Front Page Titles (by Subject) Part III: IRON AND STEEL - Some Aspects of the Tariff Question
The Online Library of Liberty
A project of Liberty Fund, Inc.
Search this Title:
Also in the Library:
Part III: IRON AND STEEL - Frank William Taussig, Some Aspects of the Tariff Question 
Some Aspects of the Tariff Question (Cambridge: Harvard University Press, 1915).
About Liberty Fund:
The text is in the public domain.
Fair use statement:
IRON AND STEEL
Part III, Chapter IX
A Survey of Growth
The present Part will consider the iron and steel industry, its extraordinary advance since 1870, and the influence of the tariff on that growth. No phase of the country's economic development shows changes so striking. None raises questions more difficult to answer concerning the effects of protective duties. To understand the complexity of the factors which have been at work, and the nature of the special problems that arise, a survey must first be made of the growth of the industry and of the various influences which have affected it.
In 1870 Great Britain was still the world's commanding producer of iron and steel. Notwithstanding half a century or more of almost continuous protection, the United States held but a distant second place. The output of pig-iron in the old country in 1870 was very nearly six millions of tons; that in the new country was but little over a million and a half. But, as the appended figures show,1 the United States gained rapidly and surely on its rival. During each of the three decades from 1860 to 1890, the annual production of American pig-iron doubled. The figure for 1870 was twice that of 1860; 1880 doubled 1870; and 1890 again doubled 1880. The British output increased considerably during the same period, but could not meet the pace of its astounding rival. By 1890 the United States passed Great Britain and established her position as the leading iron making country of the world. In the decade from 1890 to 1900 the United States failed to maintain the remarkable geometric progression; yet the output of 1900 was again doubled in 1910. Germany alone showed an advance at all comparable; Great Britain did no more than maintain a steady plodding pace. In 1910 the United States production of pig-iron exceeded twenty-seven million of tons, a total larger than that of Great Britain and Germany combined, and nearly twenty times as large as the American product of forty years previous. If, as the extreme protectionists contend, the growth of domestic industry is in itself proof of the success of their policy, a degree of success was attained in this case that could admit of no cavil.
This enormous increase, however, was by no means evenly distributed over the United States. Within the country a revolution took place, which was part and parcel of the changed relation to other countries, and which must be followed before the new situation can be understood.
The first great impulse to the production of crude iron on a large scale came in the United States with the successful use of anthracite coal as fuel. During the twenty years preceding the civil war (1840-60) the site of the industry and its growth were governed by this fuel.2 Hence eastern Pennsylvania was the main producing district. The supplies of ore near this region were smelted with its anthracite coal, and Philadelphia was the central market. Proximity to the seaboard made foreign competition easy, except so far as it was hampered by the tariff duties; and the very existence of the iron industry was felt to depend on the maintenance of protection. For some time after the close of the civil war this dominant position of anthracite iron was maintained. In 1872, when the systematic collection of detailed statistics began, out of a total production of 2,500,000 tons, one-half was smelted with anthracite coal, a third with bituminous coal or coke, the remainder with wood (charcoal). The use of soft coal, which had begun before 1860, became rapidly greater. Already in 1872 it was important; and from year to year it grew. In the periodic oscillations between activity and depression which mark the iron trade more than any other industry, anthracite iron shrank in the slack periods, and barely regained its own in the succeeding periods of expansion. Bituminous or coke iron, on the other hand, held its own during the hard times, and advanced by leaps and bounds with each revival of activity.3 In 1875 for the first time its output exceeded that of the rival eastern fuel; after that date the huge advance in the iron product of the United States was dependent on the use of coke. Indeed, the use of anthracite alone began to shrink at a comparatively early date. It soon ceased to be used on any large scale as the sole fuel, coke being mixed with it for use in the blast-furnace. What is classed as "anthracite iron" is smelted with a mixture of coke and hard coal; and even with the aid of the coke, this means of reducing the ore came to be of less and less importance. Anthracite coal was completely displaced as an iron making fuel.4
This change is easy of explanation. It was the inevitable result of the greater plenty and effectiveness of coke; and it was powerfully promoted by the rapid development of the United States west of the Appalachian chain, and the nearness of the coke region to this growing market. Anthracite, at best, is an obdurate fuel. At the same time its strictly limited supply, and the cleanliness and freedom from smoke which make it an ideal domestic fuel, maintained its price at a comparatively high level. On the other hand, the vast supplies of bituminous coal and the feverish competition in opening coal lands and marketing their product caused an almost uninterrupted fall in its price. Coke proved, ton for ton, a better fuel than anthracite; and the supplies of bituminous coal available for coking proved almost limitless.
Pittsburgh, whose destiny as a great iron center was perceived long ago, is situated in the heart of the region where coking coal is plentiful. To this point the iron industry converged, attracted first by cheap fuel, and soon by other geographical advantages of the region,—its easy access to the growing western country, and the added opportunities of securing super-abundant quantities of the best ore. Pennsylvania has remained the greatest iron-producing state in the Union; but since 1880 it has been western Pennsylvania, and no longer eastern, which has secured to the state its leading position. After 1890 this district alone yielded steadily forty per cent of the enormous iron product in the country; and it is here; and in the other western districts in which the same industrial forces have been at work, that we have to study the conditions on which the growth of the iron industry depended.
The westward movement was determined not only by the geographical distribution of the fuel. It was no less affected by the distribution of the ore supply; and the effect of this in turn rested for many years on the revolution wrought in the iron trade by the Bessemer process.
The first inventions which made iron plentiful were Cort's processes for puddling and rolling. Through three-quarters of the nineteenth century this was the mode in which the world got its supply of the metal in tough form, usable where heavy strain must come on it. The processes involved at once a considerable plant, complex machinery, and strenuous exertion by skilled and powerful laborers,—conditions which during this period promoted the supremacy of the British iron trade. In the decade 1860-70 the process devised by Sir Henry Bessemer, to which his name attaches, began a second revolution in the iron trade. That process involved a still larger plant and still more elaborate machinery; and it applied machinery more fully to the elimination and subsequent replacing of the carbon on which the toughness of the iron depends. By the new methods the production of mild steel—that is, tough iron—became possible on a vastly greater scale. Bessemer steel displaced puddled iron in most of its uses. Not only this: the cheap and abundant supply, besides filling needs previously existing, made possible a much greater use of iron and steel for plant, machinery, durable instruments of all sorts. One of the first applications of the method was to rails, where the elastic and impact-sustaining steel enabled railway engines and cars to be doubled and quadrupled in size, and to become more efficient in even greater ratio. Gradually and steadily, new and wider uses were found for the cheap steel. From great ships down to the smallest nails, almost every instrument became cheaper and better. Wood was supplanted by steel for a variety of uses, and the slow-growing and easily exhausted stores of timber were re-enforced by the well-nigh limitless deposits of iron ore in the earth's crust. A new domain in nature's forces was opened to man.
But the Bessemer process depended for its availability on special kinds of ore and pig-iron,—such as are nearly free from certain admixtures and especially from phosphorus. Ores adapted to it hence became doubly valuable, and the accessible parts of the earth were scoured to find them. The deposits of Great Britain in Cumberland and Lancashire contained important supplies, yet not in quantity adequate to the new demand; and the Spanish fields of Bilboa, on the Bay of Biscay, became an indispensable supplement for the British iron masters. In the United States, also, some of the sources previously used in the region east of the Appalachian chain proved to be available,—such as the famed deposits, once unique in their ease of working, in the Cornwall hills of eastern Pennsylvania. But the greater part of the eastern ores were too highly charged with phosphorus, or for other reasons unavailable. Here, as in Great Britain, a distant source of supply was turned to. The Lake Superior iron region, long known to explorers and geologists, suddenly sprang into commanding place. Here were abundant and superabundant supplies of rich and properly constituted ore. These and the equally abundant coal of Pennsylvania were brought together, the iron made from them was converted into steel by the Bessemer process; and thus became possible the astounding growth in the production of iron, and steel in the United States.
The iron mines of the Lake Superior region stretch in widely separated fields along the lake, from the middle of its southern shore to its farthest northwestern end. At the extreme eastern end is the Menominee iron field, usually described in connection with the other Lake Superior fields, yet differing from them in important respects. The ore of the Menominee district is easily mined; and it is easily shipped, finding an outlet by the port of Escanaba on Lake Michigan, and thus traversing a much shorter journey to its eastern markets than that from the Lake Superior mines proper. But it is usually of non-Bessemer quality, and hence played no considerable part in the most characteristic effects of the new developments. The great Bessemer ore fields of Lake Superior are four in number: in geographical order from east to west, the Marquette, the Gogebic, and the neighboring Vermilion and Mesabi. As it happens, the geographical order has been also, in the main, the order of exploitation. The easternmost, the Marquette, finding its outlet by the port of that name, was the first to be worked on a great scale. Even before the civil war, mining and smelting had begun; and, as the Bessemer process was more and more largely used, especially after 1873, it was exploited on a larger and larger scale. Here began the digging of Bessemer ore on a great scale, and its transportation to a great distance. After a considerable interval the second field, the Gogebic, began to be worked, in 1884. Lying some two hundred miles further west, along the boundary line between Wisconsin and Michigan, and finding its outlet by Ashland, on the southern shore of Lake Superior, here was found perhaps the richest and purest Bessemer ore. At about the same time, in 1884, began the development of the most distant of the fields, the Vermilion, lying to the north of the extreme end of Lake Superior, in the state of Minnesota, close to the Canada frontier. Here, too, were great stores of rich Bessemer ore, shipped by the port of Two Harbors, on the northern shore of the lake.
In all these fields the ore was secured by what we commonly think of as "mining,"—by digging far into the earth, and bringing the material up from a greater or less depth. But the latest and now the most important of the fields gave opportunity for the simplest and cheapest form of mining. Great bodies of ore are lying close under the ground, and, when once the surface glacial drift has been removed, are obtainable by simple digging and shovelling, as from a clay pit.5 Along the Mesabi6 range of hills, lying about one hundred miles northwest of the end of Lake Superior, distant not many miles from the Vermilion range, vast tracts of rich iron ore, finely comminuted and easily worked, lie close to the surface. Here a new source of supply was added, offering unique opportunities for exploitation on a great scale. These opportunities were availed of with astounding quickness. The Mesabi field at once sprang into the front rank among the Lake Superior fields, and, indeed, among all the iron ore fields of the world. In 1890 the region was a trackless waste. In 1892 it was opened by railway. Towns sprang up, huge steam-shovels attacked the precious ore, and long trains carried it to the newly constructed docks at the port of Duluth. Even during the depression that followed the crisis of 1893 the output from this field mounted year by year. In 1893, virtually the first year of operation, 600,000 tons were shipped from it; in 1894, thrice that amount; and in 1895 it became, what it has since remained, the most productive of the iron mining districts. A little less than half of the ore is of Bessemer grade. Its physical constitution, moreover, is such that, for advantageous use in the furnace, other ore needs to be mixed with it. Were it all of Bessemer quality, and in the best form, the other fields might have been entirely displaced. With the limitations in the quality of the Mesabi ore, the other fields still found themselves able to hold their own in the market, though their supremacy was ended by the favored rival.
For many years the Lake Superior mines have been the main sources of supply for the iron ore of the American iron industry. A steadily increasing share of a steadily increasing total has come from them. In 1910 the total iron ore product of the country exceeded 50 million tons; and over four-fifths of this enormous mass came from the Lake Superior region.7
In this brief description of the Lake Superior iron region, reference has been made to the ports by which the ore is shipped,—Escanaba, Marquette, Ashland, Duluth, Two Harbors. To each of these the ore must be carried by rail from the mines,—sometimes a few miles, sometimes, as with a large part of the Minnesota supplies, a hundred miles and more. And, with this first movement, only the beginning is made on a long journey. From the shipping port the ore is carried eastward by water to meet the coal. Some goes down Lake Michigan to Chicago and Gary, where it meets the Pennsylvania coal about half-way. Some goes farther, through Lakes Huron and Erie, and meets the coal at Toledo, Ashtabula, Cleveland, and other ports on Lake Erie. The largest part is unloaded from the vessels at lake ports, and carried by rail to the heart of the Pittsburgh coal district, there to be smelted by the coal on its own ground. No small amount goes even beyond,—to the eastward in Pennsylvania, beyond the Pittsburgh district, even into New Jersey and New York, almost to the seaboard itself. Hence the cities of Erie and Buffalo have become important ore-receiving ports on Lake Erie; the ore, if not smelted there, going thence by rail on its journey to the smelter. This last and farthest invasion of distant regions by the Lake Superior ore was promoted for many years by the import duty on the competing foreign ore which sought to find an entrance by the Atlantic seaboard,—an aspect of the iron trade of which more will be said presently.
The iron producing region which depends on the Lake Superior ores thus stretches over a wide district, the extreme ends being separated more than a thousand miles. Close by the iron mines are a number of charcoal-using furnaces in Wisconsin and Michigan. The still unexhausted forests of these states supply this fuel in abundance; and charcoal iron, though long supplanted for most uses by its coke-smelted rival, has qualities which enable a limited supply to find a market, even at a relatively high price. Next in order come Chicago (South Chicago) and its suburb (this it virtually is) the new-created city of Gary; with which must be classed some neighboring cities, such as Milwaukee in Wisconsin and Joliet in Illinois. It is one of the surprises of American industry that iron manufacturing on a huge scale should be undertaken at such points, distant alike from ore and from coal. The coke is moved hundreds of miles by rail from Pennsylvania, and meets the ore which has travelled no less a distance from Lake Superior. Ease of access to the western market gives these sites an advantage, or at least goes to offset the disadvantage of the longer railway haul of the fuel. Other iron producing points of the same sort are scattered along Lake Erie. At each of the ports of Toledo, Lorain, Ashtabula, Erie, Buffalo, especially Cleveland, ore is smelted, and iron and steel making is carried on. But the coal region itself—Pittsburgh and its environs—remains the heart and center of the iron industry. Hither most of the ore is carried; and here the operations of smelting, converting into steel, fashioning the steel into rails, bridges, plates, wire, nails, structural forms for building, are performed on the greatest scale. For some years the natural gas of this region added to its advantages and aided in its exceptionally rapid growth. But each supply of gas exhausted itself before long, and new discoveries did not maintain the inflowing volume at its first level. It was the abundant and excellent coal which formed the sure basis of the manufacturing industries, and the permanent foundation of iron and steel making.
Whether the ore goes to the coal or the coal meets the ore halfway, one or both must travel a long journey, by land as well as by water. One or both must be laden and unladen several times. A carriage of 800, 900, over 1,000 miles must be achieved, with two separate hauls by rail. Fifty years ago, even thirty years ago, it would have seemed impossible to accomplish this on a great scale and with great cheapness. The geographical conditions on which a large iron industry must rest were supposed by Jevons in 1866 to be the contiguity of iron and coal.8 But here are supplies of the two minerals separated by a thousand miles of land and water, and combined for iron making on the largest scale known in the world's history. One of the most sagacious of American students of economics, Albert Gallatin, early predicted that the coal area of western Pennsylvania would become the foundation of a great iron industry, and that only with its development would the American iron manufacture attain a large independent growth.9 But he could not dream that his prophecy would be fulfilled by the utilization of ores distant fifteen hundred miles from the seaboard, transported from a region which was in his day, and remained for half a century after his day, an unexplored wilderness.
For the iron trade the most important section of the Pittsburgh coal district is the famed Connellsville coke region, lying some fifty miles south of Pittsburgh, along the banks of the Youghiogheny river. Here is a level and uniform outcrop of the best coking coal; and from this has come most of the coke used in smelting Lake Superior ores, and, indeed, the greater part of that used in the United States. Considerable supplies have come also from other near-by regions in Pennsylvania and West Virginia; and Alabama has made from her own coal the coke for smelting her iron. But the Connellsville coke is by far the most important as regards both quantity and quality, and it alone has steadily furnished more than half of the total. Whether used near the mines, in the Pittsburgh district, or carried hundreds of miles to meet the ore, this unexampled supply of the best fuel has been the basis of the whole iron and steel manufacture.10
The price of coke to the iron masters went down during the period here under consideration (1870-1910), partly because of cheaper production at the mines, partly because of cheaper carriage from mines to works. In the earlier years (about 1870) coke at the ovens was sold for $3.00 a ton. Its price, while fluctuating greatly, was usually below $2.00 in later years, even falling as low as $1.00 in periods of depression. On the whole, fuel was provided for the American iron master at prices less than those paid by his rivals in any part of the world; while low rates of transportation enabled it to be carried to the furnaces without sacrifice of this cardinal advantage.
The history of the American iron trade after 1870 thus came to be in no small part a history of transportation. The cheap carriage of the ore and coal was the indispensable condition of the smelting of the one by the other.11 Clearly, this factor was not peculiar to the iron industry. The perfecting of transportation has been almost the most remarkable of the mechanical triumphs of the United States. Great as have been the evils of our railway methods, disheartening as have been some of the results of unfettered competition, the efficiency of the railways has been brought to a point not approached elsewhere, largely in consequence of that very competition whose ill effects have been so often and so justly dwelt on. In the carriage of iron ore and of coal the methods of railway transportation which had been developed under the stress of eager competition were utilized to the utmost; and the same was true of the transfer from rail to ship and from ship to rail again, of the carriage in the ship itself, and of the handling of accumulated piles of the two materials. The ore is loaded on cars at the mines by mechanical appliances. At the Mesabi mines the very steam-shovel that digs the ore from the ground deposits it in the adjacent car. At the lake, high ore-docks protrude hundreds of yards into the water. On top of them run the trains, the ore dropping by gravity from openings in the car-bottoms into the pockets of the docks. Thence it drops again through long ducts into the waiting vessels, ranged below alongside the dock. At every step direct manual labor is avoided, and machines and machine-like devices enable huge quantities of ore to be moved at a cost astonishingly low.12 The vessels themselves, constructed for the service, carry the maximum of cargo for the minimum of expense; while the machinery for rapid loading and unloading reduces to the shortest the non-earning time of lying at the docks. At the other end of the water carriage, especially on Lake Erie, similar highly developed mechanical appliances transfer from boat to railway car again, or, at will, to the piles where stocks are accumulated for the winter months of closed navigation. At either end the railway has been raised to the maximum of efficiency for the rapid and economical carriage of bulky freight. What has been done for grain, for cotton, for lumber, for all the great staples, has been done here also, and here perhaps more effectively than anywhere else: the plant has been made larger and stronger, the paying weight increased in proportion to the dead weight, the ton-mile expense lessened by heavier rails, larger engines, longer trains, and easier grades, the mechanism for loading, unloading, transhipping perfected to the last degree, or to what seems the last degree until yet another stage towards perfection is invented. And evidently here, as elsewhere, the process has been powerfully promoted by unhampered trade over a vast territory, and the consequent certainty that costly apparatus for lengthened transportation will never be shorn of its effectiveness by a restriction in the distant market.
