The Morals of 
 onopoiy and Competition 
 
 I5EED
 
 UNIVERSITY OF CALIFORNIA 
 AT LOS ANGELES 
 
 GIFT OF 
 
 JALiES il. TuFTS 
 
 =^
 
 The Morals of 
 Monopoly and Competition 
 
 BY 
 
 HOMER BLOSSER REED, Ph. D. 
 
 ASSISTANT PROFESSOR OF PSYCHOLOGY AND PHILOSOPHY 
 UNIVERSITY OF IDAHO 
 
 QII7C QlollcgiaU ^rr«a 
 
 George Banta Publishing Company 
 
 Menasha, Wisconsin 
 
 1916
 
 i 
 
 « * • 
 
 • 4 
 
 » • • • • 
 
 .•:••• 
 
 « • « 
 » ^ ■ «
 
 
 PREFACE 
 
 This little book was begun in connection with a 
 " Seminar in the Ethics of Business under Professor 
 y James H. Tufts of the University of Chicago, and was 
 -^ written during the spring and summer of 1912. In 
 ;,- publishing it at this delayed date, the author did not 
 ^ undertake to make a revision for the reason that the 
 a> principles in question have not changed and are more 
 vital than ever. Much progress has however been 
 ^ made in the solution of the problems of monopoly and 
 ^ competition and many sources regarding the methods of 
 S competition have come to light since 1912. However, 
 the various papers on the Federal Trade Commission 
 13 and its Problems in the Annals of the American Acad- 
 vj emy of Political and Social Science, January, 1916, 
 ■;5y review these sufficiently and should be read in con- 
 I nection with this book. A word, however, may be 
 I said with reference to the Clayton Act and the Federal 
 ^VTrade Commission Act which embody the important 
 legislation made since 1912 upon the problem in 
 o question. The Clayton Act, among other things, for- 
 K bids price discrimination, rebating on merchandise, and 
 tp making the sale of a monopolistic article conditional 
 upon the sale of other articles, where the effect may be 
 "to substantially lessen competition or tend to create 
 a monopoly." The Federal Trade Commission Act 
 forbids "unfair methods of competition" and empowers 
 the Commission to bring a proceeding against a cor- 
 poration using an unfair method of competition "if it 
 
 
 4S8.'5,'5
 
 IV PREFACE 
 
 shall appear that a proceeding by it in respect thereof 
 would be to the interest of the public." It is not 
 stated, however, what the meaning is of these phrases: 
 "to substantially lessen competition," "to tend to 
 create a monopoly," "unfair competition" or "the 
 interest of the public." Evidently there is room here 
 for judicial interpretation. By what method shall a 
 judge settle these questions? Shall he merely consider 
 what has been laid down by the law in the past or shall 
 he study each case with reference to its facts and with 
 reference to the future public good? It is in cases of 
 this sort that a judge should be conscious of his logic, 
 a matter in which it is hoped this book may be found 
 of some use. While it is dissappointing to find so 
 much undefined in these Acts, it is a matter of con- 
 gratulation to see that they have made a great step 
 forward in putting big business under the public law 
 and under the direction of public experts, which means 
 that the purpose of these Acts and the purpose of this 
 book grew out of common objective conditions. 
 
 I gratefully acknowledge my indebtedness to Pro- 
 fessor Tufts who read the manuscript a number of 
 times and oflfered many helpful criticisims and sug- 
 gestions; to Professors Geo. H. Mead, E. S. Ames, 
 R. F. Hoxie, T. C. Marshall, and C. W. Wright, — all 
 of whom gave the manuscript a critical reading; and 
 to Anna Dale C. Reed, who kindly did the typing and 
 proofreading. 
 
 H. B. R. 
 
 Moscow, Idaho, March, 1916.
 
 CONTENTS 
 
 Chapter I. Introductory 1 
 
 Chapter II. The Change from Private to Public 
 Morals with Carriers 
 
 Section 1. The Effect of Private Bargaining between 
 Rai'roads and shippers 12 
 
 Seclion2. Judicial Opinion upon Rate Discrimination.. 38 
 Section 3. How the Courts Developed a New Principle 
 
 for Testing the Fairness of Railroad Rates 51 
 
 Section 4. How the Courts Determined a Fair Profit. .. 69 
 Section 5. Factors Determining the Development of 
 Judicial Opinions upon Rate Charges and the Rela- 
 tion of these Opinions to the Carging-what-the- 
 traflSc-will-bear and Cost-of-service Principles 71 
 
 Ch.vpter III. The Change from Private to Public 
 Morals with Large Industrial Combinations 
 
 Section 1. The Effect of the Adoption of the Methods 
 and Practices of Private and Competitive Business 
 by Large Industrial Corporations 75 
 
 Section 2. A Review and Criticism of Judicial Opinion 
 upon the Morals of Monopoly and Competition 92 
 
 Chapter IV. The Change from Private to Public 
 Service IMethods in Determining Price.s 
 Section 1. The Principle for Determining a Fair Price 
 
 under Competition 125 
 
 Summary 141
 
 CHAPTER I 
 
 Introductory 
 
 That a change in business practices and morals is 
 taking place, is evident from the opinions of judges, 
 legislators, and business men aUke. For example, 
 President Havemeyer of the American Sugar Refining 
 Company stated well the old competitive morality in 
 his testimony before the Industrial Commission in 1900. 
 He was asked whether it was a fair ethical proposition 
 to make consumers pay dividends on an over-capitali- 
 zation of $25,000,000. He answers: "I think it is fair 
 to get out of the consumer all you can, consistent with 
 the business proposition. ... I do not care two cents 
 for your ethics. I do not know enough of them to 
 apply them. ... If you get too much of a profit, you 
 get somebody in competition."^ 
 
 In 1889, Andrew Carnegie wrote in a similar style: 
 " It is not in the power of man to exact for more than a 
 brief season, indeed, unusual profit upon capital inves- 
 ted, either in transportation or manufacture, so long as 
 all are free to compete, and this freedom, it may safely 
 be asserted, the American people are not likely to 
 restrict."^ But before the congressional committee 
 investigating the United States Steel Corporation, he 
 presented a statement that shows a decided change of 
 opinion: "Your task," he says, "arises from the fact 
 that the law of competition in business, which pre- 
 vailed generally and operated with tolerable efl5ciency, 
 
 ' Report of Industrial Commission, Vol. I, p. 118. 
 - North American Review, Feb., 1889.
 
 2 MONOPOLY AND COMPETITION 
 
 has seemed recently to be impaired in certain fields, 
 
 notably those of oil, steel, and tobacco I 
 
 assume that it may be laid down as an axiom that 
 where practical monopoly exists through combination 
 in any industrial field or in any natural product, regu- 
 lation under law must follow to avert the grave danger 
 of extortion from the consumer . . . search the civi- 
 lized world around, we find the invariable rule that a 
 judge personally interested in the slightest degree in a 
 cause is thereby debarred from sitting in judgment upon 
 it. . . . Producers, from the nature of the case, are 
 thus debarred from sitting in judgment. Nor can their 
 representations of desire to obtain only "fair prices" 
 and "no monopoly" be accepted as conclusive . . . 
 there should promptly be created an industrial court, 
 molded after the Interstate Commerce Commission, 
 charged with all questions connected with manufacture 
 and natural products. ... Its province should be to 
 examine all details, ascertain cost of production, adding 
 to such as in its judgment will yield a fair or liberal 
 return upon capital when skillfully invested and pro- 
 perly managed; the maximum selling price to be fixed 
 by the court, based upon the average cost price of 
 product in up-to-date, well managed works. "^ 
 
 Here then we have an example showing very clearly 
 that the autonomous justice of the old-fashioned com- 
 petitive system no more applies to conditions of mono- 
 poly, which require regulation by the government. 
 Beside Mr. Carnegie, many others expressed similar 
 
 3 Hearings, Jan. 10, 1912, pp. 2346-47.
 
 CHAPTER ONE O 
 
 views, notably Judge Gary and Mr. Perkins of the 
 United States Steel Corporation. 
 
 What has brought about this change of opinion? It 
 was the logic of the competitive principles themselves. 
 Under the competitive system, a trader was under no 
 obligation to treat all alike. He could sell at any 
 price he could get — could either give his goods away or 
 charge as many different prices as he pleased. He 
 could give rebates whenever and to whomever he 
 pleased, or cut prices to any extent on his competitor, 
 and even untruthfully praise the merits of his own 
 goods. The system was not so bad as applied to indi- 
 vidual traders since they were all about equal in 
 strength, and it was a game therefore which two could 
 play, one man's error being corrected by another. The 
 system worked badly, however, when too many traders 
 engaged in one industry, causing competition to be so 
 sharp that hardly any could make satisfactory headway. 
 The trader remedied this evil by combination. The 
 combination, as well as the courts, took it for granted 
 that whatever an individual could lawfully do a 
 combination of individuals might lawfully do. The 
 combination therefore carried on the same methods and 
 practices as the competitive individual traders. Be- 
 cause of his small capital, the individual could not 
 meet the rebates and the cut-prices of the combination, 
 no matter how good a manager or producer he was. 
 The autonomous corrective of competition was lost, 
 resulting in a monopoly to the combination which 
 exploited both the individual trader and the consumer. 
 After the damage was done, people began to see the
 
 4 MONOPOLY AJJD COMPETITION 
 
 wrong of the combination's doing business in the same 
 way as the competitive individual trader. But it took 
 a long time to see the wrong, and a still longer time to 
 remedy it. The evil of rebates, for example, was 
 pointed out very fully by the oil producers as early as 
 1872. The railroads also understood it, for in that 
 year the trunk lines made an agreement with the Pro- 
 ducers' Union to treat all equally and not give one 
 shipper the sUghtest advantage over another. The fol- 
 lowing year, Beasley, C. J., in a well reasoned case* 
 pointed out the evils and results of rebates as clearly 
 as they have ever been pointed out. The public as a 
 whole, however, did not understand it, and it required 
 twenty years to get a law passed condemning rebates, 
 and twenty years more to put it in force. The problem 
 of railroad rebates has now been fairly solved through 
 the action of the Interstate Commerce Commission. 
 But the public is not yet convinced that the industrial 
 problem requires a similar solution. 
 
 There are many reasons why the public and the 
 government were so slow in recognizing and remedying 
 the evils of rebates and other competitive practices 
 considered bad. When the industrial revolution began 
 in the United States, after the Civil War, there was a 
 vast new country rich in possible wealth to be devel- 
 oped, and people had to get things done, no matter how. 
 They were interested in results — railroads, factories, 
 and steamboats — and in means only so far as they 
 produced the desired results. They wanted promoters 
 rather than preachers. They had no time to reflect 
 
 * Messenger et al v. Pennsylvania R. R. Co., 36 N. J., 407.
 
 CHAPTER ONE 5 
 
 over the ethical character of the means nor to recon- 
 struct their acquired habits to satisfactorily meet the 
 changing conditions. The age was absorbed in econo- 
 mic development, while the ethical lagged behind. 
 For example, when the Union Pacific line was completed 
 across the western continent, Bancroft says: "The last 
 tie . . . was placed beneath the connecting ends of 
 the rails, and a spike of gold, placed in a cavity to 
 receive it, was driven home by a silver hammer in the 
 hands of President Stanford of the Central Pacific. 
 . . . Congratulatory telegrams were read from cities 
 east and west . . . cheers, music, and banqueting fol- 
 lowed, and the royal marriage was consumated. . . . 
 Thus ended in fulfillment the long dream of nearly forty 
 years, a fulfillment that was celebrated in every city 
 of the North and many of the South with enthusiasm."^ 
 The moral judgment of the public did not change until 
 four years afterwards, when some began to complain 
 of its methods of construction and instituted a Con- 
 gressional investigation. Wlien the evidence was 
 revealed, the construction company, the Credit Mo- 
 bilier, was marked "the King of Frauds" and two 
 members of Congress, Oakes Ames and James Brooks, 
 promoters of the railway who distributed some stock 
 among Congressmen for securing "friends" and favor- 
 able legislation, were dismissed from Congress, thus 
 appeasing public clamor by making the two most con- 
 venient victims scapegoats of the entire affair. Both 
 men were undoubtedly unaware of having employed 
 questionable methods, as they were building a railroad 
 
 » Works, Vol. 24, p. 575.
 
 6 MONOPOLY AND COMPETITION 
 
 just as other men would build it, and adopting such 
 means as would bring success under the existing con- 
 ditions. 
 
 The Union Pacific incident furnishes a typical exam- 
 ple of the way in which morals and law lagged behind 
 the industrial development. This lagging was aggrava- 
 ted on the one hand by the general demoralization from 
 the Civil War, and on the other, by the laissez faire 
 policy of the government necessitated in part by the 
 period of Reconstruction that followed the war. The 
 period during and after the Civil War was not noted 
 for its high business morals. Traders had to turn the 
 fortunes of war to their enrichment. In one case, 
 5,000 rifles in the New York Armory, condemned by the 
 army officers, were bought from the government at 
 $3.50 apiece and sold to Gen. Fremont^ in St. Louis 
 for "new" and "government standard" at $22.00 
 apiece. A quotation from The Book of Daniel Drew 
 will give the moral setting of the time. "I saw very 
 quickly," says Drew, "that the War of the Rebellion 
 was a money maker for me. Along with ordinary 
 happenings, we fellows in Wall Street now had in addi- 
 tion the fortunes of war to speckilate about and that 
 always makes great doings on a stock exchange. . . . 
 As I look back now, I see that I never made more 
 money, or had four years that were in all respects more 
 genuinely prosperous. . . . We financial men organ- 
 ized a way of getting early news from the seat of war. 
 A silver key will open any lock. We had on our pay 
 roll, sutlers, reporters, private soldiers, and officers even 
 
 • Rep. of Committees, 37th Congress, 2nd Sess., Vol. II, p. LXVII*
 
 CHAPTER ONE / 
 
 up to generals. . . . Big olTicials who wouldn't accept 
 money could usually be reached by giving them some 
 shares in the stock we were manipulating. (We didn't 
 dare make offers of this kind to Abe himself. Lincoln 
 was an impractical man, so far as money making went. 
 All he thought about was to save the Union. . . .) 
 During these days of the War, we who were on the 
 inside could call the turn of a stock long before the 
 general public. This made very profitable business. 
 In fact, I got to taking a great deal of interest in the 
 Boys in Blue. . . . When Richmond was finally 
 taken, I for one was sorry to have the War come to 
 an end."^ It is significant that many of our late and 
 present masters of industry and finance were young 
 men receiving their education in this situation de- 
 scribed by Drew. 
 
 The laissez faire policy was scarcely a less hindrance 
 to morals and legal development than the condition 
 described by Drew. Although the period of Recon- 
 struction made it impossible for the government to 
 superintend business, yet this period was over before 
 the industrial problem became serious. The Sherman 
 Act was passed in 1890, indicating that Congress per- 
 ceived the error of the laissez faire policy and now 
 demanded governmental action. But the Supreme 
 Court was not yet converted. Four years later, when 
 the Attorney General brought suit for dissolving the 
 American Sugar Refining Company, Chief Justice 
 Fuller said: "It is vital that the independence of the 
 commercial power and of the police power, and the 
 ' Book of Daniel Drew, edited by B. W. White, pp. 160-162.
 
 8 MONOPOLY AND COMPETITION 
 
 delimitation between them . . . should always be 
 recognized . . .; and acknowledged evils, however 
 grave and urgent they may appear to be, had better be 
 borne than the risk be run, in the effort to suppress 
 them, of more serious consequences by resort to expe- 
 dients of even doubtful consitutionality."^ Under 
 such an opinion, industrial combinations had nothing 
 to fear, and it was not until the Addyston Pipe & Steel 
 Company case, tried five years later, that a change of 
 attitude was evident. "We conclude," Justice Peck- 
 ham said, "that the plain language of the grant to 
 Congress of power to regulate commerce among the 
 several states includes power to legislate upon the sub- 
 ject of those contracts in respect to interstate or foreign 
 commerce which directly affect and regulate that com- 
 merce, and we can find no reasonable ground for 
 asserting that the constitutional provision as to the 
 liberty of the individual limits the extent of that power 
 as claimed by the appellants."^ With this decision 
 the much prolonged policy of laissez faire had its 
 natural death. Wliether this opinion was delivered 
 too late to remedy the evils for which it was intended 
 is not yet determined. But it cannot be denied that 
 laissez faire greatly hindered the legal development 
 from keeping pace with the economic. 
 
 Considering then the absorbent interest created in 
 economic affairs by the rapid industrial development, 
 the lax morals resulting from the Civil War, and the 
 laissez faire poUcy of the government, it is no wonder 
 
 » United States v. E. C. Knight Co., 156 U. S., 1, 13. 
 9 175U. S., 211, 235.
 
 CHAPTER ONE V 
 
 that ethical evolution did not develop equally with the 
 economic, and that the old morals of individual compe- 
 tition were applied without question to conditions of 
 combination. It is this unequal evolution^'' between 
 the spheres of morals and industry that accounts for 
 the serious problem existing to-day in the world of 
 business. 
 
 This evolution is now taking place in the business 
 world, and one of the outstanding features of this 
 evolution is the change from private and competitive 
 morality to public and cooperative morality. To 
 understand the character of this change at least three 
 things are necessary. First we must know why private 
 and competitive morality in big business fails to satisfy 
 the modern public. We must understand what results 
 that morality has produced which the public has pro- 
 nounced bad and for which it demands a remedy. 
 Second, we must know something of the solutions that 
 have been proposed to remedy these so-called evils. 
 And third, we must submit these to a critical analysis, 
 and develop such new principles as seem to be required 
 by a fresh analysis of changing conditions. 
 
 The change from private to public morals in business 
 first began with the railroads. In the early days of the 
 railroads, private bargains between shipper and carrier 
 were no more thought of than a private deal between a 
 consumer and a shoemaker. But after a time it was 
 discovered that the favored shipper was getting an 
 
 " See Morals in Modern Business, Page Lecture Series, Yale 
 University, Chapter on Morals of Trade in the Making, E. D. Page, 
 1909 p. 10-12.
 
 10 MONOPOLY AND COMPETITION 
 
 unusual advantage, and then a cry was raised against 
 rebates, a practice which it took forty years to eUminate. 
 But the result was that the railroads were brought 
 under the public law and then the courts had the 
 obligation of developing a principle by which they 
 might determine the fairness of the rate charges of 
 these public carriers, a task which was much more 
 difficult than the elimination of rebates. Now, the 
 legal development by which the railroads were changed 
 from private to public law is one of the interesting 
 chapters in the evolution of morals, and it is just as 
 intricate as it is interesting. But it is not only inter- 
 esting from the standpoint of evolution but from a 
 practical standpoint as well, for the change from private 
 to public law in case of our large industrial corporations 
 is bound to take the same course. The history of the 
 change from private to public law in the case of carriers 
 therefore provides the best suggestion for the solution 
 of our modern industrial problem. 
 
 It shall be the purpose of this essay to trace this 
 development in the case of carriers, and then to take a 
 similar task in connection with large industrial cor- 
 porations in so far as this is possible under present 
 conditions. In general, our mode of treatment will be 
 to describe, first the results produced by the practice of 
 private morality between carriers and shippers; second, 
 to describe the solution proposed for these practices 
 (and these will be taken from the court decisions for it 
 was in the courts that the problem was fought out); 
 and third, to set forth through a criticism of these 
 court decisions the new principles that were developed
 
 CHAPTER ONE 11 
 
 for the purpose of meeting the conditions of modern 
 society. Having finished with the carriers, we shall 
 take up a similar mode of treatment for large industrial 
 corporations. Those interested only in the conclusions 
 reached may turn to the summary at the end of the 
 essay.
 
 CHAPTER II 
 
 The Change from Private to Public Morals with 
 
 Carriers 
 
 In the previous chapter, I indicated that my general 
 plan would be to describe concretely the results of 
 applying the methods of private and competitive 
 business to pubUc and monopolistic business, or, in 
 other words, the results of applying the methods of 
 individual traders in competition to conditions of com- 
 bination, then to review judicial opinion upon the 
 justness of such an application, and finally, by critical 
 examination to interpret and justify the new principles 
 required by conditions of monopoly and combination, 
 the business of which is public in character. 
 
 In this chapter I shall describe the effect upon 
 shippers when railroads base their rates upon the com- 
 petitive principle of charging what the trafl&c will bear. 
 Then I shall review judicial opinion upon rate dis- 
 crimination, and, finally, I shall show how the charac- 
 ter of the railroad business demanded the cost-of- 
 service principle. 
 
 Section I. The Effect of Private Bargaining between 
 Railroads and Shippers. 
 
 Charging what the traffic will bear generally means a 
 special rate between the railroad and the individual 
 shipper. If the shipper is small and has not the 
 advantage of competition, his traffic will bear a high 
 rate. If the shipper is large and has the advantage
 
 CHAPTER TWO 13 
 
 of competition, his traffic will not bear a high rate. 
 In the past, this generally meant that the carrier gave 
 the large shipper a rebate in order to get his business; 
 or, if he did not give a rebate, he made some other sort 
 of discrimination. It is necessary to see that charging 
 what the traffic will bear is a principle allowing such 
 discrimination between individual shippers. To under- 
 stand the working of such a principle in the railroad 
 business, it is necessary only to describe what rate 
 discriminations have meant to the favored shipper. 
 The history of the American Sugar Refining Company, 
 or of the Chicago packing houses, or of the Carnegie 
 Steel Company, would all furnish examples, but the 
 best illustration is supplied by the history of the 
 Standard Oil Company because it has had the benefit of 
 many investigations and the sources for materials are 
 therefore numerous and easily accessible. They are 
 also of a character to supply sufficient data for drawing 
 conclusions. For these reasons, I shall describe briefly 
 what rebates have meant to the Standard Oil Company 
 and to its competitors. Although knowledge of 
 Standard rebates is more or less common, yet their 
 exact and precise effects have never been clearly 
 depicted, and such a task is necessary in order to 
 supply a background for our discussion. 
 
 By way of preface, I may state that the Standard 
 owed its monopoly not to the fact that it could manu- 
 facture oil more cheaply than its competitors, nor to 
 the fact that it was satisfied with smaller profits, but 
 principally to the fact that it received special privileges
 
 14 MONOPOLY AND COMPETITION 
 
 in transportation. How it accomplished this I wOl 
 describe. 
 
 Rebates aided the progress of the Standard Oil 
 Company from the beginning, in 1870. In that year, 
 the Lake Shore road granted it a special rate of $1.30 
 a barrel from Cleveland to New York, the regular rate 
 being at that time $2.00^ John D. Rockefeller testi- 
 fied before the United States Industrial Commission in 
 1899 that, at this early period, it was customary for 
 each shipper to make his own special bargains with the 
 railroads. The Standard being a large shipper and 
 having the opportunity of playing competing railroads 
 against each other, as well as having a cheap water 
 route, naturally made good bargains.^ In this period, 
 there were drawn up the most remarkable rebating 
 contracts in history, the South Improvement Company 
 contracts of 1872. The South Improvement Company 
 purported to represent two-thirds^-^ of the refining 
 capacity of the United States at that time, and in its 
 stock the directors of the Standard Oil Company held 
 the largest interest. In order to further the develop- 
 ment of the oil business, this company concluded identi- 
 cal, but separate, contracts with the Pennsylvania, the 
 New York Central, and the Erie railroads, for the 
 transportation of oil. The roads agreed to haul crude 
 oil from the oil regions in western Pennsylvania to 
 
 * Tarbell, History of the Statidard Oil Co., Vol. I, p. 278. 
 
 ^ Ibid., Vol. I, p. 795. 
 
 '^Standard Oil Co. v. U. S., Emery, Record, Vol. 6, p. 2623. 
 (Hereafter referred to as Record 6/2623. 
 
 * Record, Petition, 1 /4.
 
 CHAPTER TWO IS 
 
 either Cleveland or Pittsburg for 80 cents a barrel 
 and a rebate of 40 cents, to New York for S2.56, and to 
 Philadelphia and Baltimore for $2.41 a barrel, with a 
 rebate of sS1.06 a barrel to each point. Refined oil 
 they agreed to haul from Cleveland or Pittsburgh to 
 New York for $2.00, and to Philadelphia or Baltimore 
 for SI -85 a barrel, with a rebate of 50 cents a barrel 
 to each point. From the oil regions to New York the 
 rate was vS2.92, and to Philadelphia it was $2.77 a 
 barrel, with a rebate of $1.32 a barrel to each point. 
 The rebates were to be paid to the South Improvement 
 Company alone and all others were to pay the regular 
 tariff. If any one else should be charged a less rate 
 than the regular tariff, the rate to the South Improve- 
 ment Company was to be reduced an equal amount. 
 Moreover, the rebates were to be paid not only on the 
 South Improvement Company's shipments but on all 
 oil shipments from whatever source. So if the inde- 
 pendent in Oil City shipped a consignment of refined 
 oil to Philadelphia, he had to pay $2.77 a barrel to the 
 railroad and the latter paid $1.32 of this sum to the 
 South Improvement Company. The contracts further 
 provided that, "the party hereto of the second part 
 shall maintain the business of the party hereto of the 
 first part against loss or injury by competition, to the 
 end that the party hereto of the first part may keep 
 up a remunerative and so a full and regular business, 
 and to that end shall lower or raise the gross rates of 
 transportation over its railroads and connections. . . . 
 for such times and to such extent as may be necessary 
 to overcome such competition, the rebates and draw-
 
 16 MONOPOLY AND COMPETITION 
 
 backs to the party of the first part to be varied pari 
 passu with the gross rates." "Party hereto of the 
 second part" was the railroad and "party hereto of the 
 first part" was the South Improvement Company. 
 
 It is important to keep this clause vividly in mind,* 
 not because of its importance to the South Improvement 
 Company, which was quite a transitory concern, but 
 because it gives a hint of the secret of the later success 
 of the Standard Oil Company, which soon became 
 "party hereto of the first part" while the railroads con- 
 tinued to be "party of the second part" and carried 
 out the agreement to all practical purposes. 
 
 After the above contracts were concluded, the ofl&cers 
 of the Standard Oil Company at once proceeded to 
 make use of them. They went around to the inde- 
 pendents in Cleveland in an effort to buy them out, 
 using this forceful argument: "If you don't sell your 
 property to us, it will be valueless for we have gotten 
 advantages with the railroads."^ After presenting the 
 contracts showing the "advantages," they were able 
 to buy out 25 of the thirty independents in Cleveland 
 at that time. These purchases increased the refining 
 capacity of the Standard from 600 to 10,000 or 12,000 
 barrels per day, making it by far the largest refining 
 company in the United States. The Standard could 
 now supply a large enough freight traffic to be able to 
 make its own terms with the railroads, and from this 
 time on its interest and that of the railroads became 
 
 * See Record A /Exhibit 2, for copy of contract. 
 
 * F. Rockefeller, Rep. of U. S. Industrial Commission, Vol. I, 
 p. 64. Hereafter referred to as R. I. C, 64.
 
 CHAPTER TWO 17 
 
 identical. This was the benefit the Standard derived 
 from the rebating contracts made by the South Im- 
 provement Company with the railroads. 
 
