Court not only recognized these facts, but, what is of vital importance, it has offi- cially declared that when business is carried on with these purposes and by these methods, a corporation is not acting contrary to the Sherman law, however great its size. In conclusion the court said "we are unable to see 208 BUSINESS AND THE GOVERNMENT that the pubHc interest will be served by yielding to the contention of the Government respecting the dis- solution of the company or the separation from it of some of its subsidiaries; and we do see in a contrary conclusion a risk of injuiy to the public interest, in- cluding a material disturbance of, and, it may be seri- ous detriment to, the foreign trade. And in submis- sion to the policy of the law and its fortifying prohibi- tions the public interest is of paramount regard." 1.5. Inteiniational Harvester Company decision of 1014. — It is an interesting fact and also a striking commentary upon the legal system of the United States that the District Court of Minnesota on Au- gust 12, 1914, altho recognizing that the International Harvester Company had been carrying on its busi- ness in accordance w^ith the same methods and with substantially the same results as those just mentioned, nevertheless decided that that company was a "trust" existing in violation of the Sherman Law. To be sure, the percentage of the entire output of the coun- \Ty in certain lines produced by the Harvester Com- pany is probably larger than in the case of the Steel Corporation and, at the time of its organization, some of its constituent members were competing in certain products. Nevertheless the methods of its capitaliza- tion left less to be criticized than that of the Steel Cor- poration. The purposes of doing business and the methods have apparently been largely the same. In this case an agreement was reached between the United States Department of Justice and the com- TRUSTS AND COMBINATIONS 209 pany bj'- which the corporation was reorganized to meet the contention of the Government. In conse- quence the suit was dropped without a decision. 16. Sound business principles recognized. — Judge Elbert H. Gary, more than fifteen years ago, before the organization of the United States Steel Corpora- tion, in his testimony on October 19, 1899, before the United States Industrial Commission, outlined the general line of business policy that he thought great corporations should follow in order that the best in- terests of the public as well as of the companies should be served. In his judgment there was no possible way by which any company could keep down competi- tion, even if it so desired. Speaking of the Federal Steel Company, of which lie was then President, he stated specifically: "We have endeavored not to run counter and not to be antagonistic to the spirit of any law of any state; we are not attempting to con- trol prices; we are not seeking a monopoly." And again, recognizing certain abuses that were found in some cases and the possible remedies for such evils, he said: "These great aggregations of capital un- doubtedly are for the benefit of us all, certainly for the benefit of this countiy, and certainly for the benefit of the employes generally. But the aggregation of capital may be used in such a way as to do a great deal of harm. ... I think the best remedy is plenty of light on the subject, plenty of discussion, a thoro understanding." On May 28, 191. "i, testifying in a later suit, Judge Gary expressed like o])i?ii()ns, assert- 210 BUSINESS AND THE GOVERNMENT iiig that the policy of the United States Steel Cor- poration has been consistent from the beginning, 17. Affirmative decision by United States Supreme Court recognizes honest business methods. — Altho there may have been here and there exceptions, the two great corporations mentioned, judging from the facts that have been brought out by the scores of witnesses, have conducted their affairs in accordance with the principles of enlightened business. Since the decisions in the Standard Oil and Tobacco Com- panies, the decisions of the Supreme Court have in- dicated that it believes in good business methods and will interpret the Sherman Law as being not antagonistic to corporations that follow sound busi- ness practice ; but in the individual cases before it, the decisions have generally been adverse to the corpora- tions — the Court holding that their business practices have been unsound and in many cases oppressive. There has been needed an affirmative decision that should state positively that any corporation following sound, honest business j^rinciples consistently, no mat- ter what its size, would not fall under the ban of the Sherman Law. 18. The real question involved. — The decision of the District Court in the Steel case takes definitely and positively that position. The judges, referring to the Standard Oil and Tobacco cases, say: "These cases may be taken to have established that only such combinations are within the Act as by reason of intent or the inherent nature of the contemplated acts preju- TRUSTS AND COMBINATIONS 211 dice the public interests by unduly restricting com- petition or unduly obstructing the course of trade." Again, "It will be seen that the steel and iron busi- ness of this country is not being and, indeed, can- not be monopolized, that the real test of monopoly is not the size of that which is acquired, but the trade power of that which is not acquired." And further, "We dismiss once and for all the question of the mere volume or bigness of business. The question before us is not how much business was done, or how large the company that did it, the vital question is: 'How was the business, whether big or little, done- Was it, in the test of the Supreme Court, done without prejudicing the public interests by unduly restricting or unduly obstructing trade?' The question is one of undue restriction or obstruction, and not one of un- due volume of trade." Fortunately for the develop- ment of honest business the Supreme Court, in 1920, fully upheld their decision. 19. Public interest as shown by facts. — These state- ments put tlie case squarely on the issues, not of verbal quibbles, or of legal technicalities, but of the public interest as shown by the actual facts. That position is the one that every business man wishes the Court to take. The decision of the Su])reme Court confirming this view really did more to relieve business anxiety and put the country on the road to permanent prosperity than any possible legislation. Business men have hesitated to invest capital, because they could not judge how the Court would interpret the 212 BUSINESS AND THE GOVERNMENT law. They had often followed strictly their con- sciences, knowing the facts, knowing that they were haiTning no one, and yet at times fearing that they might be breaking the law. Now they have a real basis for judging the law as applied to their own business. 20. Attempts to clarify the Sherman Anti-Trust Law. — In order to vitalize and clarify the Sherman Law so as to meet the wide dissatisfaction on the part of the general public, who felt that the dissolution of great trusts accomplished nothing of practical value, and on the part of the business interests, who felt that the uncertainties of meaning of the Sherman Law subjected business to continual harassment with no compensating gain to the general public. Congress during the Wilson administration passed the Federal Trade Commission Act and the Clayton Anti-Trust Law. In these acts Congress attempted to provide an administrative body to deal with these questions on their economic merits and to define acts so as to make the provisions of our anti-trust law specific and definite. 21. Powers of the Federal Trade Commission. — The Federal Trade Commission Act provides for a commission of five members, not more than three of whom shall be members of the same political party. The Commission has the following powers: (1) To effect the readjustment of business and to prescribe appropriate decrees in equity suits. (2) To require reports and classify corporations. TRUSTS AND COMBINATIONS 213 (3) To investigate. (4) To prevent unfair competition. In addition, by the terms of the Clayton Act, the Commission possesses: (5) Power to prevent price discrimination, exclu- sive and "tieing" arrangements, holding corporations and interlocking directorates. 22. Readjustment of business and prescribing of appropriate decree in equity suits. — The Federal Trade Commission may upon the application of the Attorney General "investigate and make recommen- dations for the readjustment of the business of any corporation alleged to be violating the anti-trust acts, in order that the corporation may thereafter maintain its organization, management and conduct of busi- ness in accordance with law." In a suit in equity the Court may refer said suit to the Commission, as a master in chancery, "to ascertain and report an appropriate form of decree therein," altho it is not bound by the report. Altho it is discretionary upon the part of the Attorney General and the courts to use the Commission, it is presumable that tliis will be done and that the decisions of the Commission will have much directing force. Much, of course, depends upon the composition of the Commission. 23. Power of investigation. — Aside from the power of investigation which is conferred upon tlie Comniis- sion as incidental to the functions just discussed, that body is given several other inquisitorial powers. It has the power to investigate tlie organization of any 214. BUSINESS AND THE GOVERNMENT corporation engaged in commerce, excepting banks and common carriers. It may also "upon the direc- tions of the President or either House of Congress, investigate and report the facts relating to any al- leged violation of the anti-trust acts by any corpora- tion." Also, it may, upon its own initiative, make investigation of the manner in which any final couK decree entered against any corporation has been or is being carried out; and may "investigate, from time to time, trade conditions in the foreign countries, where associations, combinations, or practices of manufac- turers, merchants or traders, or other conditions, may effect the foreign trade of the United States." It may also have access to the documentary evidence of any corporation being investigated and has power to require by subpena the attendance and testimony of witnesses. 24. Power to require reports and classify corpora- tions. — The Commission may "require corporations engaged in commerce, excepting banks and common carriers, to file with the Commission, in such forms as the Commission may prescribe, annual or special re- ports, or answers in writing to specific questions." It may also classify corporations and prescribe a uni- form system of accounting. This may be of far- reaching importance in determining the relative efl^- ciency of various kinds of organizations. 25. Power to prevent unfair competition. — The Trade Commission Act provides "that unfair methods of competition in commerce are hereby declared un- TRUSTS AND COMBINATIONS 215 lawful," while under the terms of the Clayton Act, jurisdiction to prevent various specific acts has been vested in the Commission. These specific acts cover discrimination in prices among purchasers, the pro- hibition of "tieing" and exclusive selling arrange- ments, the buj^ing by one corporation of the stock of other corporations where such acts may substantially lessen competition or tend to create a monopoly. The Clayton Act also provides "that no person shall be a director at the same time in any two or more corporations engaged in interstate commerce which have a capital, surplus and individual profits aggre- gating more than 1,000,000 dollars." This provision applies in cases where such corporations have been competitors, so that the elimination of competition be- tween them would be a violation of any of the pro- visions of the anti-trust laws. 26. Advantages and disadvantages of these new hnvs. — One may question whether any very material alteration from the situation under the Sherman Act has been secured by the new legislation so far as it prohibits unfair competition, price discriminations, exclusive arrangements and holding corporations. The value of prohibiting interlocking directorates as enacted in the Clayton Law is verj^ much to be ques- tioned. "Tieing" arrangements were specifically up- lield by the decision of the United States Supreme Court in Henry vs. Dick. The Sherman Act, there- fore, could scarcely have })een made applicable to any such arrangement in view of that decision. The Clay- 216 BUSINESS AND THE GOVERNMENT ton Law, therefore, here prohibits an act previously declared lawful by the United States Supreme Court. The value of this prohibition in the Clayton Law may also be greatly questioned. The new laws pro- vide for a body of men with wide investigatory pow- ers who are to devote a considerable amount of time to the study of the question. These five men ought, therefore, to become specialists. The report of the Commission on combinations in foreign trade indi- cates that the Trade Commission will be a clarify- ing factor in presenting the economic side of the cor- poration question to Congress and the public. It seems not improbable that these laws mark a turning point in our attitude toward great corpora- tions; that criminal penalties are no longer to be re- lied upon for enforcement, but that enforcement shall be handled civilly, thru either the courts or the Trade Commission. This points toward the ultimate result that the main control of great corporations will be vested in an administrative board or body. 27. Increasing power of Federal government. — The formation of the Federal Trade Commission, the enactment of the Clayton Anti-Trust Act, and the more recent passage of the Child Labor Bill aimed at the production end of business by preventing man- ufacturers who do not come up to certain standards in the emplojTnent of labor from engaging in interstate commerce, all point toward an increasing power of the central government even in time of peace. The Federal government exercises its power over business TRUSTS AND COMBINATIONS 217 thru the provisions in the constitution, giving it the right to regulate commerce among the states and with foreign nations, the power of taxation and the power over the postal service. 28. Distinction between commerce and manufac- turing. — As trusts or combinations are generally manufacturing concerns, they are, so far as produc- tion is concerned, subject to state regulations, not Federal. As organizations engaging in interstate commerce they are subject to Federal supervision, not state. This distinction makes efficient control diffi- cult and chaotic, leaving the business man between Federal supervision of interstate commerce and the intricacies of legislation enacted in states. The new Child Labor Act is an attempt to make the commerce clause in the constitution cover one factor in the manu- facturing end of the business. 29. Federal incorporation or license for interstate commerce. — In consequence of this confusion, many business men favor a voluntary Federal incorporation act or a Federal license for interstate commerce. A Committee of the National Civic Federation, made up of lawyers, great business men and labor leaders, a few years ago drafted a Federal license bill which if followed would go a long way toward meeting tliese difficulties. The l)ill included the licensing by a Fed- eral commission of corporations doing interstate com- merce under provisions which would give well-inten- tioned organizations the opportunity to s(juare tlicm- selves with the law. Unless the preceding decisions 218 BUSINESS AND THE GOVERNMENT of the Supreme Court and the work of the Federal Trade Conunission prove favorable to the country, the passage of a Federal licensing act and an exten- sion of the control of the Federal government over business in general thru an administrative body such as the Federal Trade Commission seems probable. 