What is Industry?—Industry comprises the whole process of converting raw materials into finished products. It includes the production of goods by hand in the workshops, and by machinery in the factories. Agriculture, mining, and forestry furnish the raw materials; industry works them up; commerce distributes them. In its widest sense industry includes not only manufacturing, as we ordinarily understand the term, but mining, lumbering, the fisheries, shipbuilding, and many other great branches of economic activity. It engages the attention of more than one-third of the American workers and is steadily growing to greater relative importance. The United States is now entitled to be called one of the great “industrial” nations of the world. As such its people have many difficult problems to face, including such things as the proper organization and control of industry, the improvement of conditions under which it is carried on, and, most difficult of all, the maintenance of good relations between industrial labor and industrial management.

The Old Industry and the New.—One hundred and fifty years ago practically all industry was carried on by hand. The making of cloth was a home activity; the yarn was spun by hand and woven into fabric on the hand-loom. Shoes were made—soles, heels, and uppers—by the village cobbler. The local blacksmith made such agricultural implements as there were. Large factories did not exist. But with the application of steam power to industry all this began to change. Steam power began to be utilized in American industry right after the War of Independence; it was not widely used at the outset, but in the course of time it completely revolutionized the methods of industry throughout the world. It supplanted hand methods almost altogether, drove the village industries out of existence, and introduced factory production on a large scale. Factories containing machinery operated by steam power could produce cloth, shoes, implements, and almost every other sort of manufactured commodity more cheaply than they could be made by hand-industry in the homes or in small shops. So the factory system spread over the length and breadth of the land, drawing large investments of capital into its vortex, giving rise to great industrial corporations, creating a new labor class, fostering the growth of great cities, and compelling the government to take a hand in the regulation of industry. |The Industrial Revolution in America.| This great transformation in industry, which covered the course of the nineteenth century, is known as the Industrial Revolution, and a gigantic revolution it was. Nothing in modern times has exerted a more profound or far-reaching influence upon the general course of civilization. The factory is the symbol of a new economic order. It has been said, and rightly, that three things,—steam, steel, and credit,—have revolutionized industry during the past hundred years.

Industrial Organization of Today.—In the days of hand-industry men needed no large amounts of capital in order to engage in the production of goods. The tools used in hand-industry were not expensive; nor was it necessary to buy raw materials in large quantities. The things that the workman produced, moreover, were sold almost as soon as they were made. |The use of capital.| With the advent of the factory system, however, capital in large amounts became essential because buildings and machinery, both of which are costly, had to be provided. Large stocks of materials must also be kept on hand, and workmen have to be paid before the goods manufactured by them are sold. So, whereas one man of relatively small wealth could carry on an industry under the old system, the combined resources of many men are required under the new. This need of combining the contributions of many persons into a large capital fund has given rise to the modern industrial corporation.

American industry of today is carried on for the most part, therefore, by corporations or companies. An industrial corporation or company is a group of persons, each of whom contributes a portion of the capital needed to carry on the business. These contributors receive shares in the corporation proportionate to the amounts of money which they invest. The man who contributes one hundred dollars becomes the owner of one share; the man who invests a thousand dollars receives ten shares.^[171] An industrial corporation with a capital of a million dollars is able to allot among its stockholders ten thousand shares of the par value of one hundred dollars each. It may have only a few shareholders, or it may have a great many. These shareholders, be they many or few, control the management of the business. They elect each year a board of directors, who, in turn, appoint the officers and managers. The latter purchase the raw materials, engage the workmen, supervise their labor, sell the finished goods, and distribute the profits among the shareholders in the form of a dividend declared upon each share. Every corporation has as its legal basis a charter, which is a document issued by the governmental authorities, usually by the state. This charter states the purpose of the corporation and authorizes it to do business. Charters of corporations may be revoked if the powers conferred by the charter are misused.

Industrial Agreements and Pools.—With large numbers of industrial corporations engaged in the same line of business it is inevitable that they should compete with one another for the sale of their respective products. This competition, quite naturally, tends to keep prices down, because each corporation does its best to get trade by underselling its rivals. But competition which forces down prices also results in reducing profits, and the industrial corporations often find that higher profits can be earned for their shareholders if some arrangement is made to limit this competition. Thus it came to pass that the men who controlled large corporations in the same line of business got together and made informal agreements not to compete in such way as to force prices down. |Gentlemen’s agreements.| These “gentlemen’s agreements”, so-called because they had no legal force but merely rested upon the honor of the various corporations, usually provided that a certain scale of prices would be maintained and that no concern would sell its products below this stipulated scale.

