The Regulation of Competition Versus the Regulation of Monopoly by Louis D. Brandeis

An address to the Economic Club of New York on November 1, 1912.

Ladies and Gentlemen: It is less than eighteen months since the decisions in the Standard Oil and Tobacco cases made Americans realize the importance and the urgency of the trust problem. Since that time there has been more intensive thought and serious discussion of the subject than during all the preceding twenty-one years which elapsed between the passage of the Sherman Act and the rendering of these decisions. And that thought, with general discussion, has been fruitful of results. It has not ripened into legislation; but it has done more. It has enlightened the American people, and has brought the deliberations upon the subject to that stage where wise legislation is possible. The discussion has removed many misapprehensions which clouded the consideration of measures before the country. It has removed misconceptions also, and has thus narrowed the field of controversy. A large part of the American people realize today that competition is in no sense in consistent with large-scale production and distribution. They realize that the maintenance of competition does not necessarily involve destructive and unrestricted competition, any more than the maintenance of liberty implies license or anarchy. We learned long ago that liberty could be preserved only by limiting in some way the freedom of action of individuals; that otherwise liberty would necessarily yield to absolutism; and in the same way we have learned that unless there be regulation of competition, its excesses will lead to the destruction of competition, and monopoly will take its place.

A large part of our people have also learned that efficiency in business does not grow indefinitely with the size of business. Very often, a business grows in efficiency as it grows from a small business to a large business; but there is a unit of greatest efficiency in every business, at any time, and a business may be too large to be efficient, as well as too small. Our people have also learned to understand the true reason for a large of those huge profits which have made certain trusts conspicuous. They have learned that these profits are not due in the main to efficiency, but are due to the control of the market, to the exercise by a small body of men of the sovereign taxing power. Nothing has helped so much to make this clear to our people as an incident in the life of the tobacco trust. When the Spanish War came on and we needed additional revenue, Congress properly increased the tax on tobacco products; and then the trust very promptly raised the price of tobacco products. Three years later, when our country no longer needed that additional revenue, Congress sought to remove the burden which it had placed upon the people; but Congress found itself powerless to remove the burden it had imposed. And when Congress reduced the tax, the effect was merely to transfer, from the Treasury of the United States to the treasury of the trust, the several million dollars a year which represented the reduction in the tax; because the tobacco-products market was controlled by the trust, which held the selling price practically unchanged.

The history of the tobacco trust also showed in its detailed operations how control made for profit, for the degree of control exercised by that great trust was very different in the various departments of its business. And, as the Commissioner of Corporations found, the ratio of profit ordinarily was in direct relation to the ratio of control. Where the trust had a high degree of control, the profits were great; where they had a small degree of control, the profits were small. In the cigar business, in which the trust had no control of the market, in which it was merely a large concern, doing perhaps one-eighth of the cigar business of the country, the trusts' profits were not only small, but they were very much smaller than would be satisfactory to the ordinary manufacturer. In the same year in which some of the subsidiary corporations of the trust were earning fifty, sixty, eighty, or one hundred per cent upon the tangible assets, the trust was earning in its cigar department only four to six per cent, although the ultimate management of all departments of the trusts' business rested with the same able men, and was supplied with the same great resources. Such facts as these have made men realize that while trusts are sometimes efficient, just as independent concerns are some times efficient, it is not their efficiency, but the fact that they control the markets, that accounts for the huge profits of trusts.

And people have learned also another fact of perhaps even greater importance. They have come to realize the effect of monopoly in arresting progress, arresting that advance in industry without which a great industrial future is unattainable.