Still another factor has been at work in the iron trade, as in other great industries,—the march of production to a greater and greater scale, and the combination of connected industries into great single-managed systems. The iron trade showed more markedly than any of the great industries the manifestations of the new conditions. Both vertical and horizontal combination proceeded apace.
Of these two forms of combination, the former—single management of successive stages in production, the "integration" of industry,—developed first, and contributed most surely and most largely to the effectiveness of production. Iron mines, coal mines, coke ovens, railways, steamers, docks, smelting works, converting works, rolling mills, steel works, machine shops,—these were combined into imposing complexes. The great iron and steel companies operated iron mines on Lake Superior, coal mines and coke establishments in Pennsylvania, docks and railways, as well as iron and steel works proper. The largest of them, the Carnegie Company, built as early as 1897 a railway of its own, specially equipped for the massive and cheap carriage of ore and fuel, from the shore of Lake Erie to the Pittsburgh coal district. At its terminus on Lake Erie (Conneaut) a new harbor and a new city were created. The economy in production from such widely ramifying organizations is not merely or chiefly in dispensing with the services and saving the gains of so many independent middlemen: it arises mainly from consistent planning of every stage, the nice intercalation of operations, the sweeping introduction from end to end of expensive and rapid-working machinery, continuously supplied under homogeneous administration with the huge quantities of material which alone make possible the effective and economical utilization of the great plant.
The horizontal form of combination,—what has come to be known as the trust,—appeared later; and the extent of its contribution to industrial effectiveness is not so certain. The extraordinary burst of consolidation and combination at the opening of the present century is familiar. The most momentous and conspicuous single episode was the formation of the United States Steel Corporation in 1901. Sundry other horizontal combinations in the iron industry had preceded it, such as the steel and wire combination, and others for steel hoop and tin plate. The giant Steel Corporation gathered them into one fold. Not that the whole of the iron and steel trade was absorbed: perhaps one-half of the output of the crude materials (coal, ore, and pig-iron) came under its control, with a larger share for some of the finished products. A considerable number of enterprises remained independent. Each of these was on a large scale, compared with the units of the previous generation. Each carried on vertical combination, operating its own mines of ore and coal, and carrying the iron to the stage of steel and its semi-finished products. The Steel Corporation itself carried this form of industrial organization to a greater degree than any, more particularly in its conduct of transportation by land and water. It has never been doubted that well-managed vertical combination conduced to efficiency in the iron trade. Whether the other form,—single management of all the establishments doing the like things,—conduced also to efficiency, is more open to question. The motive for it was beyond question double: in part an expectation that consolidation would lead to economies; but, no less, a wish to put an end to competition, to secure gains from monopoly or quasi-monopoly, or at all events to avoid the paring of profits under competition. That the huge iron and steel enterprises produce more cheaply than their smaller predecessors is beyond question; but how far that cheapening has been further promoted by the combination of parallel and competing enterprises is among the economic problems still unsolved.13
While the Lake Superior ores, utilized under the conditions just described, constituted by far the most important source of supply for the iron industry, a large contribution came from another source, also,—from the southern states.
In the region where the states of Tennessee, Alabama, and Georgia adjoin, the conditions once thought indispensable for a flourishing iron industry exist in perfection. Here are great deposits of ore, easy of working; and close by them great deposits of coking coal, no less easily worked. Before the civil war, these natural advantages were not utilized: the régime of slavery and the lack of means of transportation prevented any resort to them. But with the quickening of the industrial life of the south when once the civil war and reconstruction were passed, the mineral resources of this region were developed on a rapidly enlarging scale. Alabama, where the best deposits of coal occur, became a great iron producing state: here again, though for a less distance and on a smaller scale, the ore made its journey to the coal. The rate of growth was most rapid between 1880 and 1890: the pig-iron output of Alabama rose from 69,000 tons in 1880 to 915,000 in 1890. In 1900, it was 1,200,000 tons; in 1910, near 2,000,000 tons. The large supply of labor at low wages contributed to the easy and profitable utilization of this source of supply. The free negro turned miner, and proved not only a docile laborer but also,—paid, as miners are, according to the tonnage brought to the pit's mouth,—on the whole an efficient one.
The southern ore contains phosphorus in too large amounts to make it available for the Bessemer process; and this for some time gave it a place somewhat apart in the iron industry of the country. The iron made from it did not compete with that from the Lake Superior ore, and was used chiefly for general foundry purposes. Marketed at a very low price, the increasing supplies made their way to places farther and farther removed. Pittsburgh itself soon used Alabama iron for foundry purposes; the western states and the eastern alike were supplied; in New England it displaced Scotch pig, previously imported in considerable quantity.
With the opening of the twentieth century, the technical development of the industry took in some respects a new direction; but the changes were of no considerable significance for the tariff problems. Bessemer ore and Bessemer steel, which had dominated before 1900, were in part supplanted. For some time (since about 1880) Germany had been making steel from phosphoric ores by the basic (Thomas-Gilchrist) process; indeed, that process had influenced the growth of the German iron industry as profoundly as did the Bessemer process the growth in the United States. Bessemer ores, though the deposits were by no means exhausted in the United States, became less plentiful, and hence somewhat higher in price; a growing proportion of steel came to be made from basic ore and iron. In addition, a steadily increasing amount of steel was made by the open-hearth process, which is available both for Bessemer and non-Bessemer iron. Open-hearth steel is supposed to be tougher than Bessemer steel, and has been in demand for rails and other purposes. By 1910 the output of open-hearth steel (preponderantly from basic iron) exceeded that of Bessemer steel. One consequence was a facilitation of competition, since control of the Bessemer ores, so greatly prized before, was of lessened importance. These changes, however, had no appreciable effect on the geographical distribution of the industry or on its relation to possible imports. Lake ore and Pittsburgh iron remained the dominant factors, and the industry continued to be unaffected by foreign competition both because of its technical strength and because its main seats were far inland.
The outcome of the great changes in the geographical distribution of the iron industry is shown in the following tabular statement: —
In the eastern district proper the output barely held its own. The total production in 1910 was not greater than in 1872. On the other hand, the central district increased its production steadily and enormously, whether in western Pennsylvania itself or in the neighboring states of Ohio, Indiana, Illinois. This is the region where Lake Superior ore is smelted with Pittsburgh coal: in and about Pittsburgh itself, in the immediately adjacent parts of Ohio, and at the various lake cities where the ore meets the coal, Chicago, Cleveland, Toledo, and the rest. Almost as striking is the rate of growth in the southern district, of which Alabama is the most important state. While the total production here was far outweighed by that in the central district, it exceeded after the opening of the present century that of the eastern district.
Another aspect of the subject appears in the labor situation. The power of the labor unions among the iron workers has been less in the United States than in Great Britain. The Amalgamated Association of Iron and Steel Workers had been in 1870-90 a powerful organization, modelled on the British unions and strong in its bargaining with the employers. But the Carnegie Company cut loose from it a decade before the formation of the Steel Corporation. The great Homestead strike of 1892, almost a pitched battle, resulted in the defeat of the Amalgamated Association. Shortly after the great consolidation, the Steel Corporation itself faced (in 1902) a strike from the Association. Again the union suffered a defeat. The Carnegie works had been put on a non-union basis after the Homestead strike; most of the other works of the Steel Corporation were similarly made non-union after the strike of 1902. The Amalgamated Association retained a hold in a few of the Steel Corporation's works, and in some independent establishments. But it was shorn of its former considerable power, and the course of the iron industry was little affected by trade union complications.
In consequence the American iron and steel master was free to push on with new processes, to remodel and improve organization, to readjust his labor force. In this respect he had an advantage over his British rival. Whatever be one's sympathy with labor organizations, it is not to be denied that a well-entrenched union tends to oppose the introduction of labor saving devices. This attitude is the inevitable consequence of the dependence of laborers on hire by capitalist employers. The first effect of a new machine or a better rearrangement is to displace some laborers or to lower their pay. Moreover, the belief in "making work" is too deep-rooted to permit the installation of improved processes without strong even though silent opposition. The mere existence of a powerful union,—one not to be fought without heavy loss,—has a benumbing influence, checking the very consideration of radical changes and tending to keep industry in its established grooves. Such was and is the influence of the strong organization of the British iron workers (the engineers); it led to struggles and strikes, in which the union, though sometimes beaten, retained a strong position. The American iron makers, themselves men of overmastering temperament, and engaged in an industry where changes were rapid, shook loose from this sort of control. Beyond doubt, they were also induced to adopt a drastic non-union policy by another circumstance; infraction of discipline by the union men and their opposition to discharge of the insubordinate and incompetent. This phase of unionism has shown itself in the United States more than in other countries, the impulse to domination among the employers being matched by the same propensity among their employees. The most friendly observer of the trade-union movement in the American iron trade was compelled to confess the faults of the unionists in this regard.16 All in all, the defeat of the union movement served to make the iron industry more free and more vigorous, so far as concerns the advance of productive power and the cheapening of the products.
It need not be said that this by no means tells the whole story, or makes a conclusive case for the policy of the iron masters on unionism. The bargaining of the unorganized workmen with a powerful employer resulted in evil conditions, or at least delayed the abolition of evil conditions, more especially as regards the long hours of work. The twelve-hour day and the seven-day week—ugly blots on any industry—were more easily maintained than could have been the case if a strong union had been in the field. No doubt the much-attacked Steel Corporation was not the worst offender. As regards wages, hours, safety, sanitary conditions, it was not usually behind its competitors; more often it was in advance of them; but it set the example of trying to stamp out unionism, and so preventing the men from pressing their claims.
Even more dubious in its social consequences was another phase of the labor situation,—the condition of the unskilled workers. The very great numbers of these employed in the iron industry were recruited almost exclusively from the newly arrived immigrants. The same is the case in the coal mines and at the coke ovens. Such nationalities as the Italians, the Bohemians, the so-called Huns and Polaks from the Slavonian parts of Austro-Hungary, supplied the men for heavy and dirty work. Needless to say, the iron industry was not peculiar in this regard. All manufacturing industries were profoundly affected by the abundant supply of unskilled laborers willing to work at comparatively low rates of pay.
Nowhere was this influence of a cheap labor force more striking than in the fuel supply. The nature of the operations caused cheapness to be attained at the coal mines and coke ovens, partly indeed by machinery and organization, but largely by cheap labor. The mining of coal is mainly pick-and-shovel work, requiring little handicraft skill or trained intelligence; and this is still more true of the work at the coke ovens. The coal mines of the United States drew to themselves the lowest and poorest kinds of manual labor; except, indeed, where machines for cutting the coal proved applicable, and skilled and intelligent mechanics were consequently called on to work them. The miners in England seem to have maintained a better relative position. Their trade organization has been strong, the standard of living and of efficiency comparatively high. In the United States multitudes of newly arrived immigrants have been drawn to the mines, partly through deliberate arrangement by the employers, partly through the silent adjustment of supply to demand. There they have huddled,—inert, stolid, half-enslaved. The nationalities that have contributed of late years so heavily to our immigration have here found employment such as they could at once turn to. In times of activity their condition is passable. In the periods of depression which recur in the iron trade, the price of coke sinks, production is restricted, wages fall, and the barest living is all that the miners and coke workers can secure,—sometimes not even this. The American or Americanized laborers met a disheartening situation and tried in vain to stem the tide of falling wages and half-employment, with its attendant misery, strikes, bloodshed.
So far as concerns the relation of domestic producers to foreign, the effect of this cheapness of unskilled labor was the same as if labor-saving devices had been introduced for cheapening the heavy work. Not a few mechanical devices were introduced, in the iron trade and elsewhere, for work of this kind, such as steam-shovels, and loading and unloading machinery for vessels. But an immense amount of brute muscular work remained. This would normally be dear in a country of high wages and free opportunities. In such a country one would not expect men to turn to it unless attracted by good pay; and to the employer, as has been already set forth, good pay always presents itself as an obstacle. It might be expected, therefore, that industries in which coarse manual labor is called for would be at a comparative disadvantage in the United States. But the anomalous labor conditions resulting from the influx of immigrants largely removed the employers' obstacle: the labor was and is cheap. Not that it has been as cheap, in terms of money, as in European countries. Humanitarian persons who are shocked by the low wages and evil conditions of our congested immigrant districts sometimes declare that these people are no more prosperous than at home. This is going too far: the fact that they continue to pour in by the hundred thousand, still more that those on the ground steadily send for their relatives and friends, proves that some gain is secured. But only a sort of half-way position is attained,—higher than the European, not so high as the normal American. Whether the well-being of the American people as a whole, or that of humanity as a whole, has been promoted by this social and industrial revolution, is a most intricate question, which need not here be considered. It suffices for the purposes of the present inquiry to point out that common labor has been cheap, measured by American standards, and that the employer needing much of it has not been compelled to bid very high. The result is the same for him, to repeat, as if he had devised effective machinery for doing the work and had in this way secured a comparative advantage.
Part III, Chapter X
How Far Growth was Due to Protection
After this survey of the growth of the iron industry and of the main factors that have been at work, we are prepared to consider what has been the influence of the protective system.
It will be of service to note at the outset the duties on two typical articles. On pig-iron the rate was, in round numbers, $7.00 per ton from 1870 to 1894; it was $4.00 per ton from 1894 to 1909. On steel rails, the rate was $28.00 per ton from 1870 to 1883; $17.00 from 1883 to 1890; $13.44 from 1890 to 1894; and $7.84 from 1894 to 1909. The duties in force from 1909 to 1913 are of no importance for the present inquiry. Indeed, those imposed in the tariff act of 1897 are not of consequence; for, as will presently appear, the great industrial changes significant for our problems occurred in the period from 1870 to 1897. Throughout that period the duties on both of the articles mentioned, and on all the cruder forms of iron and steel, were specific (by weight), and were highly protective. The duty on steel rails was particularly high, being equivalent to one hundred per cent on the foreign price during most of the time from 1870 to 1883, and from 1883 to 1894 still equivalent to between fifty and eighty per cent.17
The extraordinary growth of the domestic industry has already been described. So far as the increase of domestic production is concerned, the protectionist may well point with pride. If the justification of his policy is to be determined by this test, there can be no question that the history of the American iron trade gives superabundant proof of success. The record indicated by the mounting production of pig-iron is matched in almost every branch of the industry. For steel rails, the other article referred to in the preceding paragraph as typical, we find a growth from no production at all in 1870 to an output of 1,000,000 tons by 1880, of nearly 2,000,000 tons by 1890, and after that one regulated solely by the requirements of the railways. The increase in the domestic product has been enormous.
But not only this: the fall in domestic prices has been unmistakable.
Let the reader glance at the appended chart. It shows the price of steel rails, in Great Britain and in the United States, year by year from 1870 to 1910. For the first twenty-five years of this period, until about 1895, the American price ranged higher than the British. The gap between the two lines is great, and it persists. Prices could not have differed so greatly but for the high duty. Some excess of price in the United States would no doubt have appeared even under free trade,—enough to cover transportation charges. But this very marked excess could not have continued but for the duty. During many of the years between 1870 and 1895 imports of steel rails were considerable, showing that the domestic price was higher than the foreign price by the full amount of the duty. During other years of this period imports ceased; but domestic prices, though not higher by the full amount of the duty, were still considerably higher. Throughout the quarter century the protective duty raised the price of the total supply, whether imported or domestic. The railways were compelled to pay more for their rails, and the public presumably more in rates for the carriage of passengers and freight. Presumably, be it said, for the relation between the cost of constructing railways and the rates charged for railway service is a loose and uncertain one. Steel rails were a cardinal factor, during precisely these years, in enabling railway traffic to be conducted more effectively and charges to be lowered. Probably rates would have been reduced even more had rails been cheaper; but it would be hazardous to reckon how far the tariff system, in keeping up their price, brought a burden on the general public, how far it simply lessened the profits or increased the losses of railway promoters and investors. But this doubt regarding the ultimate incidence of such a tax does not affect the conclusions pertinent for the tariff controversy. For a long time, the purchasers of all rails, domestic or foreign, paid a tax because of the duty on the foreign article.
With the decade 1890-1900, however, and more particularly with the years 1895 and 1896, a change set in. The lines on the chart came together. The American price fell to the level of the British. For a time it even fell appreciably below the British level. In no year since 1895 has it been appreciably above it. Taking the period since 1895 as a whole, the American price has been virtually the same as the British. It has been very steady,—so steady as to point to an agreement of some sort for the maintenance of a price. But, though there may thus be evidence of a combination or trust, the price situation no longer shows any influence of the tariff. Here again the protectionist will point with pride, and this time with pride more clearly justified. The object of protection to young industries,—the ultimate fall in price to the foreign level,—seems to have been attained.
The same general trend would appear on a chart showing the course of pig-iron prices during the same forty years. Such a chart would be less simple, and would need more explanation, than that for steel rails. Grades of pig-iron differ in the two countries; continuous price figures for the significant grades are not easily secured for the entire period; and allowance has to be made for differences of quality. For these reasons, the graphic presentation is most striking in the case of steel rails, whose quality is as homogeneous as can be the case with any commodity and whose prices are on record from the first year of the period to the last. The course of events which thus is sharply defined for rails is typical of what has happened with almost all the cruder forms of iron and steel: extraordinary increase of domestic production; domestic prices at first higher than the foreign; continuance of imports for a while, then their cessation; reduction of the domestic price; finally, equality of price for the foreign and the American products. To repeat, the outcome seems to have been precisely that predicted by the advocates of protection to young industries. True, the term "young industries" is rarely applied to such a giant as the American iron industry. But, as has been pointed out, the contention that protection operates in the end to lower prices is simply the young industries argument in a different turn of phrase.18 Substantially it is this argument which has been advanced, and which seems to be verified by the actual course of events.
Further details of the changes in the iron trade are shown in the appended tables, giving year by year the domestic product, the imports, the prices of some important grades of iron in the United States and Great Britain. It will be of service to consider not only the general sweep, but some of the details.
