Chapter XII: PROBLEMS OF RECONSTRUCTION--(continued) (1)

Any proposal to alter the responsibilities and powers now enjoyed by the central and the state governments in respect to the control of corporations and the distribution of wealth involves, of course, the Federal rather than the state constitutions; and the amendment of the former is both a more difficult and a more dangerous task than is the amendment of the latter. A nation cannot afford to experiment with its fundamental law as it may and must experiment with its local institutions. As a matter of fact the Federal Constitution is very much less in need of amendment than are those of the several states. It is on the whole an admirable system of law and an efficient organ of government; and in most respects it should be left to the ordinary process of gradual amendment by legal construction until the American people have advanced much farther towards the realization of a national democratic policy. Eventually certain radical amendments will be indispensable to the fulfillment of the American national purpose; but except in one respect nothing of any essential importance is to be gained at present by a modification of the Federal Constitution. This exception is, however, of the utmost importance. For another generation or two any solution of the problem of corporation control, and of all the other critical problems connected therewith, will be complicated, confused, and delayed by the inter-state commerce clause, and by the impossibility, under that clause, of the exercise of any really effective responsibility and power by the central government. The distinction between domestic and inter-state commerce which is implied by the Constitutional distribution of powers is a distinction of insignificant economic or industrial importance; and its necessary legal enforcement makes the carrying out of an efficient national industrial policy almost impossible.

Under the inter-state commerce clause, a corporation conducting, as all large companies do, both a state and an inter-state business, is subject to several supplementary jurisdictions. It is subject, of course, primarily to the laws of the state under which it is organized, and to the laws of the same state regulating its own particular form of industrial operation. It is subject, also, to any conditions which the legislatures of other states may wish to impose upon its business,--in so far as that business is transacted within their jurisdictions. Finally, it is subject to any regulation which the central government may impose upon its inter-state transactions. From the standpoint of legal supervision, consequently, the affairs of such a corporation are divided into a series of compartments, each compartment being determined by certain arbitrary geographical lines--lines which do not, like the boundaries of a municipality, correspond to any significant economic division. As long as such a method of supervision endures, no effective regulation of commerce or industry is possible. A corporation is not a commercial Pooh-Bah, divided into unrelated sections. It is an industrial and commercial individual. The business which it transacts in one state is vitally related to the business which it transacts in other states; and even in those rare cases of the restriction of a business to the limits of a single state, the purchasing and selling made in its interest necessarily compete with inter-state transactions in the same products. Thus the Constitutional distinction between state and inter-state commerce is irrelevant to the real facts of American industry and trade.

In the past the large corporations have, on the whole, rather preferred state to centralized regulation, because of the necessary inefficiency of the former. Inter-state railroad companies usually exercised a dominant influence in those states under the laws of which they had incorporated; and this influence was so beneficial to them that they were quite willing for the sake of preserving it to subsidize the political machine and pay a certain amount of blackmail. In this way the Pennsylvania Railroad Company exercised a dominant influence in the politics of Pennsylvania and New Jersey; the New York Central was not afraid of anything that could happen at Albany; the Boston and Maine pretty well controlled the legislation of the state of New Hampshire; and the Southern Pacific had its own will in California. Probably in these and other instances the railroads acquired their political influence primarily for purposes of protection. It was the cheapest form of blackmail they could pay to the professional politicians; and in this respect they differed from the public service corporations, which have frequently been active agents of corruption in order to obtain public franchises for less than their value. But once the railroads had acquired their political influence, they naturally used it for their own purposes. They arranged that the state railroad commissioners should be their clerks, and that taxation should not press too heavily upon them. They were big enough to control the public officials whose duty it was to supervise them; and they were content with a situation which left them free from embarrassing interference without being over-expensive.

The situation thereby created, however, was not only extremely undesirable in the public interest, but it was at bottom extremely dangerous to the railroads. These companies were constantly extending their mileage, increasing their equipment, improving their terminals, and enlarging their capital stock. Their operations covered many different states, and their total investments ran far into the hundreds of millions of dollars. In the meantime they remained subject to one or several different political authorities whose jurisdiction extended over only a portion of their line and a fraction of their business, but who could none the less by unwise interference throw the whole system out of gear, and compromise the earning power of many millions of dollars invested in other states. Moreover, they could, if they chose, make all this trouble with a comparative lack of responsibility, because only a fraction of the ill effects of this foolish regulation would be felt within the guilty state. As a matter of fact many railroads had experiences of this kind with the Western states, and were obliged to defend themselves against legislative and administrative dictation, which if it did not amount to confiscation, always applied narrow and rigid restrictive methods to a delicate and complicated economic situation. Most of the large Eastern and some of the large Western companies purchased immunity from such "supervision," and were well content; but it was mere blindness on their part not to understand that such a condition, with the ugly corruption it involved, could not continue. The time was bound to come when an aroused public opinion would undermine their "influence," and would retaliate by imposing upon them restrictions of a most embarrassing and expensive character. In so doing the leaders of a reformed and aroused public opinion might be honestly seeking only legitimate regulation; but the more the state authorities sought conscientiously to regulate the railroads the worse the confusion they would create. The railroad could not escape some restrictive supervision; neither were they obliged wholly to submit to it on the part of any one state. The situation of a railroad running through half a dozen states, and subject to the contradictory and irresponsible orders of half a dozen legislatures or commissions might well become intolerable.

