How shall the injustices of monopoly be prevented in the future? So far as quasi-public monopolies are concerned, all students of the subject are now agreed that these should be permitted to exist under adequate governmental regulation as to prices and service. The reason is that in this field successful and useful competition is impossible. Public utility corporations are natural monopolies, and must be dealt with by the method of regulation until such time as they are brought under the ownership and operation of the State. With regard to the great industrial combinations which have become or threaten to become artificial monopolies, there exists substantial agreement among competent authorities on one point, and disagreement on another point. All admit that the unfair competitive methods described in an earlier part of this chapter should be stringently prohibited. No possible reason can be found for legal toleration of these or any other discriminative, uncharitable, or unjust practices on the part of stronger toward weaker competitors.
The disagreement among students of monopoly relates to the fundamental question of permitting or not permitting these combinations to exist. According to the first theory, of which Mr. Justice Brandeis is the most distinguished exponent, no new industrial monopolies should be permitted, and those that we have should be dissolved. The basis of this theory is the assumption that all the economies and all the productive efficiency found in monopolistic concerns can be developed and maintained in smaller business organisations, and that the method of prevention and dissolution is the simplest means of protecting the public against the danger of extortionate monopoly prices. Attention has been called in a preceding paragraph to the impossibility of determining whether the great monopolistic combinations have on the average shown themselves to be more efficient than concerns subject to active and adequate competition. It is significant, however, that in the discussion of this subject which took place at the twenty-sixth annual meeting of the American Economic Association, at Minneapolis in 1913, the economists who participated were practically unanimous in holding that the superior efficiency of the trusts had not been demonstrated, but was a matter of serious doubt, and that the burden of proof of their alleged superiority had been definitely shifted upon those who maintained the affirmative.[183] Probably the great majority of the whole body of American economists would share these conclusions.
On the other hand, the opponents of prevention and dissolution, of whom Mr. George W. Perkins is probably the most conspicuous, point to the obvious economies of large-scale over small-scale production, and contend that these are sufficient reason for permitting and even encouraging the great combinations. The power to oppress competitors by unjust methods of business, and the public by extortionate prices, should be kept under rigid control by supervision, and government regulation of maximum prices. But the arguments advanced in favour of this position are never conclusive. Most of its advocates fail to realise, or at least to take adequately into account, the difference between large-scale production and production by a monopoly. While the large plant and the large business organisation have in many lines of manufacture and trade a considerable advantage over the small plant and the small organisation, there is not a scintilla of evidence to show that the efficiency of magnitude increases indefinitely with magnitude. There is no proof that the maximum efficiency is reached only with the maximum size of the business unit. On the contrary, all the evidence that we have points to the conclusion that in every field of industrial and commercial enterprise, all the economies of magnitude and of combination are obtained long before the concern becomes a monopoly. There is not an industry of any importance in the United States in which all the advantages of bigness and concentration cannot be made operative in concerns that control as low as twenty-five per cent. of the total product. The highest economy and efficiency can be obtained without monopoly.
Indeed, this is admitted by the more reasonable advocates of the regulation and price-fixing policy. While maintaining that "concentration must go far in order to give the maximum of efficiency," President Van Hise does not hold "that it should go to the extent that the element of monopoly enters"; and he would have the law "declare restraint of trade unreasonable that gets to monopoly," and fix the definite per cent. of business control which constitutes a monopoly.[184] We are justified, therefore, in concluding that the theory of prevention and dissolution (provided that the competing units are not made so small as to destroy the certain economies of magnitude) rather than the theory of permission and regulation, indicates the sound economic and social policy of dealing with monopolies.
President Van Hise advocates the regulation policy in a modified form. In substance his view is that, while no corporation should be permitted to control the greater part of any product, monopolistic price-agreements should be sanctioned and regulated by law. No amount of restrictive legislation, he maintains, can secure universal competition in the matter of prices. Experience shows that the destructive results of cut-throat competition compel the more powerful competitors to make price agreements in some lines of business.[185] For example; all the retail grocers in a city are often found selling certain staples at a uniform price for long periods of time. Agreements of this sort should, in the opinion of President Van Hise, be formally permitted by law, with the proviso that a government commission should fix the maximum and possibly the minimum limits. And he contends that the task of fixing fair maximum and minimum prices would be much less difficult than is commonly supposed, and that it would be much simpler and easier than the task of regulating railway freight rates.
Whatever may be the merits of this plan, it is not likely to be embodied in legislation in the near future. So far as we can see now, the American people are committed to the policy of endeavouring to restore genuine competition by prohibiting those predatory practices to which the great monopolies mainly owe their existence. The attempt will be made to give competition a fair opportunity to prevent both monopolistic control of products and monopolistic fixing of prices. Competition has not enjoyed any such opportunity during the last quarter of a century. If this attempt should fail after a thorough trial, the time will be at hand for the regulation of prices by the government. Until that time has arrived (let us hope that it never will arrive) the State will not, and should not, embark upon such a large and difficult experiment.
In the last chapter we saw that a monopoly has no right to gains in excess of the competitive rate of interest on its capital, except in so far as these have been derived from superior efficiency. Now superior efficiency is clearly present whenever the monopolistic concern obtains surplus gains by selling its product at competitive prices, or at the prices that would have prevailed under competition. Evidently the surplus in such a case is due to the greater productivity of the monopoly as compared with the average productivity of competitive concerns. When, however, the monopoly charges prices above the competitive level, its surplus gains cannot all be attributed to unusual efficiency. A part if not all of them are the result simply of the power to take; consequently they are immoral.