30. Present situation. — History was made quickly in times of war and there is evidence that much of the old prejudice against combinations has broken down. The needs of war emphasize the importance of increased and coordinated production. That this can be obtained more easily thru large concerns un- der a unified direction, than thru countless smaller ones working at cross purposes is almost self evident. Under such conditions during the war the people and the government were more indulgent towards combinations. During the crisis of the war the United States Government dropped pending suits against a number of the largest corporations because any decision re- quiring the dissolution of those companies would in- volve new financing on so large a scale as to compete with the Government for funds. jMoreover the exi- gencies of war proved that in such a time of emergency the superb nation wide or at times world wide power of these organizations was of the very greatest bene- fit. Had these organizations not been in existence it would have been impossible to feed and supply our armies with anything like the same degree of efficiency. Their operations, of necessity, would have been re- TRUSTS AND COMBINATIONS 219 stricted, so that it is scarcely too much to say that the formerly hated and feared trusts proved in this emergency of ahiiost indispensable benefit. The lesson has not been entirely lost. The passage of the Webb Bill which provides for combination in export trade, and the Edge Bill which makes provi- sion for financing such organizations engaged in ex- porting so as to secure a low cost of production to enable them to compete in foreign markets make it probable that a radical change in our policy toward combinations will from this time on be noted. It is to be expected that while the Government will still be on guard to protect tlie interests of the people against abuses, the normal l)eneficial economic effects of the large organizations will be recognized and the com- panies allowed to continue their work so long as it is carried on in the interests of the public. REVIEW Why would regulation of a manufacturing concern be more difficult than that of a public service corporation? What four policies may be followed by the government in deal- ing with business? Why is monopoly recognized in public service corporations and not in corporations in general business? Why is it necessary under modern economic conditions for tlie Federal government to assume more power over corporations? Can monopoly be determined by percentage of output? CHAPTER XI THE POSTAL SERVICE 1. Importance of the postal service. — Ex-president Wilson at the annual banquet of the National Asso- ciation of Presidential Postmasters, in July 1916, de- clared that in every country the post office is the "con- spicuous gauge and standard of what the government is doing for the people." From the viewpoint of government management the post office is of primary interest, as it is the best and largest example of government monopoly in this and in most other countries. The distribution of in- formation and goods is of the utmost importance, as upon its efficiency and progressiveness depends in large part our modern, complex, rapid business life. From the very nature of the postal business, good eco- nomic and financial results should be secured. If the government does not or cannot operate the post office efficiently, there is little likelihood of its suc- ceeding in the management of more complicated and^ less routine-like lines of industrial activity. Much of the government expansion of business management is thru the enlargement of the postal department. The parcel post is a recent example of such expan- sion. In many other countries the telegraph and 220 THE POSTAL SERVICE 221 telephones are also run by the post office. The Post- master-General of the United States even before the war proposed to take over the telegraphs and the long- distance telephones. The action of the President in taking control of them as a war measure and placing them for administration under the direction of the Postmaster-General and the further act of assuming control of the cables even after the siffninff of the armistice, Xov. 11, 1918, placed the issue squarely before the country. The results were not encour- aging and the Department was subjected to much criticism. The post office for many reasons, then, is worthy of careful study as a guide in settling the question as to whether further expansion in govern- ment management is a wise policy. 2. Development of postal service. — The develop- ment of the postal service is an interesting story. The first recorded postal service consisted of a regular system of sending messengers on the king's" business in the days of Cyrus the Elder, King of Persia. Among the ancient Romans it was common to have postal routes, as it was later in France under Charle- magne. So far as is known the first commercial post, aside from government messages, was established early in the twelfth century. In 1516 there was es- tablished a postal system for the Emperor of Ger- many and the position of postmaster general was cre- ated. A regidar post was established by Henry the Eighth in England — at first for the government but later for the people. Under James I. in lOO.'J, when XXIV — 16 222 BUSINESS AND THE GOVERNMENT there was a beginning of a monopoly system, James gave to a private interest a monopoly of hiring out horses to travelers. Soon after a special privilege was given in conjunction with this monopoly for col- lecting and delivering letters. A regular post was established between London and Edinburgh in 1535, and finally the business be- came so profitable that in 1650 there was a special offer made of five thousand pounds a year for the privilege of a postal monopoly. A penny delivery rate was established in London as early as 1680. This was at first a private affair, but afterward was incor- porated into the public system. Not until 1840, how- ever, under Rowland Hill, was the principle of penny postage for all England established. To have one uniform charge for all distances was a great advance, and this plan of universal penny postage was not in- troduced into England until after long discussion. It was an innovation which it was thought would be extremely expensive. Hill claimed, however, that it would pay and it proved to be a great success. The first regular post in the American colonies was established in 1682 and this was taken over in 1710 by Great Britain. The Continental Congress set up a post office system, Benjamin Franklin be- coming the first Postmaster General. Postmasters at that time had the exclusive privilege of sending their own newspapers thru the mail. In 1792, however, it became a law that any newspapers, no matter by whom published, could be sent. THE POSTAL SERVICE 223 The postage stamp was introduced in England in 1840 and in the United States in 1847. In 1876 an international postal union was established among the different nations so that regular mails could be ex- changed. 3. Activities of post office constantly expanding. — To the post office department a number of other ac- tivities besides the transmission of mail have been at- tached and there is no telling what further functions may be given to it. Registering letters was a great innovation when first put into effect. The money order system is relatively a late develop- ment. It was first established in England as a pri- vate matter thru the enterprise of three English postal clerks. They developed the system of making pay- ments thru the mails and later it was made a part of the regular postal work. Postal savings was estab- lished in Great Britain in 1801 but not until compara- tively lately in this country. In 1865, too, Great Britain started in connection with the postal savings a system of annuities and life insurance. The carry- ing of parcels by the post office also began in Europe much earlier than in this country. 4. Particular reasons for government management of the post office. — There are many special reasons why the post office in particular should be managed by the State. The idea of a government mono|)oly appeared early, and from the very beginiiing as a re- sult, the post office had a close connection with the government. The need for secrecy also, from the 224. BUSINESS AND THE GOVERNMENT first, was very important and the State, in those days, was the only agency which could undertake and guar- antee this. We do not ordinarily think much about it, but the European war showed us how often it be- comes extremely embarrassing when the privilege of secrecy is withdrawn. The loss and delay consequent upon the examination of mails was clearly brought out during the great war by the action of Great Britain in stopping and censoring mails between the United States and neutral countries. At first some believed that this practice gave much information to British manufacturers regarding American business connections. In business dealings, individuals in the United States will trust to the mails information which they would not trust to the telegraph or telephone. While the employes of the telegraph and telephone compa- nies are sworn to secrecy, at times they cannot be trusted and often are careless or indifferent. More- over, the lines are easity tapped. 5. Possibility of governmental revenue. — The post office was early seen to be a possible source of profit, and the State undertook it for that reason. At the present time, however, only a few countries are actu- ally running their postal systems at an apparent profit, and it is doubtful if even these cases would show a profit if proper accounting covering all items of expense were in vogue. In the United States, the deficits for a number of years have been very large so that the total loss from 1837 to 1912 was well over THE POSTAL SERVICE 225 three hundred milhon dollars, and this amount would be very much larger if proper charges were included in the expenditures. 6. Social aspects prominent in the post office. — The educational and social aspects of the public man- agement of the postal service are also very great. The cheap delivery of letters, newspapers, magazines, and books is extremely important. The extension of service into country districts, where no private com- pany can afford to extend it, is worth while from the social and educational viewpoint. This service can be most easily secured by government monopoly. The postal savings bank in accepting money from those who will not trust the ordinary banks, and who in many places have not the right kind of banking facilities, is also a great social gain. The post office, then, has many historic reasons showing why it is peculiarly a business to be managed by the government. In other ways also, it is marked off from common industrial enterprises in such ways as to indicate that it is a fit field for public manage- ment to enter. 7. Should be run efficiently and economicalli/. — The post office is unifjuely a business which the gov- ernment should be able to run efficiently and econom- ically. The risks of ordinary trade are absent. In the post office, costs remain fairly constant, large quantities of materials do not have to l>e stored with consequent changes in prices or depreciation in (jual- ity. Very little of the speculative element is pres- 226 BUSINESS AND THE GOVERNMENT ent, unforeseen losses are reduced to a minimum. A system of transportation is at hand in the railroads so that no expensive development of plant is necessary. Capital charges are low, compared with other big busi- ness. Postal charges are simple. The business is one of orderly routine, reducible to a system, and needs, relatively speaking, only a small number of high salaried executives and technical men. Above all, it is constantly under the eye of the public, which is able to check up and to object if things go wrong. Very few^ kinds of business, in brief, are so admirably adapted to government management. If, then, the government is not able to run this business efficiently or economically, there would seem to be little hope of its succeeding in a more complex, more difficult enter- prise. A brief examination should result in a clear- cut decision as to whether the post office should fur- ther extend its activities. 8. Financially a failure. — The United States Post Office from 1837 to 1912 had a total deficit amounting to the tidy sum of $330,000,000. Even at this, the loss is probably underestimated, as accurate account- ing methods which included proper expenditures would without doubt, considerably raise the amount. Was this amount dehberately devoted to the public service? In the political jealousies between different admin- istrations, slipshod methods are often interestingly brought out. In a statement issued ^lay 30, 1913, Postmaster General Burleson in trying to overthrow THE POSTAL SERVICE 227 the contentions of former Postmaster Hitclicock that a surplus had been obtained during the latter's ad- ministration, said : Notwithstanding the great zeal displayed in the effort to place the department on the so-called paying basis, and the resulting injuries to the service, the claim of the former Postmaster General, that the service actually yielded a profit in 1911, has no foundation in fact. Instead of a surplus of $219,118.12 for that year (1911), as claimed by my predecessor, it is clearly demonstrated that there was in reality a deficit of more than three-quarters of a million dollars. Furthermore, a close anaylsis of the financial statement of the year 1912 discloses the fact that the admitted deficit of $1,758,523.10 for that year was under- stated by nearly $100,000. 9. Proper accounting methods Jacking. — An in- teresting experience of a private nature confirms tlie statement regarding possible inaccuracies. In lOl-t some inquiries were made as to the cost accounting system employed in the Post Office Department under Mr. Burleson's administration. One of the auditors in the Post Office Department was asked what system they had for cost accounting. The auditor replied, "Why, man, what are you thinking of? There is no such thing in the Post Office Department." I-'ui-- ther incjuiry verified the statement. From the stand- point of a business man or an express company this would look like very loose management, but as a mat- ter of fact the auditor could not give any definite state- ment of the cost accounting system. 'I'he fauh is clearly not confined to eitlier party or either admin- 228 BUSINESS AND THE GOVERNMENT istration. It is a question of government manage- ment. 10. Other factors causing inefficiency. — Many other reasons can be given why the post office makes a sorrj' showing along efficiency lines. Despite the fact that the Civil Service reform acts have on the whole been favorable in that they have to a considerable degree stopped the abuses of the spoils system, it still remains true that in both the Fed- eral Government and many State Governments, the spirit of that system is not yet dead. It is, of course, proper that heads of departments who are the presi- dent's political advisors on matters of policy change with the new administration, but it is not best that many subordinates in responsible positions who ought to stand or fall wholly by the value of their work are turned out for political reasons. The Civil Service rules, too, protect the clerks in the lower positions so far as the retention of their offices is concerned, but they have little effect in securing for them properly earned promotion. Post masters, revenue officers. United States marshalls, and other officials of similar rank are appointed or dropped chiefly on account of their political affilia- tions. When a new president is elected he is at once beset by literally many thousands of citizens eagerly ambitious to serve their country in office and the basis of the claim of the applicant is not primarily that of fitness, but rather that of party service. In another direction the Civil Service system has THE POSTAL SERVICE 229 an evil influence. So careful have our law makers been to protect the worthy in their positions that they have made it extremely difficult, practically impossible in many cases, to get rid of the unworthy, unless they perform some criminal act. So long as they obey general regulations, as a rule they can hold their posi- tions even tho grossly inefficient. When the post- master in a country village can be judged and pro- moted or dismissed on the same principles as the rail- way station agent we shall see a decided improvement in our post office system. Postmaster General Burleson is the authority, in his 1915 report, for the statement that in the build- ing up of the rural delivery service, efficiency and quality of service have not been the controlling factors, but rather that special favor and ]H'ivilege, creating "gross extravagance" have prevailed. New routes have at times been started without sufficient reason. In certain favored localities, two deliveries a day have been given, when others of greater desert were not so served. Again, in the erection of new post office build- ings that were not actually needed, political activity and favoritism have played too conspicuous a part. In certain instances new l)uil(liiigs have been erected where fully satisfactory quarters might have easily been found at a modest rental. He wisely suggests that public buildings erected for post office purposes should be standardized and their costs made com- mensurate with the needs of the service. Moreover, he recommends that in the erection of public buildings 230 BUSINESS AND THE GOVERNMENT the needs of the service should be kept primarily in mind and not merely the erection of ornamental buildings to gratify the artistic taste of the citizens of the town, in which they are located. The annual "pork barrel" measures including large sums for post offices in small towns where the postal income is very small are well known to all. A recent postmaster-general himself said that if he could keep down "useless extravagances not postal but political" the country might have one cent postage. 