 As soon as the terms of the contract became public, 
 it raised such enormous opposition among all oil pro- 
 ducers that they speedily compelled its cancellation. 
 Besides, they organized a Producers' Union which, on 
 March 25, 1872, concluded a more favorable contract 
 for rates with the railroads. This contract provided 
 that all shipping of oil should be made on a basis of 
 perfect equality to all shippers, producers, and refiners, 
 and that no rebates, drawbacks, or other arrangements 
 of any kind should be made or allowed that would 
 give any party the slightest advantage in rates, or dis- 
 crimination of any character whatever.^ This was a 
 praiseworthy standard indeed, but it proved altogether 
 too high for many of the interested parties;^ for, in 
 less than two weeks afterwards, the New York Central 
 again paid rebates to the Standard Oil Company on its 
 eastbound shipments, a rebate of 25 cents at first but, 
 later, it was increased to 45 cents because of the compe- 
 tition of the Pennsylvania. The railroads did not 
 keep this agreement because to do so would have meant 
 a loss of much of their accustomed traffic.^ They 
 had agreed to make the rates on oil equal to all refiners, 
 whether in the oil regions or in Pittsburgh or in Cleve- 
 land, the rate being SI. 50 a barrel to New York and 
 $1.35 to Philadelphia or Baltimore. This seems gen- 
 
 ' 1 R. I. C, 640. 
 
 *Ibid. 
 
 " Railroad Investigation, 1879, New York, Blanchard, p. 3393.
 
 18 MONOPOLY AND COMPETITION 
 
 erous to Cleveland and Pittsburgh, since both points 
 were a considerable distance farther from the seaboard 
 than the oil regions were. But the refiners in Cleve- 
 land and Pittsburgh had to pay 50 cents a barrel to 
 get their crude oil from the wells. The refiners at the 
 wells, of course, were free from this charge. Its pay- 
 ment would have meant a great loss to the vested 
 interests in those cities; this the railroad wished to 
 avoid, although the arrangement allowed each point 
 its natural advantages of location. 
 
 After making use of the South Improvement Com- 
 pany's contracts, the next important step taken by the 
 Standard was to secure control of the oil terminals at 
 New York Harbor belonging to the Erie and the New 
 York Central railroads. It leased the Erie terminal in 
 1874 and, the next year, entered into a contract with 
 the New York Central for constructing one for it.^° 
 Each of these contracts was renewed one year after the 
 first signing. They authorized the Standard to make 
 terminal charges upon all oil shipped over these two 
 roads, but to make them no higher than those of com- 
 peting terminals, which was an equitable provision, 
 but was insignificant since at that time there was but 
 one competing terminal, and that was soon purchased 
 by the Standard. The contract with the Erie stipu- 
 lated in particular that rates upon oil were to be made 
 between the Standard and the Erie, contrary to the 
 usual custom of railroads making their own rates. The 
 renewed contracts openly allowed the Standard a re- 
 
 " Record, A/Exhibits 4-5.
 
 CHAPTER TWO 19 
 
 bate of 10 per cent from the regular rates. ^^ This was 
 given as a compensation for its operating the terminal. 
 Whether this was a fair compensation is not necessary 
 to say. The point is that the rebate, together with the 
 privilege the Standard had of fixing the terminal charges 
 as it pleased, put it above competition. Besides, 
 this arrangement put the Standard in a position to 
 get an exact knowledge of all the business of its 
 competitors shipping over these roads. However, the 
 competitors shipped very little oil. They could not do 
 so because of the prohibitive terminal charges. ^^ 
 
 Because of its control of the Erie and New York 
 Central terminals, the Standard was well on the way to 
 a monopoly. It required only a few more finishing 
 touches. These were added contemporaneously with 
 the acquirement of the terminals. One of them was 
 the pool of 1874, entered into by the Pennsylvania, 
 New York Central, and Erie railroads. This pool did 
 away with the charges for the hauling of crude oil 
 from the wells to the refinery, as provided in the agree- 
 ment of 1872 with the Producers Union ; and it 
 charged all refiners the same, irrespective of location, 
 for having the oil hauled to the seaboard. ^^ The re- 
 finers in the oil regions, however, did not see the equity 
 of this arrangement since they were deprived of their 
 
 " But at the same time the Pennsylvania agreed to pay the 
 Standard a 10% rebate, apparently to guarantee it a certain 
 portion of its business. Blanchard, Railroad Investigation, p. 
 3451. 
 
 " Emery Record, 6/2640. 
 
 " Record, A/Exhibit 6.
 
 20 MONOPOLY AND COMPETITION 
 
 natural advantages of location; but the refiners in 
 Cleveland or Pittsburgh enjoyed their natural advan- 
 tages of location for shipping and marketing, and could 
 secure acids, barrels, and other materials needed in re- 
 fining oil much cheaper than the refiners in the oil re- 
 gions. But this agreement was much more favorable to 
 the Standard than the competitors supposed; for a short 
 time previous to the pool, the Standard had bought up 
 the leading refineries in Pittsburgh, Philadelphia, and 
 New York, and now o\\Tied 90 per cent of the refining 
 capacity of the United States.^^ 
 
 However the offensive part in the pool arrangement 
 was a clause providing a rebate of 22 cents a barrel to 
 all shippers who transported their oil "through pipes 
 the owners of which maintain agreed rates of pipage. "^^ 
 The "owners" were the United Pipe Lines Company, 
 owned by the Standard Oil Company. This rebate 
 enabled the United Pipe Lines to pay the producers 
 that much more for their oil and so take the trade away 
 from the competing lines. The result was that they in- 
 creased their pipage from 25 to 80 per cent of the total 
 then existing, at least 12 of the 20 competitors having 
 been forced to sell out.^*^ 
 
 This pool of 1874 not only forced competitors out of 
 the pipe line business, but it also was equally disas- 
 trous to independent refiners. Emery, an importan 
 competitor at that time, said it meant the destruction 
 of the entire independent interests. It shut down every 
 
 '^Record, Petitioners' Brief, Vol. 1, p. 46. 
 
 ^ Record, A/Exhibit 6. 
 
 16 Patterson, Railroad Investigation, p. 1693.
 
 CHAPTER TWO 21 
 
 refinery along Oil Creek, throwing out of employment 
 over 400 men in the town of Titusville alone. Inde- 
 pendents in Pittsburgh and Philadelphia were also 
 either compelled to sell or lease to the Standard.'^ 
 
 To escape the prohibitive tariffs of 1874, the inde- 
 pendents who yet remained sought routes of trans- 
 portation. "Dr." Hostetter built the Conduit Pipe 
 Line from near Titusville to Pittsburgh, where it made 
 connection with the Baltimore and Ohio. This line was 
 popularly known as "Hostetter's Bitters Line," be- 
 cause, before the value of crude oil for illuminating 
 purposes became known, "Dr." Hostetter had made a 
 considerable fortune in bottling it and selling it as a 
 patent medicine having many wonderful curative 
 powers. The pipe line had to cross the line of the 
 Pennsylvania, which was not anxious for the competi- 
 tion of the Baltimore and Ohio and therefore did not 
 permit the line to cross. Accordingly "Dr." Hostetter 
 erected tank stations on each side of the tracks and 
 carted the oil across.'^ 
 
 A second route chosen by the independents was to 
 ship the oil down the Allegheny River in barges to Pitts- 
 burgh, thence down the Ohio to Huntington, West 
 Virginia, from where it went by rail to Richmond, and 
 then by ship to New York or Europe.^^ Although 
 this route increased the distance by several hundred 
 miles, yet it proved much cheaper than the tariffs of 
 the pool of 1874. 
 
 " Record, 6/2635, 2726. 
 18 Emery, Record, 6/648. 
 " Cassat, Record, 20/38.
 
 22 MONOPOLY AND COMPETITION 
 
 By the fall of 1874 the Standard Oil Company had 
 control of 90 per cent of the refining capacity of the 
 United States; yet some competitors were arising, the 
 most formidable of which was the Empire Transporta- 
 tion Company, an ally of the Pennsylvania Railroad. 
 This company was thoroughly equipped for transport- 
 ing and handling oil. It operated 500 miles of pipe, 
 had refineries in Philadelphia and New York, and owned 
 an excellent terminal for handling oil at Communipaw, 
 N. J., on New York Harbor. The Standard objected 
 to this alliance between the Empire and the Pennsyl- 
 vania, because, since the Standard was primarily a 
 manufacturer and not a carrier, it was not fair for the 
 Pennsylvania, which was a carrier, to engage in com- 
 petition in manufacturing.^'' The New York Cen- 
 tral and the Erie also objected because if the Penn- 
 sylvania engaged in manufacturing it would discrimi- 
 nate in its own favor and so take their oil traffic away. 
 Thus the other roads could not meet the competi- 
 tion of the Pennsylvania as a carrier and the Standard 
 could not compete with it as a manufacturer, since the 
 Pennsylvania could transport its oil at a much less cost 
 and so refine oil more cheaply than the Standard. 
 From the standpoint of public policy the objection of 
 the Standard had much in its favor. If all manufac- 
 turers entered the carrying business, there would be an 
 excess of carriers, if all carriers entered manufacturing, 
 there would be an excess of manufacturers. Moreover, 
 if these functions were combined in one company, that 
 
 20 Record, Rockefeller, 16/3087; Cassat, 20, 123; Archbold, 
 6/3252.
 
 CHAPTER TWO 23 
 
 company would certainly have the upper hand over 
 those which were carriers alone or manufacturers alone, 
 and so have an easy road to monopoly. Therefore, in 
 a competitive society, there is every reason for keeping 
 the functions of carrier and producer under separate 
 and independent control. The Standard, then, had 
 apparently sound argument from an economic point of 
 view, and also from a business standpoint; since a 
 corporation having the capital of the Pennsylvania, and 
 the right of eminent domain in addition, might prove 
 an unpleasant competitor indeed if allowed to con- 
 tinue. But the political and economic argument of the 
 Standard loses its weight when we recall that at the 
 time of its objection it controlled the terminals of two 
 trunk lines and operated quite a number of miles of 
 pipe line. However, these facts were not generally 
 known and made no difference. The New York Cen- 
 tral and the Erie roads in conjunction with the Stand- 
 ard declared hostilities against the Empire and Penn- 
 sylvania in March, 1887. The roads fought by cutting 
 rates and the Standard by taking away every bit of its 
 traffic from the Pennsylvania and everywhere under- 
 selling the Empire in its markets. By the following 
 October, the Pennsylvania agreed it was primarily a 
 carrier and not a producer and sold the Empire to the 
 Standard, which by this purchase acquired 500 more 
 miles of pipe line and also the Pennsylvania oil ter- 
 minal at Communipaw.'^ It had now seemingly for- 
 gotten the unfairness of combining the functions of 
 carrier and manufacturer in one company. The Penn- 
 
 ^^ Railroad Investigation, Patterson, p. 1995.
 
 24 MONOPOLY AND COMPETITION 
 
 sylvania having been brought into line, the three trunk 
 Hnes conspired to set upon the Baltimore and Ohio. 
 The latter was soon forced to come to terms, and its 
 feeder, the "Hostetter's Bitters Line," also was turned 
 over to the Standard, which promptly put in a con- 
 necting pipe underneath the Pennsylvania tracks. 
 
 The way was now open to a treaty of peace. There- 
 fore, the four trunk lines arranged a pool in October 17, 
 1877. The Pennsylvania was to have 47 per cent of 
 the Standard's business with a minimum of two million 
 barrels a year; the New York Central and the Erie rail 
 roads were to have 21 per cent each; and the Baltimore 
 and Ohio 11 per cent. As a reward to the Standard 
 for having made this division properly, the railroads 
 agreed to pay it a rebate of 10 per cent on all its traffic 
 received.^^ Assuming that the Pennsylvania received 
 for shipment its prescribed quantity and the other rail- 
 roads their proportionate amounts, this rebate alone 
 yielded the Standard over $700,000 annually. This, 
 however, was but a small part of the rebate paid to the 
 Standard Oil Company by these roads. Soon after the 
 pool agreement of October, 1877, the New York Central 
 entered into a contract with the American Transfer 
 Company, a subsidiary of the Standard, to pay it 35 
 cents a barrel on all oil shipped over its lines whether 
 consigned by the Standard or its competitors. The 
 Erie followed suit, agreeing to rebate the American 
 Transfer Company 20 cents a barrel on all oil fron Brad- 
 ford, Pennsylvania and 30 cents on all other oil The 
 traffic manager of the Pennsylvania, upon being shown 
 
 - Record, A/Exhibit 7.
 
 CHAPTER TWO 25 
 
 the receipted bills of tlie rebates from the New York 
 Central and the Erie, agreed to rebate the American 
 Transfer Company 20 cents a barrel on all shipped 
 over its lines. Later this was increased to 223^ cents.^^ 
 In this way the Standard was receiving rebates upon 
 rebates. But by the spring of 1878 certain inde- 
 pendents had effected connections so that they could 
 ship oil very cheaply to New York by way of the 
 Erie Canal. Now an opportunity presented itself 
 to the railroads to maintain the business of the Stan- 
 dard "against injury and loss by competition to the 
 end that it may have a remunerative and so a full 
 and regular business." The representatives of the four 
 trunk lines held a conference and made an additional 
 increase to the Standard of 15 cents a barrel. This 
 rebate was effective from May 1, 1878 to December 8, 
 when the competition by canal ceased.-" But the 10 
 per cent rebate and the 223/2 cent rebate were still in 
 existence in March, 1879. 
 
 It is now in order to see whether these rebates resulted 
 in a "remunerative and so a full and regular business" 
 to the Standard. They undoubtedly did so, for from 
 October 17, 1877 to March 31, 1879 they amounted to 
 somewhere between $3,000,000 and $10,000,000.-^ The 
 lower amount even is considerable, for it would pay a 
 return of 5 per cent per annum on a capitalization of 
 
 23 Cassat, Record, 20/17; A/Exhibit 8. 
 
 '-* Cassatt, Record, 20/31. 
 
 ^ See ilcmized statement of these rel)ates by Lewis Emery 
 before Committee on Manufactures, II. R. 1st Session, 50th 
 Congress, 1887-1888.
 
 26 MONOPOLY AND COMPETITION 
 
 $60,000,000. But the American Transfer Company 
 made a larger rate of profit than this during the year of 
 1878. It operated only about 75 miles of pipe line and 
 had a capitalization of $100,000. Nevertheless, upon 
 this small capitalization its rebates from three trunk 
 lines yielded a profit of 3093 per cent. From these 
 figures, it is evident that the protection against loss and 
 injury by competition was remunerative and so pro- 
 duced a full and regular business."'^ 
 
 But what was the effect upon competition during 
 these years of the rapid growth of the Standard Oil 
 Company from 1872 to 1879, and especially of the 
 rebates arranged in 1877? In 1872 there were 250 inde- 
 pendent oil refineries in the oil country of Pennsylvania 
 alone. By 1878 not over five independents remained 
 in the whole country. In 1888 Mr, Emery produced an 
 exhibit which was a "partial list of the petroleum refin- 
 eries in Pennsylvania bankrupted, squeezed out, 
 bought up, leased, or dismantled by the great oil 
 monopoly of Ohio and New York, known as the 
 Standard Oil Company." This list named 75 refin- 
 eries outside of Pittsburg. Twenty per cent of these 
 were "squeezed out" before 1872, thkty "dismantled" 
 between 1875 and 1878, and 17 were "bought up." 
 "In Pittsburg," the exhibit states, "there were 58 refin- 
 eries in 1877. Thirty refineries have been crushed out 
 and dismantled. No record is left. The remaining 28 
 have been bought up or leased by the great monopoly. 
 
 -^ Rice, 1 R. I. C, 696, reporting F. B. Gavens' argument 
 before the Committee on Manufactures.
 
 CHAPTER TWO 27 
 
 . . , Twelve of these are shut down and sixteen only 
 are fitted for business." -^ 
 
 Although the freight rates from 1877 and 1879 had a 
 disastrous effect upon competitors of the Standard, 
 yet, in another respect, they brought great benefits to 
 the oil business. In 1878 certain independents decided 
 to free themselves from their dependence on the rail- 
 roads and to provide a scheme of transportation with 
 which the latter could not possibly compete. For this 
 purpose, they organized the Tidewater Pipe Company 
 and planned a pipe line from the oil regions of western 
 Pennsylvania to the seaboard. By June of 1879 they 
 had completed the line as far east as Williamsport, 
 whence the oil was carried by rail to New York. The 
 Tidewater now demonstrated for the first time the 
 efficacy of pipes for the transportation of oil over long 
 distances. This innovation revolutionized the oil 
 business, for it was to reduce the cost of refining oil by 
 between two and three cents a gallon. It also was to 
 become one of the great bulwarks of the Standard Oil 
 Company. But for the present, a new competitor 
 of promising f ormidability had arisen ; wherefore, there 
 was again an opportunity for the railroads to maintain 
 the business of the Standard "against loss and injury 
 by competition to the end that it have a remunerative 
 and so a full and regular business." They called a 
 conference and made the necessary reduction in rates. 
 They were generous. Crude oil from Titusville, Pitts- 
 burgh, etc., was reduced from $1.40 to 50 cents a barrel, 
 and from Bradford to 30 cents. To the Standard the 
 
 " II. R. First Sess. 49th Cong., p. 232 fl., Vol. 9.
 
 28 MONOPOLY AND COMPETITION 
 
 rates were still less, 20 cents from Bradford, and 30 
 cents from Cleveland, Pittsburgh, etc. On August 1, 
 these were still further reduced, 5 cents upon the Brad- 
 ford rate and 10 cents upon the Cleveland rate.^** But 
 these reductions, large as they were, did not put the 
 Tidewater out of business. Consequently other means 
 were used. Some men tried to obstruct the right of 
 way. They bought up farms through which the 
 right of way passed, dated the deed back to a date 
 previous to the securing of the right of way, and 
 then attempted to oust the pipe line. The Stan- 
 dard undersold the Tidewater, bought the refineries 
 in New York which it had contracted to supply, and 
 purchased a minority interest in its stock. By 1883, 
 the Tidewater drew up a compromise with the Stan- 
 dard and divided the business. Since this date the 
 two have been in harmony.-^ 
 
 Other independents sought relief from the rebate 
 system by appealing to the courts; and accordingly 
 the state of Pennsylvania was persuaded to bring suit 
 against the Pennsylvania railroad. But these were 
 withdrawn because of a compromise in which the 
 Standard agreed among other things "not to object 
 to an entire abrogation of the system of rebates."^'' 
 But although it did not object to their abrogation, 
 neither did it object to their prorogation. For ex- 
 
 '^^ Railroad Investigation, Welch, p. 3688; Blanchard and Rut- 
 ter, Exhibits p. 621. 
 
 23 See Warren, Record, 1/191, 192; Benson, 1/208; Lombard, 
 1/259; A/Exhibit 13. 
 
 3" Record, A/Exhibit 10.
 
 CHAPTER TWO 29 
 
 ample, during the years 1879 to 1883 the Lake Shore 
 road carried oil from Cleveland to points west for 
 from 10 to 30 cents less on the barrel than for Sco- 
 field, Teagle and Shurmer — a competing firm in Cleve- 
 land.^' The Cleveland and Marietta Railroad, in 
 1885, entered into an arrangement with tlie Standard 
 parties by which Rice and others, independent refiners 
 in Marietta, Ohio, were to pay 35 cents a barrel to 
 lave their crude hauled from Macksburg to Marietta. 
 The Standard was to pay only 10 cents a barrel for 
 the same services and was to receive in addition 15 
 cents for every barrel of oil shipped by Rice and other 
 independents.^^ Rice, however, invoked the protection 
 of the courts and secured the refund of this overcharge. 
 Now by 1887 the effects of railroad rebates and dis- 
 criminations were becoming generally understood, so 
 that Congress passed the Interstate Commerce Act for- 
 bidding such methods and also creating the Interstate 
 Commerce Commission as an agency to remedy them. 
 The Standard Oil Company, anxious to abide by the 
 law, accepted very few rebates after 1887. Instead of 
 going through the cumbersome process of paying an 
 open rate of 60 cents and then accepting a rebate of 
 20 cents, it simply accepted a special rate of 40 cents 
 straight; or instead of shipping its oil in wooden barrels, 
 it shipped either in iron barrels or in iron tank cars and 
 had these containers entered in a lower class of freight; 
 
 '1 Teagle, Committee on Manufactures, II. R. 1st Sess. 
 49th Cong., p. 544. 
 
 '- Rep. of Master Commissioner Nash to the Circuit Co urt, 
 Tarbell, Vol. 2, p. 348; Handy v. Cleveland M. R. Co., 31 Fed., 689.
 
 30 MONOPOLY AND COMPETITION 
 
 or instead of shipping oil to a distant point through an 
 interstate commerce route, it accomplished this by a 
 combination of a series of local state routes, a plan 
 which was much cheaper and was beyond the juris- 
 diction of the Interstate Commerce Act; or where the 
 Standard refinery was located in a town in which there 
 was no competing refinery — which was the almost uni- 
 versal rule — the railroads made lower open rates from 
 this point than from competitive points. The result 
 was that the Interstate Commerce Act did not seriously 
 affect the progress of the Standard Oil Company. 
 
 There are abundant illustrations of each of these 
 evasions in the United States Report on the Transpor- 
 tation of Petroleum^^-^^ by the Commissioner of corpo- 
 rations, Mr. Garfield. This report consists of more 
 than 500 pages but it does not aim to give a com- 
 plete account of all the discrimination enjoyed by 
 the Standard Oil Company. There is, however, suffi- 
 cient material here for our purposes, i. e., to make clear 
 the effect of railroad rebates and discriminations. 
 According to this report, through secret and open 
 rate discriminations, the Standard received about 
 $1,500,000 in 1904; quite a sum indeed, but a consid- 
 erable improvement over the year of 1878. I will 
 review a few of the more important ones. 
 
 From Olean in southwestern New York, where the 
 Standard has a refinery, the Pennsylvania in 1904 made 
 it secret tank car rates of 10 cents a barrel to Buffalo 
 and 9 cents to Rochester. At the same time the Erie 
 
 *^ Referred to as G- 
 ="G. p. 21.
 
 CHAPTER TWO 31 
 
 had an open rate of 33.6 cents a barrel from Olean to 
 Rochester. Independents around Olean had to pay 
 from 38 to 46 cents to Rochester and 32 cents to 
 Buffalo.^^ The Standard used Rochester and Buffalo 
 as general distributing points for the state of New 
 York, and from them obtained other low secret rates 
 to various points over the state. Thus it reached 
 most of New York at a decided advantage over com- 
 petitors and consequently acquired the principal part 
 of the trade. These secret rates to Buffalo and Roch- 
 ester, as compared with the open rates, netted the 
 Standard a direct gain of $121,776 in 1904.3" 
 
 The Standard also enjoyed unusually low rates from 
 Olean to points in Vermont. This is accomplished by 
 combining a series of rates. For example, to the secret 
 rate of 2.8 cents per hundred pounds from Olean to 
 Rochester it added a secret local rate of 9 cents granted 
 by the New York Central from Rochester to Norwood 
 in northern New York, and to these two it added a 
 special tank car rate of 3.54 cents from Norwood to 
 Burlington, Vermont. In this manner it reached Bur- 
 lington at a rate of 16.12. But independents from 
 Warren, Pa., near Olean had to pay 33 cents per hundred 
 pounds to Burlington and 23 to Rutland.^^ From 
 BurUngton the Standard received other special local 
 rates to various towns in the state. These were more 
 than 9 cents per hundred pounds less than to com- 
 petitors if the shipments were made in less than car- 
 
 ^ G. p. 95-100. 
 « G. p. 97-100. 
 " G. p. 112.
 
 32 MONOPOLY AND COMPETITION 
 
 loads, and over 11 cents per hundred pounds less if 
 they were made in car-loads. By these combinations 
 of local rates, the Standard reached the distributing 
 centers of Vermont for a rate that was from 17 to 
 18 cents less per hundred than its competitors, and the 
 final destination beyond for from 16 to 29 cents less.^^ 
 The result was that little independent oil reached Ver- 
 mont. 
 
 If we now turn our attention to Whiting, Indiana, a 
 suburb of Chicago, where the Standard has one of its 
 largest refineries, and compare the oil rates from this 
 town with those from Toledo where the nearest compe- 
 titor is located, we find a set of rates analogous to those 
 from Olean. From the refinery in Whiting the Stand- 
 ard supplies the principal part of the Mississippi Val- 
 ley, and, previous to 1904, also supplied most of the 
 states of the Southwest. For our purpose it is sufficient 
 to examine the rates to the South-Central and the 
 Southwest Territories from Whiting and Toledo. 
 
 The South-Central territory comprises the states 
 south of the Ohio and east of the Mississippi. All this 
 except a part of Kentucky, and a strip along the Atlantic 
 coast, the Standard supplied from Whiting. It was 
 reached principally by two secret rate combinations 
 known as the Grand Junction and the Evansville com- 
 binations. Both of these existed about ten years 
 before they became public. The Grand Junction com- 
 bination led from Whiting to Grand Junction, which 
 is a small railway crossing in the southwestern corner 
 of Tennessee and at the extreme western corner of the 
 
 3«G. p. 127,128.
 
 CHAPTER TWO 33 
 
 South-Central territory. From this point the oil was 
 carried east and south by the Southern Railway. The 
 Evansville combination led from Whiting to Evansville, 
 Indiana, where connections were made with the south- 
 ern roads, chiefly the Louisville and Nashville. The 
 route by Grand Junction was a very circuitous one but 
 it meant an advantage over direct open rates of from 
 31/2 to 29^2 cents a hundred, according to the final 
 destination, and it saved the Standard about $72,000 
 a year.^^ The Grand Junction rates to the points 
 in the south were an average of 12.79 cents per hun- 
 dred pounds less than competitors' rates to the same 
 points from Toledo. The average distance to ten rep- 
 resentative towns reached by the Grand Junction 
 rates, such as Birmingham, Alabama, or Chattanooga, 
 Tennessee, or Spartenburg, South Carolina, is 690 
 miles from Whiting by the most direct route, but by 
 the circuitous route by way of Grand Junction increased 
 the distance to 993 miles.^*' Now the same towns had 
 an average distance from Toledo of only 664 miles. 
 Thus a slight advantage in distance for Toledo meant 
 a great disadvantage in rates. 
 
 The Evansville Combination netted an advantage of 
 about 7.86 cents per hundred over the competitors' 
 rates from Toledo and saved the Standard $10,963.72 
 per year.^^ The distance to ten representative towns 
 reached by this combination, such as Nashville, Ten- 
 nessee; BowUng Green, Kentucky; Charlotte, North 
 
 »» G. p. 253. 
 
 " Calculated from table, G. p. 255. 
 
 « From table G. p. 284, 287.
 
 34 MONOPOLY AND COMPETITION 
 
 Carolina; and Grenada, ISIississippi, was 609 miles 
 from Whiting. From Toledo it was 33 miles farther. 
 Here a sHght disadvantage in distance for Toledo meant 
 a great disadvantage in rates. 
 
 To points along the Gulf and the lower Mississippi, 
 the railroads from Chicago made low open rates in con- 
 nection with the southern roads in order to meet water 
 competition. The rates were 9.5 per hundred less from 
 Chicago and WTiiting than from Toledo, largely because 
 the railroads from Toledo did not make through con- 
 nections to these points.^'- 
 
 If now we make a comparison of the rates from 
 Whiting and Toledo to all the 64 principal towns in 
 the South-Central territory reached by the Evansville 
 and the Grand Junction Combinations, and the low 
 rates from Chicago, we get the following set of facts: 
 The average rate from Whiting to these towns, i.e., 
 38.7 cents per hundred pounds and 49.1 cents from 
 Toledo — 10.4 cents in favor of Whiting. The average 
 ton-mile rate from Whiting is 1.08 cents, and 1.31 cents 
 from Toledo — .24 cents in favor of Whiting. The 
 average distance from Whiting is 751 miles and from 
 Toledo 742 miles — 9 miles in favor of Toledo. If we 
 take 43 towns reached by way of Grand Junction, the 
 average distance of the actual route to them from 
 Whiting is 1087 miles as against 712 miles from Toledo.^ 
 From this we see that, although Toledo is on the average 
 nearer to points in the South-Central Territory than 
 Whiting, yet the latter town has an advantage in rates 
 
 « See table, G., p. 290. 
 « From table G., p. 296 ff.
 
