The Problem.—In the case of most ordinary business enterprises the factor which secures reasonable prices and good service to the customer is competition. The customer who finds that prices are high or that service is poor at one grocery store stops trading there and goes somewhere else. The merchant who finds one bank unsatisfactory moves his account to another bank. The wholesale dealer, if one factory does not send him goods promptly, or charges him too much, gives his future orders to some other factory. Stores, banks, and factories are in competition with other establishments of their own kind; in order to get business they are constantly trying to outstrip their competitors by lowering prices and improving service. In this sense “competition is the life of trade”. The rivalry of those who have goods or services to sell is in itself enough to afford the public protection.

Natural Monopolies.—But there are certain lines of business in which no real competition exists because they are monopolies. Monopolies, as has already been pointed out, are of three different types, natural, legal, or artificial (see p. 54); and all public service enterprises (railroads, telegraphs, telephones, lighting plants, etc.) fall within the first of these classes—they are natural monopolies. We call them public services or public utilities; but this is not merely because they are of great importance to the public. Bread and meat are also of vast public importance but we do not refer to the bakery and the meat market as public services. |But public utilities are natural monopolies.| Telephones, telegraphs, street railways are called public services or public utilities because they are monopolies by nature. The citizen has no alternative by reason of competition. If he wants to go from one place to another, he cannot usually find two lines of railroad, or if so, their rates are the same. If the rates for electric lighting are exorbitant, he cannot tell the company that he will buy electric light from someone else, for he is dealing with the only concern from which electric light can be obtained in that particular locality. The man who lives in Omaha can send to Chicago and buy his shoes there if he finds that prices and quality are not satisfactory in his own city; but he cannot get his telephone service or his electric light in that way. He is absolutely dependent on local service and, as a rule, on one local service alone.

Public Utilities do not Compete.—Why do we say that these public utilities are monopolies by nature? It is because their business, from the way in which it is carried on, virtually excludes competition. It would be physically possible to have two rival street railway companies operating on the same street, two gas companies, and two electric lighting companies; but imagine the congestion and inconvenience this would cause! Moreover, it would practically double the amount of fixed capital needed to provide the service and this would mean higher prices to the public in the end.^[231] In years gone by many cities tried the plan of setting two public service companies in competition with one another, and in a few cities competing telephone companies still exist; but the competition is rarely in earnest and scarcely ever lasts very long. The rival public service companies, finding that competition is not profitable, presently form a combination and raise their rates. The controlling fact is that light, power, transportation, and communication (whether by telegraph, telephone, or post) can be more cheaply served by a monopoly than by competing companies. There can be, in fact, no effective competition between public utilities operating in the same area.

Being Monopolies They Must be Regulated.—Now if public utilities are monopolies by nature, and can never be anything else, it is essential that the government shall exercise, in one way or another, sufficient control over them to restrain them from abusing their power. |Public utilities use public property.| This is all the more easy to do because public utilities, unlike ordinary industrial or mercantile concerns, must come to the state or city government for certain privileges which they find necessary in order to carry on their business. Every public utility finds it essential to use property which belongs to the whole people. A railroad must run its tracks across the highway; a gas company must lay its pipes beneath the pavements; an electric lighting company must put some of its poles in the streets; a street railway company, as its name implies, must make large use of the public thoroughfares. Moreover, they all desire the right to take whatever private property they may need for their terminals, power houses, tanks, and so on. This is a right which only the government can give.^[232] So the public service companies, from the fact that they must ask privileges from the government, render themselves amenable to governmental control. It is not so with ordinary industrial monopolies such as the making of steel or sugar or tobacco. |They also use the right of eminent domain.| They do not, as a rule, ask for legal privileges of any kind; they do not need permanent rights in the public highways or demand that they be allowed to exercise the right to eminent domain; hence they are not so easily brought under public regulation.