The iron industry is peculiarly liable to the periodic fluctuations of modern industry. Indeed, it reflects in the extreme the alternations of activity and depression between which intervene the recurring commercial crises. The explanation of this special sensitiveness is not far to seek. The periodicity of crises is closely associated with the variations in the spirit of investment. In so-called good times, new enterprises of all sorts are freely launched. In the succeeding periods of dulness, few are undertaken. But investment and fresh ventures in our modern days mean the erection of plant, tools, and machines; and these mean iron and steel. When new and ever new railways formed the main outlet for the investment of the rapidly growing accumulations of savings, it was inevitable that their construction,—rapid in the days of activity, slow and halting in those of depression,—should cause periods now of urgent demand for iron, then of glutted markets. Within the last decade or two the railway has become relatively less important in new investments; but the ever-growing use of iron and steel in buildings, ships, tools and machinery of all kinds, has caused the oscillations in the iron trade to persist. Naturally, these phenomena are accentuated in the United States, where material progress is rapid beyond comparison and where the investment of capital proceeds fast and feverishly. Hence we find that with every rising wave of enterprise and investment the price of iron rises, and its production mounts with sudden rapidity. Then comes the crisis: prices fall, production halts, and a period of depression follows, more or less long according as the conditions for revival appear later or sooner. Not infrequently, the iron industry feels a chill before the commercial storm breaks. A slackening in the launching of new enterprises naturally appears as some among the enterprises already set up begin to weaken under the test of active operation. Hence the maximum production of iron and the highest range of prices for the cycle sometimes come in the year immediately preceding the crash. In 1872-73, it is true, the largest production and the highest price came in the year of the crisis itself, in 1873. Before the disturbances of 1884 and of 1893, however, a relaxation in the rate of output and the beginning of a fall in prices are seen in advance of the general overturn. During the first decade of the present century, no such premonitory symptoms seem to have appeared. The output of pig-iron rose without a check until the crisis of 1903 set in, and even more steadily up to the great crisis of 1907.
A glance at the tables will show, again, that during the earlier part of the period under consideration,—until about 1890,—the imports of pig-iron responded regularly to the increasing demands of the active periods, and fell as regularly during the dull times that followed. Throughout the greater part of the nineteenth century the domestic supply of iron needed to be regularly supplemented by imports; and in the years 1871-72 there was simply a somewhat increased resort to a regular foreign supply. But, as the domestic product became larger, the imports became less and less important, and, except in the years of rising speculation and investment, virtually ceased. It is true that the custom-house returns show continuous and considerable imports throughout the period. But the case is one of those where special qualities continue to be imported, giving no indication of the relation between foreign and domestic prices for the grades chiefly used. Thus in the decade 1870-80, and even later, Scotch pig-iron was imported in considerable quantities, being thought specially adapted for certain kinds of smooth castings, and so bought abroad in the face of a duty which advanced its price beyond that of domestic iron. In later years southern iron was found available for these purposes, and the importation of the Scotch brand ceased. Similarly, spiegel-eisen and ferro-manganese,—classed with the ordinary kinds of pig-iron in the custom-house returns,—continued throughout to be imported in varying quantities. These are used, in comparatively small amounts, solely for mixture with ordinary iron in the last stages of conversion into steel.19 Setting aside such special cases, imports practically ceased in the dull periods of 1875-78, and again in 1884-85. On the other hand, they revived, and became of considerable volume in the active years 1879-82, and again in the year 1886-87. After this latter period, however, they ceased to come in, even during the periods of activity. The year 1890, when first the American iron product exceeded that of Great Britain, marks also the end of this spasmodic competition. With that year the revolution in the iron trade of the United States was virtually accomplished, and the new stage was entered on.
During the years of activity preceding 1890—1872-73, 1879-82, 1886-87—the price of iron in the United States was at the seaboard higher than the price in Great Britain by the full amount of the duty. This much the fact of importation suffices to prove. At other times iron did not come in,—that is, only certain special qualities came in; and the American price, while higher than the foreign, was not higher by the full amount of the duty. The tables of prices amply verify these statements. In the busy years the difference between American and British prices was large enough to offset duty, freight, and other charges; and imports flowed in. In dull years the margin shrank; and imports ceased, except for the special qualities. Until 1893 the American public had to pay roundly, sometimes the full amount of the duty, sometimes less, but always a very substantial added price, for the eventual gains which might be credited to the protective system.
A precise measurement of this burden has sometimes been attempted. Following the simplest lines of reasoning, it has been argued that the total domestic production, multiplied by the rate of duty, would gauge accurately the added charge on the community.20 The dangers of the hasty application of deductive reasoning could not be better illustrated than by the comparison of this version of the situation with the facts. Had there been no duty on iron, the price at the seaboard would unquestionably have been lower than it was,—at times by the full amount of the duty, at other times by less. The price in the interior, say at Pittsburgh, also would probably have had a somewhat lower range; but how much lower it is impossible to say. The freight charges from the seaboard would have impeded competition from imported iron, raising the price at which it could then be supplied. The iron output west of the Alleghanies was being made more and more cheaply and sold more and more cheaply, as the years went on; and the free admission of iron, while it might have caused prices to be lower, would at no time after 1882 or 1883 have caused a decline in the heart of the country by the full amount of the duty in force. Indeed, in the latter part of this decade—1888 or 1889—the price in this region was little higher, if at all, than that at which foreign iron could have been supplied, duty free. And, further, even admitting that domestic prices were much higher than foreign, it is probable that the removal of the duty and the consequent demand on Great Britain for iron would have caused the price of British iron to go up. The level of prices would indeed have been the same in the two countries (allowing for freight and the like); but it would have been higher than the foreign level which in fact prevailed. A great increase in the demand on the British iron masters for iron, consequent on the absence of the American duty and the lessening of American product, might have raised the price in Great Britain, not only temporarily, but over the whole period. During the first decade of the period, say until the year 1880, it is not unlikely that Great Britain could have sent to the United States all the iron that would have been imported there, if free of duty, without such pressure on the British coal and iron mines as to have caused enhanced cost and permanently enhanced prices. But with the extraordinary increase in the American demand after 1880, the additional quantity could not have been supplied from Great Britain except on harder terms. The price of iron in Great Britain would have risen in face of so great an addition to the annual demand, and the common international level would have been somewhat higher than the British price was in the absence of this demand.
A different question concerns the effect of the tariff system,—still during this earlier period, until about 1890,—on the range of the periodic fluctuations. The sources of supply were narrowed. The differences between highest and lowest prices were greater than they would have been without a duty or with lower duties. When a "boom" came, the domestic iron which was on hand, or was obtainable promptly from furnaces in blast, soared in price to the importing level. The abrupt and great rise in price tempted equally abrupt and great increase in the building of new iron furnaces, with the consequence that, when the boom collapsed and the demand fell, a large supply from the increased number of furnaces was on the market, and caused prices to fall as sharply as they had been before sharply raised. This is but an illustration of a simple principle: the wider the range of the sources of supply, the greater the steadiness of prices. Fluctuations of the same general sort there would have been in any case: the price of iron in all the great countries rises and falls in sympathy with general industrial conditions. But interplay between the markets of different countries, under a system of free exchange, would have mitigated in some degree the extent of the oscillations.21 The extremes were made wider apart in the United States by the protective régime; and so another count is added to the indictment which its opponents may fairly bring against it.
But, to repeat, the protectionist may point with pride to the final outcome. In the end his object was attained: the industry became self-sufficing, needed no further props, eventually supplied its product as cheaply as could be done by the now fairly beaten foreigner.
The uncompromising advocate of free trade has but one reply to make: that the same result would have come about in any case. He may maintain that it is a case of post hoc ergo propter. The protectionist assumes that his policy was necessary to bring the iron industry to maturity. No: it would have grown as fast and as far without protection. And this rejoinder is not without show of reason. To weigh its probative force, we must consider again the main factors that have led to the victorious progress of the industry.
The mode in which the great iron ore deposits of Lake Superior were utilized has already been described. The main factor which promoted their development was improved transportation, making rich natural resources available that would have been thought, a generation before, too distant for use. The cheapening in the carriage of ore and coal, however, was simply one phase,—an important one, but by no means a dominant one,—in the general cheapening of carriage by rail and water. The immense area over which free trade was permanently assured, the mechanical genius and commercial enterprise of the people, the possibilities of fortune-building through the exploitation of the great western country,—such were the impelling forces by which the means of transportation were driven to their high stage of efficiency. The protective system can claim no credit for this result. The advance appeared in the apparatus for international trade as well as in that for domestic, and in domestic trade such as would have existed without protection as well as in that fostered by protection. And this was probably the one factor which, acting in conjunction with the great natural resources, counted for most in promoting the growth of the iron industry. Through it that industry in the United States, so far from having to deal with ores of no special excellence and obdurate and limited fuel, was able to bring together unlimited supplies of both materials on easy terms and in perfect quality. How much such easy command of proper materials tells is shown by the growth of the iron manufacture in Alabama and the adjoining southern region. Here the close contiguity of coal and iron caused a great industry to develop in the face of difficult social conditions and of the competition of the strong and comparatively old industry in Pennsylvania. The cheapening of transportation gave Pennsylvania herself the equivalent of contiguous ore and coal, and was the main element in promoting the advance of her iron industry also.
Yet it must be admitted that other causes also had their effect, such as improvements at the nines and at the furnaces and iron works. At the mines, whether deep-worked or open-cut, the organization, the engineering, the machinery became better and better. The ores were systematically sampled and analyzed, their chemical and physical constitution ascertained, and the various kinds carefully assorted for different uses or mixed in the most advantageous combinations. At the iron and steel works the discoveries of applied science were before long systematically turned to account. Forty years ago the blast furnaces and iron works of the United States were behind those of Great Britain in their technology. Matters went much by rule of thumb. The ore and coal and flux were dumped into the furnace, and the product marketed as it chanced to turn out.22 As time went on, the American works were no longer backward in the application of the best scientific processes. The economies from production on a large scale,—these being partly from the better organization of labor, partly from better technical appliances,—probably were secured more fully in the American establishments than in European. These were improvements in the iron industry itself, such as might be with some reason ascribed to the stimulus given by protective legislation.
Here again, however, we are dealing with causes whose operation was not confined to the iron industry or the protected industries in general. In part, they were of world-wide effect. All countries shared in the advances of the arts and the triumphs of applied science. True, in our own country special industrial excellence was achieved in many directions; but not solely or peculiarly in the protected industries. American mining engineers pushed their art with signal success in coal mines and in mines for the precious metals, as well as in copper and iron mines. No more remarkable achievements were made than in electrical engineering, where a nurturing shelter from foreign competition cannot possibly be supposed to have played a part. An important cause throughout the industrial field was unquestionably the wonderful growth of technical and scientific education. The supply of intelligent and highly trained experts, to whom the management of departments and separate establishments could be intrusted with confidence, facilitated the process of consolidation and the organization on a grand scale of widely ramifying enterprises. It may be a question how far our scientific schools and institutes of technology have been successful in stirring invention and developing initiative talent. The prime essential for leadership seems to be here, as elsewhere in the intellectual world, inborn capacity. But the rapid spread and complete utilization of the best processes were greatly promoted by them. They were largely instrumental in enabling advantage to be taken of chemical, metallurgical, and mechanical improvements in the iron and steel works. Their influence showed itself no less in the railways, the great commercial and manufacturing plants, the textile works, manufacturing establishments at large. Their influence in permeating all industry with the leaven of scientific training was strengthened by the social conditions which enabled them to attract from all classes the plentiful supply of mechanical talent. Hence American industry showed not only the inventiveness and elasticity characteristic of the Yankee from early days, but that orderly and systematic utilization of applied science in which the Germans have hitherto been—perhaps still are—most successful. The rapid accumulation of ample capital still further facilitated the ready trial and bold adoption of new and better processes.
On such grounds as these it might be alleged that the iron industry would have advanced during the forty years in much the same way, protection or no protection. And yet the unbiased inquirer must hesitate before committing himself to such an unqualified statement of what would have been. Rich natural resources, business skill, improvements in transportation, widespread training in applied science, abundant and manageable labor supply,—these perhaps suffice to account for the phenomena. But would these forces have turned in this direction so strongly and unerringly but for the shelter from foreign competition? Beyond question the protective system caused high profits to be reaped in the iron and steel establishments of the central district; and the stimulus from great gains promoted the unhesitating investment of capital on a large scale. During the decade 1880-90 the iron output in the Pittsburgh district and the rest of the central region served by the Lake Superior ores grew from comparatively modest dimensions to independent greatness. Profits were good in all these years, and were enormous during the periods of active demand in 1880-82 and 1886-87. They continued high in the large and well-provided establishments until the crash of 1893. The mounting output was the unmistakable evidence of profitable investment. Thereafter the community began to get its dividend. Prices fell in the manner already described, and the iron industry entered on its new stage. The same sort of growth would doubtless have taken place eventually, tariff or no tariff; but not so soon or on so great a scale. With a lower scale of iron prices, profits would have been lower; and possibly the progress of investment, the exploitation of the natural resources, even the advance of the technical arts, would have been less keen and unremitting.
No one can say with certainty what would have been; and the bias of the individual observer will have an effect on his estimate of probabilities. The free trader, impatient with the fallacies and superficialities of current protectionist talk, will be slow to admit that there are any kernels of truth under all this chaff. What gain has come, will seem to him a part of the ordinary course of progress. On the other hand, the firm protectionist will find in the history of the iron trade conclusive proof of brilliant success. And very possibly those economists who, being in principle neither protectionists nor free traders, seek to be guided only by the outcome in the ascertained facts of concrete industry, would render a verdict here not unfavorable to the policy of fostering "national industry." Few persons, whether convinced protectionists or thinkers of would-be judicial spirit or plain every-day business men, will be able to resist the appeal to national pride. Mere achievement of the leading place among the world's producers stirs a sense of triumph; just as a victory on the battlefield, even in a dubious cause, kindles the joy of conquest.
The history of the iron industry in Germany during the same period shows similar phenomena and raises almost the same questions. In 1879, when Germany turned from a system not far from complete free trade to one of protection both for manufactures and for agriculture, the iron industry was the center of attention among the manufactures. The duty on pig-iron, previously admitted free, was made 10 marks per ton, with corresponding duties on other forms of iron and steel; not a high rate of protection as things have gone in the United States, yet substantial. During the twenty years after that date, the iron industry of Germany developed in much the same way as the American: rapid increase of domestic production, virtual cessation of imports, decline of domestic prices. By the opening of the twentieth century the German industry, as has already been noted, passed that of England, so far as quantity of output goes; imports became sporadic and comparatively insignificant; exports became large and steady. The decline in prices, it is true, was checked in Germany by the Kartells in the iron trade, and showed itself to the full only during the years when these combinations were not in command of the situation. But there can be no reasonable doubt that domestic cost and competitive domestic price were brought down to a level as low as the British. Moreover, in Germany as in the United States, these results came about in unexpected ways and in consequence of technical improvements whose effect had not been foreseen. What the Bessemer process proved to be for the iron trade of the United States, the Thomas-Gilchrist (or basic) process proved for that of Germany. It made possible the utilization for steel making of the enormous iron ore deposits of Luxemburg-Lorraine, whose high phosphorus content had prevented them from being available for the Bessemer method. The basic process had just been perfected at the time when the protective tariff of 1879 was enacted; but the leading German iron master then declared that it would prove of no advantage to his country's industry. In fact, it proved the making of that industry. Because of it, the Luxemburg ores could be carried in vast quantities, largely by water (the Wesel and Rhine), to the great coal region of the lower Rhine, which became an iron making district comparable in size and influence to that of Pittsburgh. Technical advance in the strictly converting and manufacturing processes took place in Germany at least as rapidly and effectively as in other countries. There, as in the United States, the wide application of exact scientific methods was promoted by the diffusion of technological training; while originating and inventive science progressed in a manner to command the admiration of the world. The German iron industry grew from youth to robust and energetic manhood.23
The argument for protection to young industries was put forward more unequivocally in Germany than in the United States. For both countries, it might indeed have been contended that the stage for nurturing protection had been of earlier date and had already been passed by 1870-80; for in both the transition from the comparatively primitive methods of charcoal iron making to the methods of the modern iron trade had been accomplished long before.24 None the less, there is a prima facie case for the protectionist,—again an apparent confirmation of the validity of the young industries argument,—from the nature and extent of the industrial development during the last two decades of the nineteenth century. And yet, for Germany as well as for the United States, the same doubt may be expressed: would not all this growth have taken place in any case? Would not the basic process in Germany (perfected as it was before the duty was put on) have solved in any case the problem how to use the Luxemburg ores? In some respects the question seems to call for an affirmative answer in Germany even more than in the United States; since in Germany not only the great coal supplies but those of ore also were familiarly known, and no exploration for new resources could play a part, as in the case of our own ore deposits on Lake Superior. And would not German science, and German methodical application of science, have pursued the same forward course; would not the same spirit of victorious enterprise have led to the upbuilding of great manufacturing industries?
To such questions no certain answers can be given. It is impossible to prove which is the right solution of the economic problem. To reach anything like a well grounded conclusion would call for a consideration of all the causes of economic progress; and this in turn for a consideration of progress of every kind, intellectual, moral, political. What has brought about the extraordinary industrial advance of Germany since the war of 1870? the no less extraordinary advance of the United States since our civil war? Those whose attention is centered on the protective controversy invariably ascribe too much to this one factor. They fail to perceive that the phenomena are large and complex. I am disposed, for myself, to believe that other factors were much more important than the protective tariffs of either country; not only the other economic factors which have been described in the preceding pages as regards the United States, but all the influences of the social environment. In both countries, and especially in Germany, the spirit of industrialism and capitalism permeated the community as never before. The spirit of boldness engendered by great victorious wars may be fairly supposed to have had its part in stimulating boldness in the conquests of peace also.25 If it is difficult in the highest degree to measure with precision the effects of the strictly economic factors, such as the protective tariff, how much more difficult is it to gauge those of the great underlying social and spiritual forces!
Discussions like these bear on still another general topic, one which has much engaged the attention of economists: the method of investigation appropriate for their subject, and more particularly the extent to which historical and statistical inquiry can contribute to the elucidation of principles. The economists of Ricardo's school were wont to say that a conclusion as to the effects of protection could be reached only by deductive reasoning, such as was commonly used by them. John Stuart Mill, in his statement of the method proper in the social sciences, treated this problem as a typical one, and set forth the difficulties of disentangling the effects of tariff policy from those of other forces operating on a country's prosperity.26 But in our own time, Professor Schmoller has questioned the validity alike of the general theorem and of the particular example. Attentive examination of the industrial policy and history of this or that country, he maintains, may show whether or no protective duties serve to promote prosperity.27 Is any aid on the question of method to be got from the present inquiry as to the duties on iron in the United States?