 CHAPTER TWO 35 
 
 of 10.4 cents per hundred pounds. This advantage, 
 Mr. Garfield says, "is equal to about five-eights of a 
 cent a gallon. Independent refiners can live on a profit 
 of one-fourth a cent a gallon on refined oil and consider 
 one-half cent liberal return on their investment in refin- 
 ing plants. The Standard Oil Company could make a 
 large profit in the south at prices that would leave abso- 
 lutely no profit to independents. It is not remarkable 
 tlierefore that the Standard Oil Company has a com- 
 plete monopoly of the sale of refined oil and naptha in 
 the southern states. . . . The prices ... are ex- 
 ceedingly high. ... In large areas they are 2 to 4 
 cents a gallon higher than in certain points where com- 
 petition is active, after taking into account the freight 
 rates. "^ 
 
 The Southwest Territory, comprising the states of 
 Arkansas, Texas, Oklahoma, Indian Territory, Arizona, 
 and the southern half of Missouri, presents an exactly 
 similar situation to the one just described. The Stand- 
 ard reached this territory by various combinations of 
 rates — secret, local, and otherwise — so that on an aver- 
 age its rates to the Southwest were over 12 cents per 
 hundred pounds lower than from Toledo; whereas, 
 compared with other rates of the same class as oil, the 
 difference should have been only 5 cents on account of 
 the greater distance for Toledo. The difference in 
 favor of Whiting produced the same result as in Ver- 
 mont or in the South, namely monopoly for the Stand- 
 ard Oil Company. 
 
 « G., p. 302.
 
 36 MONOPOLY AND COMPETITION 
 
 It is not necessary to review further the rebates and 
 discriminations given by the railroads to the Standard 
 Oil Company. It would be merely continuing and 
 repeating the same stor}% describing how in each case 
 they inevitably forced out the competitors and brought 
 about a monopoly for the Standard. I must now show 
 the reason for this connection between railroad dis- 
 crimination and monopoly — that is, I must inquire 
 whether or not the rebates received by the Standard 
 Oil Company were sufficient to cover the margin of 
 profits required by independents. 
 
 The inquiry is solved by finding out what invest- 
 ment is required in the oil business to yield a reasonable 
 profit. The Report on the Petroleum Industry*^ by 
 the United States Bureau of Corporations gives authori- 
 tative statements on this point. The average invest- 
 ment in the refining business for five Standard re- 
 fineries is $1.05 per barrel of crude. The average 
 investment in the marketing business for the same 
 refineries is $1.24 per barrel of crude oil, making 
 a total of $2.29.^^ The average investment for the 
 five independent refineries is $1.23 per barrel''^ of 
 crude. The amount invested by independents in the 
 marketing business is not known, but their marketing 
 costs are no higher than the Standard's"*^ and so we 
 may suppose the investment is no greater. This 
 would bring the total investment for the independ- 
 
 *^ Hereafter referred to as S. 
 
 « S. 2, p. 605. 
 
 " S. 2, p. 598, 600. 
 
 " Ibid., 660.
 
 CHAPTER TWO 37 
 
 ents to $2.47 per barrel of crude. Assuming 8 per 
 cent to be a living profit, then the Standard would 
 require a profit of 18.32 cents a barrel of crude and 
 the independents 19.76 cents. Now the market value 
 of the refined oil derived from a barrel of crude 
 varies from 50 to 70 per cent of the total products.*^ 
 Assuming the average to be 60, then 60 per cent of the 
 profits must come from the refined. This would be 
 11 cents for the Standard and 11.85 cents for the inde- 
 pendents. The quantity of refined derived from a 
 barrel of crude varies from 14.5 to 24 gallons. Sup- 
 posing 19 gallons to be the average, then the Standard 
 must realize a profit of .58 cents and the independents 
 .62 on every gallon of refined sold. But a reduction 
 of 10 cents per hundred pounds of freight is equal to 
 .64 cents per gallon. Therefore, if the Standard has 
 this much advantage in freight rates, it can sell oil at 
 a profit for prices that would leave less than nothing 
 to the independents. It makes no difference then 
 whether or not it has other advantages in the cost of 
 production. The discrimination is sufficient to kill 
 competition. From these results it can be clearly seen 
 that rebates and discriminations mean a surplus in the 
 Standard's treasury but bankruptcy to the competi- 
 tor. 
 
 Our summary review of railroad discrimination in 
 connection with the Standard Oil Company thus shows 
 how they made possible one of our great industrial 
 monopolies. Of course, the Standard aided its pro- 
 gress by a few other factors such as local price cutting 
 
 " S. 2, p. 668 ff. 
 
 2488(5,3
 
 38 MONOPOLY AND COMPETITION 
 
 and a peculiar system of espionage; but these have been 
 factors which assisted it in maintaining its monopoly 
 rather than causal factors in building it up. Because 
 of these advantages, it is not surprising that between 
 1872 and 1906 the Standard Oil Company acquired 
 the interests of at least 200 competitors engaged in 
 refining marketing, and piping oil;^*^ destroyed without 
 acquiring 245^^ competitor's between 1872 and 1879, 
 and an unknown number since that period; increased 
 its assets between 1882 and 1906 from $55,000,000 and 
 $359,000,000; earned during the same time $838,000,000 
 in profits; and realized 25 per cent annually on its 
 investment and 48 per cent in dividends on its capital 
 stock. ^2 Now, doubtless, good business methods and 
 technological excellence contributed to this wonderful 
 success. But considering the importance of rebates, 
 it seems clear that the railroads accomplished their pur- 
 pose in maintaining the Standard "against injury and 
 loss by competition to the end that it may have a 
 remunerative and so a full and regular business." 
 
 Section II. Judicial Opinion upon Rate Discrimina- 
 tion. 
 
 From our review of rebates and discrimination in 
 connection with the Standard Oil Company, we can 
 see how a slight discrimination in railroad rates de- 
 termines absolutely who the shipper shall be and who 
 
 s" Record, Petitioners' Brief, Vol. I, p. 92 ff. 
 
 "Emery, Committee on Manufactures, H. R., 1st Sess. 49tb 
 Cong., Vol. 9, p. 232. Exhibit A . 
 
 ^^ Ibid., p. 170.
 
 CHAPTER TWO 39 
 
 shall conduct business in the territory to which the dis- 
 crimination is made. The railroads, for this reason, 
 hold in their hands the scales of competition and upon 
 them depends the answer to the question whether 
 monopolies shall exist or fall. Therefore, the adjust- 
 ment of railroad rates is a matter of no small im- 
 portance, and to make them just and fair to all 
 parties concerned presents the keenest problem. 
 
 Another important feature to notice in this story of 
 rebates is that the Standard Oil Company and the rail- 
 roads bargained together and made special deals in the 
 same way that is common between private individuals. 
 The reasons for rebates were purely private and com- 
 mercial. For the railroads the Standard's business was 
 an important item. Rather than do without it, they 
 would make a special bargain, because even a small 
 profit was better than none. It would contribute some- 
 thing towards general expenses and might also help in 
 the matter of dividends. On the other hand, the Stand- 
 ard was anxious to make the best bargains possible. 
 A reduction in rates would mean not only that much 
 more profit but the greater advantage in driving out 
 competitors, who always disturbed the market. How- 
 ever, from the standpoint of public policy, it is a very 
 serious question whether this sort of special bargaining 
 between monopolistic corporations is permissible, even 
 for business reasons which may appear legitimate in a 
 sense. And even if it is permissible between large 
 industrial corporations, it is still further a question 
 whether it is proper in any way for common carriers to 
 engage in such special bargaining. The question is:
 
 40 MONOPOLY AND COMPETITION 
 
 Can a large corporation behave in the same way as an 
 ordinary shopkeeper, who may sell a suit of clothes to 
 one man at a certain price and another suit of the same 
 cost to another man at a different price ? 
 
 The present chapter will deal with this question in 
 its relation to common carriers which, it is agreed, are 
 affected with a public interest; and, in the following 
 chapter, we will consider the same question with refer- 
 ence to large industrial corporations. In examining 
 English and American court decisions on rebates we 
 find judicial authority on both sides of the question, 
 and we shall find it profitable to examine the argu- 
 ments both for and against rate discriminations. 
 
 One of the grounds on which courts have favored 
 rebates and discrimination is an argument based on 
 common law.^^ It may be put as follows: Under the 
 common law, common carriers are not obliged to treat 
 all patrons alike. A carrier is obliged only to charge a 
 patron a price for services which is reasonable in itself, 
 and what others are charged is none of his concern. 
 As Judge Crompton said: "Charging another person 
 too much is not charging you too little." A carrier 
 may even haul goods free of charge to one person, but 
 this does not in the least obligate him to haul goods 
 free of charge to all persons. And, if a carrier, in 
 certain isolated cases, makes a contract to haul goods 
 for one person at a rate that is below the usual, regular, 
 
 ^^ Carton and another v. Bristol and Exeter Ry. Co., 1 Q. B. 
 (B. S.) 112 (1896); Fitchburg Ry. Co. v. Gage ct al (1859), Gray 
 393, 394, 399; H. and T. C. Ry. Co. v. Rust and Dinkins (1882) 
 58 Texas, 98. 110.
 
 CIIAPTE'R TWO 41 
 
 and reasonable rate, he may undoubtedly do so without 
 entitling others to the same advantages. It will be 
 seen that this argument applies the law of private shop- 
 keepers to common carriers, and does not consider it 
 as changed by the fact that the latter are affected with 
 a public interest. The argument always forms a part 
 of "counsel's brief for defendant," and is strongly urged 
 as being "the law" applicable to the case at bar. But 
 we shall see farther on that the common law was 
 essentially changed by statutes which recognized a 
 difference between private shop-keepers and common 
 carriers affected with a public interest. Besides this 
 argument from common law, courts have recognized a 
 second argument as validating the practice of rebating. 
 This argument applies the principles of the wholesale 
 trade to rate charges. 
 
 A carrier may make a contract giving a lower rate to 
 a shipper who furnishes the railroad a large quantity 
 of traffic, given in specified amounts, at regular inter- 
 vals, and for a long period of time, when such a contract 
 increases the legitimate profits of the railway and the 
 discrimination is no more than a reasonable consid- 
 eration for the diminished cost of service. In fact, such 
 advantages are similar to differences made between 
 the selling of goods wholesale and retail. Besides, it 
 is a matter of common knowledge, and hence one of 
 which judicial notice is taken, that an increase in the 
 volume of business is desirable and advantageous; and, 
 in the rivalry of business competition, it is lawful to 
 favor those whose business is great, rather than those 
 whose business is small or inconsiderable. More than
 
 42 MONOPOLY AND COMPETITION 
 
 this, the lower rate in favor of large traffic is more 
 profitable to the railroad than higher rates on small 
 traffic which is intermittent and irregular, because it 
 results in greater economy in arrangement of trains and 
 in the organization of the service. The railway's plant 
 and equipment can also be in more constant use, a 
 condition which is desirable because there is very little 
 more expense in having them constantly in use and so 
 earning something than in having them idle. For 
 exectly similar reasons the shipper can also conduct his 
 plant with greater economy, and it is desirable for the 
 public good that goods for consumption be produced as 
 cheaply as possible. A discrimination in favor of large 
 traffic, therefore, is desirable both for the railroad and 
 the shipper because it increases the profits of each; 
 and it is desirable to the public because it cheapens the 
 cost of production, making possible a lower price to 
 the consumer.^ 
 
 Such, in a modified form, is the line of argument in 
 the Nicholson case, where the English judges affirmed 
 the validity of a ten-year contract between a coal 
 company and a railroad, the latter agreeing to make 
 lower rates to the coal company in consideration of its 
 furnishing train-loads of coal, at stipulated intervals, 
 and in such quantities that the railroad would receive 
 
 ^^ Nicholson v. G. W. Ry. Co. (1858), 5 C. B. (N. S.) 336; 
 Carton v. B. and E. Ry. Co. (1859) 6 C. B. (N. S.), 639, 655; 
 C. C. C. and Ind. Ry. Co. v. Cosser et al. (1890), 126 Ind. 348; Root 
 V. Long Island R. R. Co. (1894), 114 N. Y., 300; Western Union 
 Tel. Co. V. Pub. Co. (1900), 181 U. S. 92; Savitz v. Ohio and Miss- 
 issippi R. R. Co., 150 111. 208.
 
 CHAPTER TWO 43 
 
 40,000 pounds sterling annually in gross earnings from 
 the traffic. The case has been cited with approval by 
 American courts in several instances, and, like the 
 argument from common law, always forms a part of 
 the argument for defendants in an action against 
 rebating. The case is especially important in view of 
 our illustration from the Standard Oil Company, 
 because almost the same reasoning is given by Gen. 
 Devereaux in an affidavit in which he explains why he, 
 as vice-president of the Lake Shore Railroad, reduced 
 the rate from Cleveland to New York from $2.00 a 
 barrel to $1.30, for the firm of Rockefeller, Flagler, 
 and Andrews, the fore-runner of the Standard. He 
 found that it ordinarily required 30 days for a feight 
 car to make the round trip from Cleveland to New York. 
 But on being guaranteed a solid train of 60 car-loads 
 of oil per day the time for the trip could be reduced to 
 10 days. Consequently, not so many cars would be 
 required and the investment for the company on this 
 business would be reduced from $900,000 to $300,000. 
 Because of these facts he gave them the lower rate; 
 since, as he says, "charges for transportation being 
 necessarily based upon actual cost of service ... to 
 refuse to give them the benefit of such reduction would 
 be to the detriment of the public, the consumers, who 
 in the end pay the transportation charges. "^^ 
 
 The argument then is essentially that a rebate in 
 favor of large traffic is justifiable because of a dimin- 
 ished cost of service. Now I do not deny that to base 
 
 "Tarbell, Hist, of the Standard Oil Co., Vol. 1, Appendi.x, 
 p. 277-79.
 
 44 MONOPOLY AND COMPETITION 
 
 the rates upon cost of service is a sound policy; but to 
 charge one large shipper a rate which allows a reason- 
 able profit upon cost of service while competitors are 
 charged as much as the trafiic will bear is inconsistent. 
 Besides, there may be cases in which the cost of service 
 is not a sound principle, especially if it tends to foster 
 a monopoly. Of this more hereafter. 
 
 The fallacy of the common law, which provided that 
 common carriers must make their charges reasonable 
 but not necessarily equal to all, was soon noticed when 
 railroads began to play an important part in the com- 
 mercial life of England. It was observed that a rail- 
 road necessarily had a monopoly of the traffic along 
 much of its line, and that, by making unequal charges 
 to different shippers, it could destroy competition 
 among them and give one shipper a monopoly of a 
 given business. On this account, statutes were passed 
 requiring carriers to charge equal rates on goods of the 
 same description and under the same circumstances. 
 This situation is well explained in an opinion handed 
 down in 1869 by the House of Lords through Mr. Jus- 
 tice Blackburn. 
 
 According to this opinion, if a party sought to show 
 that under the common law he was charged extortion- 
 ately by a railway, it was not enough to show that others 
 were charged less for the same services; for the com- 
 mon law allowed this and even permitted a carrier to 
 haul goods gratis for a favored individual. Such evi- 
 dence only tended to show his charge to be unreason- 
 able. But in the Railways Clauses Consolidation Act 
 of 1845 the Legislature was of the opinion that "the
 
 CHAPTER TWO 45 
 
 changed state of things arising from the general use of 
 the railways" made it expedient to impose an obligation 
 on them beyond what is required at common law, 
 namely, the}- might charge what they thought fit, but 
 one person not more than another, during the same 
 time and in the same circumstances. And when it was 
 sought to prove charges extortionate, there was this 
 proviso: " It is immaterial whether the charge is reason- 
 able or not, it is enough to show that the company 
 carried for some other person or class of persons at a 
 lower charge during the period throughout which the 
 party complaining was charged more under like cir- 
 cumstances."^'' 
 
 This decision, then, over-ruled the earlier ones which 
 permitted rate discrimination by railroads, and clearly 
 recognized that the principles and practices allowed to 
 small shop-keepers could not be allowed to the rail- 
 roads which, as common carriers, are obliged to charge 
 all alike under the same circumstances, for the same 
 services, during the same time; and if one person was 
 charged more than another, that was ipso facto proof 
 that the higher rate was extortionate. 
 
 It was not long until some of the judges in America 
 also perceived the injustice of permitting the railroads 
 to make discriminations in their rates and recognized 
 the distinction between private and public business. 
 Along this line is the noted opinion handed down by the 
 Supreme Court of New Jersey in 1873, in the case of 
 Messenger v. Pennsylvania R. R. Co. The plaintiffs 
 
 " Greal Western Ry. Co. v. Sultan, -1 L. R. Eng. and Irish A[)i)., 
 226, 239.
 
 46 MONOPOLY AND COMPETITION 
 
 had made an agreement with the railroad that they 
 should be given a rebate of 20 cents per hundred 
 pounds from Chicago and 10 cents from Pittsburgh on 
 live hogs shipped by them to Jersey City. Further, 
 if other parties, except seven named, should receive a 
 drawback for the same services, plaintiff's rate should 
 be 20 and 10 cents below such rates according as they 
 were from Chicago or Pittsburgh. This second condi- 
 tion was not complied with, wherefore plaintiff sued 
 to recover rebates as per contract. It will be noticed 
 that this agreement is substantially the same as the 
 rebating contract made by the South Improvement 
 Company with the same railroad, and is, therefore, 
 deserving of attention. The Court said: 
 
 "A merchant who can transport his wares to market 
 at less cost than his rivals, will soon acquire, by under- 
 selling them, a practical monopoly of the business. 
 . . . The tendency of such compacts is adverse to the 
 public welfare, which is materially dependent on com- 
 mercial competition and the absence of monopolies. 
 . . , ''The defendants are common carriers and it is 
 contended that bailees of that character cannot give 
 preference in the exercise of their calling. . . . Such 
 partiality is legitimate in private business, but how can 
 it square with the obligation of a public employment? 
 ... to permit the common carrier to charge various 
 prices according to the person with whom he deals, for 
 the same services, is to forget that he owes a duty to 
 the community. ... A company of this kind is 
 invested with important prerogative franchises, among 
 which are the rights to build and use a railway, and to
 
 CHAPTER TWO 47 
 
 charge and take tolls and fares. ... If they had 
 remained under the control of the state, it could not 
 be pretended, that in the exercise of them, it would 
 have been legitimate to favor one citizen at the expense 
 of another. ... In their very nature and constitu- 
 tion, as I view this question, the companies become, in 
 certain aspects, public agents, and the consequence is 
 they must, in the exercise of their callings, observe to 
 all men a perfect impartiality."^^ 
 
 In this case, it does not appear that the rebate was 
 granted because of an unusually large traffic. But the 
 danger of such discrimination was clearly perceived by 
 the federal court in Ohio, in Hays v. Pennsylvania Co., 
 which for America over-ruled the Nicholson case in 
 England. Plaintiff was discriminated against in rates 
 for carrying coal. Defendant had a scheme providing 
 a rebate varying from 30 to 70 cents per ton to compan- 
 ies or persons shipping 5,000 tons or more per year, the 
 amount of rebate varying with the quantity shipped. 
 The court said: "The discrimination complained of 
 rested solely on the amount of freight supplied by the 
 "respective shippers during the year. Ought a dis- 
 crimination resting exclusively on such a basis be sus- 
 tained? If so, then the business of the country is, in 
 some degree, subject to the will of the railroad officials; 
 for, if one man engaged in mining coal, and dependent 
 on the same railroad for transportation to the same 
 market, can obtain transportation thereof at from 25 
 to 50 cents per ton less than another competing with 
 him in business, solely on the ground that he is able to 
 " 36 N. J., 407, 409, 410, 412, 413, 414.
 
 48 MONOPOLY AND COMPETITION 
 
 furnish and does furnish the larger quantity for ship- 
 ment, the smaller operator will sooner or later be 
 forced to abandon the unequal contest and surrender 
 to his more opulent rival. If the principle is sound 
 in its application to rival parties engaged in mining 
 coal, it is equally appUcable to . . . everybody else 
 interested in any business requiring any considerable 
 amount of transportation by rail; and it follows that 
 the success of all such enterprises would depend as 
 much on the favor of railroad officials as upon the ener- 
 gies and capacities of the parties prosecuting the same. 
 "It is not difficult, with such a ruling, to forecast the 
 consequences. The men who control railroads would 
 be quick to appreciate the power with which such a 
 holding would invest them, and, it may be, not slow 
 to favor their friends to the detriment of their personal 
 or pohtical opponents, or demand a division of the 
 profits realized from such collateral pursuits as could 
 be favored or depressed by discrimination for or against 
 them; or else, seeing the augmented power of capital, 
 organize into overshadowing combinations and extin- 
 guish all petty competition, monopolize business, and 
 dictate the price of coal and every other commodity to 
 the consumers. . . . Capital needs no such extrane- 
 ous aids. It possesses inherent advantages which can- 
 not be taken from it. But it has no just claim, be- 
 cause of its accumulated strength, to demand the use 
 of the pubhc highways of the country constructed for 
 the common benefit of all, on more favorable terms than 
 are accorded to the humblest in the land ; and a discrim- 
 ination in favor of parties furnishing the largest quan-
 
 CHAPTER TWO 49 
 
 tity of freight, and solely on that ground, is a discrim- 
 ination in favor of capital, and is contrary to a sound 
 public policy, violative of that equality of right guar- 
 anteed to every citizen, and a wrong to the disfavored 
 party, for which the courts are competent to give 
 redress." ^^ 
 
 I have quoted the above opinions at some length, 
 because they are representative of the prevailing rul- 
 ings in the United States against railroad discrimina- 
 tions. A discrimination in rates is unlawful because 
 of public policy. The railroad company is created by 
 the state to perform one of its functions, and, as per- 
 forming such a function in the capacity of a public 
 agent, is obliged to treat all men with perfect imparti- 
 ality, because this is required to promote the good of 
 the state. The common good of the state is also 
 materially dependent upon the prevalence of competi- 
 tion and the absence of monopoly. Therefore, a rail- 
 road cannot make discriminations in its charges, 
 because this destroys competition and establishes mon- 
 opoly which can by its own power, and at its will, fix 
 the prices of commodities to consumers. 
 
 What is interesting in these decisions for and against 
 rate discrimination is the development of the concep- 
 tion that railroads come under the rule of pubhc law. 
 The early discussions in favor of discrimination apply 
 the old rules of private business and do not take 
 cognizance of new conditions caused by the introduction 
 
 " 12 Fed. 309, 313, 314; cf. also Louisville etc., R. R. Co. v. 
 Wilson, 132 Ind. 517. Griffin v. Goldsboro Water Co., 122 N. C, 
 206; Fitzgerald and Co.' v. Grand ^Trunk[R. R.
 
 50 MONOPOLY AND COMPETITION 
 
 of the railroad into the field of commerce. Psychologi- 
 cally, the old habits persist in the new situation without 
 an awareness of their inadequate functioning. Legally, 
 it is a firm adherence to the precedents governing the 
 case without a critical study of the facts. Such a pro- 
 cedure is quite natural until the inadequacy of the rules 
 of private business as applied to a pubhc carrier has 
 been made distinct by a study of results, namely, that 
 the application of private law to a public carrier results 
 in a destruction of healthy competition between ship- 
 pers, and in the reestablishment of a monopoly for the 
 favored shipper, the evil of which was made clear in 
 Hays V. Pennsylvania Co. After this result was forseen, 
 the application of private law was abandoned and the 
 conception developed that a railroad's business is pub- 
 lic in character and should therefore discharge its 
 duties impartially like the state itself. This procedure 
 is justified because it is in the interest of the public. 
 The judges developing this conception are not closely 
 governed by precedent but make a close study of the 
 facts of the situation to which their ruling is to apply. 
 Precedent failing them, they appeal to what they con- 
 sider the ultimate ground of law and the purpose for 
 which law exists, namely, the promotion of the com- 
 mon good or welfare or the public interest. It is the 
 judge who is constructing law that holds this situation 
 before him, and, in point of time, he usually comes 
 toward the close of a transition period, a stage of 
 conflict between old rules and new conditions. On the 
 other hand, the judge who comes at the beginning of 
 such a period of transition or conflict or who is in cir-
 
 CHAPTER TWO 51 
 
 cumstances where rules and situations happen to fit, 
 pays no attention to any such criterion but merely 
 studies precedent and gives his decision accordingly. 
 Psychologically, this is similar to the change from old 
 to new habits in an individual, the difference being that 
 laws are social habits instead of personal ones. It can- 
 not be doubted that these psychological and method- 
 ological differences between the judges giving these 
 opposite opinions are fundamental in the explanations 
 of their rulings, a point which will become more clear 
 in our study of court decisions on the competition 
 between manufacturers or producers. 
 
 Section III. How the Courts Developed a New Prin- 
 ciple for Testing the Fairness of Railroad Rates. 
 
 Having once established the view that railroads are 
 public service corporations, and, as such, are under 
 obligation to charge all shippers impartially, the courts 
 put upon themselves the necessity of constructing a 
 principle by which fair and impartial rates may be 
 determined. The growing character of law together 
 with the conflicts and differences incident to such 
 growth is clearly illustrated in the line of decisions 
 aiming to establish what constitutes a fair basis of 
 rate charges. These we shall accordingly review. 
 
 In Smith v. Ames the Supreme Court said: "What 
 the company is entitled to is a fair return upon the 
 value of the property which it employs for the public 
 convenience." With this proposition there has been 
 very general agreement from all sides. But there has 
 been very general disagreement as to what constitutes 
 "fair return" and "value."
 
 52 MONOPOLY AND COMPETITION 
 
 With reference to value there have been in the main 
 two theories, the one that value is determined by cost 
 and the other that it is determined by earning capacity. 
 The cost theory has taken two general forms: the first 
 that value is determined by what it cost originally to 
 make the article or plant; the second that value is 
 determined by what it costs to reproduce the article 
 or plant in its present condition, allowing both for 
 depreciation and appreciation. The emphasis has been 
 decidedly upon this second form, and as such, is used 
 by a number of public service commissions for determ- 
 ining the reasonableness of rate charges. There is, 
 however, some judicial authority in favor of the earn- 
 ing capacity theory, and it will be 'best to review this 
 first. 
 
 In Chicago, Milwaukee, 6° St. Paul v. Minnesota^^ 
 the Supreme Court said: "If the company is deprived 
 of the power of charging reasonable rates for the use 
 of its property, it is deprived of the lawful use of its 
 property, and thus in substance of the property itself," 
 recognizing that a property must have some earning 
 capacity in order to have any value at all. This prin- 
 ciple was reafhrmed in Cleveland and Railway Co. v. 
 Backus,^'^ which was a taxation case. In this the Court 
 said that the value of a property results from its use 
 and that outside of its use it has no pecuniary value. 
 "Take for an illustration," explained the Court, 
 "property whose sole use is for purposes of interstate 
 commerce, such as a bridge across the Ohio, between 
 
 " 134 U. S. 458. 
 
 «" 154 U. S. 445, 446.
 