Thirteen years ago, before combinations in the steel industry began, there was almost a panic in Europe at what they called "the American invasion." We had been making steel cheaper than any nation. Germany, Belgium, and England looked with alarm upon American competition. In 1911, twelve years after the era of combination in the steel industry began, The Engineering News, a high American authority, declared:

"We are to-day something like five years behind Germany in iron and steel metallurgy, and such innovations as are being introduced by our iron and steel manufacturers are most of them merely following the lead set by foreigners years ago. We do not believe that this is because American engineers are any less ingenious or original than those in Europe... We believe the main cause is the wholesale consolidations which have taken place in American industry. A huge organization is too clumsy to take up the development of an original idea. With the market closely controlled, and profits certain by following standard methods, those who control our trusts do not want the bother of developing anything new. We instance metallurgy only by way of illustration. There are plenty of other fields of industry where exactly the same conditions exist. We are building the same machines and using the same methods as a dozen years ago, and the real advances in the arts are being made by European inventors and manufacturers."

That statement of the Engineering News was confirmed in a striking way in a memorial presented by the Inventors' Guild to the President last year. The memorial related specifically to the patent law, but it began with the recital of some facts, and this is one of the recitals:

"It is a well known fact that modern trade combinations tend strongly toward constancy of prices and of products, and by their very nature are opposed to new processes and new products originated by independent inventors, and hence tend to restrain competition in the development and sale of patents and patent rights."

There you have it, the tendency of monopoly to arrest progress, the tendency of monopoly to standardize prices and products. We hear much of standardizing prices and products, but there is only one justification for standardization, and that is to set a new level. When you standardize prices and products, in order to retain that standard, you arrest progress in the art, and such progress is the most important element in efficiency in industry.

Now, what these experts have said in regard to the course of industry in America during the last twelve years is illustrated by the steel rail controversy of which you have read much during the last year. Of course, the demand upon a steel rail today is much greater than it was thirteen years ago. The weight of trains is greater, as well as the speed. But you have this remarkable that, despite all of the possibilities that inhere in American steel rail manufacture, the steel rail industry, for some reason, did not keep pace with the demand for more efficient rails; and you have that continuing condition during the period when, as the reports of the Corporation Commissioner and of the Stanley Committee show, the steel trust was making steel rails at a cost which left the trust an operating profit of nearly $13 a ton out of the $28 paid for the rail. Now, making full allowance for the increase in the demand upon the steel rail, the deficiency in these rails shows what comes from that standardizing of process, which it is said is the avenue by which a monopoly may conceivably reduce costs.

These facts, to which I have called attention, have made our people appreciate better than they did before, the great economic truth which was embodied in the Sherman Law-have made them appreciate the value of competition. But discussion has done far more than that. While it has made us understand better the value of competition, it has also made us understand defects in the Sherman Law.

These defects are in its application and in the machinery for its enforcement. The law has grave defects. It has, among other things, the defect of uncertainty of application. Since the Supreme Court has declared that only those combinations are illegal which are unreasonable, there is the lack of certainty as to what is or is not unreasonable. Here is a wide field for legal improvement for which legal invention is demanded. These twenty two years under the Sherman Law have supplied us with experiences which can be utilized to good purpose. We have learned to lay down the rules deducible from that experience, in order to determine, in large measure, what is unreasonable. A practice is unreasonable which tends to destroy competition. And we know now what the main practices are which have been pursued by those trusts to secure the monopoly-control of our industry. They are cut-throat competition, espionage, doing business as fake independents, the making of exclusive contracts, as well as many other methods and practices of unfair trade which have been pursued not for the purpose of conducting a business in competition with others, but for the purpose of killing competitors.

Again, we have found grave defects in our legal machinery. The results of the alleged disintegration of the tobacco trust and of the Standard Oil trust have made these defects obvious; and the LaFollette-Stanley bills proposed to remedy these defects through the exercise of legal invention, just as they undertake also to remove uncertainty in the application of the Sherman Law. Take this instance: When the Court undertook to divide the tobacco trust with a view to restoring competition, the principal properties were distributed among three corporations, which, it was supposed, would compete diligently with one another; and yet the Court seemed to consider itself powerless to prevent such a disposition of the properties as left each of these three corporations to be owned by the same persons in the same proportion! That result was treated as if it were the necessary result of existing rules of law. If such was law, obviously the law ought to be changed. It ought to be not only a possible but a necessary provision in disintegrating trusts, that the several fragments into which the trust is ordered to be divided, should, for a limited period at least, be owned by different groups of stockholders instead of being owned by the same persons.