How the Regulation is Effected.—In order to use the streets or any other public property, an individual or corporation must first obtain official permission. The merchant who puts a sign out from his building over the highway, the barber who sets his familiar red-and-white pole in the sidewalk, the contractor who blocks the public passage way when he is putting up a building—all must first get the city’s permission. |Permits and franchises.| This is given by the city officials in the form of a license or permit. But the public service company must have a general permit covering rights in a great many streets and holding good for a number of years. |Definition of a franchise.| This general permission, which does not differ from an individual permit except in its broader scope and longer duration, is called a franchise. A franchise is merely a grant of the right to use public property (the streets, particularly) either in perpetuity or for a term of years and subject to certain conditions. Before any public service company can begin operations it must first secure a franchise from the state, city, town, or township as the case may be. The company secures the rights and the government imposes the conditions.

Franchises, Past and Present.—It was formerly the custom of states and cities to grant franchises for long terms of years without imposing strict conditions for the protection of the people. The reason for this was, in part, the strong desire of the community to get the service at once. When electric street railways first came into use, replacing the old horse-cars, they were regarded as a godsend to the suburban districts. There was a great popular clamor to have the horse-car lines electrified as quickly as possible. So the companies that were willing to provide this improved service obtained, in many cases, very liberal franchises running for long terms and without strict conditions. These were days, moreover, when city councilmen and state legislators often proved susceptible to corrupt influences. Valuable privileges in many cities were bartered away for next to nothing by dishonest or incompetent officials. How many million dollars in franchises have been practically given away by American states and cities during the past generation no one has ever been able to calculate. Certain it is, at any rate, that hundreds of private fortunes were made from these one-sided bargains.

But public opinion, in due course, became aroused to the injustice of this free-and-easy method, and laws were passed forbidding the grant of franchise privileges for longer than a designated term of years, or without first giving the opponents of the grant an opportunity to be heard.^[233] In some cases the laws forbade the granting of any franchise without the consent of the people at the polls. Provisions were also made to ensure that in return for their privileges the companies should pay a share of their annual profits into the city treasury.^[234] Finally, it became the practice to stipulate in the franchise that the rates charged by the company, the quality of the service, and various other features affecting the interests of the citizens, should be subject to public regulation. Franchises are still granted by legislatures and municipal councils but with much greater care than formerly.

Administrative Regulation.—In spite of these various restrictions, however, it soon became apparent that a sufficiently close regulation of public utilities could not be maintained by merely inserting various conditions in their franchises. Franchises are granted for ten, twenty, or even fifty years, and conditions greatly change within this period. A provision in the franchise relating to the quality of gas, or the rate of fare on street railways, or the candle-power of electric lamps may be framed carefully to cover the needs of today, but no one can foresee what will be needed five or ten years hence. Progress is continually being made in the mechanism of public utilities as in all other branches of industry. If regulation is to be effective, it must keep moving forward as new devices and methods come into use. A franchise has the defect of being a closed bargain. It stands still while the things which it tries to regulate keep marching on. No written document, furthermore, is self-enforcing, and unless some machinery is provided to make the companies live up to their agreements there are always loopholes through which they can evade the restrictions.

In order to make the regulation of public utilities flexible and effective, therefore, it has become the practice to supplement the terms of franchises by a system of administrative regulation. Besides inserting a long list of conditions in the franchise the government now stipulates, as a rule, that the rates and the quality of service shall be fixed from time to time, in accordance with existing conditions, by a body of officials commonly known as a public service commission which is supposed to deal fairly with all parties.

Public Service Commissions.—Public service commissions are in some cases maintained by the cities; but more often they are state-appointed bodies. There are two reasons which make it desirable that the regulation of public utilities should be in the hands of the state rather than under the control of the cities. In the first place the jurisdiction of the city officials does not extend beyond the city limits, whereas public service companies often do a considerable part of their business outside. It is not uncommon, for example, to find the same street railway, electric lighting, and telephone company operating in several neighboring communities.^[235] Municipal regulation, in such cases, would subject the company to different rules in each community.