These agreements, however, were not altogether satisfactory to the corporations. At the fixed scale of prices some companies, by reason of special advantages, were able to make large profits while others earned very little and became dissatisfied. Hence a new method, commonly known as pooling was devised to give every corporation its fair share in the earnings of the entire trade. Under this plan each company was allotted a certain territory within which it might sell its products without competition on the part of the others. Then, at the end of the year, the profits of all the companies were put into a “pool” or common fund and so distributed that no company would have a higher rate of earnings than the others. This was an ingenious method of ensuring substantial profits to each corporation, no matter how well or how badly it was managed. Incidentally, it deprived the public of the benefits which would have come to it, in reduced prices, if competition had been freely carried on. For this reason the practice of “pooling” was soon forbidden by law as an unreasonable restraint of trade.

Trusts, Holding Companies, and Mergers.—Not to be balked in this way the corporations devised a new plan for checking competition. This took the form of a trust. Corporations agreed to place their shares in the hands of trustees and these trustees, by virtue of holding the shares, controlled the business of all.^[172] Through this control the trustees were able to make sure that no price-cutting would result from competition among the various companies comprised within the trust. |Holding companies.| Another plan, not widely different, was to organize a “holding company”, in other words a large corporation to hold all the shares of the smaller corporations not merely in trust but as the actual owner.^[173] |Mergers.| Finally in some cases, the smaller companies were merged or consolidated outright into a single giant corporation. In such instances the smaller concerns passed out of existence and their former owners received shares in the new corporation.

Why Industrial Combinations are Objectionable.—The chief objection to all these combinations, whether by informal agreement, pooling, trusts, holding companies, mergers is that they seek to restrain trade, to create monopolies, and to prevent the public from obtaining the advantages in the way of reduced prices and better quality which arise from free competition. So long as free competition exists the rise of prices is automatically checked. But when competition is stifled by monopoly, the public gets fleeced. When a monopoly is once created, moreover, free competition is difficult to establish again. The reason for this is that when anyone enters the monopolized line of business the holders of the monopoly cut their prices temporarily below the profit-making point and thus make it impossible for the new competitor to continue. Then, when they have driven him out of business, they put prices up once more.

On the other hand we must not lose sight of the fact that large-scale production is more economical than production in small quantities, and that large-scale production almost inevitably leads to industrial combinations. Most manufactured commodities are produced under what economists call “the law of increasing returns”, that is to say the larger the quantity produced, the smaller the cost per article. There is a great deal of overlapping and waste when goods are manufactured in small independent shops or factories. Large industrial combinations can obtain capital more easily; they can buy raw materials in larger quantities and at better prices; they are in a position to secure and use modern machinery; and they can create better facilities for selling their goods. Large-scale production also permits a profitable use of by-products, such as coke in the manufacture of gas or scraps of leather in the making of shoes. Where industries are small these by-products are not sufficient to make their sale worth while; but large-scale industries realize considerable sums from the sale of their by-products. From almost every point of view the large manufacturing establishments have a great advantage, and if we were to insist that all industry be carried on in small concerns, the public would be the loser in the end. Large-scale production is not in itself to be frowned upon but rather encouraged. The trouble arises from the misuse of the power over prices which results from monopoly, and this misuse of power is what the laws are endeavoring to prevent.

The Legal Control of Industrial Corporations.—The right to exercise control over industrial corporations, and thereby to protect the public against extortion, rests partly with the states and partly with the national government. Most corporations are created by state charters and this gives the state authority over them. So long, therefore, as a corporation confines its business within the limits of the state in which its charter was obtained, the national government has no control over it. But most large corporations, such as steel and oil companies, woolen and cotton companies, carry on their business in more than one state. They have factories scattered over several states. They buy materials in one state, manufacture them in another, and sell the products in a third. Wherever this is the case the national government does have authority over them, for the constitution gives to Congress the power “to regulate commerce among the several states”.

Industrial Corporations and the Sherman Law.—To understand the relation of the laws to combinations and monopolies it is necessary to go back a little way into legal history. |The common law rule against combinations in restraint of trade.| By the common law of England, which was introduced into the colonies before the Revolution and became the basis of the American legal system, it was provided that combinations were illegal when formed to restrain trade unreasonably. This was the prevailing legal doctrine in the United States for a hundred years after the formation of the Union, but it did not suffice to prevent the steady growth of monopolies. In 1890, therefore, Congress decided to draw the line more strictly and to this end enacted the Sherman Anti-Trust Law, which declared every contract or combination, in the form of a trust or otherwise, or conspiracy in restraint of trade or commerce among the several states, to be illegal. |The rule in the Sherman Law.| No distinction was made by the words of this law between reasonable and unreasonable restraint of trade; the Sherman Law simply forbade all trade-restraining combinations in interstate business. It applied to railroads and industries alike, but it was not enforced widely until 1904, when the Supreme Court applied its provisions in the Northern Securities Case (see p. 365).