11. Reasons for the parcel post. — Three motives actuated the establishment of the parcel post: (1) the experience of other countries, (2) the possibility of lowering rates, and (3) the general resentment to- ward the attitude of the express companies. The ex- press companies because of their attitude toward the public have at times perhaps deserved to be troubled. The entrance of the government into the express busi- ness IS a good example of government competition with private companies in such a way as to cause a noteworthy improvement in the latter's methods and points of view. Before the government took control of them as a war measure, express companies in order to meet the parcel post competition gave better service and lower rates, partly under order of the Interstate Commerce Commission. From this angle, the en- trance of the government into the parcel post business was serviceable. 12. Parcel post introduces a new principle. — The direct carrying on of a business in competition with THE POSTAL SERVICE 231 private companies thru a general parcel post, how- ever, seems to introduce a new principle in our gov- ernment work. If so, it should be justified on the ground that it does actually effect a saving of indus- trial energy to the people ; and that is a question that seems by no means to have been settled. An in- vestigation made in 1914 by the Research Depart- ment of the Alexander Hamilton Institute with the aid of some hundreds of shippers as to the relative efficiency of handling packages by freight, by ex- press and by the parcel post, covering an average business of 118,000 parcels per day, indicated that, altho, in the opinion of these sliippers the parcel post had the advantage of the express companies in cheapness, in all other particulars — speed, convenience in pick-up and delivery, care in transit, collections, cost of insurance, tracing of lost packages and adjust- ments of claims — a large majority of the shij)pers preferred the express companies. In the matter of cost, the charges by freight were cheaper than by par- cel post or express, but of course the cliaracter of the packages differed. Even as regards clieapness, how- ever, some shippers said tlie post was unsatisfactory, since it took longer to prepare a parcel for mailing than for express, the packing cost more, the package was more liable to breakage, and if lost, the Post Office Department "fills out a paper and makes an attempt to locate it but never finds the goods." 13. Post office has never determined costs. — Again the question of cost to the public in distinction from 232 BUSINESS AND THE GOVERNMENT cost to the shipper seems as yet entirely unsettled, for, so far as one can learn, the Post Office Depart- ment has no system of cost accounting in connection with the parcel post. In consequence no one can de- termine whether it is really carrying at lower cost than do the express companies, or whether, as seems not improbable, the difference in charge to shippers is made up by the low rates forced on the railroads against their will, or by shifting the burden on other branches of the postal service, or upon the taxpayers. The railroads claim that they have been most unjustly treated and many senators and members of Congress agree that the burden has been j^laced upon them. Certainly the Post Office Department has no right to claim success in this regard until it can show cost accounts that are clearly comparable with those of the express companies. 14. Government urged to take over telegraphs and telephones. — As already stated, even before the war Postmaster General Burleson in his annual reports made the recommendation that the telegraph and long distance telephone systems of the United States should be incorporated into the postal establishment, and claimed that the welfare and happiness of the nation depended upon "the fullest utilization of these agen- cies by the people, which could only be accomplished thru government ownership." In speaking of the recommendation of the War Department for tlie transfer of the Alaskan cables and telegraphs, ^Ir, Burleson also asked that the Porto Rican and THE POSTAL SERVICE 233 Hawaiian systems be turned over to him on the ground that "the services are so detached geographic- ally as to preclude complicated relationships with neighboring systems, and are sufficient in extent to afford valuable experimental demonstrations for the postal service looking eventually to the administration of a complete national service." If the business and social welfare of the people of the United States are to depend largely upon a government-owned tele- graph and telephone, it is perhaps well that we have had, as a war measure, a brief test of the post office efficiency in this field. But it may be well also to con- sider how the population of European countries have fared under their government-managed systems. From the standpoint of the development of this in- dustry, the United States and most of Canada with their private plants have had seemingly a mucli greater success than European governments have had with their puljliclj'-managed plants. For example, the United States has 9.1 telephone stations to each one hundred of population, and Canada 5.6, altho its population is widely scattered, while the densely populated countries of Europe have only .8 stations to one hundred population. In Germany where public management was before the war generally considered efficient, only 1.9 stations per 100 of population are to be found, 1.6 in England and 3.4 in London. In the thirty-three cities of Europe with a popula- tion of over five hundred thousand, only 3.2 stations to one hundred population were used, while in the 234. BUSINESS AND THE GOVERNMENT eleven cities of the same class in the United States, 10.4 were utilized. The investment in the United States in telephone companies ( 1917 ) was $1,064,800,- 000 while the investment in Europe was $635,925,000. It is also worth while noting that whereas the invest- ment per station in Europe is $172, the investment per station in the United States is only $125. Taking into consideration the quality of service rendered it would seem as if the private companies in the United States have made much better use of their capital. Even Congressman Lewis of Maiyland, an ardent advocate of government ownership, admits that the Bell system is an organization whose securities are free from water or inflation. Looked at from any angle, the development of the private companies of the United States and Canada is much better than any of the government plants of Europe and even of Austraha and New Zealand. 15. Unprogressiveness of government plants. — The bureaucratic mind can hardly be expected to show alertness and enterprise according to the state- ments of Mr. Sidney Brooks, in speaking of govern- ment managed telephone systems. Inasmuch as tlie organization of a o^overnment office with a staff vir- tually irremovable forbids enterprise, officialdom pro- motes subordination, or servility, unwillingness to con- centrate responsibility and in consequence the stifling of initiative. The ideal of service rather than the hope of gain or the desire to retain the safe place is doubt- less found to a far greater degree in private than in THE POSTAL SERVICE 235 public enterprises. Mr. Brooks is the authority for the statement that not one of the many discoveries that have transformed the technical and commercial man- agement of the development of the telephone within the last thirty years has emanated from a government department. European governments have been the last to adopt them and the verdict of real experts on governmental officials in the telephone service is that they have not learned their business. All the govern- ments of Europe in this field of public activity have made the fundamental mistake of "seeking efficiency from economy rather tlian economy from efficiency." In London, the Post Office and the Xational Tele- phone Company have been working side by side in the telephone field. The published accounts make it clear that altho the post office pays neither rent nor taxes nor local rates, its working expenses have been ' 73% of the gi'oss receipts whereas those of the private corporations have been only 56% of its gross profits. 10. What guiding principles should he followed? — The question arises, can we find a guiding principle to determine where the post office shall stop its work. Shall it primarily do work for the government? Shall it protect the savings of the poor? Shall it promote private business and if so, shall this be done at the expense of the taxpayers or solely at the expense of the shippers? All these questions must be answered before we shall know where to draw the line. Is the post office to take over these additional activities, if so, why? For better service, for cheaper service, for 236 BUSINESS AND THE GOVERNMENT the effect upon the people in the way of protection? We must seek a guiding principle and we must be sure of our facts. 17. Government should act on basis of accurate knowledge. — That the tendency before the war ex- periences was strong toward increasing the field of government management thru the post office depart- ment is clear. It is by no means clear, however, how far it is wise to go in that direction. We are in the dark as to the clean-cut principles on which decisions should be reached, and as to data on the actual effects of existing conditions so gathered that the experiences of different systems are clearly comparable. Until the government institutes a better system of cost ac- counting so that we can know who it is that pays the rate on parcels, there ought to be no further exten- sion of the parcel post. While our privately managed telephone and telegraph companies show such initia- tive, progressive development and public spirit in meeting the nation's needs, one need expect no ad- vantage in the post office management of these in- dustries. Our postal savings banks seem to meet a genuine need, but surely the post office ought not to assume any responsibility in these matters without very careful consideration of the principles involved. 18. Special tvar services. — Like other departments of the government, and like private industry, the Post Office Department was drawn into the web of war activity in many fields. Thru its function of regulat- ing access to the mails it became an organ for com- THE POSTAL SERVICE 237 bating the spread of seditious utterances. It came to the aid of the Treasury thru the part that it has played in the sale and administration of War Savings Stamps. Since the institution of the Postal Savings System, the post office has come -into more intimate relations with the people, especially those of foreign origin, and their good-will towards the post office has been a factor of importance in the success whicli has attended the War Savings plan. The department came to the aid of the army and navy thru the ar- rangements which it made for the distribution of read- ing matter to the military forces. In times of peace, however, our experiences indicate clearly that it is wise not to extend the range of the departments activi- ties without the clear demonstration of a need that can- not be met by private agencies. JNIoreover, even in such cases, great care should be taken to provide against carelessness and inefficiency. REVIEW Under what conditions should the public be obliged to pay- thru taxation for the losses incurred in sending postal matter at less than cost rates? Why is it impossible to place dependence upon the figures of the Post Office department sur))luses or deficits? Is it a wise move, when we are ahead of the world in tele- phone developmtnt, to change from private management to government ownership? Why is a more rapid use of new technical inventions likely to be made under private management? Is it wise from the standpoint of efficiency to (■x])and greatly the activities of the post office? In what ways are the railroads less adapted to government management than the post office? XXIV— 17 CHAPTER XII SHOULD PUBLIC MANAGEMENT BE EXTENDED? 1. Government management not a panacea. — To many, government management (here taken to in- clude ownership with management) seems an obvious, relatively simple and practicable way of dealing whole- sale with monopoly conditions. The Socialist party has as its cardinal principle the enactment of legisla- tion directed toward public management of the means of production, distribution and exchange. Others see in the government management of the railroads, of the steel industry or of the merchant marine a simple panacea for the social ills of each particular industry or, in the case of land, for the economic ills of mankind. Against this wholesale opinion practical business men and the best scientific authorities, with scarcely an ex- ception, emphatically protest. 2. Advantages at times greater than disadvantages. — It must be recognized, however, that under special circumstances and in some particular lines of indus- trial activity, the advantages of public management are indisputable and far outweigh the disadvantages. For example, to leave in private hands certain indus- tries which, if their exploitation were unchecked, might threaten rapidly to deplete the natural resources of a 238 PUBLIC MANAGEMENT 239 nation, may be an extremely unwise policy for the state to follow. Private owners, who may be pos- sessed of high personal integrity, but who as business men are not immediately concerned in the future wel- fare of the country, might by their actions in behalf of their companies force the public to take over the management of their particular industries in the pub- lic interest. Forestry — even the coal industry — may be cited as examples in which private ownership and management might lead to national bankruptcy of natural resources. Most people now recognize the need of our forest preserves. 3. Importance of health. — Industries vitally affect- ing the health of a nation or of a municipality may in many instances require government management. These industries include sewage-disposal plants and care of the streets and usually of the water works, all of which have social advantages under public manage- ment which overwhelmingly outweigh any economic disadvantages. 4. The near and the extension of public manage- ment. — The most unusual lengtlis to which, as the re- sult of war conditions, governments went in the man- agement of business have naturally aroused many questions as to the principles underlying the exten- sion of governmental activity. iVll agree that mili- tary efficiency must be the supreme goal overriding- all other except internationally moral considerations at a time when nations are fighting for existence. It is well to remember, however, as Lincoln did during 240 BUSINESS AND THE GOVERNMENT the Civil War, that many acts are justified as war measures which would be unqualifiedly condemned in days of peace. No one questions that in time of war, the government should go to extremes, not only in direct military defense, but also in the indirect defense of the country, by preventing commercial losses or financial crises. All the great countries involved in the great war gave unique and startling examples of government management in fields usually left in pri- vate hands, such as the direction of private manu- facturing plants supplying war materials, the con- trol of prices, the complete regulation and distribu- tion of food supplies, and the various financial meas- ures taken in order to insure the normal business life of the nation and to prevent credit demoralization. All these war measures were justified as necessary to the self-preservation of the nations involved. 