Certainly the statistical and historical material is here as complete as it could possibly be made. The elaborate reports of the British and American Iron Associations, the publications of the Geological Survey, the detailed customs statistics, the extensive technical literature, supply information as full and detailed as the economist can hope to secure. If ever the inductive method is applicable, here is an opportunity.
The argument for protection to young industries has been considered in this volume on the assumption that the immediate effect of protection is to cause a national loss,—one measured, in the simplest case, by the volume of domestic production multiplied by the rate of duty. That loss, it has been argued, may be offset by gain at a later stage; at the outset, however, a loss there is. But as has already been noted,28 the stanch protectionist will deny this in toto. There never is a loss. The community is richer from the start. True, the prices of the articles taxed may for a while be higher. But a home market springs into being at once, capital previously idle finds employment, a demand for labor is created, the rate of wages is maintained at a high level. No doubt, all such familiar disquisition will be set aside summarily by the person severely trained in economics. It belongs to the A B C of the subject; and the proper place for its discussion is the elementary class-room. No doubt, too, the reasoning on which we conclude that there is a national loss is in its essence very simple. It is but a common-sense application of the principle of the division of labor, a simple corollary from an analysis of the gains from the geographical distribution of industry, and perhaps a platitude not to be dignified as "deductive reasoning." And yet, when we meet the protectionist on his own ground, this platitude leads to some reasoning by no means of the simplest sort. Is an additional market really created by protection? Is there employment for idle capital, or only transfer of capital previously employed? Is the rate of wages made high or kept high? The reader who has followed the voluminous economic literature which German scholarship has piled up in recent years meets not infrequently the contention in favor of Schutz der nationalen Arbeit. Yet often he is left in doubt just how and why national labor is to be shielded by protection,—whether for preventing sudden shifts in the historically rooted industries of a slow-moving people, or for elevating the condition of labor in the whole country. Or, to take another example, it is often set forth, in the same quarters, that the burdens which the great social legislation of Germany imposes on her employers must be offset by duties on the products of competing foreign employers,—a proposition to which the stanch protectionist would unhesitatingly assent. But, if this be a good ground for compensating duties, why is not a general higher range of wages also a good ground, or any other condition unfavorable to the employer,—e.g., high income or property taxes, or poorer natural advantages? To answer these questions, some severe reasoning is called for: plain commonsense, unsupported by sustained argument from principle, does not suffice. The most exhaustive statistical and historical inquiries, on the extent of the home market, the situation of domestic labor, the amount of the burdens on the employer, can lead us to no secure result until we have not only grasped, but followed into all its ramifications, the main conclusions concerning the effects on national prosperity of the new direction of the productive forces brought about by tariff restrictions.
Similarly, our statistical inquiry on the American iron industry can lead us directly to no conclusion on the old and perhaps stale dispute on protection and free trade. The initial question—is there a national loss because of the higher price of the dutiable article?—cannot be answered from facts and figures. So far Mill and his associates were right. The effects of protection on national prosperity cannot be discerned by examining, however laboriously and critically, the facts either as to the prosperity of the community at large or as to the growth of protected industries.
If, indeed, this much be settled,—if the conclusion here assumed with regard to the general principle be accepted,—then the next stage in the inquiry assumes a different form. Professor Schmoller has remarked that inductive and deductive reasoning are as indispensable each to the other as the right foot in walking is to the left.29 For the particular sort of economic problem here under consideration the analogy holds perfectly. A long step forward must first be taken by deduction alone,—that is, by reasoning from premises established through very simple observation. But thereafter both laborious digging at the facts and their critical interpretation in the light of familiar premises must proceed side by side. Even so, as has just been remarked, there may be almost insuperable difficulty in the way of reaching a firmly-grounded result. And in any case, for the settlement of the underlying questions of principle we are still compelled to rely mainly on general reasoning from simple premises.
Part III, Chapter XI
The present chapter makes a digression. We leave for the moment the history of the iron industry and turn to copper. Yet there is no digression as regards the sequence of thought. The course of events in the copper trade serves to illustrate further what was said in the preceding chapter concerning the difficulty of proving whether protection has been applied with success to a young industry, and to show the need of discrimination in the interpretation of historical and statistical data.
The duties on copper received little attention during the greater part of the period covered in this volume. But during some of the earlier years they were much discussed. Their history centers about the act of 1869, by which for the first time a considerable protective duty was imposed. Before the civil war copper in bars or pigs was subject to a nominal duty only—5%; copper ore was free. During the war the duty on copper was raised to two and one-half cents a pound, copper ore being subjected to the nominal duty of 5%. The act of 1869 imposed a duty of five cents a pound on copper, and, what was quite as important, one of three cents a pound on the copper content of imported ores. The measure was frankly protective, and in accord with the general drift of the time. Congress was then extending and stiffening the high duties for which the exigencies of the civil war had given occasion. The copper bill was vetoed by President Johnson, but passed over his veto, being aided in its passage by the bitter contest between the President and the dominant Republicans. The duties then established remained in effect without change until 1883. In that year they were reduced slightly, the rate on copper being fixed at four cents. In the McKinley act of 1890 a sharp reduction was made,—one so considerable as to mark a turning point: the duty on copper was fixed at one and one-quarter cents, that on the copper content of ore at one-half cent. The act of 1894, as might have been expected, went still farther, and admitted copper in all forms free of duty. Thereafter it remained free. The effective protection was thus maintained for about twenty years, from 1869 to 1890. That the process of reduction should have been carried so far in the protectionist act of 1890 indicated that even at this comparatively early date the duty was felt to be of little consequence. Whatever effects, good or bad, are traceable to the copper duty must be searched for in the period before 1890.
Turning now to domestic production, we find a plain and uncheckered situation: rapid and continuous growth. In 1869 the domestic output was 28 millions of pounds; in 1880, about 60 millions; in 1890, after a decade with an unparalleled rate of growth, 265 millions. After 1890 the advance continued year by year; and in 1910, the annual output exceeded 1,000 millions of pounds. The United States had become the greatest copper producing country in the world. So far as concerns the growth of domestic production, the apparent success of the protectionist policy is so extraordinary as to suggest at once the need of cautious interpretation: the figures on their face seem to prove too much.
Not only was there this vast increase in domestic output: exports set in early and soon reached great dimensions. Some slight imports continued for a few years after 1869, insignificant as compared with the home product. About 1880 exports began; fostered for a time (as will presently be explained) by a "dumping" policy on the part of the copper producers, but rapidly passing beyond this semi-artificial stage, and developing as normal exports. By the middle of the decade, 1880-90, they attained each year dimensions considerable in comparison with the output,—10 per cent and more. After the changes of duty in 1890 and 1894, and especially after the removal of all duties in the latter year, the course of international dealings became radically different from what it had been before. A larger and larger proportion of the mounting domestic product was sold in foreign countries, until by the close of the century the foreign consumption exceeded the domestic. Copper became one of the leading articles of export from the United States. At the same time, with the complete abolition of duties, a large transit trade developed. Copper was imported both in the form of ore and of bars, and then reëxported. The great smelting and refining establishments handled both domestic and imported ore. All in all, the United States became the dominant country in the world's copper markets. In no branch of industry has American progress been more great or rapid, in none has the "American invasion" been more spectacular.
The course of prices was such as must be expected with a development of this sort. The chart on page 164 tells the story at a glance.32 For the first decade after the imposition of the duty in 1869 the price of copper in New York was higher than the price in London, the difference being usually the amount of the duty, not far from five cents a pound. In other words, the ordinary effect of a protective duty appeared. During the next decade there was unstable equilibrium: the American price was at times somewhat higher than the British, at times lower, but with no divergence at all equal to the duty (four cents under the act of 1883). And in the next decade, all difference in price ceased. Even before the complete abolition of the duty (1894) domestic and foreign prices became virtually the same. After 1894 they necessarily moved together.
The chart has every feature of what might be called a representative young industries chart. So far as concerns the relation between domestic and foreign prices, it is precisely like the chart showing the course of steel prices abroad and at home.33 For a few years after the imposition of the copper duty, domestic price is raised by the full amount of the duty. As time goes on, domestic price falls nearer and nearer to the level of the foreign, until finally all difference ceases. The American consumer in the end gets his copper quite as cheaply as if it were imported. Moreover, in this instance the consummation was reached promptly, and the abolition of the protective duty also came promptly. The other data seem to be confirmatory: there is rapid and great increase of production, displacement of imports, complete independence of foreigners. The protectionists may be expected to point with pride to this record.
Yet in fact the case has rarely been cited by the protectionists; partly perhaps because of alleged monopoly and manipulation on the part of the domestic producers, but chiefly because the not unfamiliar history of the industry shows that the tariff in reality was of little consequence. The extraordinary progress of the industry was obviously due to the discovery and exploitation of great natural resources,—resources so rich and so tempting that the same effects on production, prices, and international trade would have come about, whatever the rates of duty.
Three episodes stand out: the development of the copper mines in the Michigan peninsula, the discoveries in Montana, those in Arizona and the southwest. These are significant for the tariff situation in their chronological order. Indeed, the earliest (the Michigan case) is the only one in which some influence from the duties might be sought with any show of plausibility.
That there were rich deposits of copper in the now famous peninsula of Michigan had long been known; the distribution of the "native" copper among distant Indian tribes had early attracted the attention of travelers and ethnologists. Some appreciable production of copper from this source took place before the civil war. Whatever copper was then produced in the country came from the Michigan region; and it remained virtually the only source of supply until the decade 1880-90. The remoteness of the peninsula, its dense primeval forests, the rigorous winter climate, stood in the way of systematic exploitation with large capital outlay.
That stage was reached in the middle of the decade 1860-70. There had been a steady increase in the Michigan output during the first half of that decade; then came a sudden burst. The renowned Calumet & Hecla mine was opened in 1866, and began almost at once to turn out great quantities of copper.
The story of Calumet & Hecla is typical, and not so simple as is implied in most versions and allusions. It was by no means a case of treasure-trove,—a pile of riches uncovered at a stroke and easily turned to account. The mine proved indeed to contain the best deposits in the district; but before this was ascertained, heavy investments had to be made and great risks taken. Many persons refer to copper mining, and especially to a famous mine like the Calumet & Hecla, as if it were a mere matter of digging out of the ground shining lumps of pure vendible copper. The metal in fact is obtained by working over vast quantities of hard copper-bearing rock brought up from great depths; the interior must be carefully explored, developed, preserved from caving in; expensive hoisting apparatus must be installed, with crushing machinery, water supply, a railway for carrying the rock to the water, and so on. The whole calls for heavy investment and for great initial risks. Even in this case, where handsome returns came in at a comparatively early stage, there were several years of uncertainty, of false starts and ill-devised apparatus, of imminent failure. Had it not been for the extraordinary energy, courage, technical and administrative ability, of the younger Agassiz, and the unflinching persistence of his associates—they staked their all—the venture would have been not phenomenally profitable, but utterly disastrous. How far under such circumstances, a fortune, if it finally comes, can be said to be earned, or in what measure successes are offset by failures, prizes in the lottery by blanks,—this is one of the problems of economic principle and economic policy to which it is most difficult to give an answer in precise terms.34
But the particular question here under consideration can be answered with ease and certainty. It is not the question whether mining enterprises in general, with their need of great investment and assumption of heavy risks, do or do not come within the scope of the young industries argument. There may be some ground for maintaining as a matter of general reasoning that, even though minerals be classed as "raw materials," the essential reasons for giving aid to nascent industries still hold. In this instance, however, it appears that the young industry was started and was being actively prosecuted before protection was applied. The decisive experiments and investments were made in 1867-68; by 1868 success was in sight; dividends on Calumet & Hecla began in 1869 and thereafter were continuous and generous. And it must be remembered that this mine never stood alone. Though the largest and most conspicuous in the Michigan group, it was not the earliest, nor the only one amply profitable. The production of copper in the peninsula was already considerable when the Calumet & Hecla mine began, and continued to grow from various other mines as well. The duty of 1869 clearly was superfluous as a device for encouraging ventures still in the experimental stage.35
During the decade 1870-80, as has just been pointed out, the price of copper in the United States was higher than the English price, and during a considerable part of the decade it was higher by the full extent of the duty. There being no ground for giving any credit to protection because of its having given needed aid to a young industry, the free trader can find nothing to balance the loss then caused to the community by the tariff charge. And for a year or two at the close of this period he adds something to his indictment; the charge on the community was made higher by combination among the copper producers. The mining companies of Michigan then produced almost all the American copper; price agreements among them were not difficult to arrange; the increasing output caused prices to fall, especially during the years of depression that followed 1873. In 1879-81 there was a combination, and an abrupt rise in prices,—the latter furthered of course by the revival of industrial activity. To maintain prices at home, the combinations sold for export at lower prices. It was a clear case of dumping, explicable on the theory of monopoly price. As it happened, the combination found itself plagued unexpectedly by the return to the United States of part of the copper which had been sold abroad at the low export price: the domestic price soared so much that it proved profitable to bring back some of this copper and sell it in the United States even after paying duty. The whole train of events serves to illustrate both the ordinary operation of protective duties and those concomitants which appear when the protected producers combine. It has to do with the young industries argument only in showing how completely the domestic copper industry had passed the experimental stage to which this plea for protection is applicable.
The later development of copper production in the United States stands even further apart from any connection with the tariff, and hence maybe dismissed briefly. In the decade 1880-90 Montana became an important producer, and very shortly the greatest producer; the Anaconda mine being as conspicuous in this state as Calumet & Hecla was in Michigan. Here again there was economic exploit almost romantic in character: discoveries, risks (including Indian fights), bold investments, great fortunes. Before long a similar course of events set in at another far distant locality, in Arizona, where still further copper resources of vast extent were discovered and developed. They made certain the American command of the industry, and contributed their quota of American fortunes. And in recent years the remarkable development of porphyry mining in the southwest,—Arizona, Utah, Nevada,—has added another chapter of the same sort. There are economic problems in plenty through all this remarkable episode in economic history. As in Michigan, there were great risks, heavy investments, intricate questions of mine management and mine engineering, the dominance of forceful personalities,—conquests almost Napoleonic. Thus the same question of prizes and blanks arises. How far were private enterprise and the prospect of riches indispensable for industrial advance? Other problems are more peculiar to the later western episodes. The speculative character of copper mining led to product gambling and stock gambling, to dubious episodes like the flotation of the Amalgamated Copper Company. Looking over the long-run course of events, one finds a general, even though very irregular, response of supply to demand. The growth of electrical industries has caused an enormous increase in the demand for copper. To this on the whole the supply has responded; so that, notwithstanding occasional violent fluctuations, the trend of prices, if the occasional flare-ups be disregarded, has shown no such marked rise as might have been expected from the changed conditions of demand.
But all this serves to show once more that the main problems, interesting enough to the economist, lie outside the protective controversy. The only direction in which light could be got on the tariff question is in the possible applicability of the argument for aiding young industries. And here the result is simply negative. The case has only a sort of methodological significance. The fact that an industry has developed after protection was applied does not prove that it developed because protection was applied. The course of copper prices and copper production is just such as one would expect in an example of successful protection to a young industry; yet it is clear that in this instance the same results would have ensued if there had been no duties at all. The extraordinary richness of the natural resources; the prospect of fortunes in return for daring, persistence, able management; the achievements of American mining engineers,—these quite suffice to explain the great development which has taken place. It follows that one must be cautious in other cases also; in that of the iron and steel industry, for example, considered in the preceding chapter. To eliminate protection as a vera causa may not be so easy as in the case of copper. But the evidence must be scanned critically. Only in the rarest instances can the economist prove beyond cavil his conclusions on any concrete question of public policy. He must compare, weigh, discriminate, judge; and the need of discrimination could hardly be better illustrated than by this example from the copper tariff.
Part III, Chapter XII
Protection and Combinations. Steel Rails; Tin Plate
We return now to the iron and steel industry, and take up the question of the connection between the tariff and the trusts. The growth and influence of combination have been no less conspicuous in the iron and steel industry than in sugar refining. Here also it is to be asked whether the protective system promoted combination and monopoly, or increased the profits of combination.
So far as the Steel Corporation itself is concerned, it can hardly be said that combination was promoted by the tariff. In this regard the case is different from sugar refining, where there is tenable ground for maintaining that the very formation of the trust was fostered by the sugar differential. The Steel Corporation was not formed until after the period when the tariff was of vital consequence for the iron and steel industry. It came after the depression of the closing years of the nineteenth century, when prices had fallen almost dramatically and when the independence of the American industry had become an accomplished fact. It was proximately the result of competition, feared to be of ruinous effect, among the domestic producers themselves. The great consolidation was expected not only to obviate such competition, but to carry still further the economies in production which had already been secured by the constituent integrated enterprises. Though the tariff may have been the mother of the sugar trust, it had no such relation to the steel trust.
A different question is whether the tariff increased the profits of the consolidated industry; and still different is the question whether among the constituent corporations united in the Steel Corporation there may not have been incitements to combination, as well as increased profits, from the tariff. Two typical cases will serve to show what answers can be given to these questions: that of steel rails, already considered in its bearing on the young industries argument; and that of tin plate. The latter, as it happens, suggests in its turn the young industries problem: was it nurtured to success through tariff aid?
In the steel rail branch of the industry, pools and price agreements were common during the earlier period, from 1870 to about 1900. They had the same checkered history as pooling arrangements in manufacturing industries at large. They were held intact with comparative ease in years of activity and rising demand, but collapsed in times of depression.
A formal pool (the Steel Rail Association) was established early and was maintained until 1893, though with breaks and with the quarrels over allotments which always appear under such combinations. In 1893 it went to pieces, but was shortly reëstablished, and kept in working effect until 1897. Then, under the cumulative influence of long-continued depression, it broke down completely. A couple of years of fierce cut-throat competition followed, prices collapsing beyond precedent. But in 1899 the pool was again set up, and was maintained until 1901, when the Steel Corporation was formed and the new stage was reached by the iron and steel industry at large.36
Hence the decline in the price of steel rails which has been already considered did not take place by gradual steps spread over a considerable period; in other words, did not take place in the manner to be expected in case of a commodity produced under continuously competitive conditions. It came through a series of sudden drops, following the collapses of the successive pools. For years at a time, the price was kept by combination at figures extremely profitable. It is not to be doubted that the retention of a duty heavy enough to keep out foreign competitors invited and aided combination. It thus served to swell the profits of the rail makers, and especially of those among them who were foremost in organization and technical advance. The decade from 1880 to 1890 was the golden period for the leading iron and steel manufacturers. Profits all around were high; those in rail making were enormous. All this is part of the price which the public had to pay for the gains, real or supposed, from protection to the young industry. The free trader is justified in saying that the initial burden, serious even if tempered by domestic competition (as is implied in the young industries argument), was made needlessly and indefensibly high by monopolistic combination.