One of the means by which some monopolies have obtained unjust surplus gains is overcapitalisation, or stockwatering. This practice is rarely found in businesses that are subject to normal competition. So far as the consumer is concerned, a corporation that cannot fix prices arbitrarily has nothing to gain by inflating its capital. Unless it develops exceptional efficiency, it cannot hope to obtain more than the competitive rate of interest on its capital; if it does become exceptionally efficient, it can take the resulting surplus gains without arousing public resentment or criticism. In either case, it will have no sufficient reason to deceive the public by exaggerating the amount of its capital. When a competitive concern does water its stock, the object will be to defraud investors. If the scheme is successful the unjust surplus gains are taken by one set of stockholders from another set of stockholders. Whenever anything of this sort occurs, the deceptive devices employed are so crude and obvious that they present no special problem for the moralist. Even as practised by monopolies, stockwatering raises no principle that has not been already discussed. It does, however, create some special difficulties in the matter of applying the moral principles involved. Consequently, it may with advantage be considered in a separate chapter.
The general definition of overcapitalisation is capitalisation in excess of the proper valuation of a business. What is the measure of proper valuation? According to many corporation directors, it is earning power. If a concern is able to get the prevailing rate of interest on a capitalisation of ten million dollars, that is the proper capitalisation for that concern, even though the money actually invested might not have exceeded five million dollars. In the opinion of most other persons, however, a company is overcapitalised when the face value of its securities is greater than the money put into the business plus the subsequent enhancement in the value of its land. "The money put into the business," means that which has been expended for labour, materials, land, equipment, and all other items and costs of organising the concern, together with the sum that is necessary to cover the interest not obtained by the investors during the preparatory period before the business became productively operative. The increase in the value of the land after its acquisition by the company also deserves a place in the legitimate valuation, and may reasonably be represented by an appropriate amount of securities. Monopolistic corporations have as good a right, generally speaking, to profit by the "unearned increment" of land as competitive concerns. In brief, the proper measure of capitalisation is cost: either the original cost, as just explained and supplemented; or the present cost of reproducing the business.
Stockwatering can become an instrument of unjust gains in two ways: first, through fraud inflicted upon some of the investors; second, through the imposition of exorbitant prices upon the consumers. The former cannot occur so long as the process of inflation does not go beyond earning power; for in that case all stockholders, barring dishonest manipulation of the company's receipts, will obtain the normal rate of interest on their investment. If, however, stock is sold in excess of the earning power of the concern, those stockholders who fail to obtain the ordinary rate of interest on their money are unjustly treated in so far as they have been deceived. And those officers or other members of the corporation who have profited by the deception of and injury to these stockholders, are the recipients of unjust gains. Daniel Drew inflated the capitalisation of the Erie Railroad from seventeen millions to seventy-eight millions within four years for the purpose of manipulating the stock market; owing to excessive issues of stock, the American Shipbuilding Company was thrown into bankruptcy to the great injury of all but one of its stockholders;[186] because they issued securities to buy subsidiary railway lines at exorbitant prices, and to provide extravagant commissions and discounts for bankers, the directors of the 'Frisco System forced it into a receivership, after having inflicted a net loss of four million dollars per year upon the stockholders.[187] Many other notable performances might be cited where stockwatering, both in railroads and in industrial concerns, has defrauded investors of millions of dollars, and enabled a few powerful directors to reap corresponding enormous profits.
At first sight it would seem that stockwatering is of little or no importance to the consumer. Since a monopolistic concern endeavours to fix its prices at the point that will yield the maximum net profit in any case, the amount of stock in existence would seem to be irrelevant to the problem. Nevertheless, the presence of a large quantity of fictitious capital whose owners are calling for dividends, sometimes constitutes a special force impelling the imposition of higher prices and charges. "It will happen at times that overcapitalisation does at least cause a clinging to high prices. The managers of an overcapitalised monopoly may have to face the fact that great blocks of securities are outstanding, very likely issued by their predecessors, and now held by all sorts of investors. They are then loath to let go any slice of its profits. We have seen that often the monopoly principle of maximum net profit is not applied in its full sweep, especially in industries which are potentially subject to public control. Where abnormal returns on the original investment have been made, concessions to public opinion in the way of low rates and better facilities are more likely to come when capitalisation has not been inflated."[188] The United States Industrial Commission found that as regards railroads: "In the long run excessive capitalisation tends to keep rates high; conservative capitalisation tends to make rates low."[189]
This indirect influence of stockwatering toward excessive rates and prices becomes effective in two ways. The existence of fictitious capital conceals from the public the high rate of return that is obtained on the true valuation, thus preventing effective action for a reduction in prices and charges; and it sometimes causes the rate-making authorities to allow rates to be sufficiently high to yield something to the investors in the inflated capital. If a trust or a railroad has issued stock having a par value of twice the capital invested, its rate of dividend on the entire capitalisation will be only one-half the rate of interest that it is receiving on the investment. If it pays, for example, seven per cent. on all its stock, it will be getting fourteen per cent. on its genuine capital. While the consumers of tobacco, or the patrons of a railroad, would raise no outcry against seven per cent. dividends, they would probably begin to agitate for an enforcement of the anti-trust laws, and for a reduction in freight and passenger charges, if they realised that they were providing for dividends of fourteen per cent. Nor is the public adequately protected by government investigations of trusts and regulation of railway rates. Despite the anti-trust laws, many American monopolies have for many years received exorbitant profits through excessive prices imposed upon the consumer; and in many of these instances overcapitalisation and its resulting concealment of real profits have been of considerable assistance to the extortionate monopoly. In fixing railway rates, the Interstate Commerce Commission, and the various state railroad commissions, have been seriously hampered by their inability to determine the real investment of the roads, and to separate the genuine from the fictitious capitalisation. Not until the year 1913 did the national government begin the task of making a valuation of interstate railroad property, and the work will require several years. Very few of the states have made valuations of the railroads within their borders. In the meantime it is certain that many of the rates fixed by both the national and the state bodies will continue, as in the past, to be higher than they would have been if the true value of the railroads were known and accepted as the basis of freight and passenger charges.