5. Extension of government management in the United States. — War also pushed the United States into a new era in the relations between government and the management of business. Government man- agement of the railroads became a fact ; the national control of the mining, distribution and even private consumption of coal, coke and fuel oils was under- taken, while government regulation and control ex- tended in every direction. Wheatless days, meatless days, heatless days and others were more or less cheer- fully endured by the American public. No doubt, these w^ere necessary, and not imposed >vithout due in- vestigation and cause, but, nevertheless, they marked PUBLIC MANAGEMENT 241 a new era, in which the inbred distrust of the govern- ment conduct of business was promptly laid aside for a vast extension of governmental regulation and man- agement. The old "laissez-faire" policy followed so long in this country, based upon the conviction that private is better than government management; that business should be left, as far as possible and con- sonant with justice and fair dealing, unhampered in its o^^erations, was for the time abandoned. Generally speaking, however, policies adopted to meet tempo- rary^ needs tend to remain permanent factors in the governmental organization of the country. Legisla- tors always find it difficult, almost impossible, to re- trace their steps ; economic policies once put into action thru investigation inevitably became political ques- tions. 6. What will the after-efects he? — It is as yet too soon to judge finally the after-effects of this extraordi- naiT extension of governmental activity on the trend toward government management, which in this coun- try, and in fact the world over, rapidly gained head- way during the war. There has already been a prompt revolt from extreme positions. Scores of the leading business men who so promptly and unself- ishly placed their services at the disposal of the Gov- ernment in time of peril quickly returned to private business. Generally it seems that their experience has confirmed tlieir former judgment of the inevitable waste and inefficiency of Government management. It is impossible yet to balance the benefits and 242 BUSINESS AND THE GOVERNMENT drawbacks of Government control and management of the railways, telegraphs, telephones and cables, but the drawbacks are mentioned more often than the benefits. We must wait at least until the companies have had more complete opportunity for readjust- ment before we make final judgment. Now it seems evident that the view of President Wilson as expressed in his book "The State" has been proved sound by experience. "Indeed," he says, "such are the dif- ficulties in the way of establishing and maintaining careful business management on the part of the gov- ernment that control ought to be preferred to direct administration in as many cases as possible — in every case in which control without administration can be made effectual." 7. EcVtensioJi of j)ost office work. — In this country the post office has been the best and largest example of government ownership and management, tho for a time overshadowed by the management of railroads, and the entrance of the Federal government into other business activities chiefly thru an extension of its work into such fields as the parcels post, banking, and the telegraph and the telephone business. It is evident to all that any further extensions of post office activi- ties should be determined largely by the success or non-success of present lines of work and the illustra- tions given in the chapter on the post oflSce do not en- courage further extension. In this whole field of government activity no prin- ciples have been definitely established on a basis of PUBLIC MANAGEMENT 243 fact in this country. War time management is no test of what a country can do in peace. Never in peace times will it receive such a favorable trial or operate under conditions so conducive to success. The cordial and generous support of business men was unstintedly given. The best executive brains in the country were placed at the disposal of the nation, and yet there were no conclusive results. Times of peace produce very different conditions ; with the great likeli- hood that politicians, not experts, would be the guides of railway management if the lines were again placed under government management. Experiences in Eu- rope, where social conditions are largely different and where the military aspects of the question have always predominated, have in the past been used as the stock examples. Here again, one must be careful of facts, careful of purpose, careful to judge different so- cial conditions. For example, in judging service and rates in Europe as compared with those in the United States, many varying factors, such as density of popu- lation, cost of living, taxation, and systems of account- ing, must be considered before any definite answers can be given regarding the relative welfare of Eu- ropeans under government ownership as compared to Americans under private ownership. 8. Dishonest financial methods must stop. — On the whole, the American railroad system, when compared to those of other countries where state-owned railroads predominate, have little of which they need be ashamed and much of which to be proud. A most wonderful 2U BUSINESS AND THE GOVERNMENT record, for example, is that of the Pennsylvania Rail- road in carrying 453,952,298 passengers in more than 3,000,000 trains for a distance of 10,000,000,000 miles without a fatal accident. INIuch of the feeling against the railroads in this country has been aroused by financial juggling. It is a regrettable fact that instances of such juggling, in- volving whole systems, which can be characterized only as robbery have occurred in the last few years. Yet on the other hand we have illustrations of many rail- roads conservatively managed, with a long period of sustained dividend payments, fair dealings with em- ployes and excellent service to the public. It is doubt- ful whether occurrences of bad management in private hands equal the inefficiency, the graft and the pork- barrel methods of political agencies. The Federal Government ownership of the Union Pacific Rail- road was by no means a success. Railroad officials and financiers with the best interests of the railroads at heart must see to it that individuals of the type that managed the finances of the Frisco and the Rock Island systems are eliminated. Such practices only undo the work of legitimate industry, anger the public and make more strong the feeling that only govern- ment ownership will suffice to stop such conditions. Socialists and agitators use such examples thruout the country with teljing effect. And yet such cases even now are rare. 9. Government management of rail'ways in Canada a failure. — The experience of Canada in the manage- PUBLIC MANAGEMENT 245 ment of her railways is most illuminating, inasmuch as that country has one great railway system under private management and one owned and operated by the government. The former has regularly paid good dividends; the latter, which now includes the Grand Trunk, Grand Trunk Pacific and the Cana- dian Xorthern under the name Canadian Government Railways, is still in its infancy and it is still too early to form an unbiased judgment as to whether it will continue to earn dividends as they were formerly paid by the Grand Trunk, or whether the whole system will share the fate of the former Intercolonial Rail- way which has, for years, been known as "Canada's White Elephant." It is a road more than one thou- sand miles long, favorably located so as to tap the rich iron and coal mines of Nova Scotia and for the field of transportation has a rail monopoly. Accord- ing to Mr. E. R. G. Gordon, the government has sunk over eighty-three millions of dollars in this road. Speaking in 1914, the last year when, owing to the war business, records would enable us to reach a sound conclusion, he stated that in the best year that the road had had, 1912, this railroad lost more than four million dollars net. Another authority a little earlier stated that it had lost on an average of nearly four million dollars a year for several years. An old farmer replying to the question as to why this govern- ment railway had failed to pay said, "Well, you see, the boys that run this White Elcpliant think more of getting the votes on election day than they do of get- 246 BUSINESS AND THE GOVERNMENT ting the trains in on time." The operation of that road cost some $7,500 per mile a year whereas on the Grand Trunk the operating cost was only some $5,000 and even less on the Canadian Pacific. 10. Government-managed railroads in France not a success. — Another bit of worth-while evidence, im- portant because of its European source, comes from one of the best known and most reliable of European economists, Professor Paul Leroy-Beaulieu of the College de France, who, writing in the North Ameri- can Review of March, 1913, only a few months before the outbreak of the war and speaking of the West- ern Railway, the largest and most important of the old government-owned railroads in France, said that the state management of that road from the very start had been continually a great financial and technical disappointment. Trains were late, accidents were happening continually, whereas under the previous managements not a single passenger had been killed for ten years. The financial results were very bad, constituting a great burden on the Treasury. The year before the state took over the operation of the Western Company there was a net deficit of twenty- seven million francs, under the state operation the first year the deficit was raised to thirty-eight million five hundred thousand. Later, by rapidly succeed- ing steps it was raised in four years to ninety millions. The reasons that have been suggested for this result, on the authority of the Budget Committee of the Chamber of Deputies were largely the increase in PUBLIC MANAGEMENT 247 the salaries of the employes. This increase amounted to as much as fifty-two million francs within five years. In France there seems always to be a tendency to over- increase the number of the employes for the special political benefit of the party in power. The result has been in France that public opinion is completely opposed to state management and even tho there are a large number of Socialists in the government they do not seem inclined to seek for a large increase in government ownership and management. This would indicate that European peace experi- ence, so often put before the American public in such a favorable light, has another side. 11. Conditions under which government manage- ment may be a success. — Many years ago, in 1867, when the question of the purchase of telegraphs and railways was pending in Great Britain, W. Stanley Jevons, one of the most careful and unprejudiced investigators of the last century, stated that in his judgment state management possessed advantages under the following conditions: (1) When numberless widespread operations can be efficiently connected, united and coordinated only in a single, all-extensive government system. (2) When the operations possess an invariable, routine-like character. (3) When they are performed under the public eye, or for the service of individuals who will imme- diately detect and expose any failure or laxity. (4) When there is but little capital expenditure, 24>8 BUSINESS AND THE GOVERNMENT so that each year's revenue and expense account will represent with sufficient accuracy the real commercial conditions of the department. In other cases he thought government management unwise. Jevons thought the post office, in carrying letters, was a success, while in the same article he asserted that it is but too sure that some of the state manufacturing establish- ments, especially the dockyard, fonn the very types of in- competent and wasteful expenditure. They are the running sores of the country, draining away our financial power. In 1875, summing up the experience for some years of the post office with the telegraph, he regretted "the financial failure of the telegraph department . . . be- cause it puts an almost insuperable obstacle in the way of any further extension of government industry in the present generation." He favored strongly a parcel post, but said that "the experience with the telegraph department dem- onstrated that a government department cannot com- pete in economy with an ordinary commercial firm subject to competition." Yet Jevons liked the idea of a parcel post and, four years later, in 1879, he urged strongly the adoption of a state parcel post for small packages, on the ground that it would be "a really great work of social reform to be achieved." He believed "it would be the harbinger of universal free trade if made inter- PUBLIC MANAGEMENT 24© national." His reasons were social and political, not economic. The same line of argument, however, seemed to convince him that it was not practicable or wise for the state to take over the railways, chiefly on account of the complexity of management and the waste that w^ould -be almost certain to result from government administration. 12. Manif erroneous statements made as to costs. — In the published statements of the relative cost of privately and publicly managed industries, many erro- neous statements are made, based largely on inade- quate analysis from an accounting standpoint. In the case of city-owned establishments, the direct ex- penses are regularly given, but overhead charges are rarely properly reckoned. Would any portion of the mayor's salary be included for general oversight ? The chances are ten to one that the offices would be located in a municipal building which would be free from rent. No taxes w^ould be paid to the city. ]Many items are usually left out that should be in- cluded in a comparison between a municipally owned plant and a privately owned establishment. If the comparisons w^ere made fairly, and the reports in- cluded all items of cost, the figures would rarely be favorable to city management. 13. Fallacies in government figures. — Practical illustrations of the differing ways in which govermnent and private costs are figured were given a few years ago in the proposal for a government owned armor plant. The Secretary of the Navy estimated that the 250 BUSINESS AND THE GOVERNMENT government could make armor at $262 per ton in a plant of 10,000 tons' output running at full capacity. The prevailing price at the time this estimate was made was $425 a ton. This difference was claimed by the government as an advantage of government manu- facture over private manufacture. The Bethlehem Steel Company claimed, however, and rightly so, that this was fallacious as the estimated cost covered only labor charges and no general expenses, no insurance, taxes or depreciation of plant, no interest on invest- ment and no capital cost. But these items must be paid in one way or another. All these items must be covered, if not by the industry, then by taxes. Even government estimates of neces- sary items in such cases have often been notoriously underestimated. Correct accounting methods would make a vast difference in many of the statements re- garding the supposedly low cost in government plants. Regarding government accounting it is worth wliile to quote a few statements as to the methods employed in government affairs. President Taft, in his mes- sage to Congress, January 7, 1912, in speaking of economy and efficiency in the government service, said that no system has been devised for reporting and presenting information regarding the government ex- penditures so as to reveal actual costs nor so as to make possible the "exercise of intelligent judgment regarding the expenditures and the value of the re- sults obtained." With large interests at stake the CongTess and the Administration have never had all PUBLIC MANAGEMENT 251 the information which should be currently available if the most intelligent direction is to be given to the business in hand. It has already been remarked that the accounting systems of our municipalities are thoroly impractical. All of them publish voluminous reports but often they are simply lists of figures with so little arrange- ment in order to show their real significance that no intelligent person can draw very valuable conclusions. No private business enterprise, railroads, electric light- ing plants, or even an ordinary manufacturing estab- lishment could keep out of bankruptcy with so unin- telligent a system of accounting as has heretofore been generally followed in our municipalities. One of our best authorities, Dr. Frederick A. Cleve- land, former Professor of Finance in the School of Commerce, Accounts and Finance of New York University, director of the Bureau of Municipal Re- search, New York City, and chairman of the Federal Efficiency Board, an authority on efficiency in city government, in an article entitled, "The Need for Coordinating Municipal, State and National Activi- ties," states that: If a citizen were to undertake to inform himself about the government of the United States he would have before him a life work. Even the preparation of a statement of ex- penditures for work would require the analysis and recapitu- lation of reports prepared pursuant to ninety different acts of congress, which result in nearly two hundred reports re- lating to financial matters. The hopelessness of the quest further appears when it is found that in no two departments. 