With the opening of the twentieth century, however, and the advent of the Steel Corporation, the situation changed. Some effect of combination on the price of steel rails persisted; but did not appear in the same way as before. The influence of the tariff in raising prices and fostering combination virtually ceased.
As our price chart37 indicates, steel rails were sold after 1902 at the unchanging price of $28.00 a ton. No sensible person will believe that the price could be held at this precise figure, without a variation from month to month or from year to year, except through the abrogation of competitive bidding. For several years after the formation of the Steel Corporation, there was a firmly organized pool, with allotted percentages of output and with money payments to offset variations from those percentages.38 As tine went on, this close-knit form of combination was given up; doubtless in pursuance of the avowed and sincere desire of the Corporation to "be good" and to conform to the federal statute. A loose understanding was substituted, probably not such as to constitute a violation of the Sherman act, but sufficient to maintain the same unvarying price.39
The steady price maintained under these conditions40 was not, however, higher than the foreign price. So much is shown on the chart: the two series went to virtually the same level, and remained, on the whole, in the same relative positions. British prices of rails were more irregular than American prices, and therein showed the effect of the higgling of the market; but they were, as a rule, no lower. The price in the United States may have been an unduly high one,—high, that is, compared with domestic cost of production and with the price that would have ruled under free competition. On this point there is some evidence, presently to be considered, from the fact that rails were sold for export at lower prices than those paid by domestic consumers.41 But such discrimination has nothing to do with the immediate tariff question,—the relation between foreign and domestic prices. If the domestic price is as low as the foreign, the tariff has ceased to be an operative cause. The stage where it ceased to be operative was reached, so far as steel rails are concerned, by the opening years of the century.
It is not within the scope of the present volume to consider the problems of combination; but a word may be said on one aspect, suggested by the even course of the steel rail price since 1902. Beyond question the influence of the Steel Corporation was exerted toward maintaining the unvarying price, and beyond question this was part of a large general policy. The guiding spirits of the Corporation endeavored deliberately to lessen the ups and downs of the iron and steel trade; to prevent prices from soaring in times of active demand and from sinking abruptly in the ensuing periods of depression. That policy was sought to be applied to all the forms of crude iron and steel, and showed its effects in a comparative steadiness of the prices of all these articles during the years before and after the crisis of 1907,—a steadiness in sharp contrast with the advance and recession of prices which had been the concomitants of similar industrial cycles during the nineteenth century. It happened that steel rails, being not only produced by a comparatively small knot of large-scale establishments, but usually sold in large blocks to the railways, offered specially favorable conditions for carrying on the policy without deviation. For other products that policy was more difficult to hold; and toward the end of the period of depression its maintenance proved impossible. Prices of steel billets and the like fell sharply in 1911. Nevertheless, looking at this period of expansion and contraction as a whole, a general steadying influence still appears. That it appears as regards prices, does not prove that it is to be found in output and employment also; fluctuations in these continued; yet even here it might be said with some show of reason that a moderating influence was exerted.42
These are matters on which, as indeed on so many of the phenomena of concentration and combination, further evidence must be awaited before judgment can be passed. It remains to be seen whether combination, with its almost inevitable concomitant of prices above the competitive rates, tends to mitigate the fluctuations of industry. Such is a common opinion among German investigators. It may be that this gain will prove impossible to secure at all; or, if secured, may be outweighed by the shackling of progress, the accentuated inequality of distribution, and other possible evils of monopoly. But these ulterior questions go quite beyond the range of the protective controversy.
Questions somewhat similar arise in the case of tin plate: a curious episode in tariff history, much debated and much misunderstood.43
Until 1890, tin plate had been left outside the pale of the protective system. The duty was so low that no tin plate was produced within the country, and the total supply was secured by importation. This exceptional treatment was long the cause of protest on the part of the protectionists. It was said to have arisen from a wrong construction by the Treasury Department of a clause in one of the earlier tariff acts, whose language was such as to be held to impose a low ad valorem duty,—one much lower than Congress may have intended to levy. At all events the duty, as unequivocally fixed in a series of acts preceding that of 1890, was a moderate one, and operated as a strictly revenue duty; therein being in marked contrast to the highly protective duties on other iron and steel products. This anomaly was put an end to when the McKinley tariff act, with its emphatic protectionist intent, was passed in 1890. The duty was raised to the level of the others in the iron and steel schedule. The increased rate, however, did not remain in effect long; a sharp reduction was made in the Wilson act of 1894. After a slight advance in 1897 (by no means to the figure of 1890), the duty was again lowered in 1909 to the precise rate of 1894. The salient fact in all these changes is that in 1890 a high duty was applied, but was maintained for only four years, the later duties being comparatively moderate.44
The development of the industry under this short-lived application of high protection was extraordinary; so extraordinary as to surprise friends no less than foes. The act of 1890 had provided that the duty imposed by it should not remain in effect after 1897 unless the domestic production in some one year before July 1, 1897, should amount to one-third of the importations. In other words, the maintenance of the high duty had been made contingent on a considerable development in the domestic output, and the legislators evidently were not sure that this development would take place. It happened that not only the amount called for under the act was produced at home, but very much more. The domestic production advanced by leaps and bounds, and within three years45 the required quota of one-third was supplied. All the provisions of the act of 1890 were of course swept away in 1894, and the duty, as just noted, was almost cut in half. The advance of the domestic tin plate industry, however, went on without a halt, while imports steadily declined. By the close of the decade the domestic product had entirely superseded the foreign. Some imports continued after 1900, but they were only nominal. Almost all the tin plate that continued to be brought in from England was reëxported under drawback, chiefly by the Standard Oil Company, the imported plate being made up into the large square tin cans which this Company's export trade has made ubiquitous in the tropics and the orient. So far as domestic consumption was concerned, imports were completely superseded. The districts in Wales from which tin plate had previously come, and which indeed had previously been almost the sole producers for the whole world, were hard hit, and went through a long and trying period of depression, which was observed by the American protectionists with a satisfaction but little concealed.46
Before the decade was completely ended, however, another event occurred, most unwelcome to the protectionists, and received with a jubilant "we told you so" by the other side. In 1898, in the course of the veritable mania for combinations which characterized this era in the United States, the American Tin Plate Company was formed, including virtually all the producers of tin plate. The protective tariff became the mother of a trust, and that trust exploited the possibilities of protected monopoly. Not long after, in 1901, the great Steel Corporation absorbed the Tin Plate Company as one of its constituents; the great trust succeeded the smaller trust. The protectionists were put on the defensive when the free traders alleged that this sort of thing was the natural consequence of a protective tariff.
So much on the conspicuous aspects of the case. A more detailed examination, however, is necessary, in order to make clear the effect of protection both on the establishment of the industry within the country and on the development of monopoly conditions.
Tin plates are thin sheets of iron or steel coated with tin (in former times, iron sheets were used, since the revolution in steel making, always steel). Their production involves two distinct operations: the making of the steel sheets or so-called black plates, and their tinning. The former of these operations, the more important, divides itself again into two; the making of the crude steel in the form of suitable bars, and the rolling of these bars into thin sheets suitable for tinning. Of the cost of a given quantity of tin plates, something like two-thirds is the cost of the black plates or steel sheets; and of the cost of the black plates again, 60 per cent is the cost of the steel bars (known in the trade as sheet bars).47 The making of the fundamental raw material, crude steel in the form of bars,—has been subject to the general influences described in the preceding survey of the steel industry at large. The production of the black plates by rolling from the bars, and the coating of these sheets with tin, involve operations of a more special kind.
The unexpected growth of the tin plate industry after 1890 was due chiefly to the cheapening of the fundamental raw material,—sheet bars. The decade after 1890, it will be remembered, was the period in which the American steel industry reached the stage of independence. For some years after the crisis of 1893, crude steel was considerably cheaper in the United States than in England; and though this extreme situation did not endure after the ensuing revival of trade, differences between domestic and foreign prices became negligible and remained so. The American maker of sheets and tin plates was no longer at a disadvantage in the price of his bars. Before 1890 he had been at such a disadvantage; and the continued importation of tin plate was to all intents and purposes the importation of bars in this form. It was the changed situation as regards the raw material which explains the unchecked progress of the tin plate industry in face of the reduction of duty in 1894. A duty on tin plate of 1.2 or 1.5 cents a pound (the rates of 1894 and 1897), was a very different matter according as the material was or was not as cheap as in Great Britain. With that material equally cheap, the duty of 1.2 cents was no less effective for protection in 1894 than the duty of 2.2 cents had been in 1890. The main cause of the rapid growth of the tin plate industry in 1890-1900 was the lowered price of crude steel; it was one among the consequences of the general revolution in the iron and steel industry.
Both for this earlier period, and for the later stage which set in with the formation of the Steel Corporation in 1901, the relation between domestic and foreign prices of tin plate is instructive. The chart on page 180 shows this relation for the entire period 1890-1913. It indicates that immediately after 1890, American prices exceeded foreign by the full amount of the duty. During the years in which the McKinley duty was in effect (1891-94) there was what may be called the normal effect of protection: domestic prices were raised by the full amount of the duty. Toward the middle of the decade, however, imports ceased; prices were not higher in the United States even by the amount of the lowered duty of 1894. Some difference in price remained, chargeable to the duty, but held in check by competition among the domestic producers, and apparently in process of continuous reduction,—a reduction made possible chiefly by the decline in the price of crude steel.
Then came in 1898 the spectacular episode of the American Tin Plate Company, and the exploitation of tariff possibilities by the newly-formed monopoly. Attempts at pooling and price agreement had been made by the scattered tin plate producers in 1896-98, with the usual instability of these looser forms of combination. Finally, one of the arch promoters in this promoting period, Mr. W. H. Moore, was enlisted, and succeeded in bringing about a tight organization. The Tin Plate Company bought out once for all the various competing concerns, in part with cash, chiefly by the issue of its own common and preferred stock. With the meteoric financial operations that ensued the present inquiry is not concerned. The stock was liberally watered, its par value being four or five times the price in cash which would have sufficed to purchase all the plants; and it became an active speculative stock. This was one of the most profitable among the many profitable speculations of that extraordinary time. So far as the price of tin plate was concerned, the effect was unmistakable. The American price advanced at once, and advanced as compared with the British price. It was raised to the full limit permitted by the tariff (now that of 1897, with a duty of 1.5 cents a pound).48
For two or three years, this situation was maintained with no great modification. The price of tin plate was kept, if not quite up to the foreign price plus duty, much above the price which would have prevailed under competition. The Tin Plate Company paid dividends on its common stock as well as on its preferred. It was a profitable property when absorbed by the Steel Corporation in 1901, and that absorption was doubtless expected to strengthen the command of the tin plate industry by the great combination.49
After 1901, however, the situation changed in several respects. In the first place, the Steel Corporation's command of the industry became less, not greater. Some competition had sprung up even before 1901. The Tin Plate Company's operations had been too profitable not to invite competition, notwithstanding endeavors to shut out interlopers by exclusive contracts with the makers of tin plate machinery. When the company was formed, in 1898, it controlled 95 per cent of the country's output. In 1901 its successor, the Steel Corporation, found it still in control of nearly three-quarters of the output. The proportion, however, declined almost steadily after 1901, until by 1911 and 1912 the Steel Corporation produced no more than 60 per cent of the total. The independent manufacturers, some of them large-scale producers, had a very substantial part.
Not only in control of the output, but in the course of prices also, is there evidence of changed conditions. As the chart shows, the domestic price continued for many years to range higher than the foreign; yet with a tendency toward a lessening of the difference. At no time after 1901 was there such an exploitation of the tariff as in the year immediately after the Tin Plate Company was formed. The domestic price, though higher than the foreign, was by no means higher by the full amount of the duty. Imports quite ceased; the duty was prohibitory; but the domestic consumer paid a tribute less than the amount of the duty. Gradually that tribute became still less; the domestic price approached the foreign; until finally, by 1911, almost all difference had disappeared. The price within the country became virtually as low as without. The protectionist, surveying the whole course of development, might maintain, for this branch of the steel trade as for others, that notwithstanding regrettable aberrations there had been ultimate gain from the nurture of the nascent industry.
Considering first the years from 1901 to say 1910, when prices were still higher within the country than without, we may inquire what degree of influence was exerted by the Steel Corporation, and to what extent the prices and the profits can be called monopolistic. Control of 60 or 70 per cent of the output is not complete monopoly, but it gives necessarily a commanding position. The independent manufacturers, though no doubt really independent, were yet in awe of the one great producer. Prices were not fixed by combination or agreement; there was a studious effort to do nothing that would constitute a violation of the anti-trust law; but there were conferences and understandings, and friendly pressure for the maintenance of prices. The fact that most of the independents had to procure their material—the sheet bars—from the Corporation, contributed not a little toward its influence throughout the tin plate trade. Here, as elsewhere, the policy of the Steel Corporation was to maintain steadiness, preventing fluctuations in prices and if possible in output. Though not so eminently successful as in the case of steel rails, its policy did serve to minimize fluctuations. The steadied prices were doubtless somewhat higher than unrestricted competitive prices would have been, and in so far were the source of some quasi-monopolistic gains,—gains shared by the independents, or at least by those among them who could produce as cheaply as the Steel Corporation itself.
One important factor throughout this period, not in the United States only, but the world over, was the constant increase in the demand for tin plate. The total output and the total consumption rose rapidly and without halt. The Steel Corporation's own output, though it fell relatively to the whole, rose absolutely. The use of prepared food, conserved in tins, spread more and more, and the ever-increasing quantities of tin plate found a ready market. It was this increase of demand which proved the saving of the tin plate makers of Wales. The long stage of depression through which the Welsh industry had to pass came to an end as other markets gradually enlarged,—in South America, the East, and the Continent. The Welsh product rose not only to its former dimensions, but even above. This upward swing led to a stiffening of British prices, which in turn contributed to wiping out the difference between them and American prices. Some technical changes also took place in Wales as well as in the United States; of these, more presently.
A significant phase of the course of events after 1901 was the development of an export trade from the United States: not merely the export under drawback of imported tin plate (in the form of tin cases), but the export of tin plate of domestic manufacture. These exports began, as is shown in the table appended to the present chapter, shortly after the formation of the Steel Corporation, and reached substantial dimensions by 1905 In 1911 and 1912 they increased markedly, and in the latter year were near five million dollars' worth. At first they went almost exclusively to Canada, for whose market the Steel Corporation had geographical advantages. But in the very recent period (1911 and 1912) large quantities were sent to South America and Asia. Virtually all were exported by the Steel Corporation. Not only this; they were "dumped" by the Corporation. Prices to foreigners were steadily lower than to purchasers in the United States. The policy of selling at lower prices abroad was extended also to American buyers who used tin plate in an export trade of canned goods. Such buyers were given a rebate or drawback, similar to that which the government grants on the export of goods in which imported materials have been used.
Systematic dumping of this kind suggests monopoly price, or something closely akin to it. The general reasoning which points to this conclusion is stated below.50 Suffice it here to say that the practice of selling abroad various products at lowered prices,—not tin plate only, but others as well,—adds to the evidence going to show that the prices of many forms of iron and steel were fixed under conditions different from those of unfettered competition. Even though the Steel Corporation possessed no monopoly in any strict sense of that term, and even though its control of prices therefore was restricted and precarious, the general situation was that of a combination price, not a strictly competitive price. A preponderant control of output,—sixty per cent or something of the kind,—suffices to bring about, not indeed complete control of price, but an overshadowing influence. It is possible that, as the advocates of combination assert, the conditions, though somewhat different from those of competition, are not worse, but better. They may be conditions of greater stability, and yet not of prices "unreasonably" high. Without entering on the moot questions thus raised, we may accept this part of the evidence as indicating the continuance under the Steel Corporation of some degree of monopolistic control of the tin plate industry.
But quasi-monopoly and its corollary, discrimination in favor of foreign purchasers, was not the only factor, perhaps not the main factor, in the tin plate exports. After all, there was not complete monopoly, but only some approach to monopolistic conditions; profits doubtless above the competitive rate, but not profits so high as to leave a great margin for reductions in favor of one or another buyer. Though some shaving in price, some acceptance of profits lower than those got at home, might facilitate exports, cost of production and minimum price must have been brought within the neighborhood of the cost and of the prices of those rival producers who must be met in the foreign markets. Tin plate, or anything else, would not be sold abroad at a loss; if it could be sold abroad at low prices, it must be produced at low cost. Such must be the situation if the dumping is continuous, not sporadic. Was the cost of tin plate lowered within the country? Were improvements in production made, of a kind not found elsewhere? Did the American industry progress, not merely in volume, but in technical efficiency as well?
These questions, already considered with regard to the cruder forms of iron and steel, arise also for the two processes by which bars are converted into sheets and then coated with tin,—rolling and tinning. Both had been, through the nineteenth century, largely of a handicraft character. Though the bars were passed through rolls under power, more hand labor seems to have been involved in tending and operating the rolls than in other parts of the iron and steel industry. Tinning was even more distinctly a handicraft operation; the sheets were hand-dipped. When the McKinley Act was passed in 1890, the tin plate mills first established in the United States were copied from the Welsh. Sometimes the whole equipment,—rolls, shears, pots,—was imported, and then was operated by Welshmen also brought over. This sort of literal transmigration of industry has not infrequently taken place after our imposition of heavy import duties. And when it happens, and so long as there is mere transmigration, the need for protection persists. There is then no comparative advantage; the thing is done no better in the United States than abroad; and, wages being higher here, the expenses of production are also higher, and the American manufacturer cannot hold his own without protection. It is the next stage that is of more concern to the economist. The industry feels the influence of new surroundings. Machinery, labor-saving devices, inventions and short cuts, are in the air. Some changes from the old-world methods will not fail to be made. The question is whether these changes will be great enough really to transform the industry, and bring it up to the same level of effectiveness as the dominant American industries. Possibly it too will come to have a comparative advantage; and the object of protection to young industries will then have been attained.