There is a second reason, namely, that public regulation is always expensive. A public service commission must have skilled investigators to assist it in deciding the technical questions which arise, and these experts are costly to employ. Large cities can afford it, but in the case of small communities it is better to have a single state commission perform the functions of regulation for them all. In this way, moreover, the regulations can be made uniform. Public service commissions consist of three or five members; in cities they are appointed as a rule by the mayor; in states they are usually appointed by the governor; but in some states they are elected by popular vote. Appointment is now regarded as the more satisfactory method.

The work of a public service commission covers a wide range. Its chief function is to see that the companies live up to the terms of their franchises and obey the laws relating to public utilities. It hears complaints from city officials and citizens, investigates these complaints, obtains the company’s side of the case, and makes such decision as the matter seems to require. It prevents discriminations in favor of one community against another, and insists that equally good service be given to all; it requires financial reports from the various companies and often has power to fix the maximum rates which they may charge. In some states it is the practice to grant “indeterminate” franchises, or franchises which run for no stated term of years, coupled with the provision that the franchise may be canceled at any time by order of the public service commission if the company does not comply with the conditions. It can easily be seen, therefore, that public service commissions have a degree of authority which can readily be abused unless the commissioners are fair-minded and absolutely honest men. Their position is like that of judges, in a sense, for their function is to hold evenly the scales of justice between the companies on the one hand and the public on the other. Fairness is the essence of successful regulation.

Public Ownership.—By the methods which have been described in the foregoing pages the government has been able to protect, fairly well, on the whole, the interests of the public. Railroads, telegraph companies, electric lighting plants, and other similar corporations are no longer able to do as they please. On the contrary their owners are inclined to feel that public regulation has gone too far and has become oppressive. Yet regulation has not always been satisfactory to the public. The complaint is often made that members of public service commissions are chosen for political reasons and that their work, in such cases, is neither effective nor impartial. The success of regulation has varied in different parts of the country. In some states it has been satisfactory to both sides; in others it has satisfied neither.

Because regulation has not proved successful in all cases the proposal is sometimes made that the utilities should be taken over and operated by the government itself. Those who support this policy of public ownership believe that the national government should take over the railroads, telegraphs, and telephone lines, while the states and the cities should become owners of all the street railways, gas companies, and electric lighting concerns. These utilities should then be publicly managed, they argue, just as the postal service is now conducted by the national government, or as water supplies are now provided by the cities.^[236]

European Experience in Public Ownership.—It is pointed out, in this connection, that the policy of public ownership has been widely followed in various European countries, particularly in Great Britain, France, and Germany. In Germany the railroads have been for many years owned and operated by the government. In all three countries the telegraphs are government-owned, and are operated in connection with the post-offices. The telephone service is also in public hands. Gas and electric lighting plants are to some extent owned by companies in various European cities, but the majority of them have been taken over by the municipal authorities. Even the street railways have been passing under municipal ownership. Many European cities, moreover, not only operate these various public services but conduct other municipal enterprises, such as abattoirs, bakeries, theatres, savings banks, and even pawnshops as well.^[237]

Public Ownership in America.—In the United States the policy of public ownership has not been nearly so popular. The railroads, telegraphs, and telephones are owned and operated by private companies. They were managed by the national government for a time during the war, but when the emergency ended they were returned to their owners. Among the larger cities of the United States only five or six own and operate their gas plants; about twenty have municipal ownership of electric lighting plants.^[238] Street railway lines are owned by the city in only three or four instances; but in several other communities they are being operated by the public authorities under leases from the owners.^[239] When one bears in mind that the total number of public utilities in the United States runs up into the thousands it will be seen that the policy of public ownership has had a relatively small and slow development on this side of the Atlantic.