Just this sort of thing has been recently happening. The state authorities began to realize that their lax methods of railway supervision were being used as an argument for increased Federal interference. So the state governments arose in their might and began furiously to "regulate" the railroads. Commissions were constituted or re-constituted, and extremely drastic powers were granted to these officials in respect to the operation of the railroads, the rates and the fares charged, and their financial policies. Bills were passed severely restricting the rights which companies had enjoyed of owning the stock of connecting railroads. Many of the states sought to forbid the companies from charging more than two cents a mile for passenger fares. The issuing of passes except under severe restrictions was made illegal. The railroad companies were suddenly confronted by a mass of hostile and conflicting legislation which represented for the most part an honest attempt to fulfill a neglected responsibility, but whose effort on the whole merely embarrassed the operations of the roads, and which in many instances failed to protect the real public interests involved. Even when this legislation was not ignorantly and unwisely conceived, and even when it was prepared by well-informed and well-intentioned men, it was informed by contradictory ideas and a false conception of the genuine abuses and their necessary remedies. Consequently, a certain fraction of intelligent and disinterested public opinion began soon to realize that the results of a vigorous attempt on the part of the state governments to use their powers and to fulfill their responsibilities in respect to the railroads were actually worse and more dangerous to the public interest than was the previous neglect. The neglect of the responsibility implied corruption, because it provoked blackmail. The vigorous fulfillment of the responsibility implied confusion, cross-purposes, and excessive severity, because the powers of a single state were too great within its specific jurisdiction and absolutely negligible beyond.

The railroad companies suffer more from this piecemeal and conflicting regulation than do corporations engaged in manufacturing operations, not only because they discharge a peculiarly public function, but because their business, particularly in its rate-making aspect, suffers severely from any division by arbitrary geographical lines. But all large inter-state corporations are more or less in the same situation. Corporations such as the Standard Oil Company and some of the large New York life insurance companies are confronted by the alternative either of going out of business in certain states, or of submitting to restrictions which would compromise the efficiency of their whole business policy. Doubtless they have not exhausted the evasive and dilatory methods which have served them so well in the past; but little by little the managers of these corporations are coming to realize that they are losing more than they gain from subjection to so many conflicting and supplementary jurisdictions. Little by little they are coming to realize that the only way in which their businesses can obtain a firm legal standing is by means of Federal recognition and exclusive Federal regulation. They would like doubtless to continue to escape any effective regulation at all; but without it they cannot obtain effective recognition, and in the existing ferment of public opinion recognition has become more important to them than regulation is dangerous.

Many important financiers and corporation lawyers are still bitterly opposed to any effective centralized regulation, even if accompanied by recognition; but such opposition is not merely inaccessible to the lessons of experience, but is blinded by theoretical prejudice. Doubtless the position of being, on the one hand, inefficiently regulated by the state governments, and, on the other hand, of being efficiently protected in all their essential rights by the Federal courts--doubtless such a situation seems very attractive to men who need a very free hand for the accomplishment of their business purposes; but they should be able to understand that it would necessarily produce endless friction. The states may well submit to the constant extension of a protecting arm to corporations by the Federal courts, provided the central government is accomplishing more efficiently than can any combination of state governments the amount of supervision demanded by the public interest. But if the Federal courts are to be constantly invoked, in order to thwart the will of state legislatures and commissions, and if at the same time the authority which protects either neglects or is unable effectively to supervise, there is bound to be a revival of anti-Federal feeling in its most dangerous form. Whatever the corporations may suffer from the efficient exercise of Federal regulative powers, they have far more to fear from the action of the state governments--provided such action proceeds from an irresponsible local radicalism embittered by being thwarted. The public opinion on which the corporations must depend for fair treatment is national rather than local; and just in as far as they can be made subject to exclusive centralized jurisdiction, just to that extent is there a good chance of their gradual incorporation into a nationalized economic and legal system.