The La Follette-Stanley bills, which I have not time now to discuss in detail, contain many provisions which have for their purpose to do for trust legislation what has been done by mechanical inventors for thousands of machines in our factories-to make perfect the machine that a good principle may work.

But besides making the Sherman Law certain, and providing legal machinery, we need administrative machinery. We need in industry, as in our cities, in addition to the prosecuting attorney, the inspector and the police. You hear much said of correcting most abuses by publicity. We need publicity; but as a pre-requisite to publicity we need knowledge. We must know, and know contemporaneously, what business-what big business-is doing. When we know that through an authoritative source, we shall have gone very far toward the prevention of the evils which attend the conduct of business.

We need also ample power in a government board to aid the small man as against his mighty opponent. Some of the finest patriotism which this country has known in the last ten years has been exhibited by small men who, at the risk of destruction, have been willing to aid the government in its effort to secure enforcement of the Sherman Law. We need a board which will protect these men, and in protecting their interests it will protect the interest of the whole community. For that we need an administrative board or commission of some kind.

But we need more than that. I said we need knowledge; I should say over and over again, we need knowledge-comprehensive, accurate, complete knowledge of what is being done in business. And the striking fact today is the absence of such knowledge. We know reasonably well the practices of great and conspicuous trusts which have secured monopoly. We do not know of the agreements and relations of the businesses which are competitive, of those trade agreements, those mutual relations between competitive businesses. In other words, we know the facts in regards to monopolistic combinations; but we do not know the facts in regard to combinations of competitive concerns. I say we do not know the facts. Of course, we have sporadic, unofficial, and, to a large extent, inaccurate knowledge of those combinations. But before we can legislate or act in any way, wisely, upon that great subject-the extent to which competitive businesses may have relations with one another-we need that comprehensive and accurate knowledge, and only a commission can secure such knowledge for us.

Now, the investigations and the discussions of recent years have, as I say, brought before us much that is clear, much that men agree upon, and the field of controversy has thus been narrowed. But there is also much as to which men disagree, and the title of the subject this evening suggests the great and fundamental difference of opinion.

"Shall we regulate competition, or shall we regulate monopoly?" That means, of course, shall we legalize monopoly, and I take it that the position which is clearly drawn between the views of the new party and of others-and particularly the Democratic Party-is this: The new party claims that private monopoly in industry is in some branches desirable, or at all events is inevitable, and that the effort of the government should be confined to limiting the field of monopoly and preventing the abuses which ordinarily attend monopolies.

The Democratic position, on the other hand, is that private monopoly in industry is never permissible; it is never desirable, and is not inevitable; competition can be reserved, and where it is suppressed, can be restored.

Now there had been some denial that the new party proposes to legalize monopoly. That denial has been based, as I believe, upon the assertion that the new party is endeavoring to preserve competition. So it is. But as I should put it, it is in favor of competition and monopoly, and I read, as bearing upon that position, this statement, a very recent one, of its great leader:

"Understand, I am not for monopoly when we can help it. We intend to restore competition. We intend to do away with the conditions that make for monopoly. But there are certain monopolies that we cannot prevent. I understand that the steel trust is not an absolute monopoly, but if it were, what would be the use of splitting up the steel trust into companies controlled by Morgan, Carnegie, and Rockefeller, say? Would it ameliorate conditions at all? Would it make prices lower to the consumer?-the wages and the conditions higher to the worker? Don't you suppose that these three fellows would agree on prices and methods unofficially?"