The second bad effect of stockwatering on the consumer is seen when rate-fixing bodies deliberately permit the charges of public service corporations to be high enough to include some returns on that portion of the capitalisation which is fictitious. It is very difficult for such authorities to resist entirely the plea of the "innocent investor." Consequently, railroad commissions and other rate making authorities, and even the courts, have occasionally made some provision for dividends on the "water." Chairman Knapp of the Interstate Commerce Commission admitted a few years ago that, in considering the reasonableness of a given rate, this body took into account the financial condition, and therefore the capitalisation of the railroad.[190] In 1914 and 1915 practically all the great railway systems of the United States made powerful, and in a measure successful, appeals to the Interstate Commerce Commission for a rise in rates on the ground that they were unable to pay the normal rate of interest on their securities, and hence could not obtain on advantageous terms new capital needed for improvements. Had the capitalisation of the roads been kept down to the actual investment, most of them would have been able to pay the competitive rate of interest on all their stock, and still have a sufficient surplus to command excellent credit.
When prices or charges are made high enough to provide returns on fictitious capital, the consumer is treated unjustly. As we have shown more than once, the consumer cannot rightfully be required to pay for the products of a monopoly at a greater rate than is necessary to provide the competitive rate of interest on capital in the average conditions of efficiency. If some concerns are able to sell at this price, and still obtain surplus gains, they have a right thereto on account of their exceptional productivity. But the capital upon which a monopolistic concern has a claim to the prevailing rate of interest, is genuine capital: that is, the actual investment as interpreted above, not an inflated capitalisation. The consumers may justly be required to pay for the use and benefit of actual productive goods; but it is not just that they should be compelled to pay for the supposed use of a capital that has no concrete reality.
The stockholders of the monopolistic corporation which imposes upon the consumers exorbitant prices or charges through the instrumentality of inflated capitalisation, can become guilty of this injustice in two ways: by promoting the improper capitalisation; and by getting dividends on stock for which they have not given a fair equivalent. As a rule, the greater part of such guilt and responsibility rests upon certain special and powerful groups among the stockholders. For example; the J.P. Morgan syndicate which organised the United States Steel Corporation received for that service securities to the value of $63,500,000. "There can be no question," says the Commissioner of Corporations, "that this huge compensation to the syndicate was greatly in excess of a reasonable payment."[191] The syndicate was able to exact this stupendous sum mainly because some of its members were also in control of some of the companies that were brought into the combination. "In other words, as managers of the Steel Corporation these various interests virtually determined their compensation as underwriters."[192] In the opinion of the minority members of the Stanley congressional investigating committee, "such a sum bore no relation whatever to the service rendered, the risk run, and the capital advanced."[193] The majority of the committee characterised the transaction in even stronger language. It is clear, therefore, that the syndicate committed injustice toward the consumers both by organising a monopoly which afterward imposed unjust prices, and by taking millions of dollars in securities which its members did not earn, and on which they received interest through the exorbitant prices. While this transaction is exceptionally conspicuous, it is substantially typical of the methods by which many powerful monopolies have watered their stock to the detriment of the public, and the advantage of a small group of directors and financiers.
Is the State obliged to protect, or is even justified in protecting, the innocent victims of stockwatering? That is to say, should rate-making authorities fix the charges of public service corporations high enough to return some interest to the purchasers of fictitious securities? All the facts and presumptions of the case seem to demand an answer in the negative. In the first place, it is impossible to distinguish the "innocent" holders from those who were fully acquainted with the questionable and speculative nature of the stock at the time it came into their possession. In the second place, the civil law has never formally recognised any such claim on the part of even innocent investors, nor any such obligation on the part of itself. It has never laid down the principle that any class of investors in fictitious stock has a legal or moral right to obtain the normal rate of interest on such stock through the imposition of sufficiently high charges upon the consumers. Nor have the courts, except in isolated instances, sanctioned any such principle. On the contrary, the Supreme Court of the United States, in the case of Smyth vs. Ames, declared that a railroad "may not impose upon the public the burden of such increased rates as may be required for the purpose of realising profits upon such excessive valuation or fictitious capitalisation." In the third place, when we consider the matter from the side of morals, we see that the innocent investors are not the only persons whose rights are involved. If charges are placed high enough to cover interest on fictitious capital, the cost and the injury fall upon the consumers. The latter have a right to the services of utility corporations, such as railways and gas companies, at a fair price; that is, a price which will return to the capital put into the concern the prevailing rate of interest, plus whatever gains are obtained by exceptional efficiency. To require them to pay more than this, is to compel them to give something for nothing; namely, to provide interest on capital which does not exist, and from which they receive no benefit. When, therefore, the State intervenes to secure fair charges for the consumers, it should base them upon the capital actually invested and used in the business of public service.
Frequently, however, the State has permitted overcapitalisation, and charges sufficient to pay normal dividends thereon, for long periods of years. Has it not thereby encouraged investors to cherish the expectation that these high charges would be permitted to continue, and that the fictitious stock would remain indefinitely as valuable as when it came into their possession? Is it not breaking faith with these investors when it reduces charges to the basis of the actual investment? A sufficient answer to these questions is found in the fact that the State has never officially sanctioned the practice of stockwatering, nor in any way intimated that it would recognise the existence of the fictitious stock when it should take up the neglected task of fixing fair rates and charges. At the most, the civil law has merely tolerated the practice, and the resulting extortion upon the public. And there has never been a time when the greater and saner part of public opinion did not look upon overcapitalisation as at the least abnormal and irregular. Neither from the civil law nor from public sentiment have the devices of inflating capitalisation received that measure of approval which would confer upon investments therein the legal or the moral status of vested rights. To the "innocent investor" in watered stocks the maxim, caveat emptor, is as fairly applicable as to the man who has been deceived into lending his money on insufficient security, or the man who has been induced by the asseverations of a highly imaginative prospectus to put his money into a salted gold mine, or the man who buys stolen goods from a pawn shop, or the man who because of insufficient police protection loses his purse to a highwayman. In all these cases perfect legal safeguards would have prevented the loss; yet in none of them does the State undertake to make the loss good to the innocent victim.