The control of the central government over commerce and the corporations should consequently be substituted for the control of the states rather than added thereto; and this action should be taken not in order to enfeeble American local governments, but to invigorate them. The enjoyment by any public authority of a function which it cannot efficiently perform is always a source of weakness rather than of strength; and in this particular case it is a necessary source, not merely of weakness, but of corruption. The less the state governments have to do with private corporations whose income is greater than their own, the better it will be for their morals, and the more effectively are they likely to perform their own proper and legitimate functions. Several generations may well elapse before the American public opinion will learn this lesson; and even after it is well learned there will be enormous and peculiar obstacles to be removed before they can turn their instruction to good account. But in the end the American Federal Constitution, like all the Federal Constitutions framed during the past century, will have to dispense with the distinction between state and inter-state commerce; and the national authority will prevail, not because there is any peculiar virtue in the action of the central government, but because there is a peculiar vice in asking the state governments to regulate matters beyond their effective jurisdiction.

II

THE RECOGNITION OF INDUSTRIAL ORGANIZATION

The central government in its policy toward the large corporations must adopt one of two courses. Either it must discriminate in their favor or it must discriminate against them. The third alternative--that of being what is called "impartial"--has no real existence; and it is essential that the illusory nature of a policy of impartiality should in the beginning be clearly understood.

A policy of impartiality is supposed to consist in recognizing the existence of the huge industrial and railroad organizations, while at the same time forbidding them the enjoyment of any of those little devices whereby they have obtained an unfair advantage over competitors. It would consist, that is, of a policy of recognition tempered by regulation; and a policy of this kind is the one favored by the majority of conservative and fair-minded reformers. Such a policy has unquestionably a great deal to recommend it as a transitional means of dealing with the problem of corporate aggrandizement, but let there be no mistake: it is not really a policy of strict neutrality between the small and the large industrial agent. Any recognition of the large corporations, any successful attempt to give them a legal standing as authentic as their economic efficiency, amounts substantially to a discrimination in their favor.

The whole official programme of regulation does not in any effective way protect their competitors. Unquestionably these large corporations have in the past thrived partly on illegal favors, such as rebates, which would be prevented by the official programme of regulation; but at the present time the advantage which they enjoy over their competitors is independent of such practices. It depends upon their capture and occupation of certain essential strategic positions in the economic battle-field. It depends upon abundant capital, which enables it to take advantage of every opportunity, and to buy and sell to the best advantage. It depends upon the permanent appropriation of essential supplies of raw materials, such as iron ore and coal, or of terminals in large cities, which cannot now be duplicated. It depends upon possibilities of economic industrial management and of the systematic development of individual industrial ability and experience which exist to a peculiar degree in large industrial enterprises. None of these sources of economic efficiency will be in any way diminished by the official programme of regulation. The corporations will still possess substantially all of their existing advantages over their competitors, while to these will be added the additional one of an unimpeachable legal standing. Like the life insurance companies after the process of purgation, they will be able largely to reduce expenses by abolishing their departments of doubtful law.

Thus the recognition of the large corporation is equivalent to the perpetuation of its existing advantages. It is not an explicit discrimination against their smaller competitors, but it amounts to such discrimination. If the small competitor is to be allowed a chance of regaining his former economic importance, he must receive the active assistance of the government. Its policy must become, not one of recognition, but one of recognition under conditions which would impair the efficiency of the large industrial organizations. Mr. William J. Bryan's policy of a Federal license granted only under certain rigid conditions as to size, is aimed precisely at the impairment of the efficiency of the "trusts," and the consequent active discrimination in favor of the small competitor; but the Roosevelt-Taft programme allows the small competitor only such advantages as he is capable of earning for himself; and it must be admitted that these advantages are, particularly in certain dominant industries, not of a very encouraging nature.

Nevertheless, at the last general election the American people cast a decisively preponderant vote in favor of the Roosevelt-Taft programme; and in so doing they showed their customary common sense. The huge corporations have contributed to American economic efficiency. They constitute an important step in the direction of the better organization of industry and commerce. They have not, except in certain exceptional cases, suppressed competition; but they have regulated it; and it should be the effort of all civilized societies to substitute coöperative for competitive methods, wherever coöperation can prove its efficiency. Deliberately to undo this work of industrial and commercial organization would constitute a logical application of the principle of equal rights, but it would also constitute a step backward in the process of economic and social advance. The process of industrial organization should be allowed to work itself out. Whenever the smaller competitor of the large corporation is unable to keep his head above water with his own exertions, he should be allowed to drown. That the smaller business man will entirely be displaced by the large corporation is wholly improbable. There are certain industries and lines of trade in which he will be able to hold his own; but where he is not able to hold his own, there is no public interest promoted by any expensive attempt to save his life.