252 BUSINESS AND THE GOVERNMENT and in many instances in no two bureaus in the same depart- ment, is the same classification used. It is therefore quite impossible to get together a statement of expenditures which will show the cost of activities for the government as a whole. This is really a humiliating as well as a pitiable state of affairs. 14. Why pnvafe management is more efficient. — From the standpoint of accounting, then, a careful checking up is necessary before we can get an accurate idea of the inefficiency of government management. But why are private plants more efficient than those under government management? Public manage- ment means a suspension of the struggle for existence which private management must always undergo. This suspension of the struggle for existence in pub- lic management applies to every grade of labor con- cerned — directors, managers and employes. The profits and losses of a privately owned business affect those engaged in it, while the profits and losses of pub- licly managed businesses are passed on to the public. In public business, the maximmu of efficiency is par- ticularly difficult to attain. The tendency is toward over-organization. In any movement to reform the administration of public business the line of least re- sistance is usually followed, which generally means to get along with as little friction as possible, and to change as little as possible. In private business, success comes only from a policy of activity and enterprise, of initiative and en- ergy. The force of workers is keyed up, efficiency is PUBLIC MANAGEMENT 253 the aim, and results must be shown. Administrative reforms can be made and are not questioned. The di- rector in a private concern is a general. The head officer in a public concern is generally a success be- cause he is a pacifist, and because he uses methods that please. 15. Private business dynmnic. — In matters of ap- pointments or promotions, public business again is at a disadvantage, for, as a rule, appointments are made from civil service lists, and promotions must be made by seniority. Relatively speaking, while subordinates are often overpaid, the higher grades of employes are poorly paid. Security takes the place of opportu- nity. In private business, promotion generally comes from efficiency and production of results. High sal- aries are paid to the leaders because such outlay pays in the long run. Opportunities for successful men are greater, while the inefficient are vigorously weeded out. Opportunity will always attract the more pro- gressive and the more ambitious. Public business tends to be static, private business is dynamic. Public business is forever trying to secure efficiency thru economy, while private business aims to secure econ- omy thru efficiency. Along these lines a tremen- dous advantage lies on the side of private business. 16. Government management seldom a source of revenue. — Government management is often advo- cated because, it is claimed, it is a profitable source of revenue to the state. The experiences of tlie British Government thru the telegraph and the telephone XXIV — 18 254. BUSINESS AND THE GOVERNMENT seem on the basis of fact sufficient to refute this theory. When it was proposed as long ago as 1866 to purchase for the Government the telegraph lines, an estimate that was alleged to be conservative placed the cost at $11,500,000. Three years later, after long negotia- tions, Parliament appropriated $35,000,000 to make the purchase, while in addition the government had to pay the railway companies for their free-hold interest in the telegraph equipment r mining along their lines. This added another $20,000,000, so that the mere pur- chase amounted on the whole to $55,000,000. It was expected, of course, that the government would derive from this source a large revenue. For the first two years there was a small return. Thereafter, the in- come was not sufficient to meet the interest on the capi- tal investment and from that time on the interest on the investment has been paid out of the treasury, that is by the public. The people insisted upon lower tele- graph rates, claiming that they would increase the business and therefore the profits. The result was just the opposite. In fact the treasuries of nearly all countries which manage telegraphs and telephones present annually occurring deficits, in many cases running into large figures. These are also made good by taxation. The history of our post office shows one deficit after another. Labor often makes the plea that conditions of work will be much better under the government, and state- PUBLIC MANAGEMENT 255 owned and managed industry is advocated on this score. Possibly this is true in some cases, but cer- tainly not in all. Is the Federal service, for example, preferable, from the labor standpoint, to the service of the United States Steel Corporation, of the Ameri- can Telephone and Telegraph Company, of the Penn- sylvania Railroad with their welfare work, their busi- ness systems, and their quick recognition of abilitj^? Possibly for many of the workers of the lower grades yet never for those of the higher. The ablest men fear the acquisition of the telegraph and telephone by the Government, since they feel it would lessen their op- portunities for growth and advancement. And wher- ever the workers of the lower grades receive wages higher than those of like grade in private employ, it must be kept in mind that the product does not pay these wages ; the taxpayers pay them. 17. Dangers of a large civil service. — From another angle this question of labor in a wide range of govern- ment ownership would present a very great problem. The United States lias already had an illustration of the embarrassment that may come from large numbers of Civil employes in the govermnent service in tlie Boston Police Strike, Sept. 9, 1919. In all such cases, the Government, the agency that must enforce order and fair play, finds itself in the position of one of the parties to the dispute. If matters come to a crisis, as in Boston, the Executive may take a firm stand and straighten things out, but usually the dispo- 256 BUSINESS AND THE GOVERNMENT sition of the Executive is to avoid the culmination of an issue by yielding gradually to demands for higher wages or for a less burdensome service. As we all know, tlie demand of the consumer for low rates of a service offers a serious financial disad- vantage to the Treasury ; or, as in the case of our rail- way's before the war, to the industrial development of the country. Under the pressure of public opinion railway rates were held so low and in many cases, espe- cially during and since the war, street railway fares have been so rigidly maintained on a low basis that inefficiency and in many instances bankruptcy has been the result. Fortunately now the Esch-Cummins Law seems likely to lessen this danger to the railroads. In Prussia the railway service with its eighty million employes was maintained on almost a military system following largely the plans of the organization of the national army, but those best qualified to judge have been of the opinion that altho the German trains were run fairly well on time, the service was less intelligent and helpful than in the United States, and all freight rates per ton mile were greatly in excess of those in the United States. Moreover, any attempt to direct rail- road systems of the United States and Great Britain on a similar military plan would be utterly hopeless. The people would not stand for it. It is certain that since the experience of the influ- ence of the railroad brotherhoods in the passage of the Adamson act few thoughtf id students of business or PUBLIC MANAGEMENT 257 politics would like to see these workers direct employes of the Government. 18. Could dominate country thru vote. — Senator Jonathan Bom'ne, Jr., in speaking of the eventuality of govermiient ownership of the telegraph and tele- phone lines as advocated by Postmaster-General Burleson, is of the opinion that government owner- ship would result eventually in complete domination of the government by its own employes, who would vote themselves such hours and such pay as they chose. He estimated that the taking over of the telegraph and the telephone, of the railways and electric lines, water transportation and the express business would result in adding more than 2,500,000 employes to the Fed- eral service. He says: Taking into consideration the fact that in the last ten presidential elections, the President has been elected by a plurality varying from seven thousand plus to little over two million and a half, the thought naturally arises that three million government employes would absolutely control the government of our political machinery, the tendency being more pa}^, less service in govei'nnient employment resulting in resistless efforts on the part of outside labor to secure government employment. 19. Questions to be asked. — All in all, there are dis- tinct limitations to the value of government manage- ment, from the standpoint of the public, from tlie standpoint of the consumer and from the standpoint of the wage-earner. Altho public ownersliip is not solely an economic question, in the main it is a business 258 BUSINESS AND THE GOVERNMENT proposition which must be justfied by its economic results. Even the economic results of the parcel post in the United States are still not clear and are at pres- ent the subject of controversy, while, judging from the results obtained in other countries with state- owned telegraphs and telephones, it would seem as if in these particular fields we need exceedingly careful study before going further. At least, for our own w^elfare, we should thoroly examine many questions before further ste2)s are taken in putting additional industries under j)ost office management. Will the extension of such power give more oppor- tunity for public corruption and more abuses rather than fewer? What will be the political effect of a greatly increased number of civil service employes? Will the extension of power result in a bureaucracy, and will it prove injurious to the progress of our coun- try? Will rate-making be determined by ignorance and political pressure ratlier than by expert knowl- edge? Will the public pay for inefficient manage- ment and deficits in unjust taxation of the non-using public and thru injury to the public credit? The con- sumer is interested in knowing whether government management will mean better service, or poorer, un- jjrogressive and dearer service, while the wage-earners, especially the self-reliant and well-trained, ask whether their chances for promotion will be fewer or more? 20. The public must he sure of facts. — If the gov- ernment is to extend its management we must be sure PUBLIC MANAGEMENT 259 of our facts, in order that our guiding principles may be sound. Of course, in war times sudden and impe- rious needs required quick action; we could not wait for the slow process of economic law to work a rem- edy. Legislation, however, of this war-time character ]Dassed solely for immediate results tends to commit a countr}^ to policies which later, thru inertia and politi- cal influences, may be difficult, almost impossible to alter. In peace times there should be no undertaking of new activities on the part of the government with- out careful consideration of the principles upon which it is acting and without accurate, definite knowledge of the facts by which it should be guided. 21. A remedi/ to be sparingJij applied. — In general it may be said that government management is a rem- edy to be applied only after the means of adequate government control are found to be neither workable nor available. Government management is a policy to be applied in a limited way, and then only after due consideration has been given to other remedies. It may be true that the special character of an industry or the peculiar circumstances under which it is carried on, involving large political, social and ethical ques- tions, may override the disadvantages of government management. The Government, however, with its multitudinous activities, has a tremendous task ahead of it to work out princi})les of administrati\'e efficiency and to perfect existing methods ol" control and regula- tion. It seems, therefore, that a general policy of government management would only add to these dif- 260 BUSINESS AND THE GOVERNMENT ficulties, and would result in the loss of national indus- trial efficiency, bringing no real return to the wage- earner and a loss to the consumer. If either or both profit, it will generally be at the direct and unjust expense of the taxpayer. These conclusions drawn from general economic and political principles and from the illustrations already cited of the experiences in this country and abroad seem to have received a really tragical support in the late experiences of Rus- sia where complete governmental management in the hands of the unskilled has resulted in direct disaster. 22. Fundamental principle is public welfare. — The fundamental principle to keep in mind is the promo- tion of public welfare. Every country needs to be studied by itself. In making comparisons between the experiences of different countries we should be careful to take into account all determining factors — a practice that has by no means been followed. In our country, we may practically ignore the military aspect of the question. The political viewpoint is largely a matter of party policy, while, regarding the social, financial and economic aspects, there have been very decided differences of opinion. The arguments on neither side have rarely, if ever, been worked out carefully and without prejudice. Judge Elbert H. Gary states the issue well : The guiding principle of the day should not be : "Let us be prosperous" but rather the broader one, "Let there be light." The rulc-of-thunib days are passing. It is pre- eminently necessary for the people to be rid of panaceas and PUBLIC MANAGEMENT 261 propogandists, of political theorists and demagogues, and to return once more to the simple facts as they are developed by experience. Let us emphasize these basic truths, and the judgment of the average thinking man may be relied upon to evolve the principles of action which are essential to the prosperity and happiness, if not to the very existence, of the nation. REVIEW Under what circumstances should government industries be run for profit? Should the government retain absolute control of all natural resources, or would this be an unwise restriction on development? What is the comparative relation, if any, between telephone and telegraph companies ? Arrange in order the difficulties which a state would have in undertaking the management of (1) The United States Steel Corporation, (2) Wireless telegraphy, (3) The International Mercantile Marine, (4) the long distance telephones. If the balance of power of the Federal electorate were in the Federal service, how could they be prevented from getting what they demanded in wages and conditions of labor? Why do private plants have better accounting systems than public departments ? Expain the lessons learned regarding Government management thru our experience with the railways, telegraphs and tele- phones during the time of war. CHAPTER XIII THE GREAT WAR: ITS EFFECTS, ITS INFLUENCE, ITS LESSONS 1. War cuts deep into economic life. — Xo great up- heaval in human affairs such as the Great World War can pass into history without leaving its impress deep in the institutions and in the character of every nation that participated in it. To meet the emergency of the war, our people created new institutions, some of which have left a lasting impression upon our form of government. The changes in our political and social habits were so marked for a considerable period of time that they have doubtless affected to a greater or less degree our national character, while the strain upon the thoughts and emotions of our people, both of exultation and despair, was so extreme that the results will doubtless continue to be felt and mani- fested for years to come. 2. War preparations. — Even before our countiy was drawn into the vortex of the war, in the presence of threatened danger, our government, at the sugges- tion of some of our eminent, patriotic citizens, had made provision for a most careful survey of our na- tional resources with reference to the extent to which and the methods by which our industries might assist 262 THE GREAT WAR 263 our government in case the dread event of war should be forced upon us. As early as August 29, 1916, Congress established the Council of National Defense together with the Advisor}^ Commission to cooperate with it. The Council was purely ex officio, composed of the Secretaries of War, Navy, Interior, Agricul- ture, Commerce, and Labor. Feeling the need, how- ever, of the cooperation of men of marked ability along scientific and business lines, Congress decided that the Advisory Commission should consist of distinguished persons "each of whom shall have special knowledge of some industry, public utility, or the development of some natural resource, or otherwise be specially quali- fied in the opinion of the Council for the perform- ance of the duties hereinafter provided." On this commission were represented railroads, manufactur- ers, bankers, merchants, labor men, physicians and teachers. In addition to this commission and in many in- stances for cooperation with it were created from time to time other non-ex officio committees or bodies which might bring to the assistance of the Council of Na- tional Defense and the President all the expert knowl- edge in the various fields of scientific, professional and business activity that might be contributory to the most successful prosecution of the war. Such bodies were the National Research Council, cooperating in matters pertaining to scientific research; special com- mittees made up of leading scientists and business men, under the chairmanship of one of the members 264 BUSINESS AND THE GOVERNMENT of the Advisory Commission. There were, for exam- ple, committees on women's defense work, on highway transportation, on labor, on medical and sanitary measures, on accounting, and on other subjects. 