This decision caused a great stirring among the dry bones of corporate industry. Many combinations and mergers had been formed in all parts of the country during the closing years of the nineteenth century, and it was argued that to tear these combinations apart would be exceedingly difficult. But the government proceeded against other consolidations, notably the Standard Oil Company and the American Tobacco Company, and secured their dissolution as well.^[174] |The rule of reason.| In these latter cases, however, the Supreme Court gave hope for a less drastic interpretation of the Sherman Law by avowing its intention to decide each future case in accordance with the “rule of reason”. In other words the court stated its belief that the Sherman Law was not intended to break up all combinations, good, bad, and indifferent, but only those which were contrary to the public interest. By this dictum the Supreme Court re-established in effect the old common law principle that a combination may be legal or illegal according as its purpose is reasonable or unreasonable. And such is the law of the land today.^[175]

The Practice of Price-Fixing.—Meanwhile some new abuses on the part of various large industrial corporations had arisen. Many manufacturers began the habit of dictating to retail merchants the prices at which goods should be sold. If a merchant refused to maintain these prices and sold goods at lower figures, the manufacturer would thereupon decline to supply him with any more merchandise. This was an effective way of bringing a merchant to terms, particularly in the case of patented articles which are made by only one firm and which cannot be obtained from anyone else. |The Clayton Act.| Here, again, the of the Clayton Act intervened by forbidding price discriminations wherever the effect of such action tends to lessen competition or to create a monopoly. The Clayton Act also prohibited manufacturers and wholesalers from dictating to retail merchants the sort of goods they may sell. The makers of a particular brand of flour, for example, are not permitted to say to the merchant: “You must sell our brand only, otherwise we will not sell to you.”

The Federal Trade Commission.—The foregoing statutes, the Sherman and Clayton Acts, are examples of our attempt to regulate industry by law. The trouble with regulation by law, however, is its stiffness. Laws are hard and fast while the scope and methods of modern business are continually and rapidly changing. A law which is sufficient to meet one problem today proves quite inadequate to cope with another problem tomorrow. The strictest legal provisions, moreover, can usually be circumvented or evaded by some new device. Accordingly, the national government has reached the conclusion that it is better to have the laws lay down the general principles of industrial regulation, leaving the details to be applied by an administrative board or commission. In conformity with this idea Congress in 1914 authorized the establishment of a Federal Trade Commission, the duty of which is to investigate all complaints regarding unfair methods of competition in interstate commerce (except in the case of banks and railroads) and to order that such unfair methods, if found to be in existence, shall be discontinued.^[176] Decisions of the Federal Trade Commission are reached after a hearing at which both sides may be represented. The commission is also given power to compile and publish information concerning the organization, management, and policy of any industrial corporation engaged in interstate trade. Since 1914 it has rendered signal service in protecting the business men of the country, and the general public as well, against economic injustice.

The Control of Industrial Corporations by the States.—What has been said in the preceding pages relates only to corporations which are engaged in interstate business. This includes most of the largest industrial concerns. Smaller corporations which keep their operations within the bounds of a single state, are not subject to the provisions of the Sherman or Clayton Acts, neither do they come within the jurisdiction of the Federal Trade Commission. This does not mean, however, that the smaller industrial corporations are exempt from regulation altogether. Most of the states have their own anti-trust laws and their own legal regulations to prevent the growth of local monopolies. These rules differ from state to state; in some they are much more strict than in others. State regulation is beset with serious difficulties everywhere because in all the states industries are to some extent carried on by corporations which have obtained their charters from some other state and thus cannot be fully controlled except by the national government.

The Greatest Problem of Modern Industry.—The most difficult industrial problems of today, however, are not connected with the question of government control. So far as the protection of the public against combinations and monopolies is concerned the government is bound to be, in the long run, successful in its efforts although even the strictest laws can work no miracle over night. Far more perplexing is the problem of determining the proper relations between industrial employers on the one hand and industrial workmen on the other. Although labor is a great and essential factor in industry it has hitherto had practically no direct voice in determining the conditions under which industry shall be carried on.