Arguments for Public Ownership.—The chief arguments in favor of public ownership in the United States may be briefly set forth as follows: |1. Regulation has failed.| First, all public utilities, being natural monopolies, require a stricter measure of regulation than can ever be provided by any form of public supervision. So long as these utilities remain in private hands there will be a continual effort to evade public regulation and this effort will usually be successful because rich and powerful companies are exceedingly difficult to control under a democratic form of government. “We have tried regulation”, the advocates of public ownership say, “and it has not been satisfactory. Therefore, let us try the only other alternative, which is to buy out the companies altogether.” |2. Lower rates and better service.| Second, under public ownership the people would obtain lower rates and better service. This would be possible because the government could procure capital more cheaply than private companies and thus make a substantial saving in interest.^[240] It would not be seeking for profits, but would strive to give service at actual cost. If the government owned all the utilities, moreover, it could buy supplies and materials in large quantities and hence at lower prices. Each street railway company now buys rails, cars, cables, coal, and so on for itself. If a state owned all the street railways within its territory, it would purchase these things on a much larger scale. |3. More just to labor.| Third, public ownership means a fairer and better treatment of the employees. Wages, as a rule, are higher in public than in private employment (assuming the same degree of training and skill); the hours of labor are not so long (since the eight-hour day is now generally recognized in public employment); and there is better protection against arbitrary dismissal. For these reasons labor organizations usually favor public ownership. |4. The effect on politics.| Fourth, the public service companies have had a detrimental influence upon American politics. They are seekers of public privileges, and in their zeal to obtain favors are under strong temptation to work in a quiet way for the election of public officials who will be friendly to them. They form a part of what Mr. Elihu Root once spoke of as the “invisible government”. Through their paid agents and lobbyists they try to influence the action of legislatures and city councils in ways which are to their own financial advantage but detrimental to the public interest. The abolition of all franchises and the direct public ownership of all utilities would remove, it is asserted, a corrupting influence from American politics. These are the chief arguments used by the advocates of public ownership.

The Arguments Against Public Ownership.—But there is much to be said on the other side. |1. More costly to the public.| First, it is claimed that public ownership, by reason of higher wages and less efficient management, would prove to be far more expensive than private enterprise, and that in the long run the increased cost would have to be paid by the people. This higher cost might take the form of higher rates for the service or it might come out of the general taxes; but it would fall on the public in either case. When the national government operated the railroads during the war it kept the freight and passenger rates low; the result was a deficit amounting to about a billion dollars, which had to be made good out of the public treasury. The taxpayers carried a burden which should have been borne by the shippers and passengers. |2. Means retention of obsolete methods.| Second, public ownership would mean poor service; the utilities would not keep up with modern methods; the public would be put to great inconvenience by reason of incompetent management. Private companies are alert, on the look-out for new economies, and always ready to adopt improved methods. The incentive to all this is their desire to make greater profits. They do not hesitate to spend money upon improvements if by so doing they can obtain more business and increase their earnings.^[241] Remove this incentive, as is done when the government operates a public utility, and everybody takes his job easily. |3. Would not improve political conditions.| Third, municipal ownership would merely substitute the influence of organized labor for that of organized capital in politics. The nation, states, and cities would have an enormous number of officials and employees on their respective pay rolls. The employees would also be voters. They would stand solidly for whichever political party offered them better wages, fewer hours of labor, and other advantages. The interests of the public would have scant consideration in the face of organized political pressure from this huge array of government workers. Even today the city employees are an important factor in municipal politics. What would they be if their numbers were doubled or trebled? The railroad employees of the country number many hundred thousand. Count in their wives (who are also voters), their relatives and friends, the voters whom they can personally influence, and you will see that they would form no negligible factor in national politics. |4. European experience not applicable.| Fourth, although public ownership has been moderately successful in European countries where the governments are highly centralized it does not follow that it would have the same success in this country. In the United States, where government is conducted on a democratic basis, with short terms of office and strong partisan forces at work, with the spoils system still flourishing in many states and cities, public ownership would result in gross mismanagement and extravagance. If the government is to engage in business it should first put itself on a business basis. Before it undertakes to operate the railroads or the telephone service it should introduce efficiency into its own governmental functions.