The Sherman Anti-Trust Law constitutes precisely such an attempt to save the life of the small competitor; and in case the Roosevelt-Taft policy of recognition tempered by regulation is to prevail, the first step to be taken is the repeal or the revision of that law. As long as it remains on the statute books in its existing form, it constitutes an announcement that the national interest of the American people demands active discrimination in favor of the small industrial and commercial agent. It denies the desirability of recognizing what has already been accomplished in the way of industrial and commercial organization; and according to prevalent interpretations, it makes the legal standing of all large industrial combinations insecure--no matter how conducive to economic efficiency their business policy may be.

Assuming, however, that the Sherman Anti-Trust Law can be repealed, and that the Roosevelt-Taft policy of recognition tempered by regulation be adopted, the question remains as to the manner in which such a policy can best be carried out. Certain essential aspects of this question will not be discussed in the present connection. The thorough carrying out of a policy of recognition would demand a Federal incorporation act, under which all corporations engaged in anything but an exclusively local business would be obliged to organize; but, as we have already seen, such an act would be unconstitutional as applied to many technically domestic corporations, and it would probably be altogether unconstitutional, except, perhaps, under limitations which would make it valueless. It may be that some means will be found to evade these Constitutional difficulties, or it may not be. These are matters on which none but the best of Constitutional lawyers have any right to an opinion. But in any event, I shall assume that the Federal government can eventually find the legal means to make its policy of recognition effective and to give the "trust" a definite legal standing. What sort of regulation should supplement such emphatic recognition?

The purpose of such supervision is, of course, to prevent those abuses which have in the past given the larger corporation an illegal or an "unfair" advantage over its competitors; and the engine which American legislatures, both Federal and state, are using for the purpose is the commission. The attempt to define in a comprehensive statute just what corporations may do, or must in the public interest be forbidden from doing, is not being tried, because of the apparent impossibility of providing in advance against every possible perversion of the public interest in the interest of the private corporation. The responsibility of the legislature for the protection of the public interest is consequently delegated to a commission whose duties are partly administrative and partly either legislative or judicial. The most complete existing type of such a delegated power is not the Federal Inter-state Commerce Commission, but the Public Service Commissions of New York State; and in considering the meaning and probable effects of this kind of supervision I shall consider only the completed type. A Federal Inter-state Commerce Commission which was fully competent to supervise all inter-state commerce and all commerce competing therewith would necessarily possess powers analogous to those bestowed upon the New York Public Service Commissions.

The powers bestowed upon those commissions are based upon the assumption that the corporations under their jurisdiction cannot be trusted to take any important decision in respect to their business without official approval. All such acts must be known to the commission, and be either expressly or tacitly approved, and the official body has the power of ordering their wards to make any changes in their service or rates which in the opinion of the commission are desirable in the public interest. Thus the commission is required not only to approve all agreements among corporations, all mergers, all issues of securities, but they are in general responsible for the manner in which the corporations are operated. The grant of such huge powers can be explained only on the ground that the private interest of these corporations is radically opposed to the interest of their patrons. Public opinion must have decided that if left to themselves, the corporations will behave, on the whole, in a manner inimical to the public welfare; and their business must consequently be actually or tacitly "regulated" in every important detail.

One may well hesitate wholly to condemn this government by commission, because it is the first emphatic recognition in American political and economic organization of a manifest public responsibility. In the past the public interests involved in the growth of an extensive and highly organized industrial system have been neither recognized nor promoted. They have not been promoted by the states, partly because the states neither wanted to do so, nor when they had the will, did they have the power. They have not been promoted by the central government because irresponsibility in relation to national economic interest was, the tariff apart, supposed to be an attribute of the central authority. Any legislation which seeks to promote this neglected public interest is consequently to be welcomed; but the welcome accorded to these commissions should not be very enthusiastic. It should not be any more enthusiastic than the welcome accorded by the citizens of a kingdom to the birth of a first child to the reigning monarchs,--a child who turns out to be a girl, incapable under the law of inheriting the crown. A female heir is under such circumstances merely the promise of better things; and so these commissions are merely an evidence of good will and the promise of something better. As initial experiments in the attempt to redeem a neglected responsibility, they may be tolerated; but if they are tolerated for too long, they may well work more harm than good.

The constructive idea behind a policy of the recognition of semi-monopolistic corporations, is, of course, the idea that they can be converted into economic agents which will make unequivocally for the national economic interest; and it is natural that in the beginning legislators should propose to accomplish this result by rigid and comprehensive official supervision. But such supervision, while it would eradicate many actual and possible abuses, would be just as likely to damage the efficiency which has been no less characteristic of these corporate operations. The only reason for recognizing the large corporations as desirable economic institutions is just their supposed economic efficiency; and if the means taken to regulate them impair that efficiency, the government is merely adopting in a roundabout way a policy of destruction. Now, hitherto, their efficiency has been partly the product of the unusual freedom they have enjoyed. Unquestionably they cannot continue to enjoy any similar freedom hereafter; but in restricting it care should be taken not to destroy with the freedom the essential condition of the efficiency. The essential condition of efficiency is always concentration of responsibility; and the decisive objection to government by commission as any sufficient solution of the corporation problem is the implied substitution of a system of divided for a system of concentrated responsibility.