3. Economic control horn of war conditions. — As the war continued and the burdens and responsibilities of the government increased by leaps and bounds, other organizations were created, such as the War In- dustries Board under the chairmanship of a member of the Advisory Commission, to studj^ all materials and manufactured products with reference to determining prices of goods that might need to be purchased for governmental use ; to guide and assist in the allocation of contracts, in the disclosure of sources of supply, and related matters; to decide as to priority of needs or deliveries of various types of supplies, and other sim- ilar duties, "in order that as definite an outlook and opportunity for planning as possible may be afforded the business men of the country." The Aircraft Board and an Advisory Commission for Aeronautics were created to care for that branch of industry. The Shipping Board and later the Emergency Fleet Cor- poration were established in order that the imperative need of a rapid increase in ships of all types and char- acter for the transportation of merchandise and for fighting purposes might be met as soon as possible. The War Trade Board was created to enforce the pro- visions of the Trading with the Enemy Law and in part of the Espionage Law. The failure of the railroads to meet the needs of the THE GREAT WAR 265 war, and the imperative need to secure a^ rapidly as possible united action in order to provide supplies, led to the taking over by the government of all the railroads, which were placed under the control of William G. McAdoo, Secretary of the Treasury, as Director-General of Railroads. In order to meet the unprecedented financial de- mands of the war, there was created the War Finance Corporation, consisting of the Secretary of the Treas- ury and four other persons, to make provision for loans and to advance capital to such organizations and individuals as were engaged in necessary war indus- tries. Following this came the Capital Issues Com- mittee to investigate and determine whether and to what extent securities should be issued for similar purposes. As more and more of our producers were withdrawn from active business in order to go by the millions to fight the battles of our countiy, and as the imperative need of furnishing food and clothing both to our own soldiers and to the soldiers and citizens of our Allies abroad increased, the scarcity of food and supplies became so great that the necessity of con- trolling not only unscrupidous profiteers but also the thoughtless expenditures and habits of well-meaning individuals became imperative. The government therefore established the Food Administration and the Fuel Administration in order that the needs for the war might be given precedence over private desires. All these and other minor organizations, new to our form of government tho called into being to meet an 266 BUSINESS AND THE GOVERNMENT emergency, could not fail to have a profound influence upon the business and personal habits of the entire population of the United States, and naturally will continue to have in many respects a permanent influ- ence upon our country. In consequence, as we are adjusting our institutions and our business habits again to times of peace and as we must look forward to establishing for the future methods of business and forms of organization that are suited to permanent conditions, it is desirable that we note as carefully as may be what the effect and the influence of these or- ganizations and their work, as well as the international and local influences of the war itself, have been and what lessons of permanent value may be learned from their activities. 4. The United States becomes a creditor nation. — Possibly the most clearly apparent important result of the war which in itself exerts a great influence in many directions both here and abroad is the change of the United States from a debtor nation with annual payments abroad, in round numbers of $500,000,000, to a creditor nation entitled to receive from abroad in interest alone substantially the same sum. This dif- ference in status of about $1,000,000,000 a year is in itself of great significance, but the indirect influences are possibly of even greater importance. Our chief creditors are our former Allies in the war, with the exception of Japan. France and England, instead of receiving from us goods or gold to the extent of hun- dreds of millions of dollars, must send many millions THE GREAT WAH 267 to us each year in payment of interest and eventually of principal. International payments in the long run are made by exports of goods or by the offsetting of debts owed elsewhere. The war has left these Euro- pean countries crippled. It is impossible for the present for them to send out exports to the peace-time extent; indeed in many lines exports will not begin until the proper machinery for manufacturing can be bought and installed. How can these comi- tries, and even more Italy and the countries allied with the Central Powers, create these exports to meet the demands? Our government, in order to favor its former Allies and to help them overcome their difficulties has per- mitted postponement of the payment of interest for the present, but private individuals and corporations engaged in business can hardly manage affairs on so generous a basis. Credit can be given and arrange- ments are continually being made by which our ex- porters and merchants are sending their goods abroad on credit and for a longer time than was the custom be- fore the war. Our people, however, cannot continue indefinitely to extend these credits, although it is de- sirable if we are to get the benefits of a rapid recupera- tion on the part of our former Allies, to be lenient and as helpful as possible. The fact that the balance of trade is normally in our favor would tend under normal conditions to bring gold to this country, if the supply of goods were checked ; but under present conditions, with no gold to 268 BUSINESS AND THE GOVERNMENT spare and with most of the countries on a paper basis, gold is no longer in trade at anything like a moderate rate, so that it is impossible for gold, except in negli- gible quantities, to be shipped hither to pay for goods. 5. American j)U7'chase of foreign enterprises desir- able. — To the advantage of both European countries and ourselves, perhaps even more to the benefit of less well-developed countries such as South Africa or China or some of the Latin- American countries need- ing machinery for the establishment of productive plants of all kinds and having as yet relatively little in the way of exports that would meet our needs, we might invest our capital in those countries by either the purchase of existing plants or building new plants adapted to the manufacture of goods of various kinds suitable either for home consumption or for export to America. There would be great advantage not only to us but also to the countries in question if this plan were followed. It would help stabilize the rates of exchange. We should be more sure of liberal re- turns on our capital if we made the investments and managed the business ourselves than if we took the bonds or stocks of native-owned and managed estab- lishments of the countries in questions. Moreover, the profits made in such establishments would nor- mally be reinvested in the country itself thru in- creasing the size of the plants already owned by us or by the establishment of new enterprises there. Doubtless in many instances European nations would hesitate to sell their important lines of business to a THE GREAT WAR 269 foreign country like the United States, but it would be better for the backward foreign countries, in many cases, to get the benefit of not only the capital but also of the manufacturing and industrial skill that Ameri- cans would employ in promoting their investments. JNIoreover, the profits also being left in the foreign country would not call for the exportation of goods to pay for these investments. That would take care of itself without having any direct, immediate effect upon the business concerned. This demand on the part of foreign countries for our goods, at as low rates as possible on account of their present lack of means and our urgent need to free our own market and establish a more favorable rate of exchange by selling our goods abroad, should have the effect of reducing the prices of our manufac- tured goods here in order that they may open up and develoj) good markets for us abroad. If they are to develop these markets rapidly our business men must make and sell their products for export as cheaply as they can while maintaining their standards of qualit}^ It will pay them better to extend their trade thru the policy of low prices and small profits than to re- strict their trade even tho the sale of individual arti- cles miglit be made at higher prices. 6. "'Inflated prices and credits. — One need not argue the fact of inflated prices and credits during the period of the war and after. The experience is too recent and too vivid for that. It may be worth wliile, how- ever, to glance at the causes of these conditions, for XXlV— 19 270 BUSINESS AND THE GOVERNMENT thru knowledge of the cause may be found the remedy for an undoubted evil. Probably the first and most prominent cause is the large increase in the supply of gold in this countrj^ which has its influence upon our basic monetary sup- ply. For a little while before the outbreak of the war Germany had been accumulating gold in her vaults. Doubtless her government had been antici- pating war, But the countries of the Allies, surprised and taken at a disadvantage, needed war supplies of all kinds as rapidly as possible. Their quickest way to secure them was to begin their manufacture and to buy immediately and in as large quantities as possible from the United States. This buying demanded cash or short time credits. The shipment of our goods abroad in so much larger quantities than we were im- porting naturally soon began to drain the European countries of their gold in order that they might pay for the goods they had bought from us. The balance of trade, which, as has been explained, had run for years, some hundreds of millions of dollars against us, turned immediately in our favor, so that we were receiving gold; and with the expansion of our gold supply the normal tendency was for gold as compared with goods to become cheaper and in consequence for our prices to rise. Again, owing to the reorganization of our banking system, especially the lower legal reserve requirements of our Federal Reserve Banks, the amount of gold that we had went farther than before in its employ- THE GREAT WAR 271 ment as a basis for the issuance of bank notes, giving an opportunity for a large increase in our monetary supply with a consequent tendency toward a rise in prices. From these causes alone there might well have been an expansion amounting to $5,000,000,000 or $6,000,000,000. The substitution of Federal Re- serve Bank gold notes for our gold certificates re- leased enough gold to permit an expansion still fur- ther of possibly $1,500,000,000. One might go on with minor causes for high prices such as the increased use of acceptances tending to make the use of gold more effective, the urgings of the government toward the purchase of liberty bonds and its insistence upon their being received as collateral for loans, which tended toward an abnormal expan- sion of credit. All these indirect influences were felt toward pushing prices higher and increasing thereby the cost of living. Practically all of these phenomena were the result, direct or indirect, of the war. In the fall of 1920 we found ourselves in a period of ab- normally high cost of living with problems facing us that came from a depression of business which seemed likely to last for months, if not for years. With the falling prices debtors found it more difficult to meet their obligations, banks felt compelled to restrict credits, manufacturing establishments, lessening their output, were compelled to discharge their workmen, and the pressure upon business and the standard of living became more marked. The remedy for the pre- vious expansion had to be found in contraction. By 272 BUSINESS AND THE GOVERNMENT wise consideration, banks and creditors may perhaps ease somewhat the difficulties in such circumstances, but the only permanent remedy is to live within our means whatever the cost, to put our business on a pay- ing basis even tho to do so we must sacrifice heavily in size and output, and then when the period of liquida- tion is over, to build sanely and safely upon the newly laid firm foundation. 7. Profiteeriiig. — The imperative needs of the war called for large quantities of supplies of many types. The quantity of goods had to be furnished. The ques- tion of price was secondary. Unscrupulous men nat- urally took advantage of these conditions whether dealing with the government or with private individ- uals. Conscientious men whose skill and organization enabled them to produce at less than average cost naturally made large profits while selling at the aver- age prices. High taxes levied by the government to meet its extraordinary needs furnished likewise an ex- cuse for many of these increases. People, not knowing what demands the government might make or how those demands might be increased as time went on, felt impelled to protect themselves by increasing their prices enough to be isure to cover these possible if not probable taxes. Each step in the scale of production, from the basic raw materials through the various proc- esses of manufacture to the finished product, naturally led to a greater increase, mitil the final consumer was carrying the burdens of all the various parties tliruout the whole process of production. There can be no THE GREAT WAR 273 doubt that this profiteering is primarily a war product and that with the disappearance of the abnormal stim- ulus to production and the former recklessness re- garding prices, the evils are largely curing themselves. 