Such seems to be the strict justice of the situation as between the consumer and the innocent investor. It may sometimes happen that a particularly grave hardship can be averted from the latter at a comparatively slight cost to the former. In such a case equity would seem to require that some concession be made to the investors through the imposition of somewhat higher charges upon the consumer.
Probably the majority of the great steam railroads, street railways, and gas companies that were organised during the last quarter of the nineteenth century inflated their capitalisation to a greater or less extent. Since the year 1900 the trusts have been the chief exponents and illustrations of the practice. According to President Van Hise, "the majority of the great concentrations of industry have gone through two or three stages of reorganisation, the promoters and financiers each time profiting greatly, sometimes enormously."[194] For example; in 1908 the "water" in the American Tobacco Company was estimated by the Commissioner of Corporations at $66,000,000; the United States Shipbuilding Company diluted its twelve and one-half million dollars of capital with more than fifty-five millions of "water"; the United States Steel Corporation contained at the time of its organisation fictitious capital to the amount of $500,000,000; and at least fifty per cent. of the common stock of the American Sugar Refining Company represented no actual investment.[195] Owing to the penetrating and widespread criticism, and the government investigations and prosecutions of the last few years, the practice of stockwatering has very greatly diminished. Perhaps the most flagrant recent example is that of the Pullman Company, which according to the testimony of R. T. Lincoln before the Federal Commission on Industrial Relations, distributed among its stockholders $100,000,000 in stock dividends between 1898 and 1910.
Nevertheless the temptation to inflate capital will exist until the device is stringently prohibited by law. Both the nation and the states ought to adopt the policy of forbidding the sale of stock at less than par value, and restricting issues of stock to the amount required for the establishment, equipment, and permanent betterment of a concern, including a sum to cover the loss of interest to the investors during the early period of the business. Any extraordinary risks to which an enterprise is liable can be protected by the simple device of allowing a correspondingly high rate of interest on the securities. With such legislation enacted and enforced, neither the investor nor the consumer could be deceived or defrauded; and the financing and management of corporations would become less speculative, and more beneficial to the community. The present chapter may be fittingly closed with a moderate and significant statement from the pen of Professor Taussig: "It is doubtful whether the whole mechanism of irregular and swollen capitalisation was at any time necessary or wise. Why not provide once for all that securities shall be issued only to represent what has been invested?... It is sometimes said that freedom, even recklessness, in the issue of securities was a useful device, in that it enabled the projectors to look forward to returns really tempting, and at the same time concealed these returns from a grudging public.... A more simple and straightforward way of dealing with the issue of securities might thus have dampened in some degree the feverish speculation and restless progress of railway development. But a slower pace would have had its advantages also, and, not least, restriction of securities would have saved great complications in the later stages of established monopoly and needed regulation."[196]
If the taxation and other measures of reform suggested in Section I were fully applied to our land system; if co-operative enterprise were extended to its utmost practicable limits for the correction of capitalism; and if the wide extension of educational opportunities, and the elimination of the surplus gains of monopolies restricted the profits of the business man to an amount strictly commensurate with his ability and risks,—if all these results were accomplished the number of men who could become millionaires through their own efforts would be so small that their success would arouse popular applause rather than popular envy. Their claim to whatever wealth they might accumulate would be generally looked upon as entirely valid and reasonable. Their pecuniary eminence would be pronounced quite as deserved as the literary eminence of a Lowell, the scientific eminence of a Pasteur, or the political eminence of a Lincoln. In such conditions there could be no disconcerting discussion of the menace of great fortunes.
In the meantime, these reforms are not realised, nor are they likely to be even approximately established within the present generation. For some time to come it will be possible for the exceptionally able, the exceptionally cunning, and the exceptionally lucky to accumulate great riches through clever and fortuitous utilisation of special advantages, natural and otherwise. Moreover, a great proportion of the large fortunes already in existence will persist, and will be transmitted to heirs who will in many cases cause them to increase. Can nothing be done to reduce the size and lessen the number of these great accumulations? If so, is such a proceeding socially and morally desirable?
The law might directly limit the amount of property to be held by any individual. If the limit were placed fairly high, say, at one hundred thousand dollars, it could scarcely be regarded as an infringement on the right of property. In the case of a family numbering ten members, this would mean one million dollars. All the essential objects of private ownership could be abundantly met out of a sum of one hundred thousand dollars for each person. Moreover, a restriction of this sort need not prevent a man from bestowing unlimited amounts upon charitable, religious, educational, or other benevolent causes. It would, indeed, hinder some persons from satisfying certain unessential wants, such as, the desire to enjoy gross or refined luxuries, great financial power, and the control of immense industrial enterprises; but none of these objects is necessary for any individual's genuine welfare. In the interest of the social good such private and unimportant ends may properly be rendered impossible of realisation.
Such a restriction would no more constitute a direct attack upon private ownership than limitations upon the use and kinds of property. At present a man may not do what he pleases with his gun, his horse, or his automobile, nor may he invest his money in the business of carrying the mails. The limitation of fortunes is just what the word expresses, a limitation of the right of property. It is not a denial nor destruction of that right. As a limitation of the amount to be held by an individual, it does not differ in principle from a limitation of the kinds of goods that may become the subject of private ownership. There is nothing in the nature of things nor in the reason of property to indicate that the right of ownership is unlimited in quantity any more than it is in quality. The final end and justification of individual rights of property is human welfare; that is, the welfare of all individuals severally and collectively. Now it is quite within the bounds of physical possibility that the limitation under discussion might be conducive to the welfare of human beings both as individuals and as constituting society.
Nevertheless the dangers and obstacles confronting any legal restriction of fortunes are so real as to render the proposal socially inexpedient. It would easily lend itself to grave abuse. Once the community had habituated itself to a direct limitation of any sort, the temptation to lower it in the interest of better distribution and simpler living would become exceedingly powerful. Eventually the right of property might take such an attenuated and uncertain form in the public mind as to discourage labour and initiative, and thus seriously to endanger human welfare. In the second place, the manifold evasions to which the measure would lend itself would make it of very doubtful efficacy. To be sure, neither of these objections is absolutely conclusive, but taken together they are sufficiently weighty to dictate that such a proposal should not be entertained so long as other and less dangerous methods are available to meet the problem of excessive fortunes.