Now, gentlemen, see what that implies. It implies that there are at least some fields of industry in which we are to accept private monopoly, and it indicates something which, to my mind, is far more important even than being divided on the great question whether we shall have monopoly or competition. It implies that there is a power in this country of a few men so great as to be supreme over the law; that the will of the American people as expressed in the Sherman Law-which the American people have steadfastly refused to alter in spite of many efforts-cannot be carried out because of the power of certain individuals; that, whether we like it or not, we must have private monopoly in industry to some extent because of the power held by a few fellow-citizens. Realize, gentlemen, what this means. It means that we must state solemnly that the power of the American people to enforce law is not absolute; that there are a few individuals who stand superior to the American people.

This same new party platform pledges its members to work unceasingly to restore an increased respect for law. What will be the respect for law when the people come and declare: "We cannot carry out the will of the American people. We cannot prevent individual men unofficially joining together to do that which the law prohibits?"

This very day, but for the engrossing demands of a political campaign and the interest which centers in it, our thoughts would be upon two great prosecutions which are going on, great criminal proceedings going on in this country, more important in many ways than the questions which we and others are discussing: First, the proceedings at Indianapolis involving the great dynamite plot incident to the Los Angeles and other outrages which occupied our attention a year ago; secondly, the proceedings at Salem, in my own state, where great questions arising out of the Lawrence strike are being investigated. What do these prosecutions signify? They mean that a large part of the American people, desirous of securing the social and industrial progress which this new party in its platform declares to be the end to which political effort should be directed, had concluded that social and industrial justice was not to be obtained by law in America; that there is no longer in America equality before the law; that the rich man has such control over affairs in America that the poor and less able worker cannot secure his rights according to the American Constitution, and they have, therefore, resorted to violence. You yourselves in New York, in the recent proceedings, have seen what lack of respect for the law means; not only our property and our institutions, but life itself, are at stake. And yet, with this great demand staring us in the face, calling upon us to do everything we can to bring the American [people?] back to a respect for law, we are told that a few rich and powerful men can defy the law; that their power is so great that there will be private monopoly and we cannot prevent it; and that, therefore, we must content ourselves with seeking to mitigate the evil. Respect for law-supremacy of law-is the great question involved-a question more fundamental, almost, than any other.

But that same interview with the great leader of the new party contains another proposition perhaps equally fundamental in our government. The interview ends with these words:

"Back of all this talk about monopoly and competition is the great question, ‘What are you going to do with the women and men?'"

Now, I take it in America that what we are going to do is this: Not to do something for the women and the men, but to give the women and the men of America an opportunity to do for themselves. If this opportunity is not what America stands for, then our whole scheme of government is naught. What does democracy involve? Not merely political and religious liberty, but industrial liberty also. Is not business today the greatest part of life, not only for men, but also to a large extent in the life of women? There are seven million women who have invaded industry. What America needs is not that we do for these, our fellow citizens, but that we keep open the path of opportunity to enable them to do for themselves. When these Americans come to do for themselves they find this situation: The trust is not merely a capitalistic control of men. It is the worst form of capitalistic control. It is absentee capitalistic control. One hundred and fifty thousand persons are said to interested as stockholders in the steel trust. What have these one hundred and fifty thousand persons to do with controlling the steel trust? The steel trust is a conspicuous instance of ownership separated from responsibility. The steel trust presents a condition similar to that which led to the demoralization of Ireland-the condition of absentee landlordism. The managers may be good men, and true, but the permanent separation of ownership from control must prove fatal to the public interest. The responsibility of ownership is lacking. If there had been responsibility of ownership in the steel trust it would have been impossible that, with the huge profits of the corporation, which the Commissioner of Corporations found to be $650,000,000 in ten years, in excess of a fair return upon the capital originally invested in that concern, men would have been compelled to work twelve hours a day, seven days in a week, and at such low wages that even if they worked three hundred sixty five days in a year, seven days in a week, their year's earnings would have been less than was necessary; as the minimum amount necessary, in the city of Pittsburgh for the support of a man, his wife, and three children with the minimum of decency. Alas!