8. Labor. — Another important factor in producing the new conditions which is certain to be a matter for serious consideration for some years to come is tlie changed attitude of working men toward their em- ployers. As the Government was demanding quan- tity and in certain lines was very exacting regarding quality but raised few questions regarding prices, it was natural that manufacturers and others supplying government needs should have been ready to pay lib- eral rates of wages. Indeed so abnomial was the demand that in many cases employers found them- selves bidding against each other for men, until wages in many lines were more than doubled within a com- paratively short period, sometimes even tripled. The laborer naturally took advantage of the condi- tions. To a very considerable degree, j^robably in- deed in a large majority of the cases, his act was fully justified, for the cost of living had so increased that without a corresponding increase in his wages his standards of living must have materially fallen. The enormous demand for all types of labor had naturally increased the power of the trade unions. It will be recalled that the railroad brotherlioods, taking advan- tage of the situation, had threatened j^ractically to suspend traffic by strikes on all of our railroads, and with the sympathetic approval of President Wilson 274. BUSINESS AND THE GOVERNMENT-- had imposed upon Congress the passage of the Adamson law giving to them an eight-hour basic day as well as a large increase in wages. As the effect of the war strengthened, and especially after the United States entered the war, the American Federa- tion of Labor under the leadership of jNIr. Gompers played a noteworthy part. Mr. Gompers and the other leaders of the Federation took a most loyal stand toward helping our government procure its supplies, by urging faithful work and an earnest effort to in- crease output; but realizing also their position they naturally demanded and secured high wages, good labor conditions, and especially, in many instances, the distinct formal recognition of their unions and of their leaders as parties to collective bargaining. President Wilson and Secretary Baker were especially sympa- thetic with the leaders of the Federation in its nego- tiations, but also the Secretary of Labor and the Government in general strengthened their hands. In connection with the work of the United States Shipping Board Emergency Fleet Corporation, as well as the Aircraft Board and war activities ir gen- eral, there were numerous strikes and threats of strikes. To lessen as far as possible the risks and dan- gers of such a condition, the government established various boards of arbitration which ultimately resulted in the War Labor Board, whose chief function was to hear complaints and settle disputes of all kinds arising between the government and contractors employed on government work and their laborers. Rules of action THE GREAT WAR 275 and standard conditions of work were formulated and a considerable degree of success was attained in pre- venting the stoppage of work. The War Labor Pol- icies Board was also created to attempt to unify the policies of the various departments of the government and thus secure a uniformity of action that would lessen risks. At the close of the war, therefore, and for months thereafter as the demand for labor continued, the situ- ation was probably the most favorable to workmen and workwomen of all classes and especially perhaps to the trade unions that has been known in the history of this country. Eventually, however, it became evi- dent that the peak of influence of the working men and of the unions had been reached and passed. At about the same time the radical element in the unions as well as the sentimentalists and the radicals outside of the ranks of the unions — the Socialists, the Bolshevists, and others — began pushing their demands to an extent heretofore unknown. As was natural under the cir- cumstances, these extreme demands were overdone and pushed too hard. Against the advice of the more consen'ative of the labor leaders, the great steel strike was called, afterward the coal strike, followed later by the so-called "outlaw" strikes in connection with the railways and other lines of industry — that is strikes by a relative few of the union men against the advice of the national leaders and sometimes contrary to the regulations of tlie unions themselves. Public sym- pathy, which had been with the labor men, especially 276 BUSINESS AND THE GOVERNMENT the more loyal ones, thruout the war, turned, and many of our citizens who had been supporting the wage-earners in their contentions felt that they were becoming unreasonable and that it Avas time that con- ditions should force them to recognize the fact that they are but one factor, altho an extremely impor- tant one, in the production of wealth, and that they on their part must cooperate in the spirit in which they had been demanding cooperation on the part of the employers during the period of their own greatest advantage. 9. Industrial changes. — In summing up, therefore, this result of the war and the influences and conditions which are likely to remain as a permanent result of the war conditions, we find that the eight-hour basic day is and will doubtless remain the custom and tlie basis for wages to a far greater degree in this country than ever before. The principle of collective bargaining between em- ployers and employes, either with representatives of the trade unions or with chosen representatives of workmen in the establishments interested — shop com- mittees or representatives in some other form — will be emploj-ed with increasing frequency. Before the close of the war much had been said in Great Britain and in this country of the desirability of greater personal cooperation between employers and workmen in the process and management of busi- ness. In England the Whitley committees, and both there and elsewhere other forms of shop committees THE GREAT WAR 277 had undertaken such cooperation. After the close of the war many social reformers and some scientific business experts endeavored to work out plans by which workmen might participate in the management of business, especially in the lines in which their knowl- edge would be of direct value, to so great an extent that one might properly speak of a democratic man- agement of the establishment. Doubtless under vary- ing forms and as time goes on, with a greater readiness of adjustment of the form of cooperation to the con- ditions of the establishment, this idea of cooperation in industry will be retained and extended. Connected with cooperation in management, there will also doubtless go thru the purchase of shares of stock, thi-u profit-sharing, and other devices, a consid- erable degree of cooperation of the workmen in the ownership of the establishments in which they w^ork as well as cooperative establishments where the workmen are practically the sole owners. Largely this move- ment, which will be a permanent one, has been an out- come of the war. 10. Rmhca?/s. — Especially noteworthy have been the experiences of our country with tlie railways. Owing to the great congestion of traffic and tlie im- perative need of cooperation on the part of all railroad transportation agencies, a unification of all railroads was made under the direct control of tlie government, with Mr. AVilliam G. ^NlciVdoo, Secretary of the Treasuiy, as Director-General of Railroads. It is an interesting fact tliat the first order of tlie Director- 278 BUSINESS AND THE GOVERNMENT General cleared away all the legal restrictions prevent- ing pooling, common use of railroads and terminals and practically established all the railways of the United States as one system, an act in line with many of the recommendations of the Interstate Commerce Commission and all railway managers for a genera- tion, but directly opposed to the anti-pooling clauses of the Interstate Commerce Act and the repeated and continuous attempts to force competition among rail- ways contrary to the opinions of practically all thoro students of the subject. Authority was given to standardize the rates thru- out the country, the government guaranteeing the stockholders a fixed and really reasonable return on their investments. The equipment was standardized to a greater degree than ever before. Of possibly even greater significance was the pri- ority of shipments given to the products of the indus- tries most essential to carrying on the war. The President and the Government insisted that there be no strikes, the railway workmen being government employes, but that questions in dispute, whether wages or hours of labor or other working conditions, be re- ferred to an impartial board for final settlement. The experiences soon showed that altho much had been gained along some of the lines indicated, in other waj^s much had been lost. The effectiveness of some of these acts was more than offset by a weakened morale on the part of many of the workmen, by the re- sulting greatly increased cost, met out of the United THE GREAT WAR 279 States Treasury, of much of the work and by the poorer service rendered in practically all directions. As the result of our experiences, however, we may expect in times of peace some effects that wull be per- manent. Under the Esch-Cummins act we find per- mitted a much greater degree of consolidation of rail- roads and unification of management than would have been possible before the war. Of almost if not quite equal importance, a standard has been established for the earnings of the railroads which shall serve as a ])asis and guide for the Interstate Commerce Com- mission in determining freight and passenger rates. There have been employed and will doubtless con- tinue to be employed in the future on the part of the railroads under certain congested conditions, freight embargoes involving the principle of priority of ship- ments for most needed goods. The law also provides a method of settling disputes between the railways and their employes which would seem to be modeled after some of the most successful plans developed during the war. Of perhaps prime importance, the popular judgment in opposition to government ownership, and especially to the government management, of rail- roads seems to have been strengthened. 11. Food and fuel. — During tlie war private citi- zens probably found their habits of living more af- fected by the government control of food, fuel and a few other necessities of life than l)y any other of the war policies aside from the draft and control of sol- diers. The President made a fortunate selection for 284 BUSINESS AND THE GOVERNMENT the country in appointing Hoover as Food Adminis- trator. From his extended experience in Belgium, England and the rest of Europe along similar lines, he more perhaps than any other of our government officials knew how to appeal to the sentiments and at times to the sense of humor of the American people in ways that were effective. Similar methods were fol- lowed in part by the Fuel Administrator. The re- sults of both were noteworthy and it is fair to say, on the whole, unexpectedly successful in many directions. Some permanent results may be mentioned. "Hoov- er izing" in certain forms has become a habit with many individuals. Simpler meals, a better knowledge of food values, better selection of foods as regards both expense and nourishing qualities, wiser habits of eat- ing and drinking have been retained by many and doubtless will continue in many quarters. The need of regulating the total supplies of certain jDroducts such as sugar, vegetable oils, fats, petroleum, rubber, and other articles, gave to the public a far more accurate knowledge and habit of observation re- garding the sources of supply and the quantities needed of many of these necessities than had ever existed before. The exigencies of the war strengthened the belief that a great nation like ours should be self-sufficient as regards the prime necessities. We see in conse- quence far more than ever before discussions regard- ing the retention under American ownership in botli this country, in some of our dependencies, and even THE GREAT WAR 281 abroad, of a sufficient supply of raw materials to meet our needs in time of peace as well as in time of war. This influence and this argument are bound to have their effect in discussions of the tariff and in the con- duct of many lines of business. The very grave need of dyes, of materials to make high explosives, and of lubricating oils, as well as of food supplies, and the sacrifices that we were called upon to make to meet these needs have so impressed themselves upon the American people that some of the measures taken will doubtless be adopted as a permanent policy. Along similar lines were the acts of the Fuel Ad- ministrator looking toward the conservation of coal, by changing the working hours of various establish- ments, and by giving definite instructions regarding the best methods of handling fuel so as to secure from it the best heating results. The study of different types of furnaces as well as of different kinds of fuel, and the more intimate knowledge of sources of supply of all of these materials had not merely immediate but will also have permanent results. 12. Securing popular cooperation. — Nothing was more striking perhaps in both of these administrations than the confidence with which appeals were made to the public conscience and to the sense of patriotism in order to produce results. Wlicreas not only in Ger- many and France, military nations, but also in Great Britain, regulations with heavy penalties were estab- lished, and people bouglit all types of food and fuel only on presentation of tickets issued under stringent ^82 BUSINESS AND THE GOVERNMENT regulations of government, here a simple appeal to the people backed up by a loyalty of public opinion brought results which were substantially equal to those secured by laws elsewhere. Foreign officials and other foreigners visiting this country expressed pro- found surprise and astonishment at the results se- cured. They would not have believed them possible had they not been matters of personal, observation. It is probable that in this again we have learned a lesson that in times of emergency of even lesser strin- gency may be wisely employed in the future. Similar to this governmental method was that em- ployed in various fields of activity by practically all of the departments of government in connection with voluntary workers either in organizations or as indi- viduals. Our War Department and Xavy Depart- ment worked closely in cooperation with such organ- izations as the Y. ^I. C. A., the Knights of Columbus, the War Camp Community Service, the Red Cross and others, making them in many cases official organs of the government. The results were good on tlie whole. Similar measures had been employed on a very small scale before. There is reason to believe that as a result of the war such cooperation will })e more frequently found in the future and on a larger scale. Of perhaps still greater influence and one of more permanent value was the employment of individuals without pay in important positions in the government service. Attention has already been called to the vol- THE GREAT WAR 283 untary labors of the Advisory Commission to the Council of National Defense, but outside of any such organization individuals by the thousand, so-called "dollar a year men," proffered their services, which were accepted by the Government. In many in- stances men of great business prominence, real cap- tains of industry, were called into the government service and given positions of commanding impor- tance. It is needless to say that in spite of occasional failures the results in most cases were good, in some instances magnificent. The influence of these men was not merely the direct influence at the time. I am not at all certain but that the indirect influence will be of even greater import in the future. jNIen accus- tomed to modern business methods found themselves cramped and hampered by official red tape and the routine methods of the permanent office-liolder. In some cases they had the power to cut the tape and establish effective business methods. In many others they worked for months, fretting and fuming with impatience at the small results accomplished as com- pared with what they might have achieved had there been the proper organization. This sense of the ineffi- ciency of government organization and of government methods to produce results, this intimate personal, sometimes bitter knowledge of tlie evils of the civil service laws, in connection with the recognition of course of the good connected therewith, made a pro- found impression then and is likely to be of very great influence in the future. These men bv the thousands 284. BUSINESS AND THE GOVERN]MENT will go to the polls, and those who become office- holders will take up their duties, with a strong deter- mination to get better men at the heads of our govern- ment departments, give them proper authority and insist on their getting business results. This experi- ence will give added strength to the feeling against government ownership and government management of business wherever it can be avoided. 