Four of the nine members of the Federal Commission on Industrial Relations have suggested that the amount of property capable of being received by the heirs of any person be limited to one million dollars.[197] If we assume that by heirs the Commission meant the natural persons to whom property might come by bequest or succession, this limitation would permit a family of ten persons to inherit one hundred thousand dollars each, and a family of five persons to obtain two hundred thousand dollars apiece. Would such a restriction be a violation of the right of private ownership? The answer depends upon the effects of the measure on human welfare. The rights of bequest and succession are integral elements of the right of ownership; hence they are based upon human needs, and designed for the promotion of human life and development. A person needs private property not only to provide for his personal wants and those of his family during his lifetime, but also to safeguard the welfare of his dependents and to assist other worthy purposes, after he has passed away. Owing to the uncertainty of death, the latter objects cannot be adequately realised without the institutions of bequest and succession.
All the necessary and rational ends of bequest and succession could be attained in a society in which no man's heirs could inherit more than one million dollars. Under such an arrangement very few of the children of millionaires would be prevented from getting at least one hundred thousand dollars. That much would be amply sufficient for the essential and reasonable needs of any human being. Indeed, we may go further, and lay down the proposition that the overwhelming majority of persons can lead a more virtuous and reasonable life on the basis of a fortune of one hundred thousand dollars than when burdened with any larger amount. The persons who have the desire and the ability to use a greater sum than this in a rational way are so few that a limitation law need not take them into account. Corporate persons, such as hospitals, churches, schools, and other helpful institutions, should not, as a rule, be restricted as to the amount that they might inherit; for many of them could make a good use of more than the amount that suffices for a natural person.
So much for the welfare and rights of the beneficiaries of inheritance. The owners of estates would not be injured in their rights of property by the limitation that we are here considering. In the first place, the number of persons practically affected by the limitation would be extremely small. Only an insignificant fraction of property owners ever transmit or expect to be wealthy enough to transmit to their families more than one million dollars. Of these few a considerable proportion would not be deterred by the million dollar limitation from putting forth their best and greatest efforts in a productive way. They would continue to work either from force of habit and love of their accustomed tasks, or from a desire to make large gifts to their heirs during life, or because they wished to assist some benevolent enterprise. The infinitesimally small number whose energies would be diminished by the limitation could very safely be treated as a socially negligible element. The community would be better off without them.
The limitation of inheritance would, indeed, be liable to abuse. Circumstances would undoubtedly arise in which the community would be strongly tempted to make the maximum inheritable amount so low as to discourage the desire of acquisition, and to deprive heirs of reasonable protection. While the bad effects of such a limitation would not be as great as those following a similar abuse with regard to possessions, they are sufficiently grave and sufficiently probable to suggest that the legal restriction of bequest and succession should not be considered except as a last resort, and when the transmission of great fortunes had become a great and certain public evil.
It seems reasonable to conclude, then, that neither the limitation of possessions nor the limitation of inheritance is necessarily a direct violation of the right of property, but that the possible and even probable evil consequences of both are so grave as to make these measures of very doubtful benefit. Whether the dangers in question are sufficiently great to render the adoption of either proposal morally wrong, is a question that cannot be answered with any degree of confidence. What seems to be fairly certain is that in our present conditions legislation of this sort would be an unnecessary and unwise experiment.
Is it legitimate and feasible to reduce great fortunes indirectly, through taxation? There is certainly no objection to the method on moral or social principles. As we have seen in chapter viii, taxes are not levied exclusively for the purpose of raising revenue. Some kinds of them are designed to promote social rather than fiscal ends. Now, to prevent and diminish dangerous accumulations of wealth is a social end which is at least as important as most of the objects sought in license taxes. The propriety of attempting to attain this end by taxation is, therefore, to be determined entirely by reference to its probable effectiveness.
The precise method of taxation available here is a progressive tax on incomes and inheritances. By a progressive tax is meant one whose rate advances in some definite proportion to the increases in the amount taxed. For example, a bequest of 100,000 dollars might pay one per cent.; 200,000 dollars, two per cent.; 300,000 dollars, three per cent., and so forth. The reasonableness of the principle of progression in taxation has been well stated by Professor Seligman: "All individual wants vary in intensity, from the absolutely necessary wants of mere subsistence to the less pressing wants which can be satisfied by pure luxuries. Taxes, in so far as they rob us of the means of satisfying our wants, impose a sacrifice upon us. But the sacrifice involved in giving up a portion of what enables us to satisfy our necessary wants is very different from the sacrifice involved in giving up what is necessary to satisfy our less urgent wants. If two men have incomes of one thousand dollars and one hundred thousand dollars respectively, we impose upon them not equal but very unequal sacrifices if we take away from each the same proportion, say ten per cent. For the one thousand dollar individual now has only nine hundred dollars, and must deprive himself and his family of necessaries of life; the one hundred thousand dollar individual has ninety thousand dollars, and if he retrenches at all, which is very doubtful, he will give up only great luxuries, which do not satisfy any pressing wants. The sacrifice imposed on the two individuals is not equal. We are laying on the one thousand dollar man a far heavier sacrifice than on the one hundred thousand dollar man. In order to impose equal sacrifices we must tax the richer man not only absolutely, but relatively, more than the poor man. The taxes must be not proportional, but progressive; the rate must be lower in the one case than in the other."[198]
The principle of equality of sacrifices which underlies the progressive theory does not justify the levelling and communistic inferences that have sometimes been brought against it. Equality of sacrifice does not mean equality of satisfied, or unsatisfied, wants after the tax has been collected. If Brown pays a tax of one per cent. on his income of two thousand dollars, it does not follow that Jones with an income of ten thousand dollars should pay a sufficiently high rate to leave him with only the net amount remaining to Brown; namely, 1980 dollars. Equality of sacrifice means proportional equality of burden, not equality of net resources after the tax has been deducted. The object of the progressive rate is to make relatively equal the sacrifices caused by the tax itself, not to equalise the sum total of burdens or unsatisfied wants that exist among men.