 CHAPTER TWO 53 
 
 the states of Ohio and Kentucky. From that springs 
 its entire value. . . . Suppose that there be two 
 bridges across the Ohio, one between Cincinnati and 
 Newport, and another twenty miles below where there 
 is nothing but a small village on either shore. The 
 value of the one will manifestly be greater than that 
 of the other." In San Diego Land and Town Co. v. 
 Jasper^^ it was said that original cost does not determine 
 value. On the contrary, a plant has an actual value," 
 which the Court said, "depends upon a variety of con- 
 siderations, among them, the actual and prospective 
 number of customers." 
 
 Although the phrase, earning capacity, does not occur 
 in these quotations, yet it is clearly implied; for "use," 
 "rates," "number of customers," etc., are the deter- 
 minants of earnings, and upon these, it is said value 
 depends. No one would deny that earnings are a fac- 
 tor in determining value, at least market or sale value. 
 If a corporation could not earn anything, it would be 
 worth nothing at all. Our present problem, however, 
 is not how earnings determine value, but how much a 
 company may fairly earn and by what tests we can tell 
 whether or not a given earning is fair. If we intend 
 to fix a capitalization upon which to base and calculate 
 a fair earning, it is clear that we cannot use earning as 
 the basis of our capitalization, for this would be moving 
 in a circle. This difficulty was noticed by Judge 
 Thayer in ColUngs v. Kansas City Stockyards Co.^^ He 
 said that income cannot be accepted as the test of the 
 
 «' 110 Fed. 714. 
 •2 82 Fed. 854.
 
 54 MONOPOLY AND COMPETITION 
 
 value of a property affected with a public use because 
 the owner may have made excessive charges for its use. 
 Nor can the amount of capitalization be made a test 
 "because the stock may not represent money actually 
 invested, and, furthermore, because the property may 
 have been capitalized with reference to its income 
 producing capacity." 
 
 It is because of the reasons mentioned by Judge 
 Thayer that most of the cases upon valuation have cen- 
 tered about the cost theory. But even in determining 
 value apart from earnings there are many elements to 
 be considered. For example, in Smith v. Ames, the 
 Supreme Court said: . . . "the basis of all calcula- 
 tions as to the reasonableness of rates must be the fair 
 value of the property used for the convenience of the 
 public. And in order to ascertain that value, the 
 original cost of construction, the amount expended in 
 permanent improvements, the amount and market 
 value of its bonds and stocks, the present as compared 
 with the original cost of construction, the probable earn- 
 ing capacity of the property under particular rates 
 prescribed by statue, and the sum required to meet 
 operating expenses are all matters for consideration."®^ 
 
 The items mentioned here all undoubtedly enter into 
 market value, but upon reflection, it at once becomes 
 clear that they cannot all enter into the "fair value" 
 which is to be a basis for rate charges, for they include 
 both cost items and income items. Income depends 
 upon rate charges, and where the fairness of income and 
 rates is in question, it is again moving in a circle to 
 « 169 U. S. 547.
 
 CHAPTER TWO 55 
 
 capitalize the income and then calculate the income 
 and base the rates upon this capitalization. 
 
 Later decisions of the Supreme Court have made the 
 "fair value" that is to be the basis of rate charges more 
 specific. In San Diego Land and Town Co. v. National 
 Ciiy,^* the Court said that the value of the property, 
 meaning principally the tangible assets, was to be taken 
 "at the time it is being used for the public," and this 
 as against the original cost or amount of bonds both 
 of which may have been excessive. This opinion was 
 reaffirmed by Justice Holmes in San Diego Land ajid 
 Town Co. V. Jasper and again by Justice Peckham in 
 Stanislaus v. San Joaquin C. dr I. Co.^^ But the 
 clearest opinion along this line was by Judge Hough in 
 the Consolidated Gas case. He said, "In every in- 
 stance, however, the value assigned in the report is 
 what it would cost to reproduce each item of property, 
 in its present condition, and capable of giving service, 
 neither better or worse than it now does. . . . 
 
 "Upon authority, I consider this method of valua- 
 tion correct." Then referring to the cases cited above 
 he continues: "It is impossible to observe this con- 
 tinued use of the present tense in these decisions of the 
 highest court without feeling that the actual or repro- 
 ductive value at the time of the inquiry is the first and 
 most important figure to be ascertained. . . . Upon 
 reason it seems clear that in solving this equation, the 
 plus and minus quantities should be equally considered, 
 and appreciation and depreciation treated alike. "^^ 
 
 « 174 U. S. 757. 
 M 189 U. S. 442. 
 « 157 Fed. 855.
 
 56 MONOPOLY AND COMPETITION 
 
 When this case was appealed to the Supreme Court 
 under the title of Wilcox v. Consolidated Gas Co.,^'' 
 Justice Peckham, who delivered the opinion, concurred 
 with the lower court upon the method of valuation and 
 said further: "If the property which enters legally into 
 the consideration of the question of rates has increased 
 in value, since it was acquired, the company is entitled 
 to the benefit of such increase. This at any rate is 
 the general rule." 
 
 Cost of reproduction in present condition, allowing 
 both for appreciation and depreciation, is thus, accord- 
 ing to the courts, the proper basis for determining the 
 reasonableness of rates, in case of a public service cor- 
 poration. It is not original cost, for the plant may 
 not have been economically constructed; nor income, 
 for this may be the product of unreasonable rate 
 charges; nor is it capitalization, for this may not 
 represent money actually invested or it may be used 
 on unreasonable rate charges. 
 
 Valuation, as thus determined, has reference chiefly 
 to the physical properties used for the public conven- 
 ience, such as real estate, plant, equipment, working 
 capital, etc., the so-called tangible assets. This valua- 
 tion, while correct in most items, yet appears open to 
 question upon the unearned increment in land. There 
 are several reasons why the allowance of this to a public 
 service corporation is inadvisable. It is well known 
 that land in a growing city or country increases in value 
 whether or not the owner makes improvements upon 
 it. It cannot be denied that hope of enjoying this 
 " 212 U. S. 52.
 
 CHAPTER TWO 57 
 
 increase has, in many cases, been a stimulus to owners 
 for making improvements and it also has been an 
 inducement to pioneers in settling and building up a 
 new country. In such cases, however, the "unearned 
 increment" can hardly be said to be unearned. But 
 whatever may be the justness of allowing the unearned 
 increment in land to private individuals, the case is 
 different with public service corporations; for here the 
 incentive to business is profit -from volume of traffic. 
 Besides, a public service corporation is chartered by 
 the state to perform a particular function, and because 
 of this, it has the right of eminent domain to locate its 
 properties where it chooses. It can, therefore, select 
 those places where land is apt to rise most rapidly in 
 value. If it fails to select them upon its first right-of- 
 way, it can do so later. A private individual, however 
 once having purchased land cannot move his property 
 to a more favorable location nor can he dispossess the 
 owners whose land is apt to increase most rapidly in 
 value. This is possible, however, to a public service 
 corporation, and its primary object in doing so may be 
 to enjoy the unearned increment. If so, the unearned 
 increment is an incentive to an abuse of privilege rather 
 than for making improvements. For this reason its 
 enjoyment is properly denied to a public service com- 
 pany. The company can, of course, argue that it is a 
 producer of the increase in land value, but to this it is 
 sufficient to reply that whatever it contributes to the 
 material development of a community, it fully regains 
 in the subsequent increase in the volume of traffic or 
 business. No one would deny that if a corporation
 
 58 MONOPOLY AND COMPETITION 
 
 pays for real estate, it should be allowed to make this 
 cost a part of its capitalization; but this is no reason to 
 allow it to enjoy the unearned increment. 
 
 In addition to admitting into the capitalization the 
 tangible assets, the courts, in some cases, have recog- 
 nized many so-called intangible assets, such as favor- 
 able location, good will, good management, going 
 value, and franchise. But none of these have been 
 admitted by the Supreme Court as permanently allow- 
 able elements in the valuation that is to be the basis for 
 determining rates; and with reason, for the value of 
 these elements depends upon the earning capacity of 
 the plant. If, therefore, any allowance should be made 
 for them, it can be done more equitably in the rate of 
 profit than in the valuation upon which profits are calcu- 
 lated. In this way we avoid the circle of capitahzing 
 profits or earnings and then testing the fairness of 
 earnings by this capitalization. 
 
 Location,*^^ for example, has value only in so far as 
 it affects earnings. A railroad which has accessible 
 terminals in the chief centers of distribution, many con- 
 nections, and many enterprises along its lines will have 
 far greater earnings than one that is connected prin- 
 cipally with small and thriftless towns, although the 
 cost of reproduction of either one would be the same. 
 Such a circumstance, if it is the result of choice and 
 good management, may possibly be an allowable excuse 
 for larger profits. But to capitalize these profits and then 
 argue that the rate of profit is no more than the ordinary 
 rate of interest upon the capitalization is to test the 
 
 " 90 Fed. 687; 91 C. C. Rep. 402; 113 Pac. 681.
 
 CHAPTER TWO 59 
 
 fairness of earnings by themselves. If the capitaliza- 
 tion is to be a criterion of fair earnings, it is clear that 
 such a feat is impossible. 
 
 The same reasoning applies to good will,'''' which has 
 been defined by Lord Eldon as " nothing more than the 
 probability that old customers will resort to the old 
 place." This implies choice as to whom the con- 
 sumer shall give his custom and can therefore exist only 
 in a competitive business. In a monopoly, however, 
 the old customer must resort to the old place or else 
 do without the monopolist's goods. For this reason 
 the Supreme Court in the Consolidated Gas''^ case admit- 
 ted that a monopoly cannot have any good will and 
 can neither capitalize it nor make it an excuse for 
 increased profits. 
 
 Allowance for favorable location was admitted in 
 Metropolitan l^ust Co. v. Houston, etc.,^^ as part of 
 the capitalization upon which the railroad is entitled 
 to earn a return. The judge argued that because 
 the road in question ran through the most populous 
 and growing part of the state and was put there by 
 judicious selection, it had established a business which 
 could not be disregarded in estimating the value of 
 the road either as a business property and venture 
 of the road either as a business property and venture 
 or as a property having a quasi-public nature. In 
 
 •' Lord Eldon, Words and Phrases. 
 
 '"Consolidated Gas case, 157 Fed. 872; idem, 212 U. S. 52; 
 see also Cedar Gas Light Co. v. City of Cedar Rapids, 120 N. W. 
 Rep. 969; supra, 90 Fed. 687. 
 
 "90 Fed. 687-8.
 
 60 MONOPOLY AND COMPETITION 
 
 re-proposed advances in freight rates, '''^ the Interstate 
 Commerce Commission said that the value of a raihvay 
 system is principally a matter of location, terminal 
 facilities, connections, and enterprises long the line, 
 and that allowance should be made for the ability and 
 foresight that worked out and perfected the system. 
 The element of location, if it is a matter of judicious 
 relation and foresight, may be a reasonable ground for 
 increased profits, but to capitalize these profits and 
 then argue that the rate of profit is fair because it is no 
 higher than the ordinary rate of interest upon the 
 capitalization, is again testing the fairness of earn- 
 ings by themselves. 
 
 This reasoning applies in the same way to good 
 management.'^ The success or failure of a business 
 often turns upon good management. As before inti- 
 mated, the location of a railway with reference to ter- 
 minals, connections, and enterprises may be the result 
 of this art. On the other hand, if a railway is efficiently 
 managed, running its trains regularly and delivering 
 all its goods promptly, enterprises may choose to locate 
 along its lines on this account and so increase its busi- 
 ness. This is none the less true of a monopoly than of 
 a competitive business. Again, a good manager often 
 impresses his art upon the property and business so 
 that it continues to live long after him, and as a conse- 
 quence, the business is always prosperous. If, on the 
 contrary, a railroad has poor managers during its early 
 history, it may be generations before it can overcome 
 
 ^2 9 I. C. C. 402. 
 
 " See 1 13 Pac. 68 1 ; 59 At. 540.
 
 CHAPTER TWO 61 
 
 the bad effects of the same. Because of the importance 
 of good management it is both in the interest of the 
 railway and the community to have talent along this 
 line developed as much as possible, and some reward 
 ought to be offered to stimulate it. Tf, however, we 
 allow good management to be capitalized, not only 
 would all the stockholders share in it alike whether or 
 not they contribute anything to the management but 
 we should also fall into the vicious circle descr bed 
 above, i. e., we should be capitalizing earnings. But if 
 the fairness of the earning is in question, we cannot 
 capitalize earnings at the ordinary rate of interest, and 
 then turn around and argue that earnings are fair, 
 because they will yield an ordinary rate of interest 
 upon the capitalization. Like location, good manage- 
 ment is therefore best provided for either in the rate 
 of profit or in the way of an increased salary. 
 
 Good will having been excluded from the capitaliza- 
 tion of a monopoly, many corporations have tried to 
 find a substitute in "going value" by which ^^ is under- 
 stood that value a plant possesses in virtue of its being 
 a live one, operating and earning, instead of a dead one 
 only capable of earning. It has been admitted by 
 some courts as a proper element in determining market 
 or sale value but the Supreme Court has not allowed 
 it to be made a part of the capitalization for determin- 
 ing rates. For example, in National Water-works Co. 
 V. Kansas City, which was a case to determine the sale 
 value of a water plant. Justice Brewer said: "The fact 
 that it (the water plant) is a system in operation, not 
 " 120 N. W. Rep. 969; 113 Pac. 681.
 
 62 MONOPOLY AND COMPETITION 
 
 only with a capacity to supply the city, but actually 
 supplying many buildings in the city — not only with 
 a capacity to earn but actually earning — makes it 
 true that " the fair and equitable value" is something in 
 excess of the cost of reproduction. ^^ This opinion was 
 afi&rmed by the Supreme Court in Omaha v. Omaha 
 Water Co.,""^ which was also a case for determining the 
 sale value of a water plant. But the court took care 
 to add: "No such question was considered in Knoxville 
 V. Knoxville Water Co., 212U. S. 1, or in Wilcox v. Con- 
 solidated Gas Co., 212U. S. 19. Both cases were rate 
 cases and did not concern the ascertainment of value 
 under contracts of sale," thus carefully distinguishing 
 between "going value" as an allowable element of market 
 value and as an unallowable element of a capitalization 
 that is to be the basis for rate charges. If the court 
 would not make this distinction, we should again be 
 allowing an opening for "watered stock," permit the 
 capitalization of earnings, and so defeat our criterion 
 for determining a fair earning. But "going value" as 
 an element of market or sale value seems fair, for the 
 earnings of a plant already in operation are more cer- 
 tain than the earnings of one that has not been tried. 
 A buyer would be willing to allow something for this 
 greater security. To put a new plant into operation 
 would require time, some changes and repairs would 
 probably have to be made, the construction might be 
 faulty and require adjustment, etc. — these elements, 
 
 « 62 Fed. 865; also affirmed in 17 Mass. 865, and in 76 Conn. 
 565. 
 
 7«218U. S. 203.
 
 CHAPTER TWO 63 
 
 for the first year at any rate, would lessen gross earnings 
 and increase operating expenses so that the market 
 value, which is largely dependent upon earnings, would 
 be appreciably less than of a plant having an equal 
 reproductive cost but already earning and operating. 
 For this reason, "going value" is allowable in a case of 
 sale; but to make both it and the small earnings of 
 the first year a part of the capitalization is again 
 allowing an opening for "water" and introducing the 
 circle of capitalizing earnings at the ordinary rate of 
 profit and then arguing that the profits are fair because 
 they are no more than the ordinary rate of profit upon 
 the capitalization. 
 
 The biggest loophole, however, to public service 
 corporations for watered capitalizations has been in 
 the matter of franchises. As to the legality of capit- 
 alizing franchises there are confused opinions. One of 
 the most recent and skillfully reasoned cases along 
 this line is that by Judge Hough in the Consolidated 
 Gas case cited above. Along one line of unusually 
 sound reasoning based upon facts and good economics 
 he reaches the conclusion that a franchise is not a pro- 
 ductive factor in earning wealth and is not entitled to 
 a return. But then he turns around, saying that it is 
 his duty as a judge to follow previous decisions, and 
 upon an equally learned line of reasoning of these cases 
 he finds that a franchise is productive property, and so 
 productive that, in this case, it is worth $12,000,000, 
 which amount should be added to the capital account 
 from which a fair return may be lawfully demanded. 
 This two-fold conclusion is well worth examining.
 
 64 MONOPOLY AND COMPETITION 
 
 Reasoning to the first conclusion, tlie judge says the 
 claim to demand a return not only upon tangible assets 
 but also upon the franchise, the right under which the 
 plant operates, is, as an original proposition, unsound. 
 Return can only be expected from an investment, and 
 he that invests must part with something. He that 
 hath not sown shall not reap. The complainant did not 
 invest in the franchise because it did not pay for it. 
 The investment was not made in the franchise but 
 under it and in faith thereof. A franchise has no 
 value in itself, no inherent value, and its asserted value 
 is only a duplication of the value of the tangible pro- 
 perty operating under it. Such things as land, money, 
 and chattels, when combined with industry and intelli- 
 gence, may be made productive. But a franchise is 
 non-productive. When it is combined with the above 
 productive qualities, their earning capacity is no greater 
 than before; for the franchise has added no productive 
 power to the reality or personality; it has but author- 
 ized their emplo}'Tnent in a particular way and pro- 
 tected the owners while so employing them. 
 
 "On every private sale of franchise property, the 
 price paid," the judge says, "is so much money lost to 
 official incompetence or worse, and such sale can confer 
 on the vendee no right to compel the consumer to 
 repay him a price which should have been paid to the 
 State. For these reasons I believe that on principle a 
 franchise should be held to have no value except that 
 arising from its use as a shield to protect those invest- 
 ing their property upon the faith thereof, and that, 
 considered alone and apart from the property which
 
 CHAPTER TWO 65 
 
 it renders fruitful, it possesses no more economic value 
 for the investor than does an actual shield possess 
 fighting value, apart from the soldier who bears it."^^ 
 
 At this point the argument changes to the legal side 
 wherein the judge continues: "It is familiar doctrine 
 that private citizens may acquire vested property- 
 rights through a series of even erroneous decisions; 
 rights so firmly vested that it becomes unconstitutional 
 for the court which persisted in error to suddenly rec- 
 tify its mistakes to the detriment of those who had 
 securely rested upon the decisions sought to be invali- 
 dated. In this case I am compelled to the conclusion 
 that it is necessary to allow the discoverable value of 
 complainants' franchise as a part of that capital upon 
 which a fair return must be allowed, because to refuse 
 would disregard views expressed by higher courts 
 regarding the general nature of franchises and regu- 
 lation of proceedings." 
 
 It is thus because of "views expressed by higher 
 courts" that franchises are valuable. And because of 
 this the judge, after reviewing a long line of cases, 
 feels himself compelled to consider franchises "not only 
 as property but as productive and inherently valuable 
 property." Therefore, he finds the franchise in this 
 case to be worth $12,000,000 which he adds to the 
 capital account upon which complainant is allowed to 
 charge rates so as to yield a profit of sL\ per cent. 
 
 Hence the argument is essentially that "upon prin- 
 ciple" the franchise is non-productive, has no economic 
 value, and should therefore not be allowed to yield a 
 " 157 Fed. 873-4.
 
 66 MONOPOLY AND COMPETITION 
 
 return; but upon law, "erroneous decisions," and in 
 order not so "suddenly to rectify" previous mistakes 
 which investors had considered valid, the "franchise is 
 productive and inherently valuable property." 
 
 The argument upon law seems to have so much right 
 that, where the courts and legislatures have made mis- 
 takes and the people have taken the decisions as valid 
 and built a definite commerce upon them, they should 
 not rectify these too suddenly but bring about the 
 correction gradually so as to give the people time to 
 make the necessary readjustments without too serious 
 losses. Now it appears that the Consolidated Gas 
 Company had at one time capitalized, under the legal 
 sanction of the State, its franchises to the amount of 
 about $7,000,000. But Judge Hough increased this to 
 $12,000,000, his argument being that the intangible 
 assets may be taken as increasing in the same propor- 
 tion as the real estate or tangible assets. This cer- 
 tainly is following the policy of not "suddenly to rectify 
 mistakes"; but one fails to see why a retaining of the 
 old capitalization would not have been a better step 
 towards a correction of them. 
 
 To us Judge Hough's argument "upon principle" 
 seems wholly conclusive. A franchise is not a factor 
 in production. When combined with land, capital, and 
 good managerial ability, it adds nothing to their econ- 
 omic products. It is simply a license to certain indi- 
 viduals for carrying on a public business under specific 
 conditions, conferring upon the grantee the protection 
 of the law, and, in case of municipal public service 
 companies, its protection against injury and loss by
 
 CHAPTER TWO 67 
 
 competition, giving them the power of monopoly in their 
 special locations. Because it is a license from the 
 State to perform a public function, it should not be 
 made a subject of commerce; for this is allowing pri- 
 vate individuals to confer public rights and privileges. 
 This is politically objectionable, for a private individ- 
 ual may not select a person that is acceptable to the 
 State. Besides, in a democracy the people have 
 reserved in their sovereign the right of conferring public 
 rights and privileges. If the sovereign confers this 
 power upon private individuals without his subjects' 
 consent, it is a violation of his trust and appears quite 
 as dangerous as it would be to allow a license to marry 
 to be made a subject of commerce, or for a mayor of a 
 city to sell his office to one of his friends. 
 
 In addition to the political objections to making a 
 franchise a subject of commerce, there are objections 
 of common sense. A public business is usually profit- 
 able, especially when it is a monopoly. To have the 
 State pay a public servant for the privilege of licensing 
 him to carry on a profitable business is contrary to 
 good business sense. In private business, if one indi- 
 vidual confers upon another the privilege of conducting 
 a profitable business, the grantee must pay for it, usu- 
 ally in the form of rent. If the grantee should get his 
 privilege free, he would have good reason to be grate- 
 ful and it is unlikely that he would ask the grantor to 
 pay him for the privilege of giving him gifts. There 
 is no reason why democracies and their officers should 
 not exercise as much common sense as the average 
 man in ])rivate business. If they should do so, we
 
 68 MONOPOLY AND COMPETITION 
 
 would have no more merchandizing in franchises. In- 
 stead of having the State pay the pubHc servant for 
 the privilege of giving him gifts, we should have the 
 payments made in the other direction; and I believe 
 we should find many business men willing to pay for a 
 Ucense to carry on a profitable business, especially 
 when it is a monopoly and so is protected against 
 injury and loss by competition. 
 
 When the Supreme Court heard the Consolidated 
 Gas case, it apparently appreciated the force of Judge 
 Hough's argument upon principle. It reduced the 
 value of the franchise to its former capitalization of 
 $7,000,000, and allowed this to be added to the capital 
 account as a special case, since the State had permitted 
 this capitalization and could not therefore take it back 
 again. It must bear the consequences of its own mis- 
 takes. That the franchise had a capital value solely 
 on this account is evident from the reasoning of the 
 court. Aside from such circumstances, we may take it 
 for granted that the Supreme Court recognizes no 
 capital value for franchises. And it is worth while 
 mentioning that in a very recent case, January 1911, 
 before the Supreme Court of California, that for fran- 
 chises and also "going value" to have capital value it 
 was ruled that it is necessary "to furnish data showing 
 that these elements had a distinct independent, pro- 
 ductive value, before such value could be included." 
 It is scarcely necessary to say that these data were not 
 furnished. Thus, finally, we have a court basing value 
 upon principle, expressing no regard for the precedent 
 of erroneous decision.
 
 CHAPTER TWO 69 
 
 The ruling, or at least the tendency, of the courts is, 
 then, to recognize that only that which has distinct 
 productive value can be included in the capital account 
 upon which a fair return may be lawfully expected. 
 Capital must represent some tangible investment, and 
 in investing the investor must part with something, 
 either money or money's worth. Such items as loca- 
 tion, good will, going value, and good management 
 have value only in so far as they affect earnings and, 
 as such, are justly included in the market or sale value 
 of a business or provided for in the rate of profit, but 
 are not included in the basic valuation by which the 
 reasonableness of rates are to be determined. Good 
 will exists only in a competitive business, and a fran- 
 chise should have neither market nor capital value, but 
 is the peculiar right of the sovereign who is entitled to 
 all its benefits beyond a fair wage to the public servant. 
 
 Section IV. How the Courts have Determined a Fair 
 Profit. 
 
 What constitutes a fair return is more difficult than 
 what is a fair capitalization upon which to base that 
 return. Upon this point the courts have ruled that it 
 should depend upon the degree of risk; that a business 
 is entitled to a larger return than a mere investment, 
 such as in government bonds, because of the greater 
 risk; that the rate of return upon any one business 
 should be determined by what investors usually expect 
 and receive in other businesses in the same locality 
 involving an equal amount of risk.^^ And six per cent 
 '» Consolidated Gas Company v. City of New York, 157 Fed. 871 ; 
 B/c^., 212 U.S., p. 49.
 
 70 MONOPOLY AND COMPETITION 
 
 has been considered a fair return for a public service 
 corporation in New York. 
 
 The objection might be made that if all our railroads 
 had been limited to this rate of return, not a single 
 railroad could have been built in the United States; 
 that originally railroad securities were a doubtful invest- 
 ment and that, therefore, bonds for construction had to 
 be sold at a large discount, and besides much bonus 
 stock had to be given; that a railroad requires several 
 years to build and several years more to secure a regular 
 and permanent trade; that during these years interest 
 must be paid on bonds; but it cannot be paid out of 
 earnings, since there are none, and must therefore be 
 paid out of the capital axcount; that because of these 
 reasons usually not more than two-thirds of the par 
 value of the bonds goes into actual construction; and 
 that the constitutional return upon the physical val- 
 uation of the railroad's property ignores all these pre- 
 liminary expenses without which a railroad cannot be 
 built. '''■' To this it need only be replied that cost of re- 
 production by no means necessarily includes such con- 
 siderations, and to say what is a fair return for an estab- 
 lished monopolistic business is not the same as saying 
 what is a fair return for a new untried business. As the 
 Supreme Court has said, the rate of return should be 
 proportional to the degree of risk or safety, which 
 implies that a new business should be allowed sufficient 
 inducement to attract the necessary capital. But to 
 allow original preliminary expenses and risk to be made 
 a permanent charge upon the capital, no matter how 
 " See Railroad Age Gazelle, June, 1908, p. v36vS.
 
 CHAPTER TWO 71 
 
 safe it becomes, is unnecessary. The railway pion- 
 eers should be rewarded for their ventures and losses; 
 but that all future generation should be made to pay 
 for these risk strikes are as an undue demand upon 
 their gratitude. For such losses and ventures, a com- 
 paratively large return for the first few years might be 
 allowed, but after that it could be limited to what the 
 public regards as a fair return upon the invested capital. 
 
 Section V. Factors Determining the Development of 
 Judicial Opinions upon Rate Charges and the Relation 
 of these Opinions to the Charging-what-the-trqffic-will- 
 bear and Cost-of -service Principles. 
 
 While the above line of cases for the determination 
 of a fair basis upon which a fair rate may be calculated 
 is not free from criticism, no one can read them and 
 deny that they do not represent a sincere effort to meet 
 the demands of the situation and solve the obligations 
 and problems put upon them by considering railroads as 
 coming under public law. In the beginning, although 
 it was agreed that a railroad is entitled to a fair return 
 upon the value of the property used for the public 
 convenience, there was a division as to what consti- 
 tutes either a fair return or value. But since the 
 fairness of the earning was in question, it became 
 clear that this could not be tested by the value of the 
 property if this value itself was determined by the 
 earning, and, for this reason, it was agreed that value 
 was determined by cost of reproduction. The fair- 
 ness of earnings was not settled by any definite prin- 
 ciple except local custom. These rulings are not
 
 72 MONOPOLY AND COMPETITION 
 
 determined by precedent or by what had been for- 
 bidden or enjoined in the past but rather by the facts 
 of the immediate situation. They show clearly that 
 there is no such thing as the Law, fixed, unchange- 
 able, and eternal, governing the case; but, on the con- 
 trary, the law is something flexible, growing, and 
 adaptible to immediate and practical conditions. Of 
 course, there are general rules governing all these cases, 
 and the most fundamental of these is that railroads are 
 public servants, and the aim of these cases is to find 
 out what is a fair wage for them as public servants. 
 But this general law is itself flexible and allows differ- 
 ent specific laws for different specific situations. 
 