This objection will seem fanciful and far-fetched to the enthusiastic advocates of reform by commission. They like to believe that under a system of administrative regulation abuses can be extirpated without any diminution of the advantages hitherto enjoyed under private management; but if such proves to be the case, American regulative commissions will establish a wholly new record of official good management. Such commissions, responsible as they are to an insistent and uninformed public opinion, and possessed as they inevitably become of the peculiar official point of view, inevitably drift or are driven to incessant, vexatious, and finally harmful interference. The efficient conduct of any complicated business, be it manufacturing, transportation, or political, always involves the constant sacrifice of an occasional or a local interest for the benefit of the economic operation of the whole organization. But it is just such sacrifices of local and occasional to a comprehensive interest which official commissions are not allowed by public opinion to approve. Under their control rates will be made chiefly for the benefit of clamorous local interests; and little by little the economic organization of the country, so far as affected by the action of commission government, would become the increasing rigid victim of routine management. The flexibility and enterprise, characteristic of our existing national economic organization, would slowly disappear; and American industrial leaders would lose the initiative and energy which has contributed so much to the efficiency of the national economic system. Such a result would, of course, only take place gradually; but it would none the less be the eventual result of any complete adoption of such a method of supervision. The friends of commission government who expect to discipline the big corporations severely without injuring their efficiency are merely the victims of an error as old as the human will. They "want it both ways." They want to eat their cake and to have it. They want to obtain from a system of minute official regulation and divided responsibility the same economic results as have been obtained from a system of almost complete freedom and absolutely concentrated responsibility.

The reader must not, however, misinterpret the real meaning of the objection just made to corporation reform by means of commissions. I can see no ground for necessarily opposing the granting of increased power and responsibility to an official or a commission of officials, merely because such officials are paid by the government rather than by a private employer. But when such a grant is considered necessary, the attempt should be to make the opportunity for good work comprehensive and commensurate with the responsibility. The sort of officialism of which the excavations at Panama or the reclamation service is a sample has as much chance of being efficient under suitable conditions as has the work of a private corporation. The government assumes complete charge of a job, and pushes it to a successful or unsuccessful conclusion, according to the extent with which its tradition or organization enables it to perform efficient work. Moreover, there is a certain kind of official supervision of a private business which does not bring with it any divided responsibility. Perhaps the best illustration thereof is the regulation to which the national banks are obliged to submit. In this case the bank examiners and the Controller do not interfere in the management of the bank, except when the management is violating certain conditions of safe banking--which have been carefully defined in the statute. So long as the banks obey the law, they need have no fear of the Treasury Department. But in commission government the official authority, in a sense, both makes and administers the law. The commission is empowered to use its own discretion about many matters, such as rates, service, equipment, and the like, in relation to which the law places the corporation absolutely in its hands. Such official interference is of a kind which can hardly fail in the long run to go wrong. It is based on a false principle, and interferes with individual liberty, not necessarily in an unjustifiable way, but in a way that can hardly be liberating in spirit or constructive in result.

The need for regulation should not be made the excuse for bestowing upon officials a responsibility which they cannot in the long run properly redeem. In so far as the functions of such commissions are really regulative, like the functions of the bank examiners, they may for the present perform a useful public service. These commissions should be constituted partly as bureaus of information and publicity, and partly as an administrative agency to secure the effective enforcement of the law. In case the Sherman Anti-Trust Law were repealed, the law substituted therefor should define the kind of combination among corporations and the kind of agreements among railroads which were permissible, and the commission should be empowered to apply the law to any particular consolidation or contract. Similar provision should be made in respect to railroad mergers, and the purchases by one railroad of the stock of another. The purposes for which new securities might be legitimately issued should also be defined in the statute, and the commission allowed merely to enforce the definitions. Common carriers should be obliged, as at present, to place on record their schedules of rates, and when a special or a new rate was made, notification should be required to the commission, together with a statement of reasons. Finally the commission should have the completest possible power of investigating any aspect of railway and corporation management or finance the knowledge of which might be useful to Congress. The unflinching use of powers, vaguely sketched above, would be sufficient to prevent mere abuses, and they could be granted without making any body of officials personally responsible for any of the essential details of corporation management.