Another objection to progressive taxation is that it readily lends itself to confiscation of the largest incomes. All that is necessary to produce this result is to increase the rate with sufficient rapidity. This could be accomplished either by large steps in the rate itself or by small steps in the income increases which formed the basis of the advances in the rate. For example, if the Federal income tax, which at present levies two per cent. on incomes of more than three thousand dollars, and three per cent. on incomes of over twenty thousand dollars, should thereafter progress geometrically with every geometrically progressive increment of income, the rate on incomes above $640,000 would be 96 per cent.! Or if the rate should progress arithmetically with every ten thousand dollars of increase above twenty thousand dollars, it would be 100 per cent. on incomes of over $990,000!
To this objection there are two valid answers. Even if the rate should ultimately reach one hundred per cent. it need not, and on progressive principles it should not, effect confiscation of an entire income. The progressive theory is satisfied when the successive rates of the tax apply to successive increments of income, instead of to the entire income. For example, the rate might begin at one per cent. on incomes of one thousand dollars, and increase by one per cent. with every additional thousand, and yet leave a very large part of the income in the hands of the receiver. Each one thousand dollars would be taxed at a different rate, the first at one per cent., the fiftieth at fifty per cent., and the last at one hundred per cent. If the hundred per cent. rate were applied to the whole of the higher incomes, it would be a direct violation of the principle of equality of sacrifice. In the second place, the progressive theory forbids rather than requires the rate to go as high as one hundred per cent. While the sacrifices imposed by a given rate are greater in the case of small than of large properties, they become approximately equal as between all properties above a certain high level. After this level is reached, additional increments of wealth will all be expended either for extreme luxuries, or converted into new investments. Consequently they will supply wants of approximately equal intensity. For example, the wants dependent upon a surplus of 25,000 dollars in excess of an income of 100,000 dollars, and the wants dependent upon a surplus of 75,000 dollars above the same level do not differ materially in strength. To diminish these surpluses by the same per cent., say, ten, would impose proportionally equal burdens.
Hence the rate of progression should be degressive; that is, it should increase at a constant pace until a certain high level of income is reached, then increase at a steadily diminishing pace, and finally become uniform on the very highest incomes. For example; if the rate increased one per cent. with every additional five thousand dollars, reaching fifteen per cent. on incomes of seventy-five thousand dollars, it should be on eighty thousand dollars, not sixteen but fifteen and one-half per cent. On 85,000 dollars the rate should be 15¾ per cent.; on 90,000, 15⅞ per cent.; on 95,000, 1515⁄16 per cent.; and on all sums of 100,000 and over, 16 per cent. The point at which the increments in the rate began to decline would be that at which differences in wants began to diminish, and the point at which the rate became stationary would be that at which wants fell to the same level of intensity.
While the principle of equality of sacrifices forbids a rate of tax that would reach or approximate confiscation, it gives no definite indication of the proper scale of progression, or of the maximum limit that justice would set to the rate. Under our Federal law the highest rate on incomes is now 13 per cent.; under the Wisconsin law it is 6 per cent.; under the law of Prussia it is 4 per cent.; and under the British act of 1909 it is about 8½ per cent. Evidently a much higher rate than any of these would be required to make any impression upon swollen fortunes. The British government recently (September, 1915) made the maximum rate about 33⅓ per cent. To be sure, this is a war measure which probably will not continue after the restoration of peace. However, if it were made permanent it could not be proved to be unjust, provided that it were applied to the increments of income above a certain high limit, but not to these incomes in their entirety.
Our present inheritance taxes are very low, averaging less than 3 per cent. throughout the United States. Probably the highest rate is to be found in Wisconsin, where bequests to non relatives in excess of half a million dollars are subject to a tax of fifteen per cent. It is clear that all the existing rates could be raised very considerably without causing a violation of justice. Some years ago Andrew Carnegie recommended a tax of fifty per cent. on estates amounting to more than one million dollars.[199] No country has yet reached this high level of inheritance taxes. Nevertheless we cannot certainly stigmatise it as unjust either to the testator or his heirs, nor can we prove that it is in any other manner injurious to human welfare. All that can be said with confidence concerning the just rates of inheritance taxation must take the form of generalisations. The increments of the tax should correspond as closely as possible to the diminishing intensity of the wants which the tax deprives of satisfaction; in the case of each heir a certain fairly high minimum of property should be entirely exempt; on all the highest estates the rate should be uniform, and it should fall a long way short of confiscation; and the tax should at no point be such as to discourage socially useful activity and enterprise.
The essential justice of the measures is not the only consideration affecting high income and inheritance taxes. There remain the questions of expediency and feasibility. Under the first head the objection is sometimes raised that taxes which appropriated a considerable portion of the larger incomes and inheritances would diminish very materially the social supply of capital. Immense sums of money would go into the public treasury which otherwise would have been invested in commerce and industry. Two questions are raised by this situation: first, whether it might not be better for society to have these sums devoted, through public works of various kinds, to consumptive uses instead of to an increase in the supply of capital; second, whether the reduction in the savings and capital provided by the persons paying the taxes could be offset by increases in saving among other classes. Even if it be assumed that the first question should receive a negative answer, it is not improbable that the second should be answered in the affirmative. In other words, the increased saving which the poorer and middle classes would be enabled to make as a result of the shifting of some of their burden of taxation to the large incomes and inheritances, might very well counterbalance the curtailment in the investments of the wealthy classes. Even if this possibility were not fully realised, even if the net volume of capital in the community were somewhat diminished, this disadvantage might be more than neutralised by the wider social benefits of the taxation policy.