 I have quoted rulings not fully in agreement with 
 the above remarks. The ruling of Judge Hough on 
 franchise is an instance. This opinion represents the 
 conflict between precedent and fact in the mind of an 
 individual judge, a conflict which is usually repre- 
 sented by different individuals. On the one hand, 
 Hough is constrained to follow law and precedent, 
 even the precedent of erroneous decisions. On the 
 other hand, he is constrained to foUow principle and 
 fact. In so far as he follows the former, he is merely 
 making additions to erroneous decisions and creating 
 confusion in the situation with which he is dealing. 
 In so far as he follows principle and fact, he reaches a 
 conclusion which is new, constructive, and in the inter- 
 est of the public. The opinion shows clearly on which 
 side progress and construction is made. 
 
 Put in a general form what the decisions viewing the 
 railroads as governed by public law come to, is that
 
 CHAPTER TWO 73 
 
 the fairness of rate charges is determined by cost of 
 service. On the other hand, those defending rate dis- 
 criminations and viewing the railroad business as pri- 
 vate, argue in agreement with the principle that 
 charging what the traffic will bear gives a fair rate. 
 What I wish to make clear on the one hand, is the 
 necessity of charging what the traffic will bear in a com- 
 petitive business, and, on the other hand, the equal 
 necessity of the cost-of-service principle in a monopo- 
 listic and public business. Each principle functions 
 satisfactorily in its proper situation. If carriers are 
 in free and open competition, it is supposed in theory, 
 as well as in practice, that each of them will make 
 the rate the lowest possible in order to get the largest 
 possible volume of business. That is, each carrier, 
 because of the force of competition, will make the 
 rate as low as the cost of service profitably allows. 
 But, if a carrier has a monopoly, then, charging all 
 that the traffic will bear, becomes a principle of 
 extortion. Before a consumer will do without shoes 
 or a coat or bread, he will pay the highest rate his 
 earnings will bear, and, under these conditions, the 
 carrier has power to extort most of his earnings that 
 are not necessary for a living. That is, he has the 
 power to reduce the consumer to a condition of servi- 
 tude. A principle allowing such a result would be 
 condemned as not functioning satisfactorily, at least 
 not to the satisfaction of the public. In a monopoly, 
 then, the old rule of competition is a failure, and the 
 question is how much should the traffic fairly bear, a 
 question which cannot be answered except by reference
 
 74 MONOPOLY AND COMPETITION 
 
 to the cost of service, because the check of competition 
 has been removed. It is for this reason that recent 
 decisions have approved the cost-of-service principle. 
 The early decisions that applied the common law to 
 the public carrier made the common mistake of apply- 
 ing old rules to changed conditions that required new 
 rules.
 
 CHAPTER III 
 
 The Change from Private to Public Morals with 
 Large Industrial Combinations 
 
 Section I. The Effect of the Adoption oj the Methods 
 and Practices of Private and Competitive Business by 
 Large Industrial Corporations. 
 
 In Chapter I, we pointed out the result of carriers 
 bargaining privately with combinations and of adopt- 
 ing a principle of charging what the traffic will bear, 
 which is the competitive principle of charging all you 
 can get as applied to transportation. In this chapter 
 I shall take up this principle as applied to the sale of 
 commodities and show the results of it when adopted 
 by combinations and applied in a way that is common 
 between individual traders in competition. It must 
 be remembered that this principle means low prices at 
 competitive points and high prices at noncompetitive 
 points through which the losses on the former are 
 recouped. This system of charging is local discrim- 
 ination when adopted by a single individual or com- 
 bination. As adopted by combinations, it has been 
 an important cause of monopoly, although this is little 
 understood by the public. It will, however be made 
 clear by telling what the practice has meant to the two 
 monopolies recently ruled upon by the Supreme Court, 
 viz., the American Tobacco and Standard Oil monop- 
 olies.
 
 76 MONOPOLY AND COMPETITION 
 
 An illustration of one of the methods of the American 
 Tobacco Company for killing competition is supplied by 
 the story of its fight against the NashviUe Tobacco 
 Works. The latter company had been doing a pros- 
 perous business for about fifteen years. Its leading 
 brand was a 3 by 12 dark plug called "Old Statesman." 
 Against this, the American Tobacco Company put out 
 another dark plug, of the same size, weight, and 
 quality, called "Bulls Head." Old Statesman sold 
 regularly for 39 cents a pound, but by a scheme of dis- 
 count Bulls Head sold for 16 cents a pound, a price 
 below cost of manufacture. The business of the Nash- 
 ville company soon began falling off; and by the end of 
 18 months, its owners became convinced that they 
 must either sell or lose aU. Accordingly, their plant 
 was secretly sold to the American Tobacco Company.^ 
 
 This was a common mode of procedure for the Ameri- 
 can Tobacco Company, which could well afford to sell 
 one of its brands below cost in a competitive territory, 
 for in numerous other places it had a monopoly which 
 more than offset the loss. But the competitor, being 
 confined to a comparatively narrow territory, could not 
 recoup himself in this manner and so had to give up, 
 even though he could manufacture just as cheaply 
 as his conqueror. 
 
 The American Tobacco Company defended this 
 scheme by pleading that it carried on its business in its 
 own way without reference to competitors. Their 
 destruction was only incidental. What the consumer 
 wanted was not the tobacco but the brand. However, 
 ' Puryear, IV, 165-181.
 
 CHAPTER THREE 77 
 
 to introduce a new brand, it had to be sold at low 
 prices. If the American Tobacco Company occa- 
 sionally sold at low prices, it was merely to get a new 
 brand on the market. However, one may interpret the 
 defense of the scheme, it cannot be denied that its 
 objective effect was the killing of competition and the 
 establishment of a monopoly. 
 
 But possibly the clearest illustration of local price- 
 cutting, is found in the history of the Standard Oil 
 Company. In the previous chapters, I described 
 briefly how the Standard gained its monopoly largely 
 through advantages in transportation. But, after its 
 monopoly had been established, local price-cutting was 
 the principal method of maintaining it. 
 
 In the footnote below I present a table showing the 
 price of Standard Oil in each of the states, and the 
 lowest prices in each as taken from the United States 
 Report on the Petroleum Industry, 1907. It will be 
 seen that the price of oil is 7.7 cents per gallon in 
 Deleware, 8.5 cents in Ohio, 8.7 cents in Pennsylvania, 
 and 8.9 cents in Connecticut; but 14 cents in Oklahoma, 
 15.7 cents in Washington, 16.4 cents in Nevada, and 
 16.6 in Colorado. Here the low and high prices are in 
 widely separated geographical points. But the conspic- 
 uous differences are also found within the same state. 
 For example, in Massachusetts the price is 7.4 cents at 
 Blackstone and 10.9 cents at Plymouth; in Louisiana 
 7 cents at New Orleans and 15.5 cents at Payne; and, 
 in New Mexico, 9.6 cents at Lascruces and 22.8 cents 
 at Charma. Sometimes a river or a street between two 
 purchasers is sufficient to make a difference in the
 
 78 
 
 MONOPOLY AND COMPETITION 
 
 price of oil.^ In Windsor, Mass., oil sold at 8 cents 
 but at Windsor Hill, across the river, it sold for 9 cents. 
 In Windsor Locks, Conn., the American Whiting 
 Paper Company paid 93^ cents but the grocery stores 
 in the same town paid only 73^^ cents.^ In Pittsfield, 
 Mass., the Standard tank-wagon driver offered to fill 
 the tanks of two merchants free of charge, but other 
 merchants he charged l}/2 cents a gallon.* 
 
 Table I, showing price of oil in states and towns of various 
 sizes in the U. S. 
 
 State 
 
 Maine 
 
 New Hampshire 
 
 Vermont 
 
 Massachusetts 
 
 Rhode Island 
 
 Conneticut 
 
 New York 
 
 New Jersey 
 
 Pennsylvania 
 
 Delaware 
 
 Maryland, District of Columbia. 
 
 West Virginia 
 
 Virginia 
 
 North Carolina 
 
 South Carolina 
 
 Georgia 
 
 Average 
 
 Lowest 
 
 for 
 
 price 
 
 state 
 
 per 
 
 
 gal. 
 
 (cents) 
 
 (cents) 
 
 10.4 
 
 9.5 
 
 10.3 
 
 9.8 
 
 9.0 
 
 8.0 
 
 9.9 
 
 7.4 
 
 9.6 
 
 8.4 
 
 8.9 
 
 7.9 
 
 10.0 
 
 8.3 
 
 9.8 
 
 8.3 
 
 8.7 
 
 8.0 
 
 7.7 
 
 6.9 
 
 9.2 
 
 8.2 
 
 9.0 
 
 8.1 
 
 9.7 
 10.3 
 10.8 
 11.6 
 
 7.3 
 
 8.0 
 
 10.0 
 
 8.2 
 
 Highest 
 price 
 per 
 -gal. 
 
 (cents) 
 
 11.3 
 10.8 
 00.2 
 10.9 
 
 9.9 
 
 9.8 
 11.6 
 11.3 
 10.6 
 
 8.7 
 10.1 
 
 9.5 
 10.7 
 11.9 
 12.1 
 13.4 
 
 = Hisgen, Record, 4/1820-1. 
 
 'Hisgen, Record, IV/1820-1. 
 
 * Record, Dean, 4/1895; Mandigo, 4/1963-66; Couch 4/1968.
 
 CHAPTER THREE 
 
 79 
 
 Table I Continued 
 
 State 
 
 Florida 
 
 Ohio 
 
 Indiana 
 
 Illinois 
 
 Michigan 
 
 Wisconsin 
 
 Minnesota 
 
 Iowa 
 
 Missouri 
 
 North Dakota 
 
 South Dakota 
 
 Nebraska 
 
 Kansas 
 
 Kentucky 
 
 Tennessee 
 
 Alabama 
 
 Mississippi 
 
 Louisiana 
 
 Arkansas 
 
 Indian Territory. 
 
 Oklahoma 
 
 Texas 
 
 Montana 
 
 Idaho 
 
 Wyoming 
 
 Colorado 
 
 New Mexico 
 
 Arizona 
 
 Utah 
 
 Nevada 
 
 Washington 
 
 Oregon 
 
 California 
 
 Average 
 
 for 
 
 state 
 
 (cents) 
 
 12.8 
 
 8.5 
 
 9.5 
 
 9.1 
 
 9.0 
 
 9.2 
 
 9.6 
 10.2 
 10.9 
 11.1 
 12.9 
 10.5 
 11.4 
 
 9.4 
 11.6 
 11.6 
 
 9.8 
 
 9.5 
 13.9 
 12.5 
 14.0 
 11.6 
 15.6 
 15.6 
 15.6 
 16.2 
 13.2 
 10 7 
 14.8 
 16.4 
 15.7 
 15.3 
 11.1 
 
 Lowest 
 
 price 
 
 per 
 
 gal. 
 
 (cents) 
 
 11.5 
 6.4 
 
 7.7 
 
 7.5 
 
 7.7 
 
 7.2 
 
 7.8 
 
 8.7 
 
 9.0 
 
 10.3 
 
 10.3 
 
 8.8 
 
 8.7 
 
 6.4 
 
 8.8 
 
 9.7 
 
 7.7 
 
 7.0 
 
 8.9 
 
 10.9 
 
 13.1 
 
 9.0 
 
 12.7 
 
 13.6 
 
 13.5 
 
 14.3 
 
 9.6 
 
 14.1 
 
 14.0 
 
 14.0 
 
 6.1 
 
 Highest 
 
 price 
 
 per 
 
 gal. 
 
 (cents) 
 
 13.9 
 11.2 
 10.5 
 11.5 
 10.7 
 11.2 
 12.0 
 11.2 
 16.4 
 11.5 
 16.8 
 12.8 
 13.0 
 10.7 
 13.0 
 13.0 
 12.3 
 15.5 
 16.5 
 14.1 
 14.3 
 14.8 
 17.6 
 18.8 
 16.9 
 23.4 
 22.8 
 
 16.0 
 
 17.8 
 17.7 
 14.5
 
 80 MONOPOLY AND COilPETITION 
 
 Table I Continued 
 
 Total number of states 49 
 
 Total number of states reporting both lowest and highest 
 
 price 47 
 
 Computed from tables 146, 143, 132, U. S. Report on the Petro- 
 leum Industrj', 1907. 
 
 What was the cause of this great variety in prices 
 which the Standard charges ? The fact that oil sold for 
 9.3 cents per gallon more in Nevada than in Delaware 
 makes one wonder whether the difference might not 
 have been due to geographical conditions, possibly to a 
 greater cost of marketing or of refining, or it might 
 have some relation to the density of population. But 
 when geograpliical differences are reduced to such 
 narrow limits as a river or a street, and when the 
 same oil out of the same tank-wagon was sold at greatly 
 varying prices, one becomes suspicious of the adequacy 
 of such explanation and is inclined to look for some 
 other principle, possibly competition. 
 
 Transportation charges do not explain the variety 
 in the prices quoted because they have been previously 
 deducted. Refining costs are no sufficient explanation, 
 because the variety is the same in the prices of oil from 
 the same refinery. For example, oil from the refinery 
 at Whiting, Indiana, sold for 9 cents in Michigan and 
 for 13.7 cents in Araknsas; oil from the refinery in 
 Richmond, Cal., sold for 7.2 cents in Southern Cali- 
 fornia and for 15.7 cents in Washington.^ Marketing 
 costs explain part of the variety in different localities, 
 but in no case a greater difference than 1.86 cents a 
 
 ' S. II, Table 133.
 
 CHAPTER THREE 81 
 
 gallon, which amount represents the difTerencc between 
 the markctmg costs in Southern California, 1.36 cents 
 a gallon," and 3.22 cents a gallon, the cost in South 
 Texas. Density of population, of course, can explain 
 nothing in itself. If this makes any difference, it must 
 affect either marketing costs or competition. But what 
 marketing costs explain is already stated. It remains 
 to consider competition. 
 
 In the footnote below, two tables are presented 
 showing the relation between marketing costs and 
 margins on the one hand, and the amount of competi- 
 tion on the other. Table II gives the prices and mar- 
 gins on oil in 23 towns where the Standard had no com- 
 petition, and those in 12 towns which had from 30 to 
 50 per cent competition. In the 23 towns having no 
 competition, the average price is 12.87 cents a gallon 
 and the average marginal gain is 2.52 cents. But in the 
 12 towns which had competition, the average price was 
 only 9.09 cents while there is a marginal loss of .08 
 cents a gallon. Table III gives the margins and the 
 per cents of competition at 22 main and substations of 
 the Standard Oil Company. The Standard generally 
 has a main station, for the storage and delivery of oil, 
 in some large city. From this it supplies sub-stations 
 in smaller neighboring towns. Frequently it happens 
 that there is considerable competition at the main 
 station while there was little or none at the sub-station. 
 In 20 out of the 22 sub-stations named, the table shows 
 that where competition is higher at the main than at 
 the sub-station, the margin is correspondingly lower, 
 
 « Ibid., Table, 134.
 
 82 
 
 MONOPOLY AND COMPETITION 
 
 and in a number it was less than nothing. These results 
 point clearly to the conclusion that competition is the 
 cause of the various prices which the Standard Oil 
 Company charged for its oil. 
 
 Table II, showing price and margins on oil according to degree 
 of competition. 
 
 Towns having no competition 
 
 Brockton, Mass 
 
 Fall River, Mass 
 
 L>Tin, Mass 
 
 Providence, R. I 
 
 Altoona, Pa 
 
 Columbia, S. C 
 
 Atlanta, Georgia 
 
 South Bend, Ind 
 
 Grand Rapids, Mich. 
 
 Mankato, Minn 
 
 Davenport, Iowa 
 
 St. Joseph, Mo 
 
 Fargo, S. D 
 
 Nashville, Tenn 
 
 Denver, Col 
 
 Leadville, Col 
 
 Pueblo, Col 
 
 Seattle, Wash 
 
 Spokane, Wash 
 
 Tacoma, Wash 
 
 Portland, Ore 
 
 Sacramento, Cal 
 
 San Diego, Cal 
 
 Cents 
 
 Per 
 
 gallon 
 
 Price 
 
 Mar- 
 gin 
 
 11.0 
 
 2.18 
 
 10.5 
 
 2.15 
 
 11.0 
 
 2.61 
 
 10.0 
 
 1.21 
 
 11.0 
 
 2.98 
 
 13.0 
 
 2.27 
 
 13.0 
 
 1.98 
 
 10.0 
 
 1.90 
 
 9.5 
 
 1.14 
 
 11.5 
 
 2.24 
 
 10.0 
 
 .75 
 
 11.0 
 
 1.52 
 
 13.5 
 
 2.10 
 
 12.0 
 
 2.11 
 
 16.0 
 
 3.39 
 
 20.0 
 
 5.47 
 
 16.0 
 
 3.38 
 
 15.5 
 
 4.17 
 
 21.5 
 
 6.10 
 
 15.5 
 
 3.99 
 
 15.0 
 
 4.12 
 
 13.0 
 9.5 
 
 2.45 
 
 1.30 
 
 Averages 
 
 12.87 2.62
 
 CHAPTER THREE 
 
 83 
 
 Towns having 30-50% compclition 
 
 Birmingham, N. Y.. 
 
 Pittsburgh, Pa 
 
 Toledo, Ohio 
 
 Peoria, III 
 
 La Crosse, Wis 
 
 Milwaukee, Wis 
 
 Wichita, Kans 
 
 Los Angeles, Cal 
 
 Cincinnati, Ohio 
 
 Minneapolis, Minn. 
 Des Moins, Iowa ... 
 New Orleans, La 
 
 Averages 
 
 Cents Per 
 
 gallon 
 
 Price 
 
 Mar- 
 gin 
 
 9.5 
 
 1.00 
 
 8.5 
 
 .87 
 
 9.5 
 
 1.63 
 
 9.0 
 
 .35 
 
 9.0 
 
 .17 
 
 8.5 
 
 .65 
 
 10.0 
 
 .48 
 
 7.5 
 
 -3.16 
 
 7.0 
 
 1.09 
 
 9.5 
 
 .24 
 
 10.75 
 
 .53 
 
 9.5 
 
 1.35 
 
 9.09 
 
 .03 
 
 Computed from Record, Petitioners' Exhibits, 390.
 
 84 
 
 MONOPOLY AND COMPETITION 
 
 Table III, showing prices and margins of oil at main and sub- 
 stations in relation to competition. 
 
 Division 
 
 Baltimore 
 
 Cincinnati 
 
 Cleveland 
 
 Decatur 
 
 Des Moines 
 
 Dubuque 
 
 Duluth 
 
 Evans^dlle 
 
 Indianapolis 
 
 Kansas City 
 
 La Crosse 
 
 Louisville 
 
 Memphis 
 
 Minneapohs 
 
 New Orleans 
 
 Omaha 
 
 Peoria 
 
 Richmond 
 
 Sioux City 
 
 Springfield, Mass. 
 
 Wichita 
 
 Worcester 
 
 Cents Margin 
 
 Percentage of 
 
 at 
 
 competition 
 
 Main 
 
 Sub- 
 
 Main 
 
 Sub- 
 
 stas. 
 
 stas. 
 
 stas. 
 
 stas. 
 
 0.09 
 
 1.36 
 
 16.5 
 
 7.1 
 
 (1.09) 
 
 0.65 
 
 45.3 
 
 7.2 
 
 (0.16) 
 
 1.68 
 
 11.7 
 
 20.0 
 
 0.08 
 
 1.66 
 
 12.9 
 
 4.6 
 
 0.53 
 
 1.47 
 
 41.8 
 
 12.7 
 
 (0.19) 
 
 1.88 
 
 55.1 
 
 10.3 
 
 0.88 
 
 2.52 
 
 9.9 
 
 4.6 
 
 0.05 
 
 1.30 
 
 29.0 
 
 10.4 
 
 0.12 
 
 1.02 
 
 22.0 
 
 9.0 
 
 0.27 
 
 1.71 
 
 24.2 
 
 3.8 
 
 0.17 
 
 1.82 
 
 38.6 
 
 1.5 
 
 (0.38) 
 
 1.42 
 
 16.1 
 
 3.7 
 
 0.18 
 
 2.10 
 
 27.6 
 
 4.5 
 
 0.24 
 
 1.52 
 
 41.8 
 
 0.7 
 
 (1.35) 
 
 0.46 
 
 51.2 
 
 6.5 
 
 0.41 
 
 1.32 
 
 21.7 
 
 5.3 
 
 0.55 
 
 1.68 
 
 31.2 
 
 12.9 
 
 (0.27) 
 
 2.03 
 
 12.0 
 
 5.5 
 
 0.44 
 
 1.87 
 
 23.6 
 
 5.4 
 
 (0.88) 
 
 1.19 
 
 21.7 
 
 8.6 
 
 0.48 
 
 2.63 
 
 32.1 
 
 3.6 
 
 0.08 
 
 1.45 
 
 5.0 
 
 6.5 
 
 Computed from Record, Petitioners' Exhibit 634. 
 
 At this point, it will be interesting to see how the 
 method of price-cutting worked in the concrete. A 
 few illustrations will make the process clear. 
 
 In the early part of 1900, Hisgen Brothers erected 
 storage tanks in Albany, N. Y., for the purpose of
 
 CHAPTER THREE 85 
 
 going into the oil business. When this fact became 
 known, the Standard at once dropped the bottom out 
 of the prices. Oil declined from 12 cents a gallon to 
 S}4, 8 and 7 cents. Hisgen Brothers could not meet 
 these prices and had to refrain from marketing oil in 
 Albany for two years.' In the meantime, they began 
 to work the surrounding towns. In these places, oil 
 was high and they could market it at a good profit.^ 
 When they sold in a town to some particular dealers, 
 the Standard men would soon visit these dealers, cut 
 the prices to them, but maintain the high price to the 
 others not visited by the Hisgens. 
 
 In 1901 one of the Hisgens made a trip down the 
 Hudson and visited the towns along the river. Here 
 he found oil selling between 3 and 4 cents higher than 
 in Albany. He sold oil to the dealers at their Albany 
 price plus the cost of freight, his selling point being 
 that if they would give him an order, the Standard 
 would soon sell to them cheaper. His prophecy proved 
 true, for, immediately after, a Standard man visited 
 those dealers and lowered the price. Hisgen was able 
 to sell to a dealer once or twice but after that the trade 
 went back to the Standard because of the low price. ^ 
 Therefore, the Hisgens had to go into new territory 
 and repeat the same experiences. After their visit, 
 the prices would always fall two or three cents a gal- 
 lon and in many cases the Hisgens had to drop out of 
 a town. In some, where the people had the good sense 
 
 'Record, 9/1947. 
 
 » Record, 4/1803-0-1. 
 
 "Record, 4/1813-15; 4/1977-78.
 
 86 MONOPOLY AND COMPETITION 
 
 to appreciate competition, they could hold the trade 
 at a higher price than the Standard's. For example, 
 when the Hisgens entered Springfield, Mass., oil was 
 selling at 12^ cents per gallon; but, in a few weeks, 
 the price went down to 9 cents and then, 3^ cent at a 
 time, until it reached 7 cents. The Hisgens met the 
 cut until it reached 73^ cents, and, at that price, they 
 appealed to the trade to stand by them. The dealers 
 did so, since they appreciated that the prices were 
 lower than they would be in case of no competition. ^° 
 
 By 1902 the prices in Albany had again gone up to 
 about 9 or 10 cents. When the Hisgens again began 
 to sell oil in Albany, the price again dropped, to 6 and 
 63^2 cents. ^^ The Hisgens, however, kept on at l}/2 
 cents. To a customer of the Hisgens the Standard 
 now made individual cuts in an attempt to take the 
 trade away from them. To one, Winnie, ^^ they made 
 a cut of }/2 cent a gallon, but Winnie, appreciating the 
 value of competition, refused. To another, Ahearn,^^ 
 they made a cut of 2 cents below the prevailing price 
 for six months and succeeded. 
 
 Another town in which the Standard's method of 
 price-cutting is characteristically illustrated is Augusta, 
 Georgia, where the Standard disposed of four competi- 
 tors one after the other. On the first man to begin 
 competition, namely J. T. Thornhill, they cut the 
 price from 17 to 113^ cents a gallon; and in a year, 
 
 '"Record, 4/1817. 
 " Record, 4/1813-15. 
 "^Winnie, Record, 4/1933. 
 " Ahearn, Record, 4/1970-72.
 
 CHAPTER THREE 87 
 
 ready to quit, he moved away." The next competitor 
 was Blodgett, Moore, and Co., that opened a branch in 
 August about 1888. After withstanding the Standard's 
 price-cutting for about two years, this company sold 
 out to them.^'' Afterwards, the price went up from 
 6^^ and 7}/^ to 14} 2 cents. When the third indepen- 
 dent, the Tidewater Oil Company of New York, ven- 
 tured to do business in Augusta, the Standard cut the 
 price on them 8 cents a gallon, from about 14 to 6 
 cents. At the end of about a year and a half they sold 
 out to the Standard and moved away.^^ The fourth 
 company to attempt to compete with the Standard was 
 Crew, Sevick, and Company. But this was a short- 
 lived concern, and was finished up in about a year, 
 after which it too quietly moved away.^'' These illus- 
 trations suffice to show the Standard's method of price- 
 cutting. A competitor comes into a town. A cut in 
 price follows. The competitor goes out. The price 
 goes up again. 
 
 This policy is well described in the testimony of 
 Mr. Boardman, who was at one time an employee of 
 the Standard in Augusta: 
 
 J. "What was done when a company would come 
 in there?" 
 
 A. "Cut the price." 
 
 J. "How much?" 
 
 '* Boardman, Record, 5/2166. 
 "'Ibid., 5/2166. 
 '* Boardman, Record, 5/2167. 
 " Ibid.
 
 88 MONOPOLY AND COMPETITION 
 
 A. "As much as necessary to get the business. 
 It would depend on what we thought the other fellow 
 would be able to do. . . . Say they figured this fel- 
 low's oil would cost him 12 cents in barrels; they would 
 make it 113^2 — ^ it so that he couldn't sell oil at a 
 profit if possible. "^^ 
 
 This policy is still better described by Mr. Jennings, a 
 director of the Standard Oil Company, in a conversa- 
 tion he had with Mr. Todd, who was competing with 
 the Standard in Troy, N. Y. Mr. Todd reported 
 their conversation in his testimony, and it is so import- 
 ant as to be well worth quoting: 
 
 "My talk with Mr. Jennings was that I considered 
 the business ... we were conducting at that time 
 , . . a foolish one. After I got through, he said: 'The 
 argument you put up, Mr. Todd, I can't meet . . . 
 it is all on one side, but you have got to take into con- 
 sideration that the Standard Oil Company have to 
 operate differently from what a small concern would, 
 We have got a policy to pursue and that is to make it 
 just as difficult for an independent to put out oil as 
 we possibly can; in other words, we want to drive them 
 out of business if we can; if we can't, why we sometimes 
 make a dicker; but our first move is to make it just as 
 expensive as we can. Now,' he says, 'you can readily 
 see this, because, if we didn't where would we be in a 
 few years? The independents would have the bulk 
 of the business.' He says, 'That is our policy.' "^^ 
 
 '^Boardman, Record, 5/2165. 
 "Todd, Record, 6/3215-16.
 