If the commission is granted the power to promulgate rates, to control the service granted to the public, or to order the purchase of new equipment, it has become more than a regulative official body. It has become responsible for the business management of the corporation committed to its charge; and again it must be asserted that mixed control of this kind is bound to take the energy and initiative out of such business organizations. Neither has any necessity for reducing public service corporations to the level of industrial minors been sufficiently demonstrated. In the matter of service and rates the interest of a common carrier is not at bottom and in the long run antagonistic to the interest of its patrons. The fundamental interest of a common carrier is to develop traffic, and this interest coincides with the interest in general of the communities it serves. This interest can best be satisfied by allowing the carrier freedom in the making of its schedules--subject only to review in particular cases. Special instances may always exist of unnecessarily high or excessively discriminatory rates; and provisions should be made for the consideration of such cases, perhaps, by some court specially organized for the purpose; but the assumption should be, on the whole, that the matter of rates and service can be left to the interest of the corporation itself. In no other way can the American economic system retain that flexibility with which its past efficiency has been associated. In no other way can the policy of these corporations continue to be, as it has so often been in the past, in an economic sense genuinely constructive. This flexibility frequently requires readjustments in the conditions of local industry which cause grave losses to individuals or even communities; but it is just such readjustments which are necessary to continued economic efficiency; and it is just such readjustments which would tend to be prevented by an official rate-making authority. An official rate-making power would necessarily prefer certain rigid rules, favorable to the existing distribution of population and business. Every tendency to a new and more efficient distribution of trade would be checked, because of its unfairness to those who suffer from it. Thus the American industrial system would gradually become petrified, and the national organization of American industry would be sacrificed for the benefit of an indiscriminate collection of local interests.

If the interest of a corporation is so essentially hostile to the public interest as to require the sort of official supervision provided by the New York Public Service Commission Law, the logical inference therefrom is not a system of semi-official and semi-private management, but a system of exclusively public management. The logical inference therefrom is public ownership, if not actual public operation. Public ownership is not open to the same theoretical objections as is government by commission. It is not a system of divided responsibility. Political conditions and the organization of the American civil service being what they are, the attempt of the authorities to assume such a responsibility might not be very successful; but the fault would in that case reside in the general political and administrative organization. The community could not redeem the particular responsibility of owning and operating a railroad, because it was not organized for the really efficient conduct of any practical business. The rejection of a system of divided personal responsibility between public and private officials does not consequently bring with it necessarily the rejection of a system of public ownership, if not public operation; and if it can be demonstrated in the case of any particular class of corporations that its interest has become in any essential respect hostile to the public interest, a constructive industrial policy demands, not a partial, but a much more complete, shifting of the responsibility.

That cases exist in which public ownership can be justified on the foregoing grounds, I do not doubt; but before coming to the consideration of such cases it must be remarked that this new phase of the discussion postulates the existence of hitherto neglected conditions and objects of a constructive industrial policy. Such a policy started with the decision, which may be called the official decision, of the American electorate, to recognize the existing corporate economic organization; and we have been inquiring into the implications of this decision. Those implications include, according to the results of the foregoing discussion, not only a repeal of the Sherman Anti-Trust Law, but the tempering of the recognition with certain statutory regulations. It by no means follows that such regulation satisfies all the objects of a constructive national economic policy. In fact it does not satisfy the needs of a national economic policy at all, just in so far as such a policy is concerned not merely with the organization of industry, but with the distribution of wealth. But inasmuch as the decision has already been reached in preceding chapters that the national interest of a democratic state is essentially concerned with the distribution of wealth, the corporation problem must be considered quite as much in its relation to the social problem as to the problem of economic efficiency.

The American corporation problem will never be understood in its proper relations and full consequences until it is conceived as a sort of an advanced attack on the breastworks of our national economic system by this essential problem of the distribution of wealth. The current experiments in the direction of corporate "regulation" are prompted by a curious mixture of divergent motives. They endeavor to evade a fundamental responsibility by meeting a superficial one. They endeavor to solve the corporation problem merely by eradicating abuses, the implication being that as soon as the abuses are supervised out of existence, the old harmony between public and private interest in the American economic system will be restored, and no more "socialistic" legislation will be required. But the extent to which this very regulation is being carried betrays the futility of the expectation. And as we have seen, the intention of the industrial reformers is to introduce public management into the heart of the American industrial system; that is, into the operation of railroads and public service corporations, and in this way to bring about by incessant official interference that harmony between public and private interest which must be the object of a national economic system. But this proposed remedy is simply one more way of shirking the ultimate problem; and it is the logical consequence of the persistent misinterpretation of our unwholesome economic inequalities as the result merely of the abuse, instead of the legal use, of the opportunities provided by the existing economic system.