The evidence on this subject is not easily interpreted. It is difficult to make out whether a real transformation followed the transmigration of the tin plate manufacturer. If English writers, technical and non-technical, are to be believed, the Welsh industry had fallen into ruts, and remained so for some time even after the shock from the loss of the American market; whereas the Americans promptly went ahead with new machines, larger plants, better organization of labor. Allowance must be made, when reading all such British jeremiads, for the desire to stir up John Bull, the tendency to overpraise the foreigner as a means of arousing the man at home. It must be admitted, too, that engineers and employers lay stress on all bad things in the labor unions, and sometimes arouse suspicion in their insistence on the opposition of the Welsh workman to labor-saving devices. But there remains a solid basis of fact for these allegations. In the Welsh tin plate industry the union long encouraged, and the workmen maintained, the policy of restricting output; and they opposed labor-saving devices. It would seem clear that the employers also, established as they had long been in apparently secure possession of the tin plate trade, fell into a certain stolid conservatism. Something like stagnation set in.51
In interpreting the evidence from the other side,—that of the American manufacturers and engineers,—there is also need of caution. These witnesses blow hot and cold. At one moment patriotic pride and a wish to prove how deserving is their industry lead them to descant on the improvements they have introduced and on the superiority of their ways over the foreigners'. In the next breath—when the tariff is mentioned—they will assert that they have no superiority at all, that their machines and processes are quite the same as in Wales, that their wages are twice as high, and that they will infallibly be ruined by a cut in the duties.
It would seem beyond question that some considerable improvements were made by the American tin plate makers. Welsh implements and methods, though copied slavishly at the outset, were not long retained without change. Gradually the tin plate mills were made more efficient. For example, the rolls were increased in size (width) from 18 inches to 28 inches. Overhead cranes operated by electric power were introduced for handling the material. Machine pots (for tinning), with some automatic appliances, took the place of hand pots; though the plates, it is said, still continued to be fed through singly by hand. In charging the annealing furnaces, however, the hand method was superseded by charging machinery. Certain of these changes were in time copied by the Welsh makers; sometimes doubtless with the same labor-saving results as in the United States, but in other cases (and these perhaps typical) with less success than in the originating country.
The spokesmen for the American manufacturers, though they admit the introduction of considerable improvements, maintain that in the main rolling and tinning are still handicraft operations. If this is true; if the industry has not been developed much beyond the handicraft stage; if it is carried on mainly by specially skilled workmen, with comparatively little use of machinery and labor-saving devices,—then it is presumably not up to the American industrial standard. It remains under a comparative disadvantage, and the young industry has not been nurtured with success. The evidence from the general economic situation, however, strengthens the impression that these expert witnesses understate their own case. It seems to be beyond question that the lead has been taken in the United States, at least for parts of the industry, and that American devices and improvements have been copied in Wales; always an indication not only of progress on the part of the Americans, but of probable sustained superiority.52 There is the evidence, further, from the considerable and growing exports, and the parallel evidence from the approach of the American domestic price to the foreign level. Of this last-named change there is striking corroboration in the circumstance that the Standard Oil Company finally gave up the purchase of imported tin plate, on which it had so long taken the government's drawback when exporting the case-oil. This shrewdly managed concern at last bought its tin plate from the domestic makers, i.e., from the Steel Corporation: proof conclusive that the price was as low as that of the foreign plate.53
On the whole, the verdict is not unfavorable to the protectionist. It is so, that is, on the question of real success in bringing the new industry to the stage of complete independence; from which follows the further conclusion, not at all welcome to the protectionists, that the occasion for retaining the duty quite ceased. Ultimate independence was achieved, and achieved through domestic improvements. No doubt other factors coöperated: the cheapening of the raw material and the world-wide increase in the demand for tin plate. The unrelenting free trader may indeed maintain that these factors would have led in any case to the same outcome. American invention and improvement, he may say, exercised their influence in every direction, and would have done so in the tin plate industry under any circumstances. It is no more possible to disprove the free trader's contention than it is to prove beyond cavil that of the protectionist. The difficulties in the way of exact proof remain for this inquiry, as they do for almost every concrete investigation in the economic field. But the protectionist has a strong case.
On the other question also, that of the development of trusts under protection, the free traders have often overstated their case. Surveying the course of events in the three industries for which the connection between protection and combination has been considered,—steel rails, tin plate, and sugar refining,54 —the outcome cannot be said to confirm the doctrine that the tariff nurtures monopolies permanently. Protective duties high enough to shut out foreign competition do tempt to the formation of a combination; and they do make it easier for the combination, when formed, to raise prices and secure abnormal profits. This happened conspicuously in the cases of refined sugar and of tin plate; it happened, less conspicuously, in the earlier stages of the steel rail industry. There is here no small charge in the debit account against protection. But in the long run the situation did alter: no one of the combinations was able to maintain indefinitely a price raised by the full extent of the duty. Domestic competition did set in, and brought the profits and prices much below the level which full exploitation of the tariff would have caused. This domestic competition was no doubt a halting and restricted one. A combination price, somewhat akin to a monopoly price, was long maintained. Yet even this price was subject to the influences of domestic cost, and to the indirect action of competition as well as to its direct. Gradually the effect of the protective tariff in supporting combination melted away, and the trust problem presented itself unveiled and bare. Such is likely to be the general drift. The industrial influence of the protective tariff tends to become less and less; but the march of great-scale production proceeds apace. Whether or not the tariff system is radically altered, the economic and political problems of the future will be much the same,—great social problems, that will dominate the public life of the country for generations to come.
These figures are for calendar years; they are taken from the Statistical Reports of the American Iron and Steel Association. They include terne plate as well as tin plate proper. The tons are gross tons (2,240 lbs.).
Part III, Chapter XIII
Imports and Exports—Dumping
Another phase in the development of the American iron trade has been the relation of imports to exports; the persistence of some imports, the extraordinary growth during the present century of the exports.
Here we find the perplexing phenomenon that commodities apparently of the same sort are both brought into the country and sent out from it. Cross currents of the same kind are to be seen in the international trade of other nations. They are most conspicuous in Great Britain, where complete free trade makes possible the importation of a very varied list of articles. Cotton goods, woolens, silks, iron manufactures are among both the exports and the imports of the United Kingdom. The same situation appears, though less conspicuously, in protectionist countries like Germany and France: these also have both imports and exports of textiles,—cottons, woolens, silks,—and of metal products. The phenomenon is perhaps least noticeable in the foreign commerce of the United States, because of the restrictions on our imports from a long-continued policy of high protection. But it has long been seen in the iron trade. Manufactures of iron and steel have been steadily brought into this country and sold here, even in the face of considerable duties; and yet manufactures of iron and steel have also been steadily sent out of the country, and sold in the open foreign market. The continuing imports would seem to show that the articles are dearer in the United States; the continuing exports that they are cheaper in the United States. How can both sorts of trade go on steadily side by side?
Some explanation no doubt is found in the varying accessibility of the widely separated parts of a vast country. It is quite possible that pig-iron should be sent, in face of a duty, from Great Britain to the Atlantic seaboard, when the dominant domestic center of production is in the heart of the interior, and is handicapped by a long stretch of land transportation; and that nevertheless pig-iron should be exported from that same interior region across the Great Lakes into Upper Canada. Similarly, it is easy to see why coal should figure among both the exports and imports of the United States. Coal moves naturally from the mines of Nova Scotia to New England, and from those of British Columbia to our Pacific northwest; it also moves naturally from Pennsylvania and other central states,—not only the anthracite, which is virtually a distinct commodity, but bituminous coal as well,—across the Lakes into Upper Canada.
But some other explanation than the simple geographical one must be found for the currents of trade which are most significant. Large quantities of manufactures of iron and steel move in and out of the very same regions and the very same ports; they seem to move side by side in contrary directions. Where phenomena of this sort appear, we may be certain that the commodities which cross each other are not in reality the same. They may have the same label in the custom house returns,—they may all be classified as "manufactures of iron and steel,"—but they are industrially different. This must be the case, too, when woolens are imported into Great Britain and also exported from that country. What really happens is that some kinds of woolens are imported and other kinds exported. So in the United States; what happens is that some manufactures of iron and steel are imported, and that other manufactures are exported. What kinds go in and what kinds go out? This is the question of interest; and it can be answered, in my judgment, only in the light of the principle of comparative advantage.
The general trend of the imports and exports during the period 1870-1913 is indicated on Chart V (see next page). The total imports classed as "manufactures of iron and steel" remained on the whole fairly constant in amount. It is true that in the early part of the period there were years when the imports rose to unusual dimensions. This was the case very strikingly in 1871-73 and again in 1881-83,—years of unusual and feverish activity, preceding financial crises. Indeed, there is throughout an oscillation, such as one would expect, between periods of activity and depression. But looking over the forty years as a whole, one finds no clear tendency to a steady increase or decrease of the imports. With the exports, the case is strikingly different. They grew very greatly, especially after 1890. Until that year, though continuous and considerable, they were less than the imports. After 1890, they increased rapidly, and by the close of the decade much exceeded the imports. After 1900 they increased even more rapidly, and attained very great dimensions. In the closing year of the decade (1910) they amounted to over $200,000,000, and in the very last year here recorded (1913) even exceeded $300,000,000. Iron and steel came to be among the great articles of export from the United States.
The exports of iron and steel fall into two classes. First, those of the more highly manufactured articles, very various, and made by many and scattered producers. These began to go out even before 1870, and continued to be sent to foreign countries through the whole period. The trade expanded steadily though slowly in 1870-1890, and very rapidly after 1890. Second, the exports of the heavier and less highly manufactured forms, such as steel in ingots, and shapes, wire, rails and structural material. These went out in considerable quantities during the latter part of the decade 1890-1900, and in still greater quantities after 1900. They have been largely sold to the foreigners by the great Steel Corporation. Moreover, many of them have been deliberately and steadily sold at lower prices than those for the domestic market. They have been "dumped," and they raise the general questions connected with dumping.
The first group contains, as already intimated, a varied and miscellaneous set of commodities. Among them are builders' hardware, saws and tools, machinery, cash registers, typewriters, sewing machines, electrical machinery and apparatus, locomotives. In the same group belong (though not included among "iron manufactures" in the Treasury statistics) agricultural implements and machinery, of which the exports in the decade 1900-1910 ranged from 20 to 30 millions. All these articles have been sold to foreigners, year in and year out, through several decades. They have not been deliberately dumped; neither have they been sold sporadically, or under exceptional conditions. They have been exported continuously in large quantities by many competing manufacturers.56
For this sort of trade there can be only one explanation. The things are made cheaper by Americans than by their foreign competitors, and therefore sold cheaper. In them we have a comparative advantage. Though paying higher wages than European competitors, the American manufacturers, by producing more effectively, turn out their goods at lower money price. The variety of the causes of effectiveness in this case illustrates what was said in the introductory Part 157 on the intricacies of the principle of comparative cost. Mechanical skill and ingenuity among the inventors and technical directors; organizing and managing capacity among the business leaders; steady and intelligent operation of the machinery on the part of the rank and file in the workshops,—all these count. I suspect that mechanical ingenuity is the most important factor. Much also is due to the marked ability of the American business man in managing a well-devised plant and turning out steadily a large quantity of uniform, standardized, perfected articles. It is significant that tools and implements of all kinds, made in turn with much use of other tools and implements, form the largest items in these exports.
These things are cheaper in the United States than in foreign countries; this explains why they are exported. But cheapness may mean, not absolutely lower price, but better quality,—price low, having regard to quality. American sewing machines and agricultural implements may not be lower in price than foreign, but they are more advantageous at the sane price or even at a higher price. Such I suspect to be the case with the American locomotives, which are sent out in such considerable quantities. Our own geographical and industrial situation, and the skill which our people have long shown in adapting transportation methods to long hauls and thin traffic, have caused locomotives to be developed which are fitted for use in other countries where the traffic conditions are similar. But it does not matter what form the superiority of the American article takes, whether that of absolute cheapness or of cheapness relatively to quality. In either case there is proof of effectiveness in the application of American labor. To repeat, there is a comparative advantage.
During the period before 1895 the exports of these manufactures were impeded in some degree by the fact that the most important materials used—the crude iron and steel—were dearer in the United States than in competing countries. That the exports went on notwithstanding this obstacle is in itself striking proof of the superiority developed by the American producers who made the articles from these dearer materials. As we have seen, crude iron and steel became cheaper in the United States after 1895; often quite as cheap as in foreign countries, and, if dearer at all, only by an excess small as compared with that of the previous period. It is natural, therefore, that these exports should have grown rapidly. No doubt, other causes also contributed to the growth,—still further development in invention and organization, and the general economic causes which have led to a check in the exports of agricultural produce and to an increase in those of manufactures. The increase at all events was striking, and confirms beyond question the conclusion that these exports rest on a well-established superiority in the effectiveness of American industry.
Among the curiosities of tariff experiences is the attitude which the manufacturers of these exported articles often take toward the tariff. It is nothing less than a curiosity. One would expect them to be at the least indifferent to the protective system. Yet commonly enough they appear among its advocates. Many of them are found to join the procession of persons who appear before tariff committees and commissions and plead for the retention of high duties. The main explanation probably is the general state of trepidation engendered by a long-continued policy of protection,—the constant proclaiming of the dangers of foreign competition, and the parading of the pauper labor argument, which always seem to strike a chill of terror into employers as well as employed. Mere ignorance of what is really the situation in other countries, and lack of capacity or training for seeing anything but the surface phenomena, play no small part. Competition of any sort is unwelcome enough; competition from foreigners seems always to be regarded with peculiar dread. Even though domestic producers in fact have nothing to fear from it, the constant vaunting about the dangers from foreign competition leads to a demand for the retention of supposed safeguards. One of the unfailing concomitants of a long-established protective tariff is that though duties may be needlessly high for the exclusion of foreign competitors, reductions will be vehemently resisted; and that even when the duties are of no effect at all,—nothing more than empty phrases inscribed on the statute-book,—their abolition will be no less vehemently resisted. Such we shall find to be the case with some of the duties on textiles, presently to be considered. Such was the case with duties on grain and other agricultural products. The same state of vague apprehension goes far to explain the opposition of the manufacturers who export tools and implements to the pruning of duties on their products.
A typical situation is that with regard to "machine tools," i.e., tools for working metals. They are invented and perfected in the United States beyond the stage attained elsewhere, and are steadily exported in large quantities. The makers of such tools accepted without opposition a reduction in the rate of duty in the tariff act of 1909 (from the previous duty of 45 per cent to one of 30 per cent in 1909) but protested against further reductions in later years, nay even intimated a regret at having accepted the reduction of 1909. Though the imports were insignificant, and the exports considerable, the domestic manufacturers were fearful of the consequences of free admission. In part they seem to have been influenced by a fear that their tools, after being exported, would be imitated abroad, and then sent back at lower prices, to plague their very inventors. But their own testimony was that the American makers continued to keep steadily in the van, and to forge ahead as rapidly as foreign rivals pressed on behind them. No better illustration could be found of the non-physical causes of a comparative advantage. The superiority of the Americans rests solely on ingenuity, skill, constant progress. It is at once an effect and a cause of the machine-using bent in the community at large. This bent has aroused a demand for machines for making machines, i.e., for these metal-working tools; and the high quality and comparative cheapness of these tools has in turn promoted the cheapness and the wide use of the most various sorts of labor-saving implements. And yet, notwithstanding the clear superiority of the domestic producers, shown not only by the large exports, but by the pride of the producers in their position in the international market, these very persons showed themselves uneasy at the prospect of open competition with the foreigners.58
An examination of the details in particular cases often shows that here also there are cross-currents; that some tools or machines are imported, while others are exported; and that the superiority of the American producer does not always extend through the whole range of the particular industry. And yet these apparent exceptions will usually be found not to run counter to the principle of comparative costs, but rather to illustrate it.
Thus, while sewing machines are exported in great quantities, some sewing machines are imported. The familiar machine for domestic use is made in the United States more cheaply than in foreign countries, even though the machinery and the methods in the latter seem to be quite the same and money wages and expenses are lower.59 But certain special machines,—for embroideries and for factory work,—continue to be imported. The explanation seems to be that few of any particular kind are wanted; the processes of manufacture cannot be standardized; the turning out of interchangeable parts by the thousand is not feasible. Handwork is called for in greater degree. Under such conditions the special advantage of the American producer disappears. The situation is a familiar one. Where ingeniously perfected machinery can be applied in large-scale operations, the American is likely to hold his own; but where handicraft skill is needed for a special article, he cannot compete with a country where such skill is as great and where current wages are lower.60
Similarly, knitting machines are both imported and exported. A circular automatic machine has been perfected in the United States, and is widely made here and used for the commoner and cheaper grades of cotton knit goods; it is even exported. But a very elaborate German machine for knitting full-fashioned goods continues to be imported; because the fabrics for which it is used are more expensive, less quantities are bought, and hence fewer of the knitting machines are used. Made as they are in comparatively small quantities, the machines are turned out more cheaply in Germany, and most of them are imported; and yet none of the widely used circular machines are imported.61
Illustrations are abundant; at the risk of being tedious, I will mention a few more. Anvils continued to be imported through the period of high protection, notwithstanding a heavy specific duty. The imported anvils, made largely from scrap-iron, are hand-welded. Unless so made, they do not give an easy rebound, and the blacksmith who uses steadily one of a different kind finds his arm stiffening (a "glass arm"). Cast-iron anvils are made in the United States, turned out in quantities from well-designed models. They serve well enough when only occasional use is called for. Wrought anvils are also made in the United States, but of cheaper quality and in the lighter weights. For steady blacksmith's work the imported anvils are preferred; and they have continued to be imported, under high duties as well as under low.62 Files, on the other hand, are equally good whether turned out by hand in small quantities or by machine in great quantities. The machine-made files have displaced the hand product, except where a few files of special kinds are wanted. Files are not only made with success in the United States, but are exported on a large scale; while a few hand-made files of special sizes or shapes continue to be imported.63
Some kinds of cutlery, again, are steadily imported; others are not imported at all. Pocket knives are brought in from England and from Germany, and one of the curious manifestations of extreme protectionist spirit during the period 1890-1909 was in the elaborate duties on this article.64 Table cutlery, on the other hand, is supplied by the domestic manufacturer without competition from the foreigners; hence there was no attempt to levy particularly high duties on this kind of hardware. The explanation of the difference between the two groups is clear. Table cutlery, and more especially table knives, are made in great quantities of a single pattern. Automatic machinery, interchangeable parts, standard patterns, mass production,—here the Americans can outstrip the foreigners. Pocket knives, on the other hand, are little standardized. There is a bewildering variety of patterns; comparatively small numbers of any one can be put on the market. A similar situation is found in the case of carving knives. The Sheffield manufacturer of these (a petty producer compared to the American table knife concern) can hold his own in the American market even in face of high duties; so can the German "manufacturer," who is in the main a middleman conducting an industry still in the stage of the domestic system. Hence it is that carving knives, unlike table knives, continue to be imported, vying with the protected American article. And for the same reasons, certain kinds of pocket knives and carvers nevertheless have complete command of the domestic market, and were not affected at all by the marked reductions of duty made by the tariff act of 1913,—namely, those of a standardized and staple sort, made in quantities, and affording opportunity for the methods of production in which the American is proficient.65
The second group of iron and steel products,—steel rails, pipe, sheet iron, corrugated iron, structural steel, wire, and the like, have been exported since the decade 1890-1900. It was then that the revolution in the American iron trade was accomplished; and it was during the severe depression of 1893-96, and in consequence of the low prices then ruling in the United States, that the exports of these comparatively heavy products set in. The causes which led to their cheapening and which made it possible to sell them in foreign markets have been sufficiently explained in the preceding chapters,—rich and accessible mines, transportation at low rates, efficient organization of production on a great scale, technical advances. They differ in some respects from the causes that explain the exports of machinery and tools. Ingenuity and nicety in the finished product tell less, organization of the processes of production tells more. Yet in both cases the source of the comparative advantage has been chiefly in the human factors, and among these again in the ability and enterprise of the business leaders.