 Table IV — showing price of oil in various towns before and after competition by Standard, and effect on 
 com})etition. 
 
 Town 
 
 Reference 
 
 in 
 
 Record 
 
 Price pel 
 
 (cen 
 before 
 competi- 
 tion 
 
 r Gallon 
 
 ts) 
 after 
 
 competi- 
 tion 
 
 Date 
 
 Result 
 
 to 
 
 Competitor 
 
 ■Mbanv. N.Y 
 
 Hisgen 4/1948 
 Hisgen 4/1816 
 Hisgen 4/1817 
 Hisgen 4/1817 
 Hisgen 4/1818-20 
 Hisgen 4/1821-24 
 Hisgen 4/1826-27 
 Dean 4/1892-93 
 Dean 4/1895-99 
 Mandigo 4/1963-66 
 Hisgen 4/1828 
 Allen 4/1900 
 Todd 6/3216-18 
 Messner 20/4^1 
 Todd 6/3220-21 
 Metzel 5/2413 
 Boardman 5/2166 
 5/2172 
 5/2174 
 5/2175 
 5/913 
 Wooten 5/2096 
 Wooten 5/2101 
 Wofford 5/2156-57 
 Castle 6/3054-57 
 Hosslcr 6/2941-43 
 Gamerl 6/3134-41 
 Hopkins 3/1028-29 
 Lederer 3/1044-46 
 
 12 
 9,10 
 
 12H 
 10, 11 
 10, 11 
 
 11 
 
 X 
 
 10, 1014 
 
 8, 8V2 
 
 10 
 
 9 
 
 .\ 
 
 X 
 
 14 
 
 143^ 
 
 12 
 
 15 
 15 
 
 X 
 
 13 
 14 
 
 X 
 
 12, 10 
 12 
 
 X 
 
 20 
 
 8, Ki, 7 
 
 6, 63^ 
 9-7 
 
 7 
 
 7, IH 
 
 x-lorl3-^ 
 
 6 
 
 y 
 
 6 
 9 
 
 IIH 
 5 
 
 9 
 
 13, 12,11 
 x-2 
 10, 8 
 6 
 
 X-V2 
 12,10,5 
 
 1900 
 1902 
 1901 
 
 1906 
 1905 
 
 1897 
 1900 
 
 1898 
 
 1889 
 
 1904 
 
 1906 
 
 1906 
 
 18981 
 
 1897 
 
 1901 
 
 1904 
 
 1900 
 
 1901 
 
 1905 
 
 1898 
 
 
 
 
 Springfield, Mass 
 
 Continued at 7J4 
 
 Thomnsonville. Conn.. 
 
 Continued at 7J4 
 
 Windsor Locks, Mass 
 
 
 Griffville, Conn 
 
 
 Cheshire, Mass 
 
 
 Pittsfield, Mass 
 
 Continued at 9 
 
 Long ^leadow. Mass 
 
 Compromise 
 
 Boston, Mass 
 
 Compromise 
 
 Trov, N. Y 
 
 
 Binghampton, N. Y 
 
 Sold 5 stations to 
 
 New Windsor, Md 
 
 
 Augusta, Ga ,. 
 
 Sold out to S. 
 
 Augusta, Ga 
 
 Continued at 9, S. 11 
 
 Atlanta, Ga 
 
 
 Denmark, S. C 
 
 Continued 12, S. at 113^ 
 
 Washington, Ga 
 
 Driven out 
 
 Atlanta, Ga 
 
 Sold to S. 
 
 Birmingham, Ala 
 
 Driven out, 15 after 
 Sold to S. 
 
 Cleveland, Ohio 
 
 Compromise 
 
 Chardon, Ohio 
 
 
 Portland, Mich.. 
 
 
 Pierce City, Mo.... 
 
 
 Dexter, Mo 
 
 Driven out 
 
 'Approximately.
 
 CHAPTER THREE 89 
 
 An idea of the extent of the practice of cutting the 
 price on the competitor may be seen from Table IV, 
 which gives some instances as reported by witnesses 
 in the case of the Standard Oil Company v. the United 
 States. This table gives the prices before and after 
 competition began in a town, the date, and the result 
 to the competitor when reported. It is largely such 
 instances as these that account for the price variation 
 of Standard oil. By this time, our general conclusion 
 must be clear that it is competition that explains the 
 differences in the price of Standard oil throughout the 
 United States. 
 
 A supplementary method with which the Standard 
 Oil Company used to meet cut-price conditions was to 
 employ bogus independent companies. These were 
 operated by an agent of the Standard who represented 
 himself to the trade as an independent having no 
 connection Avith the Standard; but as a matter of fact 
 he sold Standard oil and operated under policies dic- 
 tated by the refined oil department of the Standard. 
 The bogus company, after starting, usually cut the 
 price at once so as to get the trade back to the Standard, 
 often taking advantage, however, of the very prejudice 
 against trusts to get this custom. It could also make 
 rebates and concession in special cases. It solicited 
 in most part the trade supplied by independents with 
 just enough of the Standard trade to keep up the 
 appearance of its supposed independent character. By 
 employing these bogus companies, the Standard would 
 need to lower prices only in those particular districts 
 of a town or territory where there was competition
 
 90 MONOPOLY AND COMPETITION 
 
 but could keep them up elsewhere. The Standard thus 
 avoided the obligation of lowering its prices over large 
 districts and met competition in the least expensive way. 
 About 60 bogus companies were reported by witnesses 
 in the Standard Oil suit. These operated at com- 
 petitive points in 20 different states.^'' 
 
 A second supplementary method which the Standard 
 used for cutting prices was to give rebates to the pur- 
 chasers of oil. The rebate was given to a dealer or 
 peddler in consideration that he sell oil at a low price 
 named by the Standard, or that he agree to buy his 
 supplies from the Standard for a certain length of time, 
 or to keep him from "going over the line," buying from 
 a competitor. The rebates usually ranged from 3^ to 
 2 cents a gallon. As a rule, the dealer paid the open 
 market price to the tank-wagon man and received his 
 rebates from "a sort of special man in the rates depart- 
 ment with duties directly under the manager. "^^ A 
 third supplementary method employed by the Standard 
 for cutting prices was a peculiar system of espionage. 
 It would require fully twenty pages to describe this 
 method with any accuracy, but, suffice it to say here, 
 it was one of the best organized departments in the 
 Standard Oil Company. In its New York office alone, 
 the department which has charge of this system had a 
 force of 38 clerks. The system was carried out by means 
 of special arrangements not only with Standard em- 
 ployees but also with employees of railroads. Deputy 
 
 2" Mahle, Record, 5 /2353. Also Petitioners' Brief of Facts- 
 Vol. II, pp. 115-149. 
 
 =' Castle, Record, 6/3030.
 
 CHAPTER THREE 91 
 
 public oil inspectors frequently assisted, and occasionally 
 employees of independent companies. Judge Woodson 
 of the Supreme Court of Missouri, in the course of an 
 elaborate opinion upon the Standard Oil Company, 
 covering over 450 printed pages, describes the effects 
 of this system as follows: 
 
 "In order to drive out all competitors and drive out 
 the entire trade, they inaugurated and carried on a 
 perfect system of espionage, by which they acquired 
 complete knowledge of their competitors' business, and 
 followed almost every barrel of independent oil shipped 
 over a railroad to the very door of the dealer, and, there, 
 by means of cutting prices, offering rebates, misrepre- 
 sentation and deception, attempted to have the sale 
 countermanded and prevent him from purchasing inde- 
 pendent oil in the future. "^"^ This brief statement must 
 be satisfactory for our present purposes. 
 
 By such methods as these, the Standard Oil Com- 
 pany was able to maintain its monopoly of the oil 
 business. I do not mean to give the impression that 
 the Standard did not also employ excellent technologi- 
 cal methods. It excells in the latter. The Standard's 
 competitors, as well as the best of the large corporations, 
 have much to learn from the Standard in the way of 
 technological excellence and sound economic manage- 
 ment. Nor do I intend to give the impression that the 
 Standard alone practiced these competitive methods. 
 I chose the Standard as an example for showing gen- 
 
 =« Stale ex inf. v. Standard Oil Co., 218 No. 1, 444. For system 
 see Petitioners' Brief of Facts, Vol. IF, ])p. 358-428. For the case 
 see St. Oil Co. v. U. S., 22 1 U. S., 1.
 
 92 MONOPOLY AND COMPETITION 
 
 eral practices prevailing in corporate business, with the 
 hope of making clear their significance to the public 
 welfare, namely, the establishing of a monopoly when 
 practiced by a large combination against small traders. 
 If this is their effect the question is whether such 
 methods are unfair. If so, how shall we draw the line 
 between fair and unfair competition? These questions 
 will be discussed in the next section. 
 
 Section II. A Review and Criticism of Judicial 
 Opinion upon the Morals of Monopoly and Competition}'^^ 
 
 The problem set by the last chapter caimot be solved 
 without an appreciation of the changing character of 
 morals, how they originate and change with reference 
 to the environment or situation in which they func- 
 tion, and what the moral and logical grounds are justify- 
 ing such changes. These matters will be fully dis- 
 cussed in connection with the analysis of our problem. 
 
 Underlying the changing character of morals is the 
 conception that new conditions require new rules. It 
 usually happens that when the conditions suddenly 
 change old rules are applied unaltered, and are allowed 
 to work serious havoc before their inertia is overcome 
 and an effort made to formulate rules fitting the new 
 situation. This state of affairs applies in particular to 
 the morals of competition and monopoly. Within the 
 last half century there has been an unrivaled develop- 
 ment of industry from a simple agricultural stage to the 
 extreme form of the factor^' system, or from industry 
 as carried on by individuals each according to his 
 
 =*** Reprinted from the author's paper, "Morals of Monopoly 
 and Competition," Int. J. of Ethics, Jan. 1915.
 
 CHAPTER THREE 93 
 
 preference to a condition of industry carried on by the 
 coml)ined efforts of many men resulting in large com- 
 binations and monopolies. But there has been no 
 corresponding change in business methods or morals. 
 On the contrary, competitive morals have been applied 
 without alteration to conditions of monopoly and com- 
 bination. This mis-application resulting from the 
 unequal evolution between business morals and business 
 conditions appears to be the fundamental cause of our 
 present monopolies and other industrial problems en- 
 gaging the serious efforts of our legislatures and courts. 
 I hope to make this clear in the body of this section. 
 The opinion is often expressed that the so-called laws 
 of competition have existed since time out of mind, are 
 a part of the order of nature, and as such are unchange- 
 able. There are a few old cases, however, which show 
 that such a view is contrary to fact, that the competitive 
 system grew out of previous monopolistic conditions 
 fostered by the medieval guild system and by royal 
 grants. It was welcomed because it was thought a vast 
 improvement upon the old system and in the interest 
 of the public. Beale and Wyman, writing of the govern- 
 mental regulation of business during the late middle 
 ages say: "Not only did the law regulate business 
 indirectly through the courts, parliament itself fre- 
 quently regulated prices of the necessaries of life by 
 direct legislation. The great staples like wool and 
 food were habitually regulated in this way, and the 
 employment and the price of labor was a subject of 
 statutory provision. Thus, in 1366, Henry III, after 
 reciting former statutes to the same effect, regulated 
 the price of bread and ale according to the price of
 
 94 MONOPOLY AND COMPETITION 
 
 wheat and barley, and forbade forestalling, that is, cover 
 ing the market. In 1344 the ordinances fixing the 
 export prices of wool were repealed after some years of 
 trial. In 1349 all laborers obliged to serve for the 
 customary wages and 'butchers, fishmongers, regrators, 
 hostelors (i. e., innkeepers), brewers, bakers, poul- 
 terers, and all other sellers of all manner of victuals' 
 were bound to sell for a reasonable price.^^ These 
 statutes continued in force throughout the middle ages, 
 and until the settlement of America." The explana- 
 tion of this regime is to be found in the economic con- 
 ditions of the times. — The respective business men had 
 a practical monopoly in their ovm localities. To pre- 
 vent extortion or refusal of service, either of which 
 might be very damaging to a customer, the state had 
 to undertake legislation. So far as a single case is 
 evidence, a breaking away from these conditions began 
 with the Schoolmaster's case in 1410.^ The masters 
 of a grammar school in Gloucester brought a complaint 
 against another master, and said that the defendant 
 had started a school in the same town, so that whereas 
 formerly they had received 40 d. a quarter from each 
 child, they now got only 12 d. to their damages. Their 
 counsel contended that this interference and damage 
 made a g:od action, and cited many instances of exclu- 
 sive rights, especially the claim of the masters of Paul's 
 that there should be no other masters in all London 
 except themselves. But Justice Hill denied the claim 
 of the plaintiffs s'nce they had no estate but a min- 
 
 " Rail oad rates regulation, p. 7. 
 2^Y. B. IIHenrylV, 47, 21.
 
 CHAPTER THKEE 95 
 
 istry for the time; and though another equally compe- 
 tent with the plaintiffs came to teach the children, 
 "this was a virtuous and charitable thing, and an ease 
 to the people, for which he could not be punished by 
 the law." 
 
 It would be difficult to find a better illustration of 
 the fact that competition was welcomed because it was 
 "an ease to the people." But, without going into fur- 
 ther detail upon the origin of the system of free compe- 
 tition, it may be said that in course of time there 
 developed a fixed set of morals, customs, and habits 
 which became cr\'Stallized into the common law and 
 which represent what seems almost the apex of indi- 
 vidual liberty. To give an idea of the wide range of 
 liberties allowed in competition by the American com- 
 mon law, we may refer to the recent case of Citizens' 
 Light, Heat, and Power Co. v. Montgomery Light and 
 Power Co. The contestants were competitors in fur- 
 nishing light, heat, and power to the people of Mont- 
 gomery. The defendants induced customers of plain- 
 tiff to break their contracts with it, made false state- 
 ments about its credit and service, and frequently took 
 business below cost in order to take its trade away. 
 The court gave judgment for the plaintiff on the first 
 count, but for the defendants on the other two. Judge 
 Jones saying: "At common law, a trader, or persons in 
 other callings, in order to get another man's customers, 
 could use any means not involving violation of the 
 criminal laws, or amounting to 'fraud,' 'duress,' or 
 'intimidation,' as the law understands and applies these 
 terms to transactions between man and man, or to his
 
 96 MONOPOLY AND COMPETITION 
 
 becoming a wrongful party to a breach of another man's 
 contract. The trader may boast untruthfully of the 
 merits of his wares, so long as it does not take the form 
 of false statements, amounting to slander or wilful mis- 
 representation of the quality of a rival's products, or a 
 libel upon the character, business standing, and credit 
 of his rival, or an effort to induce the public to believe 
 that the product he sells is that manufactured and 
 sold by the rival. He may send out circulars, or give 
 information verbally, to customers of other men, know- 
 ing there are bound by a contract for a definite term, 
 although acting with the purpose of getting the trade 
 of such a customer. He may use any mode of per- 
 suasion with such a customer, keeping within the limi- 
 tations stated, which appeal to his self-interest, reason 
 or even his prejudices. He may descant upon the 
 extent of his rival's facilities compared with his own, his 
 rival's means, his insolvency, if it be a fact, and the 
 benefits which will result to the customer in the future 
 from coming to the solicitor rather than remaining 
 where he is. He may lawfully, at least so far as his 
 rival is concerned, cut prices to any extent, to secure 
 his trade. So long as what he does is done to the bene- 
 fit of his own trade and, in taking over the customers 
 of another, he keeps within the limits heretofore defined, 
 he is safe from legal restraint at the instance of a comp- 
 etitor in following 'the law of competition'; which 
 takes little note of the ordinary rules of good neighbor- 
 hood, or abstract morality. The person whose cus- 
 tomers are thus taken from him cannot complain, for 
 no right of action lies in his favor against him who
 
 CHAPTER THREE 97 
 
 solicited his customer, since the soHcitor exercised a 
 legal right in a legal way.^* ' 
 
 The judge giving this opinion has lost sight of the 
 pubhc interest in the competitive system which was 
 originally designed for its benefit. He takes no 
 account of common morality. He simply states what 
 the common law allows and gives his decision accord- 
 ingly, which is clearly a definite crystallization of the 
 laissez faire policy in business. The liberties which he 
 allows function well in such a competitive system in 
 which they developed. The traders were small, had 
 approximately equal resources, and each one was more 
 or less for himself. If one trader cut prices, or gave 
 rebates, or granted special favors to particular cus- 
 tomers, or slandered his rival, or boasted untruthfully 
 on the merit of his wares, his competitors could do 
 likewise with equal effect. If a customer could not get 
 satisfactory terms from one trader, he could do so 
 from another. The public took no interest in a war 
 of competition except to get the advantage of good 
 bargains. If anyone was injured, it was the trader 
 rather than the consumer. There were, of course, evils 
 such as numerous bankruptcies and periods of under- 
 and over-production, but, on the whole, the system 
 was worth more to the public than it cost, and one 
 positive merit that it did have was that it allowed full 
 freedom to individual capacity and ingenuity. 
 
 But, if we introduce into this competitive system of 
 approximately equal individual traders, a large com- 
 bination of traders having an enormous capital, then 
 "'171 Fed. 553.
 
 98 MONOPOLY AND COMPETITION 
 
 the competitive morals as practiced between the com- 
 bination and individual trader have an altogether dif- 
 ferent effect because of the inequalities in capital. In 
 a siege of price-cutting, in getting information of the 
 competitors' business from their employees and from 
 those of the railroads, in securing favorable advertising 
 in the form of disinterested news and editorials, in 
 securing favorable legislation and able lawyers and 
 solicitors, and in delaying litigation by appeals, and in 
 many other instances the combination can get advan- 
 tages which are wholly denied to the small trader 
 because of his small capital. The small trader may be 
 a better manager than anyone in the combination, he 
 may produce cheaper, treat his customers more con- 
 siderately, give prompter service, and offer a superior 
 quality of goods, but, no matter what his merits are, 
 he cannot possibly overcome the superior capital of the 
 combination which, as a consequence, secures a monop- 
 oly. It, then, has power to oppose the public with 
 unreasonable prices through which it may recoup the 
 losses from the war of competition. When such a 
 result occurs, we begin to hear of "unfair competition," 
 "cut-throat and predatory competition," "tainted 
 money," "anti-trust legislation," "the extortion of 
 monopohes," "restraint of trade," "reasonable and un- 
 reasonable restraint of trade," and such phrases which 
 indicate that a problem has arisen in the public con- 
 sciousness and that moral feelings have been aroused. 
 The old adage "competition is the life of trade" begins 
 to have an unsavory sound and these so-called laws of 
 competition which existed since time out of mind begin
 
 CHAPTER THREE 99 
 
 to be questioned. The combination is dubbed an 
 "Octopus." But, as a matter of fact, the combina- 
 tion has done nothing more than carry out the "good 
 old-fashioned laws of competition," the very same 
 methods practiced daily by those who raise the bitter 
 cry against it. The only difference is that the com- 
 bination got all the gain and the little trader went to 
 the wall. The question arises, however, whether a 
 combination can rightfully adopt the same methods 
 practiced by small traders in competition and whether 
 its large capital does not create a new situation in which 
 the old morals of competition fail to function and 
 whether the combination should not adopt a new set 
 of morals commensurate with its new situation. Here 
 there is clearly a moral problem and, to show the form 
 which it has taken, we can do no better than to refer 
 to some court decisions on the matter. We may guess 
 that the conservatives on competition will think the 
 old system of competition good enough, while those 
 enlightened on new conditions will recommend a change. 
 I shall first quote some opinions from the former class. 
 We shall find that they are averse to make distinctions 
 between kinds of competition and believe compe- 
 tition, as such, a part of the unchangeable order of 
 nature. The Mogul Steamship case, the leading case 
 on competition in England, gives the general trend of 
 the conservatives' views. In this case, the defendants, 
 who were firms of shipowners trading between China 
 and Europe, formed themselves into an association, 
 from which the plaintiffs were excluded, the purpose 
 being to obtain a monopoly of the tea trade and main-
 
 100 MONOPOLY AND COMPETITION 
 
 tain freight rates. They offered a rebate of five per 
 cent to shippers who consigned their tea exchisively 
 to their (the defendants') vessels, and also to send 
 special ships to under-bid any vessels wliich the plain- 
 tiffs might send. Defendants reduced rates so low that 
 plaintiffs were obliged to carr}' at a loss in order to 
 obtain homeward cargoes. To recover their losses, 
 they brought suit for damages. Lord Morris, in his 
 judgment, said: " I am not aware of any stage of compe- 
 tition called 'fair' intermediate between lawful and 
 unlawful." The Lord Chief Justice Coleridge said: 
 " It must be remembered that all trade is and must be 
 in a sense selfish; trade, not being infinite, nay, trade of 
 a particular place or district being possibly very limited, 
 what one man gains another loses. In the hand-to- 
 hand war of commerce . . . men fight on without 
 much thought of others, except a desire to excel or 
 defeat them. Very lofty minds, like Sir Philip Sid- 
 ney with his cup of water, will not stoop to take an 
 advantage, if they think another wants it more. Our 
 age, in spite of high authority to the contrary, is not 
 without its Sir Philip Sidneys; but these are counsels of 
 perfection which it would be silly indeed to make the 
 measure of the rough business of the world as pursued 
 by ordinary men of business."^ Lord Justice Fry said: 
 "I know no limits to the right of competition in the 
 defendants — I mean, no limits in law. I am not 
 speaking of morals and good manners. To draw the 
 line between fair and unfair competition, between what 
 is reasonable and unreasonable, passes the power of the 
 ^ 21 L. R. Q. B. D., 553-4.
 
 CHAPTER THREE 101 
 
 courts. Competition exists when two or more persons 
 seek to possess or enjoy the same thing: it follows that 
 the success of one must be the failure of another — 
 and no principle of law enables us to interfere with or 
 to moderate that success or that failure so long as it is 
 due to mere competition."^^ 
 
 Lord Justice Bowen gave the clearest exposition of 
 the common law on this subject. He said in part: 
 " We are presented in this case with an apparent con- 
 flict or antimony between two rights that are equally 
 regarded by the law — the right of the plaintiffs to be 
 protected in the legitimate exercise of their trade, and 
 the right of the defendants to carry on their business 
 as seems best to them, provided they commit no 
 wrong to others. . . . What, then, are the limitations 
 which the law imposes upon a trader in the conduct of 
 his business as between himself and other traders? . . . 
 No man, whether trader or not, can . . . justify dam- 
 aging another in his commercial business by fraud or 
 misrepresentation. Intimidation, obstruction, and mo- 
 lestation are forbidden; so is the intentional procure- 
 ment of a violation of individual rights, contractual or 
 other, assuming always that there is no just cause for it. 
 The intentional driving away of customers by shew of 
 violence;-" the obstruction of actors on the stage by 
 preconcerted hissing ;2^ the disturbance of wild fowl in 
 
 « 23 L. R. Q. B. D^ 625-26. 
 " Tarldon v. M'Gawlcy, Peak N. P. C, 270. 
 -^CliJJord V. Brandon, 2 Comp. 358; Gregory v. Brunsuick, 
 6 Man & G., 205.
 
 102 MONOPOLY AND COMPETITION 
 
 decoys by firing guns;^^ the impeding or threatening 
 servants or workmen;^'' the inducing persons under per- 
 sonal contracts to break contracts ;^^ all are instances of 
 such forbidden acts. But the defendants have been 
 guilty of none of these acts. They have done nothing 
 more against plaintiffs that pursue to the bitter end a 
 war of competition waged in the interest of their own 
 trade. ... To say that a m.an is to trade freely but 
 that he is to stop short at any act which is calculated to 
 harm other tradesmen, and which is designed to attract 
 business to his own shop, would be a strange and 
 impossible counsel of perfection. But we are told that 
 competition ceases to be a lawful exercise of trade 
 ... if carried to a length which is not fair or reason- 
 able. The offering of reduced rates is said to have been 
 "unfair." This seems to assume that, apart from 
 fraud, intimidation, molestation, or obstruction of some 
 other personal right, there is some natural standard of 
 "fairness" or "reasonableness" (to be determined by 
 the internal consciousness of judges and juries) beyond 
 which competition ought not in law to go. There seems 
 to be no authority ... for such a proposition. It 
 would impose a fetter upon trade. . . . And what is 
 to be the definition of a "fair profit?" It is said it 
 ought to be a normal rate of freight, such as is reason- 
 ably remunerative to the shipowTier. But over what 
 period of time is the average of this reasonable remu- 
 
 ^ Carringlon v. Taylor, 11 East 571; Keehle v. Hickering, 11 
 E?st, 574. 
 
 '" Garret v. Taylor, Cro. Jac. 567. 
 
 " Bowen v. Hall, 6 Q. B. D., 333; Lumley v. Gye, 2 E. & B. 216.
 
 CHAPTER THREE 103 
 
 nerativeness to be calculated? All commercial men are 
 acquainted with the ordinary expedient of sowing one 
 year a crop of apparently unfruitful prices, in order by 
 driving competition away to reap a fuller harvest of 
 profit in the future; and until the argument at bar, it 
 might be doubted whether shipowners or merchants 
 were ever deemed to be bound by law to conform to 
 some imaginary "normal" standard of freights or prices, 
 or that Law Courts had a right to say to them in respect 
 of their competitive tariffs, "Thus far shalt thou go 
 and no further." To attempt to limit English compe- 
 tition in this way would probably be as hopeless an 
 endeavor as the experiment of King Canute. . . . As- 
 sume that what is done is intentional, and that it is 
 calculated to do harm to others. Then comes the 
 question, Was it done with or without just "cause or 
 excuse"? . . . legal justification would not exist when 
 the act was merely done with the intention of causing 
 temporal harm, without reference to one's own lawful 
 gain, or the lawful enjoyment of one's own rights. . . . 
 But if the real object were to enjoy what was one's own, 
 or to acquire for oneself some advantage in one's pro- 
 perty or trade, and what was done was done honestly, 
 peacably, and without any of the illegal acts above 
 referred to, it could not in my opinion, properly be 
 said to be done w'thout just cause or excuse."^^ 
 
 Along the same line as this opinion have been numer- 
 ous American decisions. The following cases indi- 
 cate the lower limits to which competition may go in 
 America. 
 
 3= 23 L. R. Q. B. D., 614-16. 618-19.
 
 104 MONOPOLY AND COMPETITION 
 
 In Bohn Mfg. Co. v. Xortlnvestern Lumbermans^ Asso- 
 ciation, a number of retail dealers in lumber combined 
 for the purpose of preventing wholesale dealers in lum- 
 ber from selling directly to the consumers or other non- 
 dealers in localities where a member of the association 
 did retail business. Judge Mitchell upheld the asso- 
 ciation, saying: " What one man may la\^^ully do singly, 
 two or more may lawfully do jointly. The number who 
 unite to do the act cannot change its character from 
 lawful to unlawful. The gist of a private action for 
 the wrongful act is not the combination or conspiracy, 
 but the damage done or threatened to the plaintiff by 
 the acts of the defendants. ... It can never be a 
 crime to combine to commit a lawful act, but it may be 
 a crime for several to conspire to commit an unlawful 
 act, which, if done, by one individual alone, although 
 unlawful, would not be criminal." 
 