An economic organization framed in the national interest would conform to the same principles as a political organization framed in the national interest. It would stimulate the peculiarly efficient individual by offering him opportunities for work commensurate with his abilities and training. It would grant him these opportunities under conditions which would tend to bring about their responsible use. And it would seek to make the results promote the general economic welfare. The peculiar advantage of the organization of American industry which has gradually been wrought during the past fifty years is precisely the opportunity which it has offered to men of exceptional ability to perform really constructive economic work. The public interest has nothing to gain from the mutilation or the destruction of these nationalized economic institutions. It should seek, on the contrary, to preserve them, just in so far as they continue to remain efficient; but it should at the same time seek the better distribution of the fruits of this efficiency. The great objection to the type of regulation constituted by the New York Public Service Commission Law is that it tends to deprive the peculiarly capable industrial manager of any sufficient opportunity to turn his abilities and experience to good account. It places him under the tutelage of public officials, responsible to a public opinion which has not yet been sufficiently nationalized in spirit or in purpose, and in case this tutelage fails of its object (as it assuredly will) the responsibility for the failure will be divided. The corporation manager will blame the commissions for vexatious, blundering, and disheartening interference. The commissions will blame the corporation manager for lack of cordial coöperation. The result will be either the abandonment of the experiment or the substitution of some degree of public ownership. But in either event the constructive economic work of the past two generations will be in some measure undone; and the American economic advance will be to that extent retarded. Such obnoxious regulation has been not unjustly compared to the attempt to discipline a somewhat too vivacious bull by the simple process of castration. For it must be substituted an economic policy which will secure to the nation, and the individual the opportunities and the benefits of the existing organization, while at the same time seeking the diffusion of those benefits over a larger social area.

III

THE FRUITS OF INDUSTRIAL ORGANIZATION

The only sound point of departure for a national economic policy is, as we have seen, the acceptance by the state of certain of the results of corporate industrial organization. Such state recognition is equivalent to discrimination in their favor, because it leaves them in possession of those fundamental economic advantages, dependent on terminals, large capital, and natural resources, which place them beyond effective competition; and the state has good reason to suffer this discrimination, because a wise government can always make more social capital out of a coöperative industrial organization than it can out of an extremely competitive one.

It is extremely improbable that, even when officially recognized in this way, the process of corporate combination would go beyond a certain point. It might result in a condition similar to that which now prevails in the steel industry or that of sugar refining; but it should be added that in industries organized to that extent there is not very much competition in prices. Prices are usually regulated by agreement among the leading producers; and competition among the several producers turns upon quickness of delivery and the quality of the service or product. Whether or not this restriction of competition works badly depends usually upon the enlightened shrewdness with which the schedule of rates and prices is fixed. A corporation management which was thoroughly alive to its own interest would endeavor to arrange a scale of prices, which, while affording a sufficient profit, would encourage the increased use of the product, and that is precisely the policy which has been adopted by the best managed American railroad and industrial corporations. But it must always be kept in mind that, in the absence of a certain amount of competition, such a policy cannot be taken wholly for granted. A short-sighted management may prefer to reap large profits for a short time and at the expense of the increased use of its product or service. Moreover, the margin between the cost of production and the particular price at which the product or service can be sold consistent with its largely increasing use may enable the producer to gather enormous profits; and such profits may not stimulate competition to any effective extent, precisely because they depend upon advantages in production which cannot be duplicated. No state desirous of promoting the economic welfare of its citizens can remain indifferent to the chance thus afforded of earnings disproportionately large to the economic service actually rendered.

In dealing with this question of possibly excessive profits under such a method of economic organization, the state has many resources at its disposal besides the most obvious one of incessant official interference with the essentials of corporation management. Of these the most useful consists unquestionably in its power of taxation. It can constitute a system of taxation, in respect to the semi-monopolistic corporations, which would deprive them of the fruits of an excessively large margin between the cost of production and the price at which the product or service could be increasingly sold. Net profits could be taxed at a rate which was graduated to the percentage paid; and beyond a certain point the tax should amount to much the larger fraction of the profits. In this way a semi-monopolistic corporation would not have any interest in seeking profits beyond a certain percentage. A condition would be established which, while it would not deprive the managers of a corporation of full responsibility for the conduct of its business, would give them an additional inducement always to work for the permanent improvement of the economic relation of the corporation to the community. They would have no interest in preferring large but insecure net earnings to smaller ones, founded on a thoroughly satisfactory service, a low schedule of prices, and the constantly increasing efficiency of the plant and organization of the company.

The objection will, no doubt, be immediately urged that a system of this kind would prevent any improvement of service from going beyond a certain point, just because it would cease to be profitable beyond a certain point. But such an objection would not be valid, provided the scale of taxation were properly graduated. I shall not attempt to define any precise scale which would serve the purpose because the possible adoption of such a plan is still too remote; but the state should, in return for the protection it extends to these semi-monopolistic corporations, take a certain percentage of all profits, and, while this percentage should increase until it might at a certain level reach as much as one half or three quarters, it should not become larger than three quarters--except in the case of a corporation earning, say, more than 20 per cent on its capital. To be sure the establishment even of such a level would conceivably destroy the interested motive for increased efficiency at a certain point, but such a point could hardly be reached except in the case of companies whose monopoly was almost complete.

