1. Examination of the course of prices in the case of some notable trusts shows that, wherever effective, they raise prices above the competitive rate possible to smaller production. The most instructive study in the subject is that undertaken by J. W. Jenks a number of years ago, and later developed by him when working with the Industrial Commission from 1898 to 1900. Its results are embodied in a series of charts. It appears that the price of refined petroleum, in 1871, was twenty-five and seven tenths cents per gallon; in 1880, eight and six tenths cents; in 1887, seven and eight tenths cents; in 1900, seven and eight tenths cents. A writer in the "North American Review" claims that this decline was due to the economies accomplished by the Standard Oil Trust. It will be noticed, however, that prices fell most rapidly (from twenty-five and seven tenths cents to eight and six tenths cents) between 1871 to 1880, a period of intense competition, when the industry was new, and when the independent companies, fighting for their existence, introduced many improvements and began the construction of the pipe-lines that were later secured by the Standard Oil Co. Despite this rapid decline, the smaller companies still could have maintained a profitable business had it not been for the ruinous discrimination of the railroads against them. Because of this, the Standard Oil Co., in 1880, obtained almost complete control. The price twenty years later than that date was less than a cent cheaper. In the meantime the price for a time continued to fall. Competition was never quite stilled. The small competitor, wherever he saw a chance, has nibbled off a bit of the tempting profits. The rise from 1898 to 1900 was in accord with that occurring in other lines. A much lower cost of production is now possible to the great monopoly with its larger sales and more economical methods. The by-products, unknown at the beginning of the period, now yield large sums, yet the price remains much the same as a quarter of a century ago. The trust has succeeded in retaining a large part of the increasing margin of price over cost.

Trusts raise prices.

The oil trust.

The sugar trust.

The influence of the sugar trust may be studied by what is known as the method of differentials. The differential in sugar is the difference between the cost of the raw sugar and the refined granulated sugar. Raw sugar is the main material and the principal fluctuating item of cost beyond the control of the trust. Changes in the differential reflect the changes in profits except as modified by a cheapening of the process. The period from 1880 to 1887 was one of great competition. In 1880, the differential was one and ninety-two hundredths cents on each pound of refined sugar, but it fell steadily till, in 1887, it had reached sixty-four hundredths cents. In the fall of that year the trust was formed; and the next year the differential had risen to one and twenty-five hundredths cents, in 1889 to one and thirty-two hundredths cents. Tempted by the enormous profits, the rival refineries of Claus Spreckel were started, and with competition the differential fell, in 1890, to seventy hundredths cents. The rival factories were then bought up and under the new combination the differential went sailing up to one and three hundredths in 1892, and to one and fifteen hundredths in 1893. Rival factories again arose and competition grew stronger, reducing the differential to ninety-four hundredths in 1894. It was in that year that the firm of Arbuckle Brothers and Claus Doscher each opened a great refinery, and in the next year the differential fell to fifty hundredths cents. In 1900, some agreement, the terms of which were unknown to the public, was entered into by the rivals and the differential had risen, in March, 1901, to ninety-five hundredths cents. In every case the differential fell when competition was effective and went up when monopoly power was regained.

The differential of steel-wire nails is the difference between the cost of the steel billets and the price of the wire-Between 1890 and 1895 there was a steady decline in the differential. In 1895 was formed the nail pool, an agreement to share the profits, a form of combination. A rapid advance took place, both in the price and in the differential. In the fall of 1896 the pool was broken and then occurred a fall in prices and in the differential during 1896-97. In January, 1899, the nail trust was formed, controlling sixty-five to ninety-five per cent, of the output of wire nails, and a rapid advance occurred in the price and also in the differential.

The nail trust.

The tin-plate industry practically had its origin in the United States, in 1892, under the McKinley tariff. As competition increased, prices and the differential fluctuated and declined. At the end of 1898 the tin-plate company was formed and prices at once started upward with a rapid increase in the differential. Cause may, in a measure, be mistaken here for effect. In these cases the part of the rise in price due to the rise of materials is not brought about by the trust. The differential represents its part of the productive process and its source of profits. The power to make the differential high is due in part to the general conditions of business in the last three years considered. The profits of all industries in those years increased. While prices may have risen partly because the trust was formed, it may have been possible to form the trust because prices were rising. The general conclusion is that trust prices are always raised when, and to the extent that, control is secured. They are lowered below normal prices when competition becomes troublesome. Fluctuation of prices probably has been more rapid and more spasmodic under trusts than it has been under ordinary competitive conditions.