 In Macauley Brothers v. Tierney, the members of a 
 national association of plumbers agreed not to buy from 
 wholesale dealers who sold to plumbers not members. 
 Chief Justice Matteson justified the action, saying: 
 " Competition, it has been said, is the life of trade. . . . 
 To hold such an act wrongful and illegal would be to 
 stifle competition."^' . . . 
 
 In National Protective Association v. Cumming, where 
 contestants were competing organizations of steam- 
 fitters, defendants caused the discharge of plaintiffs by 
 the threat of a strike. Chief Justice Parker justified the 
 conduct of defendants mainly on the grounds of compe- 
 tition, that an organization may lawfully do what an 
 33 19 R. I., 225.
 
 CIL\PTER THREE 105 
 
 individual may lawfully do. The following extract in- 
 dicates the ground of his decision: "A man has a right, 
 under the law, to start a store and to sell at such 
 reduced prices that he is able in a short time to drive 
 the other storekeepers in his vicinity out of business, 
 when, having possession of the trade, he finds himself 
 soon able to recover the loss sustained while ruining the 
 others. Such has been the law for centuries. The 
 reason, of course, is that the doctrine has generally been 
 accepted that free competition is worth more to society 
 than it costs, and that on this ground the infliction of 
 damages is privileged. "^^ 
 
 An unusually vigorous defense of competition is found 
 in a Standard Oil case decided in West Virginia. De- 
 fendant, the Standard Oil Company, built a pipe line 
 through the territory of the plaintiffs' line, and then 
 refused to buy oil from producers unless they shipped 
 it through their own line, and also refused to buy any 
 oil shipped through plaintiffs' line. This ruined the 
 business of the plaintiff. Judge Brannon held such con- 
 duct not actionable. He said: "This is the act of 
 persons and corporations, by union of means and effort, 
 drawing to themselves, in the field of competition, the 
 lion's share of the trade. This is not a monopoly con- 
 demned by law. The lion has stretched out his paws 
 and grabbed in prey more than others, but that is the 
 natural right of the lion in the field of pursuit and cap- 
 ture. Pity that the lion exists, his competing animals 
 may say; but natural law accords the right, it is given 
 him by the maker for existence. The state made the 
 " 170 N. Y., 315.
 
 106 MONOPOLY AND COMPETITION 
 
 Standard Oil Company, and gave it the right of being 
 and working. . . . The defendant companies were all 
 in common interest. Could they not unite to further 
 their interests? Could not the Standard Oil Company 
 buy from whom it chose? . . . Cannot the village mer- 
 chant say to the farmer, " I will not buy your eggs unless 
 you buy my cahco?" Cannot the big mill owner refuse 
 to buy wheat from those who do not ship it over a rail- 
 road or steamboat owned by him? . . . Now, these 
 companies were furthering their interests in lawful com- 
 petition with others. . . . That, in these days of sharp 
 ruinous competition, some perish is inevitable. The 
 dead are found strewn all along the highways of busi- 
 ness and commerce. Has it not always been so? The 
 evolution of the future must answer. What its evolu- 
 tion will be in this regard we do not yet know, but we 
 do know that thus far the law of the survival of the 
 fittest has been inexorable. Human intellect — human 
 laws — cannot prevent these disasters. The dead and 
 wounded have no right of action from this imperious 
 law. This is a free country. Liberty must exist. It 
 is for all. This is a land of equality, so far as the law 
 goes, though some men do in lust of gain get advantage. 
 Who can help it?"^^ 
 
 From these cases, it is possible to form an idea, not 
 only of the particular acts allowable in competition, but 
 also of the general principles on which they are per- 
 mitted. The former have been sufficiently reviewed. 
 The latter seem to fall into three classes: competition 
 is morally right because: (1) it is the right of individual 
 «50W. Va., 611.
 
 CHAPTER THREE 107 
 
 freedom, and what individuals may do singly they may 
 also do jointly; (2) it is based upon natural right and 
 the law of the survival of the fittest, an order of nature 
 created by the maker; (3) it is for the best interests of 
 society, being worth more than it costs. These prin- 
 ciples are but reflections of a competitive, industrial 
 society which has been defended ever since Adam 
 Smith's "Wealth of Nations:' But within the last fifty 
 years, there has been a rapid change in the industrial 
 order; a change from individual, competitive, and 
 small-scale production to cooperative, monopolistic, 
 and large-scale production; a movement from an un- 
 directed, unorganized, and separate control of the many 
 to the directed, organized, and unified control of the 
 few. 
 
 The judiciary has begun to appreciate the signific- 
 ance and tendency of this movement. Accordingly, 
 we have a number of cases in which the judges have 
 ceased justifying acts of trade simply because they are 
 due to mere competition, but have carefully considered 
 whether a given act is for the best interests of society, 
 whether it tends toward monopoly, or is only in reaso- 
 nable restraint of trade. 
 
 Without going into details, it may be said in a general 
 way that the principles upon which this new line of 
 decisions is based began to be laid down in the English 
 case of Mitchel v. Reynolds in 1712. The defendant 
 leased his bake-shop in the parish of St. Andrew's 
 Holborn, to plaintiff for a period of five years, and upon 
 a bond of fifty pounds, agreed not to open a new shop 
 within this time. But he broke his agreement and was
 
 108 MONOPOLY AND COMPETITION 
 
 sued. Parker, C. J., decided in favor of the plaintiff 
 because the contract was Hmited to a particular place 
 and offered a sufficient consideration to the defendant. 
 But a contract restraining trade generally throughout 
 the kingdom "must be void, being of no benefit to 
 either party and only oppressive"; and "the true rea- 
 sons" for judging voluntary restraints of trade are: 
 "first, the mischiefs which may arise under them, first 
 to the party, by loss of his livelihood, and the subsis- 
 tence of his family; secondly, to the public, by depriving 
 it of a useful member." ^^^ 
 
 The principles for judging a contract in restraint of 
 trade are more clearly stated in Horner v. Graves, 1831. 
 The contestants were dentists. Defendant, who was a 
 moderately skillful dentist, agreed not to practice inde- 
 pendently within a radius of 100 miles from York, in 
 consideration of entering the service of plaintiff for 
 five years at a salary of 100 pounds per year, to be 
 increased annually ; but within three months he started 
 independently within the prohibited distance. Counsel 
 for defendant argued: "If the Plaintiff were to labor 
 night as well as day, it would be physically impossible 
 for him to draw all the teeth of such a district. If he 
 leaves home, York is without the benefit of his skill; 
 if he remains at York, patients may die at Lancaster 
 . . . the health of the public is endangered, without 
 the possibility o!: any advantage to the Plaintiff. The 
 agreement is therefore unreasonable and void." 
 
 Tyndall, C. J., agreed with counsel, and out of these 
 petty facts, developed a most significant principle for 
 
 ^'^^ 1 p. wms. 181.
 
 CHAPTER THREE 109 
 
 distinguishing between reasonable and unreasonable 
 restraint of trade, and one which has been frequently 
 afhrmed in American decisions upon questions of 
 monopoly. He said: "And we do not see how a better 
 test can be applied to the question whether reasonable 
 or not, than by considering whether the restraint is 
 such only as to afford a fair protection of the interests 
 of the party in favor of whom it is given, and not so 
 large as to interfere with the interests of the public. 
 Whatever restraint is larger than necessary for the 
 protection of the party, can be of no benefit to either. 
 It can only be oppressive; and if not oppressive, it is, 
 in the eye of the law, unreasonable. Whatever is in- 
 jurious to the interests of the public is void, on the 
 grounds of public policy."^" 
 
 In these two cases we have laid down the fundamental 
 principles for the regulation of monopolies and restraint 
 of trade, a half century before the problem existed in 
 its modern form. The public interest should be the con- 
 trolling factor in determining the reasonableness of a 
 contract in restraint of trade. Monopoly or total re- 
 straint of trade is against the public interest and is 
 unlawful. But a partial restraint of trade, if it allows 
 a fair consideration for the contracting parties and no 
 more than is necessary for their protection, is reason- 
 able and good. If it produces a greater protection than 
 necessary, it is oppressive and void. It remains only 
 to define more specifically what constitutes monopoly 
 and public interest, and by what principle we may 
 
 M 7 Bing.. 733. 743.
 
 1 10 MONOPOLY AND COMPETITION 
 
 determine what a fair protection is for the contracting 
 parties. 
 
 The definition of monopoly and of public interest is 
 rather concretely stated in Morris Run Coal Company 
 V. Barclay Coal Company, decided by the Supreme Court 
 of Pennsylvania in 1871. Five coal companies organ- 
 ized a selling agency which had control of the produc- 
 tion of the respective companies and could fix prices. 
 Judge Agnew said: "When competition is left free, 
 individual error or folly will generally find a correction 
 in the conduct of others. But here . . . they have 
 combined together to govern the supply and the price 
 of coal in all the markets from the Hudson to the 
 Mississippi river. . . . The public interest must suc- 
 cumb to it for it has left no competition to correct its 
 baleful influence. . . . The domestic hearth, the fur- 
 naces of the iron master, the fires of the manufactures 
 all feel its restranit. . . . Such a combination is more 
 than a contract, — it is an offense. . . . Every "cor- 
 ner," in the language of the day, whether it be to affect 
 the price of articles of commerce such as breadstuffs, 
 or the price of vendible stocks, when accompanied by 
 a confederation to raise or depress the price and oper- 
 ate on the market, is a conspiracy." 
 
 In another coal case, Pocahontas Coke Co. v. C. fe' C. 
 Co., where 20 coal operators combined in a similar form 
 as in the case above, monopoly is still more clearly 
 defined. Judge Cox said: "If the direct and necessary 
 and natural effect of a contract or combination among 
 producers and sellers of a commodity is to restrain com- 
 petition and control prices to the injury of the public
 
 CHAPTER THREE 111 
 
 when all the powers of the contract or combination 
 shall have been exercised, the contract or combination 
 is in unreasonable restraint of trade and against public 
 policy. ... A contract which is charged to be in 
 restraint of trade is not to be tested by what has been 
 done under it but what may be done under it."^'' 
 
 The definition of monopoly is now clear. The test 
 of a monopoly or contract in restraint of trade against 
 the public interest is power or tendency to control 
 prices. 
 
 Another basic principle of numerous recent decisions 
 against monopolistic practices was laid down in Massa- 
 chusetts by Chief Justice Shaw in Commonwealth v. 
 Alger, 1851. The question was whether an owner of 
 land along the seashore might extend a wharf beyond a 
 limit prescribed by the legislature, if it neither ob- 
 structs navagation nor is a public nuisance. Justice 
 Shaw did not permit the exception since this would 
 confuse the law, and the law he upheld on this ground: 
 "We think it a settled principle, growing out of the 
 nature of well-ordered civil society, that every holder 
 of property, however absolute and unqualified may be 
 his title, holds it under the implied liability that his 
 use of it may be so regulated, that it shall not be injuri- 
 ous to the equal enjoyment of others having an equal 
 right to the enjoyment of their property, nor injurious 
 to the rights of the community. All property in this 
 commonwealth ... is derived directly or indirectly 
 from the government, and held subject to the common 
 good and general welfare. Rights of property, like 
 
 " 60 W. Va., 508, 524-5.
 
 112 MONOPOLY AND COMPETITION 
 
 other social and conventional rights, are subject to 
 such reasonable limitations in their enjoyment ... as 
 the legislature, under the governing and controlling 
 power vested in them by the constitution, may think 
 necessary and expedient. . . . The power we allude 
 to is . . . the police power, the power vested in the 
 legislature by the constitution, to make, ordain, and 
 estabhsh all manner of wholesome and reasonable laws 
 statutes and ordinances, either with penalties or with- 
 out, not repugnant to the constitution, as they shall 
 judge to be for the good and welfare of the common- 
 wealth, and of the subjects of the same." 
 
 The good of the subject of the state or the public 
 interest also formed the basis of a dissenting opinion 
 of Lord Esher in the Mogul Steamship case already 
 referred to. He said: "Unless the public has an inter- 
 est in traders being left to their own judgment, and 
 to a free course of trade, there is no foundation for the 
 law as to agreements in restraint of trade being illegal. 
 It follows, if the agreement be an agreement to violate 
 the right of an independent trader by restraining his 
 trade, there is a sufficient public interest which is also 
 injured, and the agreement is an indictable conspiracy. 
 ... If one goes beyond the exercise of the course of 
 trade . . . his act is an unlawful obstruction. . . . 
 The act of the defendants lowering their freights far 
 beyond a lowering for the purpose for any trade — that is 
 to say, so low that if they continued it, they themselves 
 could not carry on the trade — was not an act done in 
 the exercise of their own free right of trade, but was an 
 act done evidently for the purpose of interfering with —
 
 CHAPTER THREE 113 
 
 the plaintiff's right to a free course of trade, and was 
 therefore a wrongful act."^^ 
 
 The principle that property rights proceed from the 
 state and must be used for the common good of its sub- 
 jects received a new interpretation in a recent Massa- 
 chusetts case, Martell v. White, having special bearing 
 upon competition. The question was whether a vol- 
 untary association of granite-workers could, by a system 
 of fines, prevent members from trading with plaintiff, 
 not a member of the association, and so ruin his 
 business of quarrying granite. The court denied the 
 right, Judge Hammond saying: "To what extent com- 
 bination may be allowed in competition is a matter 
 about which there is as yet much conflict, but it is 
 possible that, in a more advanced stage of the discussion, 
 the day may come when it will be more clearly seen 
 and will more distinctly appear in the adjudication of 
 the courts than as yet has been the case; that the pro- 
 position that what one man lawfully can do, what any 
 number of men acting together by combined agreement 
 may do, is to be received with newly disclosed quali- 
 fications arising out of the changed conditions of civi- 
 lized life and of the increased facility and power of 
 organized combination, and that the difference between 
 the power of individuals, acting each according to his 
 preference, and that of an organized extensive com- 
 bination may be so great in its effect upon private and 
 pubUc interests as to cease to be simply one of degree 
 and to reach the dignity of a difference in kind. . . . 
 The right of competition rests upon the doctrine that 
 >8 23 L. R. Q. B. D., 606-10.
 
 1 14 MONOPOLY AND COMPETITION 
 
 the interests of the great public are best subserved by 
 permitting the general and natural laws of business to 
 have their full and free operation, and that this end 
 is best attained when the trader is allowed in his busi- 
 ness to make free use of these laws. . . . But from 
 the very nature of the case it is manifest that the right 
 of competition furnishes no justification for an act done 
 by the use of means which in their nature are in vio- 
 lation of the principle upon which its rests. "^^ 
 
 Here, then, we have a clear grasp of the modern 
 situation and a clear recognition that changes in the 
 conditions of civilized life call for equal changes in 
 business methods and principles applicable to these 
 changed conditions, that although it may be logically 
 inferred that what one man may do singly he may also 
 do jointly with others, results may prove this an invalid 
 conclusion, and the difference in conditions may be so 
 important as to make the inference impossible. 
 
 Summing up the new line of cases that we have 
 re\'iewed upon the Hmits of competition, we may draw 
 the boundaries as follows: The legitimacy of a given 
 business method, or use of property, or contract in 
 restraint of trade is to be determined by reference to 
 the public interest or good of society, from which all 
 rights are derived. Monopoly or contracts in restraint 
 of trade giving the parties concerned the power or 
 possibility of controlling prices are against an individual 
 by a combination which aims to destroy his business 
 by a mere agreement not to trade with him, or by 
 going beyond the ordinary course of trade, such as 
 
 39 185 Mass., 255, 259-61.
 
 CHAPTER THREE 115 
 
 doing business at a loss — is against the public interest 
 and unlawful. Under the police power, the 'legislature 
 may pass any laws limiting methods of business and 
 uses of property to any extent which they deem neces- 
 sary for the welfare of the people. 
 
 It would be quite impossible to enumerate all the 
 particular acts declared illegal both by statutes and 
 courts within the limits thus drawn. But the mention- 
 ing of a few that some courts have prohibited may aid 
 in getting a clearer idea of unfair competition. A 
 manufacturer or seller may not give rebates to the pur- 
 chasers of his commodities for the purpose of main- 
 taining and fixing prices.^'^ He may not sell goods 
 lower at one place than at another for the purpose of 
 destroying competition. He may not compel dealers 
 not to purchase or deal in the goods of a rival so as 
 to have him deal in his own exclusively.''^ He may 
 not follow the employees of a rival and harass them 
 while engaged in the discharge of their duties. He 
 may not publish false and injurious reports about his 
 rival."*- He may not fix the prices and conditions 
 under which dealers should sell his goods.^ A seller as 
 a member of an association of retail dealers may not 
 refuse to sell goods to a non-member, or charge him 
 
 " Slate V. Standard Oil Company, 218 Mo., 1,442. 
 
 *' People V. Duke, 44 N. Y. Supp., 336; Commonweallh v. 
 Strauss, 191 Mass. 545. Cibley v. United Shoe Machinery Co., 
 152 Fed., 720. 
 
 « StaMard Oil Co. v. Doyle, 118 Ky. 622. 
 
 «Co«r/ Wall Paper Co. c. Voighl &• Sons, 212 U. S. 227; 
 Dr. Miles Med. Co. v. Pork & Sons Co., 220 U. S. 873.
 
 116 MONOPOLY AND COMPETITION 
 
 higher prices than a member,'*^ nor compel wholesale 
 dealers not to sell goods to nonmembers.^^ And, as a 
 member of a monopoly, he may not charge more than 
 competitive prices for his goods under penalty of 
 treble damages.'*'^ — All such acts are forbidden as tend- 
 ing toward and establishing a monopoly. But any 
 contract in restraint of trade, or method of business is 
 permitted by the courts when it is not a part of a 
 monopolistic scheme nor is likely to produce such a 
 result. 
 
 When we consider that hardly a one of these acts 
 would be denied to an individual acting singly for his 
 own interests, and compare them with acts prohibited 
 and acts allowed by the common law as expounded by 
 Lord Justice Bowen or Judge Jones, both of whom we 
 have quoted, it becomes apparent what a remarkable 
 change has taken place from the business methods of 
 individual competitive bargaining to those of coopera- 
 tive and monopolistic bargaining. The courts appar- 
 ently do recognize a difference in kind between the acts 
 of individuals acting alone and the acts of individuals 
 acting as a combination. The query now arises what 
 are the conditions which account for this difference, 
 and which do not allow individuals to do jointly what 
 they may do singly. What is the difference between 
 competition as carried on by a combination and as car- 
 ried on by an individual? 
 
 « Montague &= Co. v. Lowry, 193 U. S. 38. 
 
 ^'^ Cleland v. Anderson, 66 Neb. 252. 
 
 ^* Chattanooga Foundry Co. v. Atlanta, 203 U. S. 390.
 
 CHAPTER THREE . 117 
 
 Lord Justice Bowen said the Mogul Steamship case 
 presented "an antinomy between two rights equally 
 regarded by the law — the right of the plaintiffs to be 
 protected in the Icigitmate exercise of their trade, and 
 the right of the defendants to carry on their business as 
 seems best to them, provided they commit no wrong 
 to others." Did defendants commit any wrong to 
 others? The judge answers the question by taking a 
 backward look. He finds that in 1620 it was forbidden 
 to drive workmen and servants away from a rival by 
 threatening to cut their arms off; that in 1706 it was 
 forbidden to fire with guns into a man's decoy pond for 
 the sake of frightening away his fowl; that in 1804 it 
 was forbidden to drive a rival's customers away by 
 shooting them with cannon; that in 1810 it was declared 
 illegal to drive actors from the stage by preconcerted 
 hissing; and that in 1853 it was forbidden for a third 
 party to induce the breaking of personal contracts. 
 "But the defendants," he says, "have been guilty of 
 none of these acts. They have done nothing more 
 against the plaintiffs than to pursue to the bitter end 
 the war of competition waged in the interest of their 
 own trade." If they had no such interest to main- 
 tain, and if they had injured plaintiff for the mere sake 
 of the injury, it would have been unjust. But, since 
 it was done for the maintenance of their own interests, 
 it was just and lawful. Lord Esher, however, looks 
 at the question from an opposite point of view. He 
 takes 2i forward look and considers whether such com- 
 petition is compatible with the public interest and wel- 
 fare. He does not see that there can be any permanent
 
 118 MONOPOLY AND COMPETITION 
 
 gain to the public in destroying a useful trader by 
 doing business at a loss, as the defendants did, and 
 therefore gives judgment for the plaintiff. 
 
 Thus the solution of the antinomy between equal 
 rights turns upon the point of view of the judge. 
 Does the act come within the scope of acts classified 
 as wrong in the past? If not, it is right. Or does it 
 tend to further or hinder the public good? If the 
 former, it is right; if the latter, it is wrong. Which of 
 these two views is based on the better ethical and 
 logical principle? 
 
 The first essential in deciding this issue is a keen 
 consciousness of the different logics used in these two 
 lines of cases. It is significant that on both sides there 
 are judges who say that the standard of reference is the 
 public interest. The conservatives argue in syllogistic 
 fashion as follows: Competition is the life of trade and 
 in the interest of the public. This is an act of com- 
 petition and therefore in the interest of the pubUc. 
 This reminds one of Aristotle's logic, but it is not in 
 agreement with his ethics in which he says that know- 
 ledge is virtue provided it was knowledge of the major 
 and minor premises in their proper relationship. I 
 rather think Aristotle was right. You must be sure of 
 your major premise and then that the minor comes with- 
 in its major before it is possible to draw a proper con- 
 clusion. The difficulty with the conservative judges is 
 that they do not examine their premises, whether they 
 are true or not. They assume in their major premise 
 that competition is the life of trade, is an eternal law of 
 nature. They then merely determine whether the case
 
 CHAPTER THREE 119 
 
 at bar is a case of competition. If it is, it must be a 
 part of the eternal order, and therefore privileged. 
 They make no effort to distinguish between kinds of 
 competition, and assume with equal naivete that to 
 distinguish between fair and unfair competition passes 
 the power of the courts and of the human understand- 
 ing. 
 
 In contrast to such a naive syllogistic procedure, is 
 the logic underlying the opinions of the liberal judges. 
 For want of better terms, I shall call this the func- 
 tional, genetic, evolutionary, historical, or situational 
 logic. For the sake of brevity, I shall restrict myself 
 to the term functional. According to this method in 
 ethics, we take the view that morals are group habits 
 formed to meet the requirements of a particular situa- 
 tion and are right, or function satisfactorily, when they 
 satisfy the wants of the group in that situation. If a 
 conflict arises, we should discover the conditions out 
 of which it arose, find out how the old system of morals 
 originated, analyze the situation in which it func- 
 tioned, and find out the elements which made the old 
 system satisfactory, analyze the new elements in the 
 changed situation which impair the usual functioning of 
 the old morals, then project an hypothetical solution, 
 keeping the good of the old system as much as possible 
 and making changes only for the new elements, and, 
 finally, try out the proposed solution in a practical 
 way. 
 
 In agreement with this method, we have found that 
 the competitive system grew out of ancient conditions 
 of monopoly and was approved by the judge of the
 
 120 MONOPOLY AND COMPETITION 
 
 transition period because it better satisfied the interests 
 of the pubhc. It did this because it allowed free range 
 to individual incentive and capacity; and success 
 depended, among other things, on good management, 
 prompt service, considerate treatment of customers, 
 abiUty to produce and sell goods of a quality and price 
 demanded by the customers, and on capital, which 
 however, was only one element. With reference to 
 the traders, the system was a success because they were 
 approximately equal in capital; and one could play 
 " the rule of the game" as effectively as the other. Un- 
 der such conditions, competition was the life of trade, 
 that is, on the whole it was worth more to the public 
 than it cost. When, however, a combination is intro- 
 duced into these conditions, then success depends prin- 
 cipally on the single element of capital against which 
 the other elements of success in the small trader are of 
 little avail. Competition, as between the combination 
 and the individual trader, instead of being the life of 
 trade, becomes the restraint of trade, the outcome of 
 which is inimical to the interests of the public. 
 
 When, under these conditions, a judge tells us that 
 what is right for an individual is also right for a com- 
 bination, he is unconsciously basing rights upon the 
 single element of capital. He fails to see that this 
 element in the combination destroys all the other values 
 of the competitive system. He assumes that a differ- 
 ence in magnitude does not produce a difference in 
 kind and he is led into this assumption because in law 
 both the individual trader and the combination possess 
 the common name of "person." When, however, the
 
 CHAPTER THREE 121 
 
 individual person and the corporate person are analyzed 
 and the elements of success in each are made distinct, 
 then such propositions fall to the ground. In general, 
 the judge who commits such fallacies fails to analyze 
 the situation in which the morals in question function. 
 He is satisfied to refer to cases which have nothing 
 more in common than some problem of competition, 
 and then to argue that, if in the case at hand, nothing 
 was committed that was forbidden in the past, the 
 act complained of is just and lawful. This sort of 
 procedure is quite correct when the cases referred to 
 and the act in question present identical situations. It 
 is then a matter of prudence to apply to the present 
 situation what has proved successful in identical situa- 
 tions in the past, and, only when such a motive is 
 present in the consciousness of the judge, is this refer- 
 ence to past cases profitable. But the judge who says 
 that what is lawful for individuals is lawful for com- 
 binations wholly ignores their respective situations and 
 deals only with rules in the abstract. He assumes that 
 an old competitive rule must ipso facto apply to a com- 
 petitive situation, forgetting that one competitive situa- 
 tion may be wholly different from another. A judge 
 proceeding in this way, rather than take the pams of 
 analyzing the differences in situation, which make a 
 rule right in one case and wrong in another, will rather 
 devise new arguments in defense of the old rule such as 
 "the survival of the fittest," "the interests of the 
 stronger," "the right to pursue trade for one's own 
 interests," and so on. We may accept these argu- 
 ments and assume with them that right is with the
 
 122 MONOPOLY AND COMPETITION 
 
 stronger, if we remember that both individuals and 
 combinations are members within the state, which, 
 being the strongest of all, may, on Judge Brannon's 
 principle of "natural law," crush either individuals or 
 combinations, provided it is for the state's "own inter- 
 est." These would be "natural" acts; for, if the acts 
 by which a combination destroys competitors are "na- 
 tural," the acts of the state, which is the mother of the 
 combination, cannot be other than "natural." 
 
 It is not necessary to say more in criticism of the 
 conservative opinions. They are based on fallacies, 
 and, of such fallacies, monopolies are an expression. 
 How they are, we have indicated above. I wish, how- 
 ever, to make clear the merits and reasonableness of 
 the opinion of the liberal judges. They are conscious 
 of the grounds upon which laws are based, and, that 
 this consciousness is a fundamental cause of these 
 enlightened opinions, is evident to everyone who reads 
 them. An equally fundamental factor is that they 
 study, not only the concrete situation in which the 
 laws in question function, but also their concrete effects 
 upon society. It is this which reveals to them that a 
 difference in magnitude makes a difference in kind and 
 that a changed situation demands a new rule. This is 
 not derived from a priori and syllogistic reasoning, but 
 is made evident by inductive reasoning from experience, 
 from facts of observation. And, by analogy, if birds 
 must have a different sort of locomotion in the air than 
 on the earth, and, if fishes must breathe differently 
 from horses, it is not unreasonable that large com- 
 binations should have a different method of conducting
 
 CHAPTER THREE 123 
 
 business than small traders. In all cases, it is the 
 changed situation that demands a new behavior. 
 Morals are no exception to the functional character of 
 biological behavior of which they are a part. To know 
 this fact is more important in the administration of 
 justice than to know law. What judges need is not 
 so much a knowledge of law as a knowledge of philoso- 
 phy, and by philosophy in this connection I mean a 
 knowledge of the principles, logical and ethical, upon 
 which morals are based, on awareness of the proper sort 
 of methodology in practical reasoning. 
 