With regard to the feasibility of very heavy income and inheritance taxes, it is sometimes contended that neither of these measures can be made effective toward the reduction of abnormal fortunes.[200] It is held that the successful collection of these taxes requires the co-operation of the persons affected by them; that if the rate should go above ten or twelve per cent., the income receiver would evade the tax in a great variety of ways, while the owner of a large estate would transfer his property outright to a trust company, which would after his death make the desired distribution. The man who urges these objections is a very high authority on taxation, especially on its administrative side; nevertheless his contentions are not absolutely conclusive. In particular, it does not seem probable that high inheritance taxes could be evaded by the simple devices that he mentions. It ought not to be beyond the power of administrative ingenuity to find methods of defeating such subterfuges. However, it is altogether likely that the possibilities of evasion would be sufficient to prevent the imposition of tax rates that approached within measurable distance of the borderland of confiscation.
The sum of the matter seems to be that the reduction and prevention of great fortunes cannot prudently be accomplished by the method of direct limitation; that these ends may wisely and justly be attained indirectly, through the imposition of progressive income and inheritance taxes; but that the extent to which these measures would be genuinely effective cannot be estimated until they have been given a thorough trial.
The correctives of the present distribution that were proposed before the beginning of the last chapter related mainly to the apportionment of the product among the agents of production. They would affect that distribution which takes place as an integral element of the productive process, not any disposition which the productive agents might desire or be required to make of the shares that they had acquired from the productive process. Such were many of the proposals regarding land tenure, and all of those concerning co-operative enterprises and monopoly. In the last chapter we considered the possibility of neutralising to some extent the abuses of the primary distribution by the action of government through the taxation of large fortunes. These were proposals directly affecting the secondary distribution. And they involved the method of compulsion. In the present chapter we shall inquire whether desirable changes in the secondary distribution may not be effected by voluntary action. The specific questions confronting us here are, whether and how far proprietors are morally bound to distribute their superfluous wealth among their less fortunate fellows.
The authority of revealed religion returns to the first of these questions a clear and emphatic answer in the affirmative. The Old and the New Testaments abound in declarations that possessors are under very strict obligation to give of their surplus to the indigent. Perhaps the most striking expression of this teaching is that found in the Gospel according to St. Matthew, ch. 25, verses 32-46, where eternal happiness is awarded to those who have fed the hungry, given drink to the thirsty, received the stranger, covered the naked, visited the sick, and called upon the imprisoned; and eternal damnation is meted out to those who have failed in these respects. The principle that ownership is stewardship, that the man who possesses superfluous goods must regard himself as a trustee for the needy, is fundamental and all-pervasive in the teaching of Christianity. No more clear or concise statement of it has ever been given than that of St. Thomas Aquinas: "As regards the power of acquiring and dispensing material goods, man may lawfully possess them as his own; as regards their use, however, a man ought not to look upon them as his own, but as common, so that he may readily minister to the needs of others."[201]
Reason likewise enjoins the benevolent distribution of surplus wealth. It reminds the proprietor that his needy neighbours have the same nature, the same faculties, capacities, wants, and destiny as himself. They are his equals and his brothers. Reason, therefore, requires that he should esteem them as such, love them as such, and treat them as such; that he should love them not merely by well wishing, but by well doing. Since the goods of the earth were intended by the Creator for the common benefit of all mankind, the possessor of a surplus is reasonably required to use it in such a way that this original purpose of all created goods will be fulfilled. To refuse is to treat one's less fortunate neighbour as something different from and less than oneself, as a creature whose claim upon the common bounty of nature is something less than one's own. Multiplying words will not make these truths plainer. The man who does not admit that the welfare of his neighbour is of equal moral worth and importance with his own welfare, will logically refuse to admit that he is under any obligation of distributing his superfluous goods. The man who does acknowledge this essential equality will be unable to find any logical basis for such refusal.
Is this obligation one of charity or one of justice? At the outset a distinction must be made between wealth that has been honestly acquired and wealth that has come into one's possession through some violation of rights. The latter kind must, of course, be restored to those persons who have been wronged. If they cannot be found or identified the ill-gotten gains must be turned over to charitable or other worthy objects. Since the goods do not belong to the present holder by any valid moral title, they should be given to those persons who are qualified by at least the claim and title of needs.
Some of the Fathers of the Church maintained that all superfluous wealth, whether well or ill gotten, ought to be distributed to those in want. St. Basil of Cæsarea: "Will not the man who robs another of his clothing be called a thief? Is the man who is able and refuses to clothe the naked deserving of any other appellation? The bread that you withhold belongs to the hungry; the cloak that you retain in your chest belongs to the naked; the shoes that are decaying in your possession belong to the shoeless; the gold that you have hidden in the ground belongs to the indigent. Wherefore, as often as you were able to help men and refused, so often you did them wrong."[202] St. Augustine of Hippo: "The superfluities of the rich are the necessities of the poor. They who possess superfluities possess the goods of others."[203] St. Ambrose of Milan: "The earth belongs to all; not to the rich; but those who possess their shares are fewer than those who do not. Therefore, you are paying a debt, not bestowing a gift."[204] Pope Gregory the Great: "When we give necessaries to the needy, we do not bestow upon them our goods; we return to them their own; we pay a debt of justice rather than of mercy."[205]
The great systematiser of theology in the thirteenth century, St. Thomas Aquinas, who is universally recognised as the most authoritative private teacher in the Church, stated the obligation of distribution in less extreme and more scientific terms: "According to the order of nature instituted by Divine Providence, the goods of the earth are designed to supply the needs of men. The division of goods and their appropriation through human law do not thwart this purpose. Therefore, the goods which a man has in superfluity are due by the natural law to the sustenance of the poor."[206]
That this is the official teaching of the Church to-day is evident from the words of Pope Leo XIII: "When one has provided sufficiently for one's necessities and the demands of one's state of life, there is a duty to give to the indigent out of what remains. It is a duty not of strict justice, save in case of extreme necessity, but of Christian charity."[207] Nearly thirteen years earlier, the same Pope had written: "The Church lays the rich under strict command to give their superfluity to the poor."[208]
The only difference between the Fathers and Pope Leo XIII and St. Thomas on this question has reference to the precise nature of the obligation. According to the Fathers, the duty of distribution would seem to be a duty of justice. In the passage quoted above from St. Thomas, superfluities are said to "belong," or to be "due" ("debetur") to the needy; but the particular moral precept that applies is not specified. In another place, however, the Angelic Doctor declares that almsgiving is an act of charity.[209] Pope Leo XIII explicitly says that the obligation of giving is one of charity, "except in extreme cases." The latter phrase refers to the traditional doctrine that a person who is in extreme need; that is, in immediate danger of losing life, limb, or some equivalent personal good, is justified in the absence of any other means of succour in taking from his neighbour what is absolutely necessary. Such appropriation, says St. Thomas, is not properly speaking theft; for the goods seized belong to the needy person, "inasmuch as he must sustain life."[210] In a word, the mediæval and the modern Catholic teaching would make distribution of superfluous goods a duty of justice only in extreme situations, while the Fathers laid down no such specific limitation. Nevertheless, the difference is less important than it appears to be on the surface. When the Fathers lived, theology had not been systematised nor given a precise terminology; consequently, they did not always make exact distinctions between the different classes of virtues and obligations. In the second place, the Patristic passages that we have quoted, and others of like import, were mostly contained in sermons addressed to the rich, and consequently were expressed in hortatory rather than scientific terms. Moreover, the needs of the time which the rich were exhorted to relieve were probably so urgent that they could correctly be classed as extreme, and therefore would give rise to an obligation of justice on the part of those who possessed superfluous wealth.