In the second group, however, still another factor has been of influence: persistent and systematic development of the foreign market by the dominant Steel Corporation. In that development, again, dumping has played a large part,—deliberate and continuous sales to the foreigner at lower prices than those charged to the domestic purchaser. Dumping alone would not explain the phenomenon. Even with the special concessions, sales to the foreigner could hardly take place unless the usual price of the article were close to the export level. But the concessions may just make the difference; without them, the exports might not be possible; and they raise the whole question whether a country gains from foreign sales brought about in this way.
The part played by the Steel Corporation has been surprisingly large. Great as is the scale of operations by some of the other iron and steel enterprises, no one of them has undertaken to cultivate the foreign field with the same enterprise and tenacity. Before the Steel Corporation was formed some of its constituent companies,—the Carnegie, the Federal Steel, the American Wire companies,—had established foreign agencies and had begun export sales. In 1903,—a year of depression and low prices in the iron trade,—a special subsidiary company of the Steel Corporation, the United States Steel Products Company, was formed for handling all of its foreign business. The business done by that Company has been by the million. It had (in 1912) some fifty-eight foreign offices, and large warehouses in England, South America, Australia, South Africa; it possessed a line of steamships of its own, and operated others under charter. Its export sales included steel rails, structural steel, pipe, wire, sheet-iron, and in recent years tin plate. Some of these articles were exported by other companies also, such as steel rails and structural steel; but none operated on a scale comparable to that of the Steel Corporation.66 Some goods were sold abroad at prices no less than those at home,—i.e., were not dumped at all. Among those were fencing wire, especially barbed wire,—a peculiarly American product, comparable to the iron and steel manufactures of our first class. But it seems that ordinarily the sales to foreigners were at reductions from the current domestic rates. One curious form of dumping was that of "allowances" to domestic manufacturers who bought material from the Steel Corporation for use in making articles which those manufacturers later exported, such as machinery, boilers, agricultural implements, or "containers" (e.g., tin plate for canned goods). Such manufacturers, on proof of actual export,—of the sort required by the government before granting a drawback for import duties paid, were given rebates from the usual domestic prices.
Two sorts of questions present themselves: one, whether a country gains by dumping or loses by being dumped on; the other, how it comes about that dumping takes place at all.
On the first question, the drift of protectionism and mercantilism is naturally in favor of dumping. It is in accord with protectionist reasoning to regard exports and devices for increasing exports with favor. Imports are thought presumably harmful to a country, exports presumably beneficial. The Steel Corporation's representatives, when testifying before Congressional committees and before the courts, have not failed to parade with pride this part of their operations, confident that they would be thought herein to have deserved well of the country. The average man beyond question would approve, and so would the average writer on financial and economic topics.
It is part of the same general attitude that, conversely, dumping is resisted by the countries into which the articles are sent, at least when there are in those countries competing industries. The protectionist approves when his own country dumps, but is alarmed and indignant when the foreigner resorts to the same practice. Our government laid a countervailing duty on sugar during the period when the countries of continental Europe gave bounties on the export of sugar. Canada embodied an antidumping clause in her tariff legislation of 1904 and 1907.67 Our own tariff act of 1909 contained a sweeping section levying additional duties equal to any and every export allowance or bounty by foreign countries: and the same provision was made in the act of 1913.
On the principles involved in this first question, I am unable to do better than repeat what I have said elsewhere:68 —
" 'Dumping' I take to mean the disposal of goods in foreign countries at less than normal price. It can take place, as a long-continued state of things, only where there is some diversion of industry from the usual conditions of competition. It may be the result of an export bounty, enabling goods to be sold in foreign countries at a lower price than at home. It may be the result of a monopoly or effective combination, which is trying to keep prices within a country above the competitive point. Such a combination may find that its whole output cannot be disposed of at these prices, and may sell the surplus in a free market at anything it will fetch,—always provided it yields the minimum of what Professor Marshall happily calls 'prime cost.'
"Now, if this sort of thing goes on indefinitely, I confess that I am unable to see why it can be thought a source of loss to the dumped country; unless, indeed we throw over all our accepted reasoning on international trade and take the crude protectionist view in toto. If one country chooses to present goods to another for less than cost; or lets its industrial organization get into such condition that a monopoly can levy tribute at home, and is then enabled or compelled by its own interests to present foreign consumers with goods for less than cost,—why should the second country object? Is not the consequence precisely the same, so far as that other country is concerned, as if the cost of the goods had been lowered by improvements in production or transportation, or by any method whatever? Unless there is something harmful per se in cheap supply from foreign parts, why is this kind of cheap supply to be condemned?
"The answer to this question seems to me to depend on the qualification stated above—if this sort of thing goes on indefinitely. Suppose it goes on for a considerable time, and yet is sure to cease sooner or later. There would then be a displacement of industry in the dumped country, with its inevitable difficulties for labor and capital; yet later, when the abnormal conditions ceased, a return of labor and capital to their former occupations, again with all the difficulties of transition. It is the temporary character of dumping that gives valid ground for trying to check it.
"A striking case of this sort has always seemed to me to be that of the European export bounties on sugar which for so long a period caused continental sugar to be dumped in Great Britain. These bounties were not established of set purpose. They grew unexpectedly, in the leading countries, out of a clumsy system of internal taxation. They imposed heavy burdens on the exchequer, as well as on the domestic consumer, in the bounty-giving countries; and they were upheld by a senseless spirit of international jealousy. Repeated attempts to get rid of them by international conferences show that the cheap supply to the British consumer, and the embarrassment of the West Indian planter and the British refiner, rested not on the solid basis of permanently improved production, but on the uncertain support of troublesome legislation. It might well be argued that these conditions would come to an end sooner or later. The longer the end was postponed, the worse was the present dislocation of industry and the more difficult the eventual return to a settled state of things. No doubt these were not the only considerations that in fact led Great Britain, the one great dumping ground, to serve notice that she would impose import duties equal to the bounties, unless these were stopped. Perhaps this decisive step would have been taken even if it had appeared that the bounties were to continue as a permanent factor in the sugar trade. But it is in their probably temporary character that the sober economist finds justification for the policy that led to their abolition. At all events there is tenable ground for arguing that Great Britain, in causing them to be stamped out, acted not only in the interest of the much-abused consumers of sugar on the Continent, but in the permanent interests of her own industrial organization."
These principles should be borne in mind, and at the same time may be subject to qualification, when we turn from the simplest case,—that of dumping in consequence of export bounties or the like,—to the more complicated case where goods are sold abroad at lower prices quite without public subsidy. Here it is not so easy to answer our second question,—how does it happen that sales are made to foreign purchasers at lower prices than to domestic? How explain the phenomenon?
The precise phenomenon now under consideration, it must be remembered, is the disposal of part of a supply at a lower price than is got for the bulk of it. It is quite different from another phenomenon, common enough, and often called "dumping,"—throwing the whole of a supply on the market and disposing of it for whatever it will fetch. It is the discrimination in price which calls for explanation, and especially the discrimination in favor of foreigners. This again seems to be of two kinds: sporadic and irregular, or continuous and deliberate. The explanation would seem to be different according as it is of the one kind or the other.
Sporadic dumping commonly takes place by the disposal of part of a supply in some out-of-the-way market, while yet the accustomed price is maintained in the usual markets. It is part of the halting process by which the equilibrium of demand and supply is brought about; one of many instances to show that the results which the economist thinks probable or certain come to pass not smoothly or promptly but by slow and irregular steps. "Fair prices" and "square dealing" play a larger part in everyday transactions than is apt to be admitted by the economist, skeptical as he is about the pseudo-morals of trade. A manufacturer thinks it "fair" to treat his regular customers with equality, and not to sell to one at lower rates than to another; and conversely the customers expect him to treat them "right." Moreover, the prices of many goods, more particularly of specialties and articles having a brand or trade-mark, are much influenced by tradition and custom. The producer of such an article strives with all his might to maintain the traditional price, even though it proves difficult to sell the whole of his output at that price. Hence when there is a hitch in disposing of the entire current supply, he will welcome a chance to "dump" in some unfamiliar market. The temptation to do so comes the more frequently and pressingly under the conditions, usual in modern industry, of large plant and heavy overhead charges. If the prime cost ("direct" or "productive" expense) is got back at these low-price sales, and if total cost or "fair price" can be maintained in the usual sales, there is a net gain from this sort of dumping. It may take place within a country as well as through the export trade; but it seems to be more likely in the latter. Where indeed exports take place regularly and on a considerable scale, there is no greater probability of special concessions to the foreigners than to out-of-the-way domestic purchasers. But where the export is occasional and irregular, it affords a tempting opportunity for sporadic dumping. The market at home—the main one—is not "spoiled." All this will not prevent an eventual collapse of the traditional domestic prices, if the supply is steadily larger than can be sold at those prices; but it staves off the collapse, and if the condition of oversupply is but temporary, may serve to tide over a period of depression without "breaking" the market. Shrewd business men have questioned whether it is good policy;69 but there seems to be a strong recurrent temptation to relieve the general market in this way.
Continuous and steady dumping is a different matter. And it does take place. Sales at lower prices are made to foreigners, not only sporadically, but for long periods and systematically. This phenomenon would seem to be explicable only on another ground,—that of monopoly. Where there are competing producers, no one of them will steadily accept lower prices than the others. Each will be desirous of selling in the most advantageous market. There will be dumping of the sporadic sort only, by one of the competitors or by several of them, at times when the total output is not easily carried off at remunerative prices. The more effective is competition, the more standardized the article, the less likely is even sporadic dumping. On the other hand, the more removed the conditions are from those of smooth-working competition,—to the degree that there is influence from brands, specialties, quasi-monopoly, complete monopoly,—the more is there likely to be departure from a uniform market price, and the more likely is it that discrimination and dumping will appear.
Dumping due to monopoly is simply one form of the discriminations in price which appear under monopoly conditions, and which are familiar to economic students.70 The monopolist sells at high prices where he can, and accepts lower prices where he must. If there are protective duties or other factors within the country (such as advantages of location) which prevent competition from foreigners, a higher price may be got by the monopolist at home than is secured in the foreign market where competition operates without restriction.
Such would seem to be the explanation of a large part of the export business of the Steel Corporation. Much of that business is secured by systematic dumping. Though part of the Corporation's export is similar to that of the strictly competitive iron and steel articles, a substantial part is to be explained on the ground of monopoly. The monopoly is not an iron-clad one, nor is the price secured in the domestic market such as would appear under full monopoly. It is a quasi-monopoly price, not a strict monopoly price. But that price has been a profitable one, somewhat higher than could have been maintained under really effective competition. Much the same seems to be the situation in Germany, under the Stahlwerksverband. There, too, combination has kept the prices of many iron and steel products above the competitive range; though the combination has taken the form of the Kartell,—the strictly-enforced agreement of quasi-independent producers,—not that of the domination of the market by one great consolidated concern. There, too, export prices have been steadily lower than domestic prices. And in both countries the discrimination is approved by the protectionists: high prices within the country, and large exports stimulated by lower prices without, are alike welcome under their philosophy.
It is often maintained that lower prices to foreigners are in no way disadvantageous to the domestic consumers; they enable the business to be carried on continuously, keep the working force intact and employed, lessen the overhead charges per unit, and so on. The reasoning is specious, but not tenable. All these same desirable results would be attained if the reductions in price were made to favored domestic purchasers, not merely to foreigners. Yet if made to a special knot of domestic purchasers, the question would at once be asked, why not equally to all? Why not lower the price for everybody, to the extent needed in order to dispose of the whole output? Then there would also be continuous operation, steady employment of workmen, reduction of overhead charges, and so on. Lurking under the advocacy of this sort of dumping, there is almost always an express or implied premise of a mercantilist character,—that international trade is a thing quite by itself, and that exports cause an advantage of a special sort, not to be secured by any commonplace sales within the country.
The argument that monopoly conditions explain the case may be put in another way. The domestic price (higher than the export price) may or may not be a "fair" or normal price, that is, such a price as would bring the usual rate of profit, and would be maintained under competitive conditions. If it is a fair price, then the foreign price being lower, is less than fair. In the long run, the business as a whole then would prove a losing one; the domestic business just pays, the foreign business does not pay. Then surely the low foreign price would not be indefinitely maintained; such dumping could not go on. Or the foreign price may be not less than "fair," but quite a sufficient one,—enough to bring the normal profit, overhead charges and all being reckoned in. In this case only will the dumping be steady and continuous. But in this case the domestic price, being higher, is necessarily more than "fair"; and the permanent maintenance of a domestic price higher than normal indicates that competition is not free,—that there is some approach to monopoly conditions.
In all such discussion, we are confronted with the question, is there a "fair" profit or a "normal" price? Is the notion applicable to such industries as the iron and steel manufacture of our day? Is there a representative firm or a representative outfit whose expenses of production can be said to be normal? How much allowance must be made, in an unbiased and careful process of cost measurement (say in an inquiry conducted by a government bureau) for depreciation, risk, obsolescence, the reward of capable management? The striking thing is that those engaged in the industries speak without hesitation about ascertainable cost and reasonable price. They aver, for example, that the price of twenty-eight dollars a ton so long maintained for steel rails was no more and no less than a fair price. The truth seems to be that they have in mind very much what the economist has in mind; not something which is ascertainable with strict accuracy,—even the most refined system of cost accounting gives at best a basis for inferences,—but a rough approximation. The cost figure is of service, so far as concerns matters of public policy, mainly in checking marked deviations from a reasonable price. With reference to steel rails, for example, the manufacturer who maintained that under the conditions of the period 1900-1910, $28 was a fair price, would doubtless admit that $27 or $29 might with equal plausibility be considered fair. Who could say in advance how things would turn out in the long run? How much would have to be allowed for depreciation, running at half-time, contingencies of all sorts? What is the normal or reasonable rate of return in a manufacturing industry of this kind? A public body (say a Trade Commission) charged with ascertaining and fixing a fair price could not possibly do more than settle an approximate standard. Our manufacturer would probably admit at once that $35 would be clearly more than fair, and $20 clearly less than fair; and as to the figure of $28, would merely say that it was "about right."
The steel rail situation, as it happens, illustrates in more ways than one the various possible phases of dumping and its concomitants; not only the connection between dumping and monopoly, and the difficulty of gauging the "fair" price, but the shifts in industrial conditions which necessarily affect the approximated reasonable price. That domestic price of $28 a ton, long maintained and unvarying: was it "fair"? If so, the foreign price was less than fair; and then rail making as a whole was conducted at a loss. If the foreign price (less than $28) was itself fair, then the domestic price was more than fair, and rail making as a whole was more than sufficiently remunerative. For a large part of the period during which the fixed price was kept up, the latter probably was the case; the industry, though not exorbitantly profitable, yielded more than a normal competitive return. As the years went on, however, the situation shifted. With the general advance in prices, expenses of production rose, and profit became less. The consequent gradual shaving of the margin of gain appears to have proceeded so far by the close of the decade (about 1910) that the $28 price was but little more than fair, and the foreign perhaps something less than fair. The business as a whole was very likely stripped of any marked monopoly profits; the two sets of prices averaged "about right," and were maintained at their divergent rates largely through inertia. The process by which this outcome was reached was insidious, and alike unexpected and unwelcome to the rail makers. Yet the established policy of a fixed domestic price, the fear of public discussion about a rise in price, the higgling of the market as regards foreign prices, a disposition to go slow and await a possible turn in the tide of rising expenses,—these might explain an acquiescence through a considerable period in a situation quite at variance with what had been expected from the dumping policy.
It must not be supposed that all of the export business done by the Steel Corporation was or is at reduced prices, or is explicable solely on the grounds just stated. Many of the articles are sold abroad because they are cheap at home also. This seems to be the case with wire and especially wire fencing, in which American ingenuity and adaptiveness play the same part as in tools and machines. So it seems to be, in part at least, with structural steel and bridge-work. Structural steel for buildings, for example, is not supplied by the Steel Corporation at lower price than those quoted by its competitors in foreign countries; but it is lighter and better designed, and preferred even at the same or a higher price.71 A considerable part is played by skill and persistence in merchandizing,—by steady and well-planned cultivation of the foreign market. Not a little is due to the economies from a great and varied business. In many foreign places it is worth while to maintain agencies and to make considerable shipments only where a variety in products enables considerable sales to be rolled up. Here are the advantages of large-scale production; advantages, to be sure, which can be secured not merely by size, but by skilful management. It is not to be denied that ability in management has played a large part in the development of this part of the Steel Corporation's business. Here, as elsewhere, leadership and organization have been important factors in bringing about the conditions of comparative advantage.72
To conclude: The extraordinary growth of iron and steel exports since the beginning of the twentieth century seems explicable in the main on the ground of comparative advantage. No doubt, in some branches of trade it has been promoted by dumping. But most of the exports rest on a more solid basis,—effectiveness of labor, cheapness or high quality of the product. That effectiveness of labor, again, rests only in part on the rich natural resources of coal and iron. The most important factors are the qualities of the industrial leaders: mechanical ingenuity, skill in organization and management, the utmost utilization of the advantages of large-scale production.
[1.]The figures of production, at quinquennial intervals, are (in 1,000 tons of 2,240 lbs.):
[2.]For an account of the industry during this period I refer to my Tariff History of the United States, pp. 123-125.
[3.]During the earlier years, bituminous coal was much used in the blast-furnaces without being first coked. But soon this crude procedure was given up, and the coal was used in the form of coke.