13. Groncth of real democracy. — In still other lines that may in the long run have an even deeper influ- ence upon American citizenship than do these busi- ness problems, the war had a profound effect. Men who served with the colors, who fought side by side at risk of life, came to know one another as real men and not as members of social classes. Sometimes men who in civil life had been employers found themselves in the-arni}^ subject to the orders and the discipline of men who had been their servants and who because of theh' real efficiency in times of danger could win their respect and admiration. Snobbishness disap- pears under such conditions. Real democracy is at- tained. Service is the standard of conduct and of respect. Trickery and dishonesty, if they are such as to affect results, become intolerable. Sincerity and loyalty are the tests of comradeship and manhood. These experiences carry over into civil life. There is some truth in the arguments for war that have been brought up by militarists, some of whom argue in line with these thoughts that every generation needs a war in order to maintain the hisrhest moral standards THE GREAT WAR 285 among the people. Such arguments seem mistaken; but, even tho we can secure these quahties without the dread cost of war, when war does come some of these qualities develop and their influence lasts. And these qualities are as admirable in business in time of peace as in the army under government direction in time of war. 14. Art and Literature. — It was often predicted during the early days of the war that as one result we should have in time a renaissance in art and in litera- ture so marked that it would affect materially future generations. Attention was called to the fact that many of our best statues, monuments and works of architecture of today were produced as the memorials of the Civil War. Many of the noblest poems of all literatures have been connected with war. Some of our critics have thought that the high water mark of American literature was reached in Lincoln's Gettys- burg address and Lowell's Commemoration Ode. It is as yet too soon to give any positive estimate of the results of the World War in tliese directions, but al- ready one may note in plays, in pictures, in monu- ments and proposals for memorials, and in poems and public addresses, in works on history and government and philosophy and business, some effects. Art and poetry and imaginative literature are the outgrowth of emotion and of sentiment. And in no other times are these sentiments and emotions so deeply and nobly stirred in the minds and hearts of so many people as in time of war. Any great change in these directions xxiy — 20 286 BUSINESS AND THE GOVERNMENT has also a marked influence upon the types of business and their relative proportions in any country. 15. Gi'owth of national feeling. — Since the signing of the Armistice as well as before, it has been easy to note the change in the sentiments of all classes of the population regarding our country and its place among the nations. The war doubtless strengthened im- measurably the feeling of nationality in this country, the sentiment for unity. No other single influence has done so much to abolish sectionalism. A decade ago, to many of the inhabitants of the Middle West questions of shipping, of a merchant marine, of a navy, seemed remote and aroused little interest. To- day as a result of the new knowledge of the imperative need of a navy and of the dire disasters that would have overcome the country had we not been able to supplement our own efforts to create on short notice a merchant marine by securing the loan of ships from Great Britain, our great Ally, the man from Kansas or Dakota has come to feel that a great merchant marine is of vital interest to him. The Panama Canal, a naval force on the Pacific, the submarine cable landing on the island of Yap, the mental attitude of the Fili- pinos — all touch him as questions of immediate impor- tance that may affect him because they affect our one unified nation of which he is now conscious that he is a part. We see this sentiment of our nationality in its rela- tions to other nations in the increased attention given in our newspapers and books to discussions on inter- THE GREAT WAR 287 national trade and the methods of its development. International exchange was formerly a question for a few experts in two or three banks and for a dozen big business houses. Today thousands are talking- of the value of the franc in terms of dollars, of the influence of a falling rate of exchange on imports, of the balance of trade and its significance. These are influences of the war and they are influences that will last. As never before, despite all the discussions over the details of a League of Nations, all of us are feeling that our country is ours ; that it has a place and a lead- ing place among the nations — in finance, in business, in trade ; and that it is certain to have a leading place in settling for the world along moral lines, with the welfare of the nations in mind, the great questions of war and peace and justice. REVIEW 1. Describe the organs of economic control which grew out of war necessities. 2. Contrast the United States as a debtor and a creditor nation. 3. What are the principal causes of inflated prices? 4. What gains were made by labor during the war? How far have they been maintained ? 5. What features of government railway management are likely to affect future operations ? 6. What lessons can be learned from the Food and Fuel Ad- ministration ? Note: Numerous questions of business practice and procedure are discussed in detail in the Modern Business Reports. The current list will show those which are especially related to this volume. Among them may be mentioned 7 Income and Excess Profits Taxes 69 The Uses of Government Statistics in Business 79 Preparing for the Consular Service. INDEX Accidents, Extent of losses, 107 ; Responsibility for, 109 Agriculture, Importance of, 47 ; Government ac- tivities in, 47 ; Department of, 48 ; Colleges, 49 ; Institute work, 52 ; Extension teaching, 52 ; County agents, 53; Marketing problem in, 54 American LaJid Policies, 43 Americanization, 154 Art and Literature, 285 Bolshevism, 137, 141 Boycott, The, 145 Bounties, 80 Business, Foundation of civilization, 2; And taxation, 18 ; Need of standards in, 85 ; Controversy regarding govern- ment inspection, 85 Business Men, >rembers of organized government, 3 ; Guided by and guiding state, 4 ; Influence on public opinion, 15 Certification of Professions, 96 Of other public servants, 98 Civil Service and the Post Office, 228 Dangers of large lists, 255 ; could dominate countrj- thru vote, 257 Clayton Law, The, 215 Compensation, Workmen's, 120 .Scope of laws, 122: Limited bene- fits of, 122; Assurance of benefits, 123 ; Simple administration of, 123; Results of workmen's, 123 Conservation, 44 I'lans for, 4ft County Agents, 53 Corporations, Public Service, 150 Credits to Foreign Nations, 268 Department of Agriculture, 48 Development of Holding Companies, 194 Distinction between Commerco and Manufacturing, 217 Diversion to Lees Profitable Indus- tries, 73 Dumping, 81 Duties, Kinds of, 79 ; pound, 80 Specific, 79 ; Com- 289 Economic Independence of Nations, 82 Education and Diversification, 72 Ely, Professor R. T., 199 Employer's Liability, 121 Employment, Problems of, 103 Examination and Certification of Cer- tain Professions, 96 Executive and Judiciary, 11 Expenditures, Importance of Public, 39; War, 41 Farm Management, 51 Farm Loan Act, - Federal, 55 ; Associations, National, 57 Federal Government, Increasing Power of, 216 Federal Incorporation for License for Interstate Commerce, 217 Federal Trade Commission, Powers of, 212; Power of investi- gation, 213; Power to require re- ports and classify corporations, 214; Power to prevent unfair competition, 214 Federal War Compensation Laws, 133 Finance, Public, 38 Foreign Trade, Proportion of total, 76 Forests, 44 Gary, Elbert H., 209 George. Henry, :'.4 Goods Under Bond, 78 Government Management, Tclc;,'raplis and tclcpliones, 232 ; Un- progressiveness of government plant.s, 234; What guiding princi- ples should be followed, 235 ; Gov- ernment should act on ba,si8 of accurate knowledge, 236; Not a panacea, 238; Advantages at times greater than disadvantages, 238; Importance of public health, 239; £90 INDEX GoTernment Management — continued War and the extension of, 239 ; Extension of in the United States, 240 ; What will after effects be, 241 ; Extension of post office work, 242 ; Dishonest financial methods must stop, 243 ; Of railways in Canada, 244; Of railroads in France, 246; Conditions under which it may be a success, 247 ; Erroneous statements as to costs, 249 ; Fallacies in government figures. 249 ; Why private man- agement is more efficient, 252 ; Private business dynamic, 253 ; Seldom a source of revenue, 253 ; Dangers of large civil service, 255 ; Questions to be asked regard- ing it, 257; Public must be sure of facts, 258; A remedy to be spar- ingly applied, 259 ; Public wel- fare is fundamental principle, 260 Government Officials Influence of, 6 Government Regulation by, 1 ; Committee or agent of the state, 5; Conditions under which it must act, 7 ; The funds of, 19 ; Natural resources and the farmer, 43 ; Federal, grants lands to states, 45 ; En- couragement of industries and com- merce, 61 Great War, Its effects, its influences, its lessons, 262 ; War cuts deep into economic life, 262 ; War preparations, 262 ; Economic control born of war con- ditions, 264 ; United States be- comes a creditor nation, 266 ; Further credits to foreign na- tions a necessity, 268; Inflated prices and credits, 269; Profiteer- ing, 272; Labor, 273; Industrial changes, 276; Influence upon rail- ways, 277; Food and fuel, 279; Securing popular cooperations, 281; Growth of real democracy, 284; Art and literature, 285; Growth of national feeling, 286 Growth of Real Democracy, 284 Hatch Act Experiment Stations, 50 Holding Companies, Development of, 194 Home Market, 75 How Far Should Country Be Self- sufficient? 71 Industrial Commissions, 149 Infant Industries, 69 Immigration, 150 Inspection, Of meat as commercial and sanitary measures, 91: For export trade, 92 ; Of banks and insurance com- panies, 96; Limitations of, 100 Insurance, Against unemployment, 129 ; Com- pulsory against unemployment, 129 ; Soldiers and sailors, 134 Insurance and the Laborer, 118 Insurance, social, 119; General re- sults and prospects of, 130 Insurance, life, 119 ; Workmen's compensation, 120; Health, 124; Field and scope of health insur- ance, 124; Benefits under health insurance, 125; Sources of funds, 125 ; Peculiar difficulties of admin- istration, 125 ; Results of health in- surance, 126: Against invalidity and old age, 127; Compulsory old age, 128 ; Old age pensions. 128 International Harvester Company, 199, 208 Judiciary, 11 Justice and Taxation, 33 "Kartell" (In Germany), 200 Labor, 273 American policy. 105 ; Results of regulation, 106; Organizations, 137; Industrial changes, 276; Whitley committees. 276 Labor Contract, 103 Constitutional limitations of, 104 Labor Unions, 137 Relations of to government, 143 ; in- junctions in control of, 146; Financial liability of members, 146 Laborer and Insurance, 113 Legislatures, 10 Low Wages, Extent of, 116 Mackenzie-King, W. Lyon, 203 Marketing Problem, 54 Mercantilists and Theory of Protec- tion, 63 Minimum wage, 115 Laws on, in United States. 115; De- cisive experience still lacking, 116; Caution in adopting, 117 Mineral Lands, 43 Modern Industry, New needs of, 106; Conditions in, 107 ; Responsibility for conditions. INDEX 291 Modem Industry — continued 109 ; Part of the Government, 109 ; Extent of requirements in, 111; Regulation of, 111; Women and children in, 112; New risks in, 117; Public inspections, 147; Results of public inspection, 149 Municipal Accounting, Poor Systems of, 190 Municipal Government Still Inefficient, 194 Municipal Ownership, In United States, 176; In Europe, 178 ; Issue must be settled by ex- perience, 196 ; Why undertaken, 179; Moral aspect of, 180; New point of view on, 180; Favorable interest rates secured for, 181 ; No dividends on watered stock, 181; Expense of regulation, 182 Municipal Ownership and Labor Con- ditions, 182 Betterment claimed. 183 ; Different conditions in Europe and Amer- ica, 184 ; Favoring workmen by re- duced rates, 189 Natural Besources, Conservation of, 44 Old Age Pensions, 128 Parcel Post, Reasons for, 230; Introduces a new ])rinciple, 230 Picketing, 145 Postal Service, The, 220 Importance of. 220; Development of, 221; Activities constantly expand- ing, 223 ; Reasons for Governmen- tal Management. 223 ; As possible field of Governmental Revenue, 224; Social aspects prominent in, 225; Should be run eflficiently and economically, 225: Financially a failure, 226; Proper accounting methods lacking, 227: Other fac- tors causing inefficiency. 228 ; Parcel Post, 230; Post office costs undetermined, 231; Tele- graphs and telephones, management by post office. 232 ; .Si)pciul war services of. 236; Extension of oj)erations. 242 Prices and Credits, Inflation of. 269 Private Management Preferable for Profit, lit4 Profiteering, 27'j Public Inspection of Business, 8.t Public Opinion, ' Nature of, 12 ; Influences of busi- ness questions, 14 Public Parks, 45 Public Service Corporations, 156 Need special recognition, 156; Why different from other industries, 157 ; Meaning of natural monopoly, 158 ; Tend toward monopoly, 159 ; Characteristics of, 161; Substitu- tion for services of impossible, 161 ; Competition impossible, 162 ; Competition between railroads, 159; Assisted by the Government, 162; Bad practices in the post, 163 ; Public character of, not rec- ognized, 163; Systematic regulation of, 164; Powers of regulating commissions, 165; Commissioners, how chosen, 165 ; Commissioners, qualifications of, 166; Status of regulating bodies, 166; State versus local regulation, 166; Ad- vantages of state regulation, 167; Optional home rule, 168; Achieve- ments of regulating bodies. 169 ; Powers of commissions, 169; Net income and distribution. 170; Val- uation of properties, 171; Points in dispute, 172; Regulation of security issues. 173 ; Regulation of utilities still in developmental stage. 173 Public Utilities, Local, 175: Water works, 176; Elec- tric light plants. 176 ; Gas works, 177; Street railways, 178 Pure Food Laws, 93 Quality, Determination of salt, lumber, grain and sugar, 88 Quasi-official Privileges, 98 Reclamation Service, 44 Regulation or Ownership (Municipal), 175 In France, 185; Modern develop- ment, effects, advantages of, 192 Restraint of Trade, reasonable and un- reason.-ible. 205 Rural Conditions, Improvement in, 59 Sherman Anti-Trust Act, 205; Defi- nition of Monopoly in, 205; At- tciniits to rinrify. 212 Should Public Management Be Ex- tended, 23 8 Smith-Lever Bill, 52 292 INDEX Social and Ethical Questions, 16 Socialism, 140 Standard Oil Company, Decision of Supreme Court, 206 Syndicalism (I. W. W.), 139 Tax, General property, 27 ; Modified forms of general property tax, 27; Federal income, 28; Other income, 29 ; Corporation, 30 ; Excess profits. 31; In other countries, 32; Inheritance, 32; Single, 34; Internal Revenue, 36 Taxation, And Justice, 33; Indirect, 36; State, 38; Ideal system of, 37 Taxation and Business, 19 Share in distribution, 20; Nature of, 22 ; Canons of, 23 ; Incidence of. Who pays, 24; Forms of, 26; Modified Forms, 27 Tariff, and Politics, 61 Systems, 62 ; Alexander Hamilton's View on, 64 ; Conflicting interests in, 65 ; Classification of products, 67; Infant industries and, 69; Who bears burden of, 70 ; Effects on wages, 73 ; Protective duties, 76 ; Home market, 75 ; small in- fluence on industry, 77 Chief objection to, 77 ; Machinery in, 78; Goods under bond, 78; History of, 81; Effect of war on, 81 Tariff Commission, 83 Trusts and Combinations, 197 No clear-cut government policy rec- ognized, 197; Definition, 198; Why government interferes, 198 ; Policy followed in Germany, 200 ; Policy followed in England, 201 ; Ca- nadian policy, 201 ; Regulation under the Canadian Act, 202 ; Consideration in Canadian Policy, 203 ; Beginnings of American anti-trust movement, 203 ; The real question involved, 210; Ad- vantages and disadvantages of new laws regarding, 215; Present situation, 218 U. S., A Creditor Nation, 266 U. S. Steel Corporation, 199 ; 207 Sound business principles recognized, 209 U. S. Supreme Court, afprmative de- cision recognizes honest business methods, 210 War and Economic Life, 262 War Expenditures, loans and taxations, 41 Weights and Measures, 86 Women and Children in Industry, 112 Present regulations beneficial, 117 THE-PLIUPTONPEESS NORWOOD-MASS-.U-S-A iill|^ 3892 UC SOUTHERN REGIONAL LIBRARY FACILITY llllllll l"r AA 000 988 944 5 UNIVERSITY OF CALIFORNIA LIBRARY LOS ANGELES. CALit- n ill ill I pi iPll'IPl ' i i I ir ill i [< !| ti tj t| !i E; Ill'