Summary.—In balancing these various arguments, one against the other, and in comparing the relative merits of public regulation with those of public ownership, much depends upon local conditions. It cannot be said that either policy is the better one at all times, in all communities, for all utilities, and under all circumstances. Where public regulation has been satisfactory there is a good deal to be said for the policy of letting well enough alone. Where the policy of regulation has not been successful the arguments for trying the experiment of public ownership become stronger. It ought to be remarked, however, that if local conditions are such as to make regulation a failure they are not likely to make public ownership a success. A state or community which cannot hold capital under effective control is not likely to be much more successful in its dealings with a large body of public employees. No great weight should be attached to the fact that public ownership has succeeded in one city or failed in another. The success or failure of public ownership, as a policy, cannot be fairly judged from this or that adventure in it, any more than we can judge the outcome of a campaign from the winning or losing of a single skirmish. Banks sometimes fail, yet our banking system is sound. Speculators occasionally succeed, and make fortunes, but that does not prove speculation to be a profitable form of business.

So far as can be judged from the figures of profit and loss, public ownership is less economical than private management. The community which owns and operates a street railway or a lighting plant or any other public utility will not make a profit, in most cases, unless it charges higher rates than would be charged by a private company. The books may show a profit, but this is because not all expenses which ought to be charged to the plant are put down; they are saddled upon the taxpayer in some roundabout way. Public ownership cannot be justified as a matter of pennies and dimes. |The question is not one of profit and loss alone.| But profit and loss are not the only things to be considered. The question as to which plan is better for the public is much more than a question of surplus or deficit. The fair treatment of labor, the reliability of the service, the removal of sinister political influences—these should be reckoned with as well. And that is where people with different points of view fail to agree. The advisability of public ownership is an intensely practical issue which cannot be solved by appealing to any set rules or principles. It is entirely logical for one to favor public ownership of the water supply while opposing its extension to the street railway. One is closely related to the public health; the other is not. In a well-governed community, where the service rendered by a private company has proved to be unsatisfactory, the policy of public ownership may be entirely justified. This does not mean, however, that the people of boss-ridden cities, with the spoils system in full operation, should take over public services which are doing well enough under private management. Conditions, not theories, should determine which is the wise policy.

Guild Operation.—In recent years another alternative to private ownership has been put forth. It is known as guild ownership. Knowing that many people are disinclined toward public ownership because they fear that it would merely mean the mismanagement of the public services by politicians, some labor leaders have proposed that the utilities should be owned and operated by the organized employees. In brief they suggest that the government should supply the capital (receiving interest on it, of course,) and that the employees should operate the utilities through officials chosen by them, or chosen by themselves and the government jointly. The Plumb plan, put forward in 1919 as a solution of the railroad problem, was a proposal of this nature. Some advocates of guild operation believe in applying this policy not only to public utilities but to all industries.

F. W. Taussig, Principles of Economics, Vol. II, pp. 397-418;

Clyde L. King, The Regulation of Municipal Utilities, pp. 3-55;

H. G. James, Municipal Functions, pp. 246-281 (Public Utilities); pp. 282-295 (Municipal Ownership);

Massachusetts Constitutional Convention, 1917-1918, Bulletins, No. 22 (Municipal Ownership in the United States);

E. M. Phelps (editor), Government Ownership of Railroads (Debaters’ Handbook Series). Contains material on both sides of the question. See also K. B. Judson (editor), Government Ownership of Telegraphs and Telephones, and J. E. Johnson, Municipal Ownership, in the same series;

F. C. Howe, The Modern City and its Problems, pp. 149-164.

1. Government ownership of telegraphs and telephones. History of the wire services. How the telegraph and telephone companies are organized. Present methods of regulation by the national, state, and local authorities. Public ownership of telegraphs and telephones in Europe. The results of European experience. American experience during the war. Summary and conclusions. References: K. B. Judson (editor), Government Ownership of Telegraphs and Telephones (Debaters’ Handbook Series); A. N. Holcombe, Government Ownership of Telephones in Europe, pp. 441-463; H. R. Meyer, Public Ownership and the Telephone of Great Britain, pp. 239-268; W. W. Willoughby, Government Organization in War Time, pp. 191-198.

