SCHEME SHOWING THE VARIOUS SEPARATE INDUSTRIES THAT ARE INVOLVED IN THE MAKING OF A FINISHED STEEL PRODUCT Reading up, each factory is wholly dependent upon the preceding. E must buy shapes and plates from D; D must buy billets, slabs, and blooms from C; C must buy pig-iron from B; B must buy ore from A. Reading down, there is not the same degree of dependence save in the case of the mine, A, which has but one customer, B, the blast furnace. The others have several outlets for their production. As between D and E, the rolling mill turns out so many different products, from tin plate and wire rods to rails, that it is virtually independent of the fabricator. Many mills do not consider it worth while to equip for the making of shapes and plates for structural steel work, notwithstanding the fact that an immense tonnage is used some 1,500,000 tons annually. hearth furnace it knows it is not in a position to compete with mills that do. The open-hearth furnace wants its own blast furnace and the blast furnace wants its own ore supply. Reading down, any one factor may or may not have an interest in a succeeding factor ownership is not vital, but may be profitable. Reading up, it may be a question of existence; reading down, it is more a matter of profit, of "branching out" to secure business, and, as every one knows, "branching out" is often disastrous. The blast furnace that buys an open-hearth furnace with a view to making steel in addition to making pig-iron may come to grief, while the purchase of a blast furnace by an open-hearth company in order to get its raw material to better advantage may be a very sound proposition; the motives are fundamentally different; results in the latter case may be quite accurately estimated and forecast, whereas in the former they are largely guess-work, a gamble on the question whether a company organized to make and sell pig-iron can make and sell steel successfully. To make the point clearer, a blast furnace might very naturally buy a coal mine. to get the coal and coke it needs, but there is no more reason why a coal company should buy a blast furnace than why it should buy a railroad or the business of any other large customer. It is one thing for a given industry to buy a plant from which it must get raw material, it is a fundamentally different thing for an industry to buy a plant to which it sells its finished product. A railroad company may buy a coal mine to get the coal it burns, but a coal mine should not buy a railroad in order to sell it the coal it uses as an economic proposition the first purchase may be entirely sound, the second is unsound; the first might lead to abuses, the second would be sure to. In response to these incentives to combine and consolidate in the vertical line, a number of large steel companies in this country own all the factors from and including A to E. Under existing competitive conditions the fabricator feels the imperative need of close alliance with some rolling mill. They own directly or indirectly their Unless the rolling mill owns an open- own, A, mines; B, blast furnaces; C, THE ARROWS REPRESENT THE COMBINATION OF ONE INDUSTRY WITH ALL OTHERS INVOLVED IN THE PRODUCING Line A would be extended to the number of mines in operation; line B to the number of blast furnaces reported 208 for the year 1909-and so on; each horizontal line being carried out to include all the mines, furnaces, mills, and fabricators in active operation. The number varies from time to time. The sign of division is used between units on the horizontal lines because each is normally more or less antagonistic to the others; there is no necessary interdependence as in the vertical line; all unions and combinations are more or less forced and artificial. The perpendicular is the line of normal combination, the horizontal is the line of normal competition. A mine does not compete with a blast furnace but with all other mines that are trying to sell ore to the same furnaces. tions along the horizontal line are usually made for the express purpose of suppressing competition. The public is, and for a long time has been, opposed to combinations along the horizontal line, combinations of mine with mine, mill with mill; it is beginning to see that combinations in the perpendicular line may be far more effective in restraining trade and developing monopolies. A combination of all the furnaces in the country would have the power for a time to fix any price it pleased on pigiron short of cost of importation — but this power would not last long; its arbitrary exercise would invite new competition. Monopolies along the horizontal line are seldom more than partial and are always short-lived, with reactions that send prices below cost. The monopoly that results from combination in the perpendicular line is a very different proposition. It is not due to any control of the industry, as a whole, but entirely to the ability of the combination to kill off competitors instead of buying them up as in the other case. All other things equal, it matters little to a blast furnace that buys its ore whether it competes against a dozen independent furnaces or a number in consolidationas pointed out, it may profit more with the consolidation in existence, but if one furnace secures control of a mine, the position of every furnace that has no mine is seriously affected. Why? Simply because the combination is in a position to sell pig-iron at cost or less than cost to down competitors, and make its money from its mine. So long as A, B, C, D, and E are independent units in the production and sale each of its own products, no one can sell at less than cost for any length of time and survive, but when all are united under one ownership, the consolidation is in a position to lose money indefinitely on one or more of its units - departments – A 1 This is the the combination that the independent, who has to buy his material, cannot stand. The independent blast furnace has nothing to fear from a combination between mine and furnace if neither is permitted to live off the other. What is true of mine and furnace is true of all combinations in the vertical line - the independent competitor stands no chance unless the operations of the consolidated units are so segregated that he can ascertain just what he is up against. Take the case of the independent steel fabricator. There are a great many in the country; he is to be found in every city of any size, and comparatively few have connections with rolling mills. Most of them buy the steel they use — shapes and plates in the open market. In bidding upon work they are obliged to figure their material at market price — say $1.10 per hundred pounds, or $22 per ton, Pittsburg. Competing with these independent companies are several companies that are owned by or allied with rolling mills. The following illustrates the situation: IS NOT THE CORPORATION WHICH BUYS UP ALL COMPETITORS, BUT THE ONE WHICH (COL. 1) CONTROLS ALL ITS OWN SUBSIDIARY PROCESSES AND IS ABLE, THEREFORE, TO CONTROL the prices of RAW MATERIAL SO AS TO FORCE 2 AND 3, WHO BUY IN THE OPEN MARKET, out of BUSINESS until its competitors in that horizontal line are driven to the wall, all the time more than recouping its losses in other departments. Independent 3 is obliged to buy its steel in the open market, possibly of rolling mills 1 and 2. Rolling mill 2 is obliged to buy its raw material in the open market, possibly from furnaces owned by 1. It is plain that the independent (3) can exist only so long as combinations 1 and 2 compel their structural departments to figure steel at market price in making all estimates and to make no bids except at a fair profit. It is equally plain that, after disposing of independent fabricator 3, the fight for control may result in combination 1 selling all the products of its mill (D) at costwhile still making money in units A, B, and Cand so compel 2 to shut down. In short the large corporations - there are a number most efficiently organized - which own or control all the processsteps of finished steel production, are in a position absolutely to dominate the industry; independents in any one branch live only by their sufferance. On the surface this would seem to be a dangerous situation, but it is undoubtedly true that no one of these large corporations has any desire to monopolize any particular branch of the industry or to suppress independents in various lines; on the contrary all the large corporations would like to help independents, for they make good local customers. But conditions are bad. At the present time there is so little business to go around and competition is so keen that the large companies are bidding against themselves, and in their fight for business they are permitting some of their departments to bid at cost and less than cost, covering the deficits in other departments. This is old-fashioned cut-throat competition, but it is death to the independent and, in the long run, detrimental to the community, for, if logically extended, it means monopoly of this and that branch of the industry by the few powerful survivors. Furthermore it must not be overlooked that between each letter in the perpendicular line there is the big item of freight, especially important between A and B - mine and blast furnace. A combination in this line may save or make enough on transportation to enable it to sell all its products at competitors' cost and still show a good profit. between the upper and nether millstones, between the rolling mills from which they are obliged to buy and the structural steel companies owned by the mills, with which they have to compete. It is quite natural for a mill to favor its own subsidiary company, or a company closely allied to it, and make a secret price on shapes that will enable such company to secure a good contract, and many will insist upon its right to do so. A prominent lawyer representing a large company was asked: "Given a corporation that controls two or more units of a product, has it the right to sell one unit at cost to beat its competitors in that particular line?" "You mean -?" "I mean, has a steel company that owns mines, furnaces, rolling mills, and - say a fabricating company, the right to do fabricated work at less than cost to beat independent fabricators that have no connection with mills?" "That is competition." "Is it?" "It is the sort of competition the public is crying for.". "Are you sure?" "If the purchaser gets his building at less than cost, who is going to complain?” "How about the independent that stands no show at all and is forced out of business?" "That's his look-out; if the people want 'cut-throat' competition, the company that has no mill back of it is going to get hurt." "But does not that mean monopoly in the end by the few big companies that own both mills and fabricating companies?” "That can't be helped. If the big company can do the work cheaper, then it is bound to survive." "But it can't do fabricated work any cheaper, not so cheaply as the independent who is well situated locally; the big company can show a profit in its structural department only by charging against that department a low price for its steel." "What if it does?" "That means it charges its own subThe independent fabricators are caught sidiary company one price and charges the independents so much more that they are forced out of business. The big company uses the profits it makes in other lines to get control of the structural business." "Isn't that competition?" "Not the sort of competition the people will tolerate when they understand." "Ha! it is the sort of competition every merchant indulges in when he makes a run on a particular line of goods at less than cost to drive out some competitor." "Perhaps the day of that kind of competition is passing - but all that the individual does the corporation may not do." "What is your remedy?" "Segregate the departments of every large corporation in such a way that every competitor against any department may know exactly what he is up against.' "Segregation that is ridiculous." "But less disastrous than disintegration." Many remedies have been proposed for the trust problem - federal incorporation, federal supervision, federal regula tion of prices and profits, dissolution, but after years of close association with competitors of the trusts, who are also large buyers from them, the writer has never heard any very loud demand for any one of these remedies. Dissolution - no one who has any knowledge of the industry seems to want that. Federal regulation of prices and profits is dismissed as chimerical. Federal incorporation or supervision—yes, if you please, then what? Every objection that can be urged against segregation was urged with greater force against the inter-state commerce law, yet, sharply as that law is criticized by railroad men here and there, the railroad world as a whole would not go back to the old demoralized conditions. that prevailed in the days of unfettered competition, secret rebates, pools, and unfair discrimination in rates. Ten years from now manufacturers will look back upon existing conditions in the industrial world as equally barbaric. WITH THE KNOX MISSION TO SECOND ARTICLE THE MEETING WITH ESTRADA CABRERA, THE DESPOT OF GUATEMALA – VENEZUELA'S LAVISH HOSPITALITY AND THE PARTY'S |