The foregoing plan, however, is not suggested as a final and entirely satisfactory method of incorporating semi-monopolistic business organizations into the economic system of a nationalizing democracy. I do not believe that any formula can be framed which will by the magic of some chemical process convert a purely selfish economic motive into an unqualified public economic benefit. But some such plan as that proposed above may enable an industrial democracy to get over the period of transition between the partial and the complete adaptation of these companies to their place in a system of national economy. They can never be completely incorporated so long as the interest of their owners is different from that of the community as a whole, but in the meantime they can be encouraged to grow and perhaps to become more efficient, while at the same time they can be prevented from becoming a source of undesirable or dangerous individual economic inequalities; and I do not believe that such a transitional system of automatically regulated recognition would be open to the same objections as would a system of incessant official interference. In so far, indeed, as the constructive industrial leader is actuated merely by the motive of amassing more millions than can be of any possible use to himself or his children--in so far as such is the case, the inducement to American industrial organization on a national scale would be impaired. But if an economic democracy can purchase efficient industrial organization on a huge scale only at the price of this class of fortunes, then it must be content with a lower order of efficiency, and American economic statesmanship has every reason to reject such an alternative until there is no help for it. The best type of American millionaire seems always to have had as much interest in the work and in the game as in its prodigious rewards; and much of his work has always been done for him by employees who, while they were paid liberally, did not need the inducement of more money than they could wholesomely spend in return, for service of the highest efficiency.

In any event the plan of an automatically regulated recognition of semi-monopolistic corporations would be intended only as a transitional measure. Its object would be to give these somewhat novel industrial agents a more prolonged and thorough test than any they have yet received. If they survived for some generations and increased in efficiency and strength, it could only be because the advantages they enjoyed in the way of natural resources, abundant capital, organization, terminals, and responsible management were decisive and permanent; and in that case the responsibility of the state could not be limited to their automatic regulation and partial assimilation. A policy must be adopted of converting them into express economic agents of the whole community, and of gradually appropriating for the benefit of the community the substantial economic advantages which these corporations had succeeded in acquiring. Just in so far, that is, as a monopoly or a semi-monopoly succeeded in surviving and growing, it would partake of the character of a natural monopoly, and would be in a position to profit beyond its deserts from the growth of the community. In that event a community which had any idea of making economic responsibility commensurate with power would be obliged to adopt a policy of gradual appropriation.

The public service corporations in the large cities have already reached the stage of being recognized natural monopolies. In the case of these corporations public opinion is pretty well agreed that a monopoly controlling the whole service is more likely to be an efficient servant of the city than a number of separate corporations, among whom competition in order to be effective must be destructive and wasteful. American municipal policy is consequently being adapted to the idea of monopolized control of these public services. The best manner of dealing with these monopolies, after they have been created and recognized, is not settled by any means to the same extent; but the principle of restricting the franchises under which they operate to a limited term of years is well established, and the tendency is towards a constant reduction of the length of such leases and towards the retention of a right of purchase, exercisable at all or at certain stated times. The American city has come to realize that such privileges possess a value which increases automatically with the growth of the city and with the guarantee against competition; and this source of value should never be alienated except for a short period and on the most stringent terms. Wherever, consequently, a city has retained any control over such franchises, it is converting the public service corporations merely into temporary tenants of what are essentially exclusive economic privileges. During the period of its tenancy the management of a corporation has full opportunity to display any ability and energy whereof it may be possessed; and such peculiarly efficient management should be capable of earning sufficient if not excessive rewards. In the meantime, any increase in value which would result inevitably from the possession of a monopoly in a growing community would accrue, as it should, to the community itself.

The only alternative to such a general scheme of municipal policy in relation to public service corporations would be one of municipal operation as well as municipal ownership; and municipal operation unquestionably has certain theoretical advantages. When a corporation enjoys a tenancy for a stated term only, there is always a danger that it will seek temporarily larger profits by economizing on the quality of its service. It has not the same interest in building up a permanently profitable business that it would in case it were owner as well as operator. This divergence of interest may lead to a good deal of friction; but for the present at least the mixed system of public ownership and private operation offers the better chance of satisfactory results. As long as the municipal civil service remains in its existing disorganized and inefficient condition, the public administration should not be granted any direct responsibility which can be withheld without endangering an essential public interest. A system of public operation would be preferable to one of divided personal responsibility between public and private officials; but when a mixed system can be created which sharply distinguishes the two responsibilities one from another without in any way confusing them, it combines for the time being a maximum of merit with a minimum of friction.