The truly important fact of the whole situation is that both the Fathers and the later authorities of the Church regard the task of distributing superfluous goods as one of strict moral obligation, which in serious cases is binding under pain of grievous sin. Whether it falls under the head of justice or under that of charity, is of no great practical consequence.
Is a man obliged to distribute all his superfluous wealth? As regards the support of human life, Catholic moral theologians distinguish three classes of goods: first, the necessaries of life, those utilities which are essential to a healthy and humane existence for a man and his family, regardless of the social position that he may occupy, or the standard of life to which he may have been accustomed; second, the conventional necessities and comforts, which correspond to the social plane upon which the individual or family moves; third, those goods which are not required to support either existence or social position. Goods of the second class are said to be necessary as regards conventional purposes, but superfluous as regards the maintenance of life, while those of the third class are superfluous without qualification.
No obligation exists to distribute the first class of goods; for the possessor is justified in preferring his own primary and fundamental needs to the equal or less important needs of his neighbours. The owner of goods of the second class is under obligation to dispense them to persons who are in extreme need, since the preservation of the neighbour's life is more important morally than the maintenance of the owner's conventional standard of living. On the other hand, there is no obligation of giving any of these goods to meet those needs of the neighbour which are social or conventional. Here, again, it is reasonable that the possessor should prefer his own interests to the equal interests of his fellows. Still less is he obliged to expend any of the second class of goods for the relief of ordinary or common distress. As regards the third class of goods, those which are absolutely superfluous, the proportion to be distributed is indefinite, depending upon the volume of need. The doctrine of the moral theologians on the subject is summed up in the following paragraph.
When the needs to be supplied are "ordinary," or "common"; that is, when they merely expose a person to considerable and constant inconvenience, without inflicting serious physical, mental, or moral injury, they do not impose upon any man the obligation of giving up all his superfluous goods. According to some moral theologians, the possessor fulfils his duty in such cases if he contributes that proportion of his surplus which would suffice for the removal of all such distress, provided that all other possessors were equally generous; according to others, if he gives two per cent. of his superfluity; according to others, if he contributes two per cent. of his annual income. These estimates are intended not so much to define the exact measure of obligation as to emphasise the fact that there exists some degree of obligation; for all the moral theologians agree that some portion of a man's superfluous goods ought to be given for the relief of ordinary or common needs. When, however, the distress is grave; that is, when it is seriously detrimental to welfare; for example, when a man or a family is in danger of falling to a lower social plane; when health, morality, or the intellectual or religious life is menaced,—possessors are required to contribute as much of their superfluous goods as is necessary to meet all such cases of distress. If all is needed all must be given. In other words, the entire mass of superfluous wealth is morally subject to the call of grave need. This seems to be the unanimous teaching of the moral theologians.[211] It is also in harmony with the general principle of the moral law that the goods of the earth should be enjoyed by the inhabitants of the earth in proportion to their essential needs. In any rational distribution of a common heritage, the claims of health, mind, and morals are surely superior to the demands of luxurious living, or investment, or mere accumulation.
What per cent. of the superfluous incomes in the United States would suffice to alleviate all the existing grave and ordinary distress? Nothing like an exact answer is possible, but we can get an approximation that will have considerable practical value. From the estimates of family incomes given by Professor W. I. King, it appears that in 1910 the number of families with annual incomes of less than one thousand dollars was a little more than ten and three quarter millions, and that the total incomes of those families receiving more than ten thousand dollars a year amounted to a little more than three and three quarter billions.[212] If each of the latter class of families should expend ten thousand dollars per year for the needs of life and social position, they would have left nearly two and three quarter billions for distribution among the ten and three quarter million families who are below the one thousand dollar level. So far as the figures of Professor King's table enable us to judge, the greater part if not all of this sum would be required to bring this group of families up to that standard. Possibly an income of one thousand dollars per family is not required to remove all ordinary and grave distress; and possibly ten thousand dollars is not enough for the reasonable requirements of some families. If both these suppositions are true they will tend to cancel each other: the needs to be met will be less, but the superfluous income to be distributed will be less also. Whatever be the minimum and maximum limits of family income that approve themselves to competent students, the conclusion will probably be inevitable that the greater part of the superfluous income of the well-to-do and the rich would be required to abolish all grave and ordinary need.