2. State regulation of public utilities. References: H. G. James, Municipal Functions, pp. 246-281; C. L. King, Regulation of Municipal Utilities, pp. 253-263; G. P. Jones, State Versus Local Regulation, in Annals of the American Academy of Political and Social Science, LIII (May, 1914), pp. 94-107; Proceedings of the Conference of American Mayors, 1915, pp. 123-162; H. M. Pollock and H. S. Morgan, Modern Cities, pp. 225-249.

3. Municipal ownership in Europe. References: G. B. Shaw, The Common Sense of Municipal Trading, pp. 17-42; Leonard Darwin, Municipal Ownership, pp. 33-66; Douglas Knoop, Principles and Methods of Municipal Trading, pp. 95-106; F. C. Howe, European Cities at Work, pp. 37-67; Yves Guyot, Where and Why Public Ownership Has Failed, pp. 55-71; W. H. Dawson, Municipal Life and Government in Germany, pp. 208-259; C. D. Thompson, Municipal Ownership, pp. 15-25; National Civic Federation Report (1907), Part I, Vol. I, pp. 261-302.

1. Franchises. Cyclopedia of American Government, Vol. II, pp. 44-48.

2. A model street railway franchise. C. L. King, Regulation of Municipal Utilities, pp. 165-181.

3. Gas and electric lighting franchises. W. B. Munro, Principles and Methods of Municipal Administration, pp. 247-257.

4. Germany’s experience in public ownership. W. H. Dawson, Municipal Life and Government in Germany, pp. 208-259.

5. Great Britain’s experience in public ownership. Douglas Knoop, Principles and Methods of Municipal Trading, pp. 306-365.

6. Municipal ownership in the United States. Massachusetts Constitutional Convention, 1917-1918, Bulletin, No. 22; National Civic Federation, Shall the Government Own and Operate the Railroads, the Telegraph and Telephone Systems? The Affirmative Side; Ibid., The Negative Side.

7. Guild ownership. G. D. H. Cole, Guild Socialism, pp. 42-77.

8. Public service commissions. S. P. Orth, Readings on the Relation of Government to Industry, pp. 308-343.

9. The danger of giving government too much to do. Otto H. Kahn, American Economic Problems, pp. 235-275.

10. The Plumb plan. Public Ownership League, Bulletin, No. 12, pp. 86-100; Ibid., Bulletin, No. 14, pp. 59-74; 127-130.

1. Name all the principal public service industries of the present day. Would you say that the following are public utilities: abattoirs; grain elevators; coal mines; pipe lines for conveying oil from city to city; wireless telegraph establishments; airships carrying passengers; automobiles; taxicabs; jitney busses; hotels; steamships; docks; banks; hospitals? Why or why not in each case?

2. Make a definition of public utilities which will square with your answer to the previous question.

3. If a merchant should install an electric generator to provide light for his own store, would he be then engaged in a public service and would he require a franchise? If he desired to sell current to his neighbors (without crossing a street) would he then require a franchise? Give your reasons.

4. Certain industries are particularly suited to public management (for example, the postal service and water supply). Name some others. Why are they suited?

5. What provisions should be made in a street railway franchise as regards term, fares, service, contributions by the company to the public treasury, disposal of the plant when the franchise expires, and regulation during the franchise term?

6. Can you give any reasons why the government should carry mail but not telegrams? Parcels by post but not by express?

7. Name some reasons why the effective regulation of public utilities is difficult.

8. What public utilities are operated in your city? By what companies? When do their franchises expire? Who regulates them? Would any of them be better managed under public ownership?

9. Which of the arguments for municipal ownership seem to you to be the strongest, and why? Which of the arguments against?

10. Would it be consistent for an Englishman to favor municipal ownership of street railways in London but to oppose it in New York after becoming a resident there?

1. Street railways should be (a) owned and operated by private companies, or (b) owned by private companies and operated by the government, or (c) owned and operated by the government.

2. Guild operation should be applied to all public utilities.