The tinplate trust.

Effective trusts injure various producers.

2. A large degree of monopoly control may lower the incomes of producers of materials, the value of competitive plants, and prices in special local markets. A strong selling monopoly tends to become also a buying monopoly. A great industry using great quantities of materials may either own the sources or purchase from small producers. The steel trust owns mines, and ships and railroads to bring the ore to the furnaces; but the tobacco trust buys from the farmers. If the packing, refining, and marketing of a product is monopolized, the sellers of the raw or partly finished product are subject to one-sided competition. The small producers of tobacco, of crude oil, and of anthracite coal claim that the effect of the trusts is to give them lower prices for their products. Some have been severely punished by the monopolies for refusing to take the first offer made. Monopoly is thus likewise able to purchase competing plants at ridiculously small sums, by first making them valueless through fierce price-cutting, or by threats of it. "Rich" is often a relative term, and it is said that many a small millionaire producer has anxiously waited to see whether the great trust would next turn its attention to him.

3. Competition of less capable producers works in most cases to prevent the great or continued rise of trust prices. Early trusts overestimated their power. The persistence of competition in industries where the trusts have had great advantages in position and resources has been astonishing. The wall-paper trust, though for many years it kept prices above competitive rates, was repeatedly undermined by competition. The whisky trust, while it frequently raised prices, was as often forced by the growth of small distilleries to lower them below competitive rates. Competition in the oil industry has persisted under the greatest difficulties. The smaller companies have hauled the product by wagon when the trust was moving it by pipe-lines. The continuance of high prices by a trust depends on a high degree of control of supply. A recognition of the limits of their power has led trusts in some cases to a policy of moderate prices, affording a good profit, but not encouraging competition.

The persistence of competition reducing prices.

The limits of the power of the trust to control prices are strikingly shown by the fact that it cannot even insure low prices if the market conditions do not justify them. The steel trust, in 1902-3, declared that it would not advance the price of steel rails above twenty-eight dollars, and this was hailed as a beneficent effect of trust control, which, by equalizing production, could prevent excessive fluctuations of price. But the trust's declaration was a bit of inexpensive humor on the part of the managers; the trust had nothing to sell at the price quoted, as its entire product had been sold out months in advance. While, therefore, the trust continued calmly to quote steel rails at twenty-eight dollars, competition raised the market price to thirty-three dollars a ton; twenty-eight dollars or more was paid for second-hand rails, and a proportionate price for other iron products. Such exceptional conditions, raising prices to abnormal levels, are followed by a decline disastrous not only to the small producer, but to the trusts as well.

Supply as the condition of low prices.

Modes of controlling trusts.

4. The control of the trusts must be sought in the direction of maintaining potential competition through fair and free conditions of industry. Many of the remedies suggested are reactionary and would give up the benefits of large production. Measures must be sought in harmony with the economic principles of price. Since many of the trusts have grown wealthy by special shipping privileges from the great quasi-public corporations, the railroads, and by special favors from public or corporation officers, who have been false to their duties, the solution must be a political and moral one; it must be sought in the development of honest citizenship and of a more efficient social regulation of quasi-public industries. The conditions of competition may be made fairer by requiring publicity of accounts, and by making it impossible for great corporations to strangle their local competitors by special and temporary prices. The state here has the same duty to perform that it has to protect the weak man from personal violence at the hands of the strong. This will not prevent competition, but it will determine the ways in which the rivalries of men can be manifested. Any measures for controlling the great combinations must start from a right understanding of the law of value, neither underestimating nor overestimating their economic power. Public sentiment toward the trust question has changed somewhat in recent years, because the nature of trusts and the extent of their power are better understood. There is now less fear of them, and more confidence that they can be tamed and made to serve the welfare of society.

Questions On Chapter 35. Effect Of Trusts On Prices

1. Can the large factory always outsell the small one? Why?

2. Why are trusts or selling agreements formed?

3. Describe any agreement of which you know, made between merchants or manufacturers for the purpose of regulating prices. Did prices go up or down as a result?

4. Would it be a good thing for society if a trust made great economies in production, crowded out its smaller competitors, and maintained prices just where they were before, dividing among its shareholders the amounts saved?

5. How would the effects on society be different if prices were reduced by better organization and. the prevention of waste?

6. Is it good public policy to allow a trust to undersell its smaller competitor in one district while it keeps up its prices elsewhere?