been made, not of those who are competitors in the same line of manufacture, but rather between the producers of raw material and the manufacturers of the finished product, in order that these requirements of demand and supply may be readily met, and the course of production from the raw material through to the highest finished product may be carried on without delay or unnecessary friction.

A very large establishment often finds it profitable to manufacture some by-products from its waste material, which, owing to the extra capital needed, or to an insufficient quantity of waste material, its smaller rival must either lose entirely or part with at a disadvantage. The largest oil refineries at times make as much profit from by-products as from their illuminating oil.

It would seem that if there is any real economic function of combination of capital, whether it has attained monopolistic power or not, it is this: saving the various wastes of competition, in great part by providing for the direction of industrial energy to the best advantage. Under wastes of competition may be understood also those of subdivision in production or production on a small scale; under

combination also mere aggregation of capital. But these separate meanings should be distinguished, as is done later. In this way only can it be made possible for the general public to secure articles of consumption at an absolutely low price on the basis of a low cost of manufacture. How far combinations thus far have permitted the public to gain these advantages, and how far they have themselves selfishly taken advantage of their superior productive power to the detriment of the public, will be considered elsewhere.

CHAPTER III

FAVORS TO INDUSTRIAL COMBINATIONS

Many writers and thinkers on the subject of industrial combinations are of the opinion that they are usually brought into existence by special favors, and that, at any rate, whatever monopolistic power they possess is secured in this way. It is even the contention of some that unless the industries themselves are natural monopolies, such as railways and the telegraphs, or unless they are granted some special legal privileges, such as patents or copyrights, it is impossible for them to secure monopolistic power without some special favors shown them.

The protective tariff is probably most frequently cited as a special favor to an industry that brings into existence monopolies. The dictum of Mr. Havemeyer, the President of the American Sugar Refining Company, in his testimony before the United States Industrial Commission, that "the mother of all Trusts is the customs tariff law," has found ready acceptance by large

numbers of thoughtful people. Mr. Havemeyer's contention is that a high tariff, by making the protected industry very profitable, will tempt much capital into that special field. In many cases, the establishments, on account of the high profits, will be placed carelessly in unfavorable locations. In other instances, for the same reason, men who are not skilled in the industry will be ready to engage in it. The promise of high profits having thus tempted many rivals into the field, the pressure from this home competition becomes severe, and investors feel themselves cheated of their anticipated profits. With the profits thus in sight, or even perhaps with the memory of large profits in the immediate past to stimulate them, they more readily combine, not primarily for the sake of reducing expenses, but rather for the purpose of reaping from consumers a large reward through high prices. It is beyond question true that several of our largest combinations have been formed in industries protected to a considerable extent against the pressure of foreign competition by the high protective tariff. Indeed, Mr. Havemeyer himself acknowledged that, had the sugar industry at the time of the formation of

the Trust not been so protected that there was promise of a high profit without foreign competition, he would not have risked his property in the combination, which of necessity included also many of those establishments least favorably situated for cheap production.

The situation is, however, not so exceptional as is often thought. Even in unprotected industries in which the United States has an advantage, the same principle of high profits in the earlier days, lower profits from the pressure of competition, and the consequent temptation to combination exists. If one considers what the effect would probably be of the removal of the protective tariff in an industry in which a combination exists, one can readily see that, while the public might be benefited, the result would hardly be the prevention of monopoly. If the combination, as is ordinarily assumed, were stronger than the few independent competitors still in existence in the country, the first effect of the removal of the tariff would be the ruin of the independent producers. Provided the industry were dependent entirely upon the tariff for its existence, the removal of the tariff would of course kill the Trust, but would