 Aside from the matter of methodology, the issue in 
 conflict of these cases is whether business is a matter 
 of private interest and of private law, or a matter of 
 public interest and public law. The conservative 
 judges take the former view; and the liberal judges the 
 latter view. The conservatives, therefore, do not see 
 a difference in kind between the business of a private 
 individual and that of a large combination. The lib- 
 erals say that, because business is affected with a public 
 interest, the combination cannot refuse service to any- 
 one, but must, without discrimination, serve all who 
 apply; and further that it cannot destroy competition 
 by doing business at a loss. The difference in magni- 
 tude between a private individual and a corporation 
 is important here. When a corporation becomes so 
 large that its capital, business organization, and num- 
 ber of employees equals that of the government itself, 
 and, when it supplies an article of necessity to every 
 community throughout the state's territory, it holds 
 within its grip the fortunes of individuals quite as much
 
 124 MONOPOLY ANT) COMPETITION 
 
 as the state itself, and is equally afifected with a public 
 interest. To anyone alive to modern conditions, there 
 can be no doubt that business combinations should 
 come within the public law and perform their duties 
 with the same sense of obligation as the state itself; 
 that is, give service to all impartially and without dis- 
 crimination. Such a regime has, besides the economi- 
 cal advantage by compelling both combination and 
 individual to succeed on their merits, for it allows the 
 individual to engage in business beside the combina- 
 tion, provided he can produce just as cheaply and sell 
 at the same margin of profit. If, however, the individ- 
 ual trader cannot succeed under these conditions, it is 
 difficult to see how the public is benefited by his reten- 
 tion. The state then might allow monopoly and check 
 the competition on prices by government regulation. 
 I cannot properly conclude this section without rais- 
 ing the question of the meaning of public interest, 
 which is the ethical criterion used by the liberal judges 
 and also referred to by one of the conservative. That 
 an adequate analysis of this concept is necessary is 
 evident because different judges come to opposite con- 
 clusions in reasoning from the same standard. This 
 must be the case so long as its meaning is left to indi- 
 vidual opinion.
 
 CHAPTER IV 
 
 The Change from Private to Public Service 
 Methods in Determining Prices' 
 
 We have seen that the tendency of the Hberal judges, 
 quoted in the last chapter, is to treat large industrial 
 corporations as affected with a public interest and 
 impose upon them the same restrictions and obligations 
 as are now imposed upon public service corporations 
 like the railroads. If this view should be generally 
 accepted, the courts will have the additional obligation 
 to determine what fair prices are for the commodities of 
 these corporations, just as they had to determine what 
 fair rates are for a railroad. Little has been done in 
 this direction, but the conflict will be the same as in 
 the previous cases; that is, whether large industrial 
 combinations should continue to charge all that the 
 commodities will bear, the principle of competitive and 
 private business, or whether they should base their 
 prices upon cost of production, the principle of public 
 service business. In order to decide upon this issue, 
 we must again review the conditions that are supposed " 
 to determine fair prices in competition and then exam- 
 ine how these conditions are changed in a monopolistic 
 business. 
 
 Section I. The principle for determining a fair price 
 under competition. 
 
 In the competitive system it is supposed that charg- 
 ing all you can get in an open market determines a 
 
 ^\ partial reproduction of the author's paper, "The Combina- 
 tion versus The Consumer," Int. J. of Ethics, Jan. 1913.
 
 126 MONOPOLY AND CORPORATION 
 
 fair price. In Adam Smith's system, such a price was 
 called the natural price of a commodity and covered the 
 cost of bringing an article to market, including subsis- 
 tence for the wage-earner, subsistence for the trader, 
 and the ordinary rent to the land-owner. The rela- 
 tions of supply and demand tended to keep the market 
 price at the level of the natural price. Adam Smith's 
 argument for this tendency is as follows: 
 
 "If at any time it (the quantity of any commodity) 
 exceeds the effectual demand, some of the component 
 parts of the price must be paid below their natural 
 rate. If it is rent, the interest of the landlords will 
 immediately prompt them to withdraw a part of their 
 land; and if it is wages or profit, the interest of the 
 laborers in the one case, and of their employers in the 
 other, will prompt them to withdraw a part of their 
 labor or stock from this employment. The quantity 
 brought to market will soon be no more than to supply 
 the effectual demand. All the different parts of the 
 price will rise to their natural rate, and the whole price 
 to its natural price. If, on the contrary, the quantity 
 brought to market should at any time fall short of the 
 effectual demand, some of the component parts of the 
 price must rise above their natural rate. If it is the 
 rent, the interest of all other landlords will prompt them 
 to prepare more land for the raising of this commodity ; 
 if it is wages or profit, the interest of all other laborers 
 and dealers will soon prompt them to employ more labor 
 and stock in preparing and bringing it to market. 
 "The quantity brought thither will soon be sufficient 
 to supply the effectual demand. All the different parts
 
 CHAPTER FOUR 127 
 
 of the price will soon sink to their natural rate, and the 
 whole price to its natural price. 
 
 "The natural price, therefore, is as it were, the central 
 price to which the prices of all commodities are con- 
 tinually <];ravitating. Different accidents may some- 
 times keep them suspended a good deal above it, and 
 sometimes even force them down below it. But what- 
 ever may be the obstacles which hinder them from 
 settling in this center of repose and continuance, they 
 are constantly tending towards it."^ 
 
 A modern version of this argument with its ethical 
 bearings is given by President Hadley: "The idea that 
 each article has a value or just price based on its cost 
 of production, and that the trade is moral or immoral 
 according as the trader based his charge upon this cost, 
 was at one time quite universal and is held by many 
 persons even at the present day. . . . To begin with, 
 while it makes provision against extortionate profits by 
 the trader on some articles, it does not say how he is 
 to be protected against losses on others. What will 
 happen if buyers are not prepared to pay a price for 
 the article which covers the cost of production? You 
 cannot compel a man to purchase when he would 
 rather go without the articles than pay the price 
 charged. You cannot compel the trader to leave the 
 goods unsold on his shelves because the just price is 
 not forthcoming. You must let him sell at a loss. 
 But if he sells some things at a loss and is only allowed 
 a fair profit on others, his business in general is a 
 
 ^ Wealth of Nations, Cannan's edition, pp. 59, 60.
 
 128 MONOPOLY AND COMPETITION 
 
 losing one. He must be allowed to make extra charges 
 on the things that the pubUc will buy, to make up for 
 his failures on the things the public will not buy. 
 
 "But there is a deeper practical difficulty than this. 
 The attempt to prohibit a trader from selling an article 
 for more than it cost may become disadvantageous to 
 society as a whole. Take a concrete case, which was 
 frequently occurring in mediaeval communities. There 
 is a scarcity of wheat and a deficiency in the bread sup- 
 ply. Those who have the wheat or the bread to sell 
 are anxious to put the price up. They are not allowed 
 to do it. The church threatens them with everlasting 
 penalties in the next world, and, more immediate if not 
 more important, the magistrates threaten to cut off 
 their ears in this. Of course, the price stays where it 
 was. No man is going to imperil his soul's salvation 
 and his ears at the same time. The consequence is 
 that, as long as the supply lasts, the consumption of 
 bread goes on at the same rate as before. Then there 
 is a sudden and appalling famine in which whole vil- 
 lages are desolated. Contrast the working of the 
 modern principle of letting people charge what they 
 can get. Those who own the food supplies raise their 
 prices as soon as they see the scarcity threatening. 
 This enhancement of price causes people to be more 
 economical in the use of bread, so that the old supply 
 lasts longer. It also gives people a motive to arrange 
 for the importation of wheat from other markets in 
 time to prevent the most acute forms of famine. Of 
 course, there is some hardship. The poor feel the 
 increased price of bread acutely; and when they see
 
 CHAPTER FOUR 129 
 
 that this price goes to swell the profits of traders who 
 had more money than the consumers to begin with, 
 they are more jealous of the injustice. But the moder- 
 ate hardship to the consumer when the price of bread 
 begins to rise prevents the awful and appalling loss 
 which he would suflfer in seeing his children die before 
 his eyes if all the bread in the community were used 
 up; and the extra profit to the seller is a small price for 
 the public to pay if the seller thereby is stimulated to 
 bring in additional supplies before the acute stage of 
 famine is reached. . . . 
 
 "If you fix an arbitrary price, there may be a per- 
 manent scarcity, where some of those who most want a 
 thing will not get it at all. If you let the price fix itself, 
 the men who want it most get the thing for the moment, 
 while the producers who charge unfair profits soon find 
 the price reduced to the level of cost of production by 
 the competition of others who enter the same line of 
 business. . . . Instead of saying that a just price was 
 one that conformed to the cost of production, they 
 (the followers of Adam Smith) said that a just price 
 was one that was obtained under fair competition in an 
 open market. The competition of producers prevented 
 it from getting too high; the competition of consumers 
 prevented it from getting too low. The net result was 
 a price that better met the necessities of society than 
 any other; and the trader, as long as his actions were 
 fair and above board, did a public service by producing 
 this competitive market price which fully warranted 
 him in pocketing any he could get. In the eyes of 
 those who held this \iew, any price which could be
 
 130 MONOPOLY AND COMPETITION 
 
 thus obtained, without fraud or concealment, was of 
 itself a fair price."^ 
 
 For convenience President Hadley's argument may- 
 be summed up as follows: (1) You cannot charge more 
 than the commodity will bear. But if this price falls 
 below cost on some articles, you must make up the 
 deficiency by charging extra prices on other commodi- 
 ties that will bear them. (2) A fixed price conformmg 
 to cost may result in waste and scarcity. But this is 
 avoided by leaving the price free since it necessitates 
 thrift and increased production. (3) Under a fixed 
 price, people who most want a thing often fail to get it, 
 while under a free price they are able to get it by paying 
 the price. (4) A price determined naturally in an open 
 competitive market is just, since if one merchant charges 
 extortionately, his competitor promptly undersells him. 
 (5) Therefore, prices and production, if left to them- 
 selves, produce far more favorable results to society 
 than a system of control according to some imaginary 
 standards of justice. 
 
 The soundness of this argument for the natural and 
 automatic justice resulting from the competitive system 
 depends altogether upon the truth of the underlying 
 assumptions, namely, those of fair competition and an 
 open and free market. With reference to the open 
 market it assumes a free flux and change of all the 
 factors of industry. If the laborer is engaged in an 
 industry in which there is an over-production, he is 
 free either to withdraw or to change to an industry in 
 which there is a scarcity of production. Similarly, the 
 ^Standards of Public Morality, pp. 37-43.
 
 CHAPTER FOUR 131 
 
 capitalist can either shut down his plant or lake up 
 another line of manufacturing, and the land-owner can 
 either withdraw his land or begin growing crops in 
 which production is scarce. That is to say, a laborer is 
 free to stop coal-mining and promptly begin work either 
 as a baker or an engineer or as a skilled mechanic in a 
 steel plant. The rolling mills in steel could stop turn- 
 ing out steel rails and begin the manufacture of shoes 
 or lumber. 
 
 Not only is such a perfect flux required to make the 
 system always yield natural prices but also a pre- 
 knowledge of all the conditions and factors that bring 
 about changes in the market price. For example, if 
 there were going to be a dry season in Western Canada, 
 during the next year and a favorable season in Southern 
 Russia, the Russians, in order to avoid scarcity in the 
 wheat market, would have to know this fact and bring 
 a greater number of fields under cultivation, and the 
 Canadians would have to know it so as to avoid an 
 over-supply of labor and a useless putting out of crops. 
 The over-supply of labor in Canada would either have 
 to move to Russia or find employment in other indus- 
 tries in which there would be a scarcity of production. 
 In fact, nothing short of an absolute knowledge of the 
 world would satisfy the necessary conditions. 
 
 It is well known that this mobility with respect to 
 industry does not exist. There is an element of per- 
 manency to be considered. In the laborer it is habit; 
 in the capitalist, the fixity of machinery; and in land, 
 the nature of soil in the relation to the seasons of the 
 year. The laborer cannot change and train his habits
 
 132 MONOPOLY AND COMPETITION 
 
 for a new trade and in the meantime support his family; 
 nor is he free to withdraw his labor, for he usually has 
 no surplus. The capitalist cannot shut down his plant 
 for a very long time without infringing upon his divi- 
 dends and credit. Nor can the land-owner usually fore- 
 go his rent without some injury or failure in his business 
 relations. So far, then, as there is permanency in any 
 of the factors of industry, the natural or fair price in 
 an open competitive market will not be obtained. So 
 if there is a scarcity in wheat, it will probably be a year 
 before the production will be increased. If it is in 
 steel, or in coal, the scarcity may never be remedied, 
 for no more mines may be available to new com.petitors. 
 In such a case, the market price could always be main- 
 tained above Adam Smith's natural price. 
 
 In this view, then, the assumption of the Tree mobility 
 of the factors of industry is taken with too much ex- 
 travagance and in so far invalidates the natural and 
 automatic justice of the competitive system. There is 
 an equal extravagance with regard to the assumption 
 of fair competition. For competitors fair competition 
 obtains when the rules and opportunities under which 
 they operate, apply equally to all. It is not so import- 
 ant what the rules are as it is to have them affect each 
 alike. We have seen that there are many ways in 
 which this condition is violated. The combination can 
 start a siege of price-cutting upon a small trader and 
 wholly destroy his business by spending only a small 
 part of its capital. Because of its ability to supply 
 the carrier with a large and regular traffic, it can obtain 
 a rebate large enough to cover the small shipper's
 
 CHAPTER FOUR 133 
 
 profit and so close the market against him. Because of 
 its extensive capital and organization, it can carry on 
 a system of espionage by which railroad and competi- 
 tors' employees are paid for furnishing information 
 about the small trader's business, through which in- 
 formation it can go to the competitor's customer and 
 get his trade either by offering lower prices or even 
 by giving the goods gratis; or, if it has a monopoly on 
 some goods which the customer must have, by refusing 
 to trade with him at all unless he ceases to patronize 
 competitors; or, if the customer is a small dealer, by 
 threatening to open competition with him and ruin 
 his business. The combination can also promote its 
 own business and injure that of a competitor through 
 improper use of the press and through questionable 
 advertising. It can furnish editors with editorials 
 which discount the wares of the competitor and praise 
 the merits of its own, or it can cause advertising to the 
 same effect to be printed in the reading columns in the 
 form of disinterested news. It can also go before a 
 legislative body and often by means of its capital alone 
 secure legislation favorable to itself but unfavorable to 
 competitors; or it can employ able lawyers and solici- 
 tors who, through their persuasion often secure the same 
 sort of legislation. And with respect to matters in the 
 courts it is well known that the combination can ga'n 
 much through delays and appeals which are quite 
 impossible to small traders. In these and many other 
 ways the combination can carry on competition from 
 which the small trader is almost wholly deprived be-
 
 134 MONOPOLY AND COMPETITION 
 
 cause of his small capital. But this competition is 
 bound ere long to prove fatal to his business. 
 
 It is seen, therefore, that there are competitive meth- 
 ods and privileges which do not aflfect all traders alike. 
 On the contrary, they close the market to the small 
 trader and bring monopoly to the combination. The 
 fair competition in an open market which the classical 
 economists and their followers suppose will naturally, 
 bring a fair price is quite fallacious; for as soon as the 
 competitors become unequal fair competition comes to 
 an end. 
 
 Since, therefore, both the assumptions of the free 
 mobility of the factors of industry and of fair compe- 
 tition in an open market are fallacious, it follows that 
 the fair price which these conditions are supposed to 
 yield is a fiction. It would, however, be unfair to both 
 Adam Smith and President Hadley to say that they 
 failed to recognize this fiction under conditions of mon- 
 opoly. The error is that President Hadley supposes 
 fair competition to prevail generally while monopoly 
 is the exception. 
 
 Let us suppose that the combination, because of its 
 carrying on competition in ways that are not open to 
 the small trader, establishes a monopoly. What then 
 happens to the price? The combination still supposes 
 that charging all it can get brings a fair price. The 
 consumer is not compelled to buy. If then the com- 
 bination is willing to sell at a given price and the con- 
 sumer is willing to pay that price, the result is a fair 
 price. Even if the price is more than twice above cost 
 the consumer is still not overcharged for he was willing
 
 CHAPTER FOUR 1.^5 
 
 to pay the price asked. This is the point of view taken 
 by the combination. Undoubtedly a contract made 
 between two reasonable beings is fair, provided they are 
 equally dependent upon each other. The question is then 
 whether the monopolist and the consumer are equally 
 dependent upon each other. The monopolist must, of 
 course, sell his goods in order to make profits. He 
 cannot sell them for more than they will bear. But his 
 business is not dependent upon any one individual's 
 purchase. So what independence the individual pur- 
 chaser has is limited by the number of his alternatives, 
 that is, the number of substitutes which he has for the 
 goods which the monopolist sells. If the monopolist is 
 a carrier to a central market from a point where the 
 only important produce is wheat, it is clear, as we have 
 pointed out before, that the farmer's alternatives are 
 few, that his profits will depend upon the carrier's 
 rates, and that the carrier can dictate to the former 
 in what proportion he shall divide his profits with him. 
 If wheat sells for 80 cents per bushel at the central 
 market and 15 cents per bushel is a fair rate for the 
 carrier, that is, a rate high enough to permit him to 
 conduct an efhcient business, then the farmer should 
 receive 65 cents for his wheat. But the carrier may 
 raise his rate to 30 cents and reduce the farmer's price 
 to 50. The farmer is still compelled to sell at 50 and 
 pay the carrier 30 for the grain is useless in his gran- 
 ary and he has no other way of disposing of it. He 
 must therefore sell in order to be able to purchase 
 goods needed, such as farm implements, clothing, and 
 books. Where, then, the carrier has a monopoly, he
 
 136 MONOPOLY AND COMPETITION 
 
 can determine in what proportion the shipper shall 
 divide his profits with him. Again, suppose the monopo- 
 list is a manufacturer of gas in a city. Previous to 
 the monopoly there was competition in the gas business 
 and consumers received rates of "5 cents per 1,000 
 feet. But this did not yield an average profit upon 
 the investment. The result was a combination and the 
 rates raised to $1.25. During the competitive regime 
 consumers found gas a cheaper and more convenient 
 fuel than any other materials. Accordingly, they dis- 
 carded all their stoves and furnaces and had their 
 houses supplied with gas fittings. In this way gas 
 became organized as a necessary element in the con- 
 sumers' lives so that it was impossible to dispense with 
 it without great inconvenience. Consequently, the con- 
 smner will pay the high rate, although with reluctance 
 and complaint. But a rate of 80 cents may be enough 
 to enable the monopolist to carry on a flourishing busi- 
 ness and pay a good return upon his investment. The 
 extra 45 cents must, therefore, be looked upon as a tax 
 which the manufacturer is able to levy because of his 
 power of monopoly. Again, the monopolist is able to 
 compel the consumer to divide his earnings with him. 
 To bring out the point more clearly, we may cite the 
 classic example of the baker's monopoly. A starving 
 man with a dollar in his pocket has the alternative of 
 parting either with his life or with his dollar for a loaf 
 of bread. He chooses to spend his dollar, although 
 five cents would have been enough for the baker. 
 
 From these illustrations it is clearly seen that when a 
 trader once has a monopoly upon a useful commodity.
 
 CHAPTER FOUR 137 
 
 the equal dependence between seller and buyer is de- 
 stroyed. The buyer has lost the alternative of compe- 
 tition which prevented him from being over-charged 
 and he is unable to find substitutes which are equally 
 as good and cheap as the monopolist's products. So 
 long, therefore, as the monopolist is left to bargain 
 individuallv with each consumer, there is no equality 
 and a free and fair contract is impossible. To make 
 the monopolist and the consumer equally dependent 
 upon each other, all the consumers must combine and 
 bargain collectively with the monopoHst or combina- 
 tion of traders. The monopolist then must sell to this 
 combination of consumers in order to realize any profits, 
 and he must sell at such prices as the consumers think 
 reasonable. The consumers would pay a price sufficient 
 to enable the monopolist to carry on a flourishing busi- 
 ness and receive an average return upon his capital, 
 for otherwise they could not get the monopolist's goods 
 in the quantity and quality in which they want them. 
 In this way alone can the consumer bargain fairly with 
 the monopolist. 
 
 But then there is the practical problem of forming a 
 combination among the consumers, for in not a few 
 cases the consumers are scattered over an entire nation 
 and, in some, over many nations. It is unnecessary 
 that the consumers of separate nations combine, for as 
 yet there is no combination of manufacturers with which 
 a single nation cannot deal fairly and equally. But the 
 consumers of a given nation are already combined and 
 have an organization in the State. Their recourse is 
 then to have the State bargain in their behalf with the
 
 138 MONOPOLY AND COMPETITION 
 
 monopoly. There are many reasons for making this ar- 
 rangement. Only the State can bargain fairly with the 
 combination. The State protected consumers against 
 unreasonable prices in allowing traders to freely com- 
 pete with each other. It allowed traders to charge all 
 they could get, for in an open market under fair compe- 
 tition they could not get too much. But competition 
 often became too strong and caused too many traders 
 to fall into brankruptcy. To avoid this, the State 
 allowed traders to combine for regulating production 
 and prices. This made possible unequal competition 
 between the combination and the small trader. The 
 Slate failed to prevent this and the result was monopoly. 
 The monopoly still kept on charging all it could get. 
 But charging all it could get in a closed market under 
 no competition proved to be extortion to the consumer. 
 To prevent this, the State should again resume its 
 protection of the consumer, not necessarily by rein- 
 troducing competition, but by regulating the monopoly. 
 It should do this not only because of its former protec- 
 tion of the consumer against unfair prices, but also 
 because, if it protects the trader against the wastes of 
 competition and of unregulated production, it should 
 treat the consumer equally well by protecting him 
 against the extortion of monopoly. 
 
 I believe the justness and fairness of this reasoning 
 and conclusion to be indisputable. Charging all you 
 can get in an open market under fair competition brings 
 fair prices. But charging all you can get in a closed 
 market under no competition is extortion just as taxa- 
 tion without representation is tyranny. Even under
 
 CHAPTER FOUR 139 
 
 competition, charging all you can get is not fair unless 
 the competition is fair and affects all traders alike, large 
 or small; for just in so far as competition is unequal, 
 and !ust in so far as a trader enjoys monopoly, he can 
 charge unreasonable prices. If the State, then, relies 
 upon competition to bring justice to the consumer, it 
 should undertake to make competition fair and make 
 the "rules of the game" apply equally to all. But if 
 it allows monopoly, then it is obliged to regulate it. 
 All the arguments against State interference wth the 
 course of trade, however applicable to conditions of fair 
 competition, lose all their force as applied to monopoly; 
 for, under monopoly, prices and production are no more 
 free and left to adjust themselves. On the contrary 
 they are fixed and regulated by the monopolist. The 
 consumers or people then have to choose between a 
 price as fixed by the monopolist, who regulates the 
 price primarily with reference to his own interests, and 
 a price as fixed by an intelligent Public Service Com- 
 missioner, who regulates prices with reference to the 
 interests of all, both consumer and producer. To sup- 
 pose that an intelligent and disinterested commissioner 
 could not do as well as a self-interested monopolist is 
 presumptuous and requires proof, especially in view of 
 the success of some present-day Public Service Com- 
 missions. To recite the failures and disasters of medi- 
 aeval regulation is no argument; for the mediaeval 
 idea of a fixed price, which did not recognize changes 
 required by new conditions, is not necessarily adopted 
 by a modern commission which does recognize such 
 changes. Moreover, in medieval times the judge
 
 140 MONOPOLY AND COMPETITION 
 
 thought it sufficient to fix prices %vithout interfering 
 with, production, and this was the cause of his failure. 
 But in the present day we are in control of both pro- 
 duction and prices, and, therefore, conditions are 
 favorable for the success of public regulation. 
 
 Looking back over our argument, I believe we may 
 safely conclude that the methods of charging common 
 between indi\-idual traders in competition cannot be 
 adopted without change by combinations or monopohes. 
 Such an adoption is just as disastrous to the consumer 
 as are the methods of LndiN-idual competitors to the 
 small trader when played against him by the com- 
 bination. To insure the consumer as fair deahng under 
 conditions of monopoly as he received from indi\-idual 
 traders in competition, the State must directly regu- 
 late the monopoly. That is to say, under these con- 
 ditions we must abandon the view that the business 
 of a large industrial combination is a matter of pri- 
 vate interest and private law, and on the contrary, 
 we should treat them as pubUc service corporations 
 required to operate under the laws governing a busi- 
 ness of that nature. The judicial and legal problem 
 will be solved by applying to manufacturing and 
 marketing concerns the principles now appUed to rail- 
 roads.
 
 SUMMARY 
 
 In regard to the character of morals, we noticed that 
 the phase of moraUty, constituted by judicial law, is 
 a matter of growth and evolution. The growth is 
 occasioned by a change in the environment or situation 
 in which the laws are designed to funct'on. When such 
 a change occurs, the old rule is at first generally applied 
 to the new situation without alteration. After it is 
 discovered that the results are unsatisfactory, then 
 a change in the rule is proposed giving rise to a conflict 
 between old and new rules. This usually takes place 
 between two types of judges, namely the conservative 
 and the liberal. The conservatives ignore the changed 
 conditions and are governed principally by precedent. 
 They merely consider whether the act in question was 
 forbidden in the past, and, if it was not, they argue in 
 a syllogistic fashion, without examining the grounds of 
 their premises, that the act is lawful. The liberals, on 
 the other hand, take account of the changed conditions 
 and are governed primarily by the facts of the case. 
 Precedent failing them, they appeal to the public inter- 
 est which they consider the criterion of authoritative 
 law. In formulating a new rule, they use functional 
 and inductive logic as against the syllogistic. It is this 
 which enables them to construct and reach a new con- 
 clusion. 
 
 The changing character of morals is nowhere more 
 conspicuous than in those of monopoly and competition.
 
 142 MONOPOLY AND COMPETITION 
 
 Competitive morals grew out of previous monopolistic 
 conditions and were approved because they better satis- 
 fied the public interest, and, on the whole, were worth 
 more to society than they cost. They functioned satis- 
 factorily so long as industrial conditions were genuinely 
 competitive and individual traders were approximately 
 equal in capital. Because of this, they in course of 
 time were definitely crystallized into the common law. 
 But, when large combinations were introduced and con- 
 tinued the customs of individual traders, competitive 
 morals made the capital of the combination the principal 
 element of success, enabled it to crush small traders 
 and establish a monopoly which was not in the interest 
 of the public. This result was first observed in the 
 case of the railroads which were in consequence removed 
 from the concept of private law and private business 
 to the concept of public law and public business, and 
 accordingly required to conduct their business impar- 
 tially and without discrimination. Manufacturing and 
 marketing combinations are now passing through the 
 same stage. I believe our analysis has shown that their 
 business is essentially public in character, and, that if the 
 interests of the consumer are to be as well protected 
 as under the old competitive regime, these large indus- 
 trial combinations must be treated as public service 
 corporations governed by public law instead of by pri- 
 vate law. The fact that they now operate under pri- 
 vate law is the principal cause of our present industrial 
 problems. 
 
 As business conditions change from the private, indi- 
 vidual, and competitive system to the public, combina-
 
 SUMMARY 143 
 
 tional, and monopolistic system, there must be a cor- 
 responding change in the working principles from charg- 
 ing what the commodity or traffic will bear to charging 
 prices and rates yielding a fair profit over cost of pro- 
 duction or service. In general, this is a change from 
 charging all you can gel to charging only what is needed 
 for conducting an efficient business.
 
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