[4.]The production of pig-iron by fuel at quinquennial intervals is given below. By way of illustrating the trend over a long period, the year 1855 has been taken as the starting-point. The figures, as in the previous table, indicate thousands of gross tons:
Charcoal iron has qualities that make it advantageous for certain uses, and hence it continues to be produced in small quantities.
[5.]It should be noted that in the Marquette region, also, iron ore was secured at the first working and for many years thereafter by open cuts. But the extraction of ore on a great scale has proceeded by underground operations.
[6.]Variously spelled: Mesabi, Mesaba, Messabi, Messaba.
[7.]The United States Geological Survey, in its successive admirable Reports on the Mineral Resources of the United States, has followed the history of the iron fields of Lake Superior, as, indeed, of all the mineral resources of the country. In the issue for 1895-96 (forming vol. iii of the Seventeenth Annual Report of the Survey) a summary description is given, with convenient sketch maps showing the location of the several fields.
[8.]Jevons, The Coal Question, second edition, chap. xv. Jevons in that chapter looked for important changes in the United States, chiefly from the wider use of anthracite in iron making. The fact that "the Americans are, of all people in the world, the most forward in driving canals, river navigations, and railways," was noted by him as sure to affect the American iron trade; but even his keen imagination and wide knowledge could not foresee how much and in what directions this "driving" would operate.
[9.]"A happy application of anthracite coal to the manufacture of iron, the discovery of new beds of bituminous coal, the erection of iron works in the vicinity of the most easterly beds now existing, and the improved means of transportation which may bring this at a reasonable rate to the sea-border, may hereafter enable the American iron master to compete in cheapness with the foreign rolled iron in the Atlantic district.... The ultimate reduction of the price of American to that of British rolled iron can only, and ultimately will, be accomplished in that western region which abounds with ore, and in which is found the most extensive formation of bituminous coal that has yet been discovered in any part of the globe, and this also lying so near the surface of the earth as to render the extraction of the mineral less expensive than anywhere else." Albert Gallatin, "Memorial to the Free Trade Convention" (1832), as reprinted in State Papers and Speeches on the Tariff, pp. 179, 180.
[10.]The production of coke was (in tons of 2,000 lbs.)
In the second column I have combined in a single figure the production of the older Connellsville region and that of the "lower district" which came to be of importance after 1900. See Mineral Resources of the United States, 1911, Part II, pp. 215, 256, 259.
[11.]"Few people who have not actually run a blast-furnace realize what it means to fill the capacious maw of one of these monsters with raw material. A stack of 200 tons' daily capacity, running on 50 per cent ore, must have delivered to it each day something more than 400 tons of ore, 250 to 300 tons of coke, according to the character of the metal required, and over 100 tons of limestone,—say 900 tons of raw materials. Add the 200 tons of pig-iron shipped out, and we have a daily freight movement of 1,100 tons, taking no note of the disposition of the slag. This is 55 carloads of 20 tons each [A modern ore car will carry 50 to 60 tons; and coal cars have been introduced carrying 90 tons.—F. W. T.].... Starting up a furnace of ordinary capacity calls immediately for the labor, from first to last, of nearly a thousand men; for the use of at least a thousand railway cars, and many locomotives; for perhaps several steamers and vessels on the lakes." A. Brown. "The Outlook in the American Iron Industry," in the Engineering Magazine, October, 1899, p. 88.—By 1910, the daily capacity of a "modern" iron furnace had again been doubled, reaching 400 tons a day, and bringing a corresponding increase in the ore and fuel required.
[12.]"Every extra handling means more cost.... Formerly it was necessary to trim the cargoes; and this had to be done by hand, and gave employment to a great many men at exceedingly high wages. The work, however, was killing while it lasted. Now trimming is in most cases done away with, because the immense size of the freighters renders them stable in any weather; and, if there is any great inequality in the trim of the boat, it is rectified by shifting the water ballast from one compartment to another." Peter White, The Mining Industry of Northern Michigan, in Publ. Mich. Pol. Sci. Assoc., iii, p. 153.
[13.]Of the enterprises merged in the Steel Corporation, the two largest, before 1900, were the Carnegie Company, and the Federal Steel Company, the latter dominated by the firm of J. P. Morgan & Co. Both carried on vertical combination on a great scale,—mining the coal and ore, transporting them on railways and vessels of their own, and operating great iron and steel works. The Carnegie works centered about Pittsburgh, the Federal about Chicago. The American Steel & Wire Co. illustrated both vertical and horizontal combination. The same was the case with the so-called "Moore properties": the National Steel Company with its affiliations, the Sheet Steel, Tin Plate, and Steel Hoop companies. The Bridge (structural steel) and Tube companies had no raw-material supplies of their own, and so represented horizontal combination only.
[16.]See Fitch, The Steel Workers, pp. 102-103.
The war duty on pig-iron had been $9.00 a ton; it was reduced to $7.00 in 1870. Steel rails as a separate item appeared for the first time in 1870. The reductions of duties in 1872 were part of the "horizontal" 10 per cent reduction made on most manufactured articles in that year, repealed in 1875.— For the history of the various tariff acts and the way in which the iron and steel duties were dealt with in them, the reader is referred to my Tariff History of the United States.
[18.]See chapter ii, p. 19, above.
[19.]The production of these special brands varies greatly, within the country and without, apparently from the sporadic and easily exhausted pockets of the peculiar ore. But the domestic production, on the whole, has been rapidly increasing. See the Report of the American Iron and Steel Association for 1898, p. 40.
[20.]See the Appendix to D. A. Wells's Recent Economic Changes, pp. 469, 470.
[21.]That such an interplay would have lessened the fluctuations in prices is made more probable by the fact that the ups and downs of industrial activity are not precisely synchronous in the international sphere. The speculative revival in 1870-73 began in England and on the Continent earlier than in the United States. The American revival in 1879-80, on the other hand, preceded the European, as did also that of 1886-87. In 1889-90—certainly so far as iron went—the European demand again showed renewed strength earlier than the American; and the same was true in the period 1897-99.
[22.]See an instructive article by J. S. Newberry in the International Review for November, 1874, i, especially pp. 778-780, where it is pointed out that at that date "the ingenious, enterprising, and energetic Americans" were still "far outdone by their English relatives."
[23.]A careful and detailed survey of the development of the German iron industry is given by G. Goldstein, in a series of articles published in the Verhandlungen des Vereins zur Beförderung des Gewerbefleisses, Berlin, 1908-09. An excellent brief account, with extracts from the speeches of those who advocated protection to the iron industry because "young," is in the same author's paper, Der deutsche Eisenzoll; Ein Erziehungszoll, Volkwirtschaftliche Zeitfragen, Berlin, 1912. On later developments, among them the growing importation of ore, see an article by E. Günther, in Schmoller's Jahrbuch, Heft 3, 1914.
[24.]Professor M. Sering in his Geschichte der Preussisch-Deutschen Eisenzölle von 1818 zur Gegenwart (Schmoller's Forschungen, iv) traces the history of protection to iron, with special regard to the period 1840-70, and concludes that in this earlier period there was successful application of protection to young industries; intimating also that the German iron industry was well on its feet when he wrote (1882) and that there was no good ground for duties as high as those enacted in 1879. Compare, for the United States before the civil war, what I have said in my Tariff History of the United States, pp. 123 seq.
[25.]I venture to reprint here some passages from my presidential address of 1904 before the American Economic Association, on the "Present Position of the Doctrine of Free Trade," Papers and Proceedings of the Seventeenth Annual Meeting, pp. 54 seq.
[26.]J. S. Mill, Essays on some Unsettled Questions of Political Economy, p. 148; see also his System of Logic, Book VI, ch. vii, §§ 2, 3, 4.
[27.]In the article "Volkswirthschaft" in the Handwörterbuch der Staatswissenschaften, reprinted in the volume Ueber einige Grundfragen (1898), Mill is referred to as trying to prove his theorem "with the inept example [groben Beispiele] that the general inquiry, whether a system of protection makes a country rich, can lead to no result. He fails to see that he puts his question wrongly; i.e., in terms too general. Specialized investigations, such as Sering's on the German iron duties, Sombart's on the tariff policy of Italy, and others of recent times, show that inquiries which examine properly the facts in detail may prove, with reasonable certainty, when protective duties operate to promote prosperity." Ueber einige Grundfragen, p. 296. Cf. what Schmoller says in his Grundriss, ii, Book IV, especially pp. 647 seq. (1st edition).
[28.]Chapter ii, p. 27 .
[29.]Grundfragen, p. 293.
[32.]I am indebted for the preparation of this chart to Mr. E. P. Coleman, Jr., who investigated the copper industry under my guidance while an undergraduate in Harvard College.
[33.]See p. 140, above.
[34.]See the vivid account of the enterprise in the Letters and Recollections of Alexander Agassiz, chapter iv. On the general significance of risk, especially in metalliferous mines, compare Einaudi, La Rendita Mineraria, § 13, pp. 47 seq., and Taussig, Principles of Economics, chapter xliv, ii, pp. 92 seq.
[35.]The following figures, giving in round numbers the production of copper, indicate what was the position of the Michigan mines in 1860-80. For comparison I have given figures for later years also. By 1890 Michigan had lost its dominant position among the copper producing districts; the discoveries in Montana and Arizona (to mention the chief) completely changed the situation.
[36.]Accounts of the steel rail pools of this earlier period are to be found in the Iron Age, November 16, 1893; February 11, 1897; January 1, 1901. On the general prevalence of such agreements in the iron and steel trade see Belcher, "Industrial Pooling Agreements," in Quarterly Journal of Economics, xix, p. 111 (1904).
[37.]See the chart on p. 140.
[38.]See for example the testimony in the government suit of 1912-13 against the Steel Corporation, Transcript of Record, pp. 1674-1681. There was apparently no written agreement, but all the essentials of a pool. An arbitrary figure ($17 or $18 a ton) was fixed, presumably an approximation to prime cost; everything received above this by each member was paid to a representative of the pool, who divided the money among the members according to fixed allotments. This arrangement was kept up until 1904, possibly even to a later date.
[39.]See the testimony in the Steel Corporation suit, pp. 92, 337.
[40.]The steadiness of price was not in reality so complete as the chart, based on the "official" quotations, would indicate. During 1903 there was heavy demand for steel rails, and the mills were unable to fill the orders that poured in from the railroads. The contract price remained $28.00, but not for prompt delivery. Premiums were paid for "spot" rails; in other words, the market price went up. Considerable importations took place during this year, chiefly to ports on the Pacific Coast,—the only importations of consequence since 1887. This flurry subsided within a year.
[41.]See what is said below on exports and "dumping," pp. 202 seq.
[42.]See an article by E. S. Meade, "Price Policy of the Steel Corporation," Quarterly Journal of Economics, May, 1908, xxii, p. 452.
[43.]On this topic, I have been greatly aided by the research of one of my students, Mr. D. E. Dunbar, the results of whose work are shortly to be published in book form as one of the Hart Schaffner & Marx prize essays.
[44.]The precise duties, with ad valorem equivalents (on the basis of foreign prices) for the specific duties of 1875 and 1890, were:
A duty of 2.5 cents a pound had been provided (i.e., probably meant to be imposed) in 1872, but had never gone into effect, because of the Treasury ruling referred to in the text.
[45.]That is, by 1894. The tin plate duty, though imposed in 1890, did not go into effect until July 1, 1801.
[46.]I append at the close of this chapter statistics on the tin plate situation.
[47.]For example, in the middle of 1913, the constituent elements in the cost of production for a ton of tin plate stood in round numbers as follows:
I derive these figures from information privately given.
[48.]On this earlier stage, see the good account in Jenks, The Trust Problem (1900), pp. 157 seq., where is also an elaborate chart showing the course of prices 1888-99.
[49.]The tin plate stock was exchanged for stock of the Steel Corporation on these terms:
[50.]See the next chapter, pp. 208 seq.
[51.]Thus in 1901, a writer in the (English) Iron and Coal Trades Review, May 2, 1901, speaks of "labor-saving appliances thoroughly exploited in America.... There is not a single point about the Welsh tin plate trade that can be said to compare favorably with the American." It should be said, however, that an unmistakable bias against the trade unions runs through this paper. A correspondent of the London Economist (January 29, 1910) remarks that "the English manufacturers sullenly clung to their old methods" for a considerable period, but "eventually scrapped their worst mills" and regained prosperity. The Iron and Coal Trades Review for March 28, 1913, printed an extended paper, read before the South Wales Institute of Engineers, by Mr. H. Spence Thomas, in which the Welsh industry is described and some comparison made with the American. "American practice gives 1,500 to 2,000 boxes per mill per week, whilst the English average is only half of this quantity." "In America all the pots are handled by overhead cranes,... by these mechanical means America is a great way ahead of the generality of our English works." In the discussion on this paper (p. 488) there was reference by several speakers to the difficulty of introducing improvements in face of the workmen's opposition. One referred to an episode in his own experience: "he put up an electric crane to do work for annealers that had hitherto been done by themselves; yet not one penny had been got off the annealers' wage bill" [the annealers were paid by the piece]. Still another said that "they were handicapped by the disinclination of the workmen as a whole to cooperate. If this could be secured, he felt they could do as well in the matter of output and economy as was now done in America."
[52.]Mr. Jones, in his excellent book on the Tin Plate Industry (pp. 99, 100), is disposed to admit that protection to young industries was in this case applied in the United States with success; and adds that "if in spite of the difference in the general level of prices in the two countries, the money costs of production differ so little, it is obvious that the net amount of human energy employed in tin plate manufacture is much lower in America than in Wales."
[53.]I have come across nothing to indicate whether the Standard Company got a rebate or "drawback" from the Steel Corporation, such as the latter concern gives to manufacturers who use its products in export business. Presumably it secured the "drawback," like others.
[54.]On the sugar refining trust, see above, chapter viii, pp. 100-114.
[56.]The exports of certain kinds of iron and steel implements are given below for selected years. The figures are taken from the Statistical Reports of the American Iron and Steel Association, and are for calendar (not fiscal) years. The figures are not given with regularity in the Reports, nor in much detail for the earlier period; hence the apparently arbitrary selection of years. They stand for millions of dollars (3.2 = $3,200,000).
[57.]Chapter iii, pp. 37-45.
[58.]The total production of machine tools in the United States was in 1909 about $40,000,000 in value, the exports $4,500,000, the imports $200,000. (Senate Hearings of 1912, p. 128.) In these same Hearings, the manufacturer who spoke for the machine tool makers remarked:
[59.]An American manufacturer of sewing machines, testifying before a tariff committee in 1912, remarked that the Singer Sewing Machine Company had been compelled (by German duties on American machines) to manufacture in Germany, but found it could not do so as cheaply there as in the United States. "The plant may be the same and the machinery the same and the buildings the same, but the conditions in each country are not the same." (Hearings before the Senate Committee on Finance, 1912, pp. 352-355.) Similarly the International Harvester Company was induced by German and Russian duties on its American-made agricultural implements to establish factories for making these same implements in Germany and Russia, yet found it impossible to make them as cheaply in these countries of lower wages. I have been assured of this by officials of the Company.
[60.]The same manufacturer (just referred to): "I can see, by examining the [German] machine, the handwork, the parts that had been filed, and the fact that they do not go so far with interchangeable construction as we do in this country." Hearings, p. 355.
[61.]See the testimony of the one American manufacturer of the full-fashioned machine, Senate Tariff Hearings of 1912, pp. 919 seq.
[62.]The anvil situation has been thus explained to me by persons engaged in the trade.
[63.]Professor Lloyd, writing of the English file industry in his excellent book on The Cutlery Trade (1913), remarks at p. 59 that "hand cutting [of files] is likely to survive for small work and miscellaneous orders; but while the older process still claims to produce a superior article, it cannot be maintained that the method possesses any important advantages, whether technological or commercial." An American file manufacturer who exported a quarter of his output to all parts of the world exhibited to a congressional committee a file of which there were considerable imports; and, as might be expected, this was a "high grade file... on which there is very much labor." Senate Hearings of 1912, pp. 481, 482.
[64.]See my Tariff History of the United States, pp. 343 seq.
[65.]See Professor Lloyd's book, just referred to, on The Cutlery Trades, pp. 55, 208, 387, on the many patterns of pocket knives and the consequent difficulty of applying machine methods. Cf. pp. 40-41, 394, on table knives. Here again I am indebted for confirmatory information to persons engaged in the trade.
[66.]The following are the figures for 1904-13 of the exports by the Steel Products Co. (i.e., the Steel Corporation), compared with the total exports of iron and steel.
See the figures given before the Stanley Committee (Report, p. 2749), and those given in the government suit against the Steel Corporation (Defendants' Exhibit, ii, p. 38). The two sets of figures agree, except for 1905, for which I have taken the second-named source of information.
[67.]For an account of the Canadian legislation see a paper by Professor A. Shortt, Quarterly Journal of Economics, vol. xx, p. 250.
[68.]I quote again from the paper cited at p. 155, above.
[69.]Thus a member of Lister & Co., a great British silk manufacturing firm, admitted occasional sales for export at lower than home prices, but said "this class of business has many objectionable sides," "causes irregular work," tends to spoil reputation because quality and costs are cut keenly, and so on. See Report of the (Chamberlain) Tariff Commission, ii, Part 6, paragraph 3326. Similarly, the President of the U.S. Steel Corporation spoke of this sort of dumping as a "sporadic business," "an uneconomic practice, and one that does not develop continuous business." (Testimony of the Government suit against the Steel Corporation, 1913, x, p. 3843.)
[70.]See, e.g., Taussig, Principles of Economics, ch. 15, §§ 4, 5.
[71.]The Steel Corporation built the first steel structure in Buenos Ayres in 1905, and from that date until 1913 built every steel structure in the city. The European steel makers offered lower prices per ton, but "we were endeavoring to get a higher ton price by giving a lighter structure that will answer for a greater amount of work." (President Farrell of the Steel Corporation, testifying in the Government Suit against the Corporation, Evidence, x, p. 3795.) This is the sort of steel work which has been most skilfully developed by American engineers and steel makers; in other words, in which they manifest a comparative advantage.
[72.]See the interesting account of the growth of the Steel Corporation's export business given by Mr. Farrell, in his testimony (just cited) in the Government Suit, pp. 3783 seq. Cf. his testimony before the Stanley Committee, Report, pp. 3748 seq. Mr. Farrell had been organizer and president of the Steel Products Co. (the export subsidiary), before being made president of the Steel Corporation itself.