Taking American industry as a whole, labor has had no share in ownership or management. |The human relation in industry.| The relation of the worker to industry has been strictly that of a hired employee who does his job, takes his pay, and calls the account square. But of late years it has been becoming apparent that this relation does not satisfy the workman altogether and that he does not regard wages alone as a sufficient recompense for his share in industrial production. His leaders are asking, in some cases, for a share in the profits, for a voice in determining the conditions of labor and, ultimately, for some share in the management.

Industrial Democracy.—In some large industrial concerns representation has already been given to the workers. They are permitted and encouraged to select a committee from among themselves whose function it is to take up with the management, in an official way, all questions of wages, hours of labor, discipline, and conditions of work. In case of disagreement between the committee and the management impartial arbiters are called in. Thus the employees are given a fair share in the settlement of all matters affecting their work and welfare.

The success of such schemes will depend, of course, upon the degree of fairness which both sides display in conference. Just as the success of political democracy depends upon the exercise of tolerance on the part of those to whom power is given, so in any form of industrial democracy the abuse of power, whether by employers or workmen, will surely spell failure. It is essential to the well-being of the nation that the workers in industry shall receive their rightful share from the earnings of industry, that they shall have just conditions of employment and be treated like men. But it is also essential that the management of industry shall not be subjected to unreasonable demands and that a system of production which the world has spent a century in building up shall not be broken down until something well tried and tested by experience can be put in its place.

Profit Sharing as a Step toward Industrial Harmony.—One of the ways suggested for ensuring to the workman his full share in the earnings of industry is known as profit sharing. The usual provision is that after the current rates of interest, wages, and salaries are paid the surplus earnings shall be divided between the employers and the workers on some fair basis determined in advance. But the amount which goes to the workers is not necessarily paid in cash. Either in part or in whole it may be given to them in the form of shares in the business and on these shares they receive thereafter the regular rate of earnings.

It was hoped that an arrangement of this sort would bring the employer and his workers more closely together. Profit sharing, indeed, was at one time proclaimed to be a solution of the whole labor problem. But on the whole it has not fulfilled expectations. For this there are several reasons. |Why profit sharing has not made great headway.| Some workers did their best, others scamped their work; but all shared alike. The employers did not find that labor responded with increased efficiency when a share of profits was given. The workers, on their part, found that profits sometimes declined greatly in spite of their hardest efforts. Bad judgment on the part of the management would offset hard work on the part of the men. Not having access to the books and figures the workers often suspected that their rightful share of the profits was being withheld from them. The trade unions, moreover, looked askance at the whole proposal and insisted, among other things, that no one who was not a member of the union should be a profit-sharer. So the movement has slackened, although it still has some strong advocates and seems to be losing none of the ground that it has gained.

Other Remedies for Industrial Unrest.—Several other remedies for industrial unrest have been suggested, and some of them are being given a trial. The relations of labor to industry constitute a large and difficult problem, however, and cannot be made clear in a single paragraph. They are, in fact, of sufficient importance to have a chapter to themselves.

Industry and the Individual.—The opportunities for capable young men and women in industry were never greater than they are today. The operations of industry have become so complex that they afford openings for every type of individual skill and proficiency. The management of American business is no longer conducted by hit-or-miss methods; everything is worked out with scientific precision in buying materials, merchandising, manufacturing, marketing, and financing. American industry in all its branches is hiring brains as well as muscle.

The success of the young man or woman who goes from school into industry depends in the first instance upon a wise selection at the start. Different types of industrial work call for altogether different tastes and abilities on the part of the individual. Some individuals are of a distinctly mechanical temperament; their interests run to machinery and the processes of working with material things. Others have no interest at all in that direction; but they may be tactful in dealing with other people, able to use their imaginations, with perhaps a penchant for figures. Others, again, have none of these qualities but are punctual, industrious, and can always be depended upon to carry out instructions to the letter. American industry has openings which exactly fit individuals of all temperaments and capacities; the big problem is to bring the man and the opportunity into touch with each other. A square peg will not go into a round hole; no amount of patience will put it there. But there are many square pegs trying to fit themselves into the round holes of industrial employment today because so many young men and women have taken the first job offered to them without reference to its real suitability. These first jobs very often lead up a blind alley. The time spent in them by thousands of young men and women is time wasted.

It is to help eliminate this enormous waste of human effort that facilities for vocational guidance are now provided by a great many schools. But no vocational counsellor can properly plan the start in life without assistance from the boy or girl immediately concerned. It is the duty of everyone to make a personal study of the opportunities which the various forms of industry afford, to reflect upon his own tastes, abilities, and ambitions, and to look at the problem as one of supreme importance to himself. A right start is half the victory.^[177]

R. T. Ely, Outlines of Economics, pp. 26-62 (The New Industrial System);

W. Z. Ripley, Trusts, Pools, and Corporations, pp. 78-96; 703-734;

F. W. Taussig, Principles of Economics, Vol. II, pp. 419-442 (Industrial Combinations);

F. A. Ogg, National Progress, pp. 58-75 (The Legal Control of Industrial Combinations);

L. H. Haney, Business Organization and Combination, pp. 81-116;

E. D. Durand, The Trust Problem, pp. 9-30;

J. R. Commons, Labor and Administration, pp. 120-148;

F. A. Fetter, Modern Economic Problems, pp. 427-457;

Isaac Lippincott, Economic Development of the United States, pp. 469-490. See also U. S. Bureau of the Census: Abstract of the Census of Manufacturers, 1914, ch. vi, vii.

1. The advantages and defects of large industrial organizations. Advantages of large-scale production. Are large organizations essential to large-scale production? Large industrial organizations and monopoly. Some examples. The distinction between “good trusts” and “bad trusts”. Can large organizations be effectively regulated? Summary of merits and defects. References: F. W. Taussig, Principles of Economics, Vol. II, pp. 419-442; L. H. Haney, Business Organization and Combination, pp. 365-382; E. D. Durand, The Trust Problem, pp. 60-85; W. Z. Ripley, Trusts, Pools, and Corporations, pp. 324-355; J. T. Young, The New American Government and Its Work, pp. 141-186; John Moody, The Truth about the Trusts, pp. 102-132; E. S. Meade, Trust Finance, pp. 193-217; Theodore Roosevelt, Autobiography, pp. 476-515.

2. The position of women in industry—past, present, and future. References: Edith Abbott, Women in Industry, especially pp. 1-9; 215-245; 307-323; T. S. Adams and H. L. Sumner, Labor Problems, pp. 19-67; J. A. Hobson, Evolution of Modern Capitalism, pp. 290-321; John Mitchell, Organized Labor, pp. 131-141; B. L. Hutchins, Women in Modern Industry, pp. 239-265.

1. The far-reaching effects of machine industry. L. C. Marshall and L. C. Lyon, Our Economic Organization, pp. 106-126.

2. Evils of the factory system. W. C. Taylor, The Modern Factory System, pp. 177-227.

3. The power of Congress to regulate corporations. S. P. Orth, Readings on the Relation of Government to Prosperity and Industry, pp. 208-220.

4. Roosevelt and the trusts. F. A. Ogg, National Progress, pp. 40-75; Theodore Roosevelt, Autobiography, pp. 476-515; Otto H. Kahn, Our Economic Problems, pp. 317-322.

5. The Clayton Act. James T. Young, The New American Government and Its Work, pp. 173-178.

6. The work of the Federal Trade Commission. W. H. S. Stevens, Unfair Competition, pp. 217-244.

7. Politics and big business. J. G. Brooks, The Social Unrest, pp. 46-67.

8. Competition and big business. J. H. Hammond and J. W. Jenks, Great American Issues, pp. 160-173.

9. Profit sharing in industry. T. S. Adams and Helen Sumner, Labor Problems, pp. 333-378.

10. The contribution of American industry to the winning of the war. W. F. Willoughby, Government Organization in War Time and After, pp. 67-120.

1. Show why the rise of the factory system is entitled to be called a “revolution.” Are people better or worse off as a result?

2. “Machinery has made life more varied,” “Machinery has reduced life to routine.” With which of these statements do you agree and why?

3. Make a diagram showing how a corporation is organized. If you owned one or more shares in a corporation, what would be your rights? Your duties? Your risks? What is meant by the statement that a corporation has “legal immortality”?

4. What is the difference between a pool, a trust, a holding company, and a merger? Is it better to forbid these things or to regulate them?

5. Why is it that the Chicago meat-packing concerns have been able to sell dressed meat to marketmen in the towns of the Eastern states more cheaply than it can be procured and slaughtered locally?

6. Explain what President Roosevelt meant when he said that there are good trusts and bad trusts. What service can a good trust perform? What harm can a bad trust do?

7. What are the chief provisions of the Sherman Law? The Clayton Act?

8. Show how regulation by a commission is likely to be more effective than regulation by law.

9. In determining a choice of a vocation what considerations are you going to keep in view? What tests have you applied to make sure that you know your own tastes and abilities? Have you made yourself acquainted with the industrial opportunities? See foot note on p. 397.

10. To what extent should the workers share in the management of industry?

1. The Sherman Law should be repealed.

2. The government should have the power to fix maximum prices in the case of all goods produced by industrial organizations which possess a monopoly.