THE INTEGRATION OF INDUSTRY IN THE

UNITED STATES.

BY WILLIAM FRANKLIN WILLOUGHBY.

[William Franklin Willoughby, economist; born Alexandria, Va., July 20, 1867; graduated Johns Hopkins, 1888; appointed special agent of the United States com mission to the Paris exposition, 1900; appointed, 1890, expert in the United States department of labor and has represented that bureau at several international congresses and has conducted several investigations abroad in its behalf; author of Workingman's Insurance and contributed the following article to the Quarterly Journal of Economics.] Copyright 1901 by George H. Ellis Company

The tendency toward what may be designated as the integration of industry is a tendency which, though it has been at work for some time, has only in very recent years become one of marked prominence. At the present time, however, it constitutes the fundamental force now at work for the reorganization of our industrial system. Through it alone can be established the significance of recent important happenings.

By integration of industry is meant the knitting together, so as to form one compact, harmonious whole, of all the related branches, or all the necessary processes, of any great department of industrial work. As such, it is evidently a movement quite distinct from that of concentration of industry. Concentration indicates the bringing together of likes under central management, as where all the coal mines or all the blast furnaces or rolling mills are brought under the control of one or a few parties. Integration indicates the bringing together of dissimilar, but interdependent, branches of an industry, so that complete harmony may be obtained among them, and the undertaking contain within itself a complete control of all the factors necessary for the successful and uninterrupted prosecution of its work. This is what takes place when the same management acquires control of such widely dissimilar, but essentially dependent, branches of industrial work as the mining of coal and ore, the operation of railways and steamships for its transportation, the extraction of lime, the working of coke ovens, the manufacture of pig, its conversion into billets, bars, sheets, and what not, and from them the manufacture of

wire, nails, rails, tin plate, structural material, or even bridges ready for final consumption. We have given as an illustration probably the most perfect example of integration that has yet taken place, and we shall have occasion to consider it more in detail in another place. The operation of this force, however, can be seen in almost every branch of industrial enterprise. Wherever a brewer decides to make his own barrels or to raise his own hops, wherever a bicycle manufacturer undertakes the manufacture of his own tubing or tires, this tendency may be seen at work.

A study of this movement, if it is to be at all adequate, should include the three points of: first, a description of the extent to which it has advanced and an account of its more important manifestations; second, an examination of the motives that are responsible for its rise and progress; and, third, an attempt to determine-as far as conditions will permit-its probable effect upon efficiency of production and the general welfare of society. Of recent examples of integration in this country, far the most important and striking is the iron and steel industry through the creation of the United States Steel corporation. In no other case can we find such a perfect working of the forces of integration. In other cases, integration has taken place almost unconsciously, and as the result rather than the object of the steps taken. Here we have an instance where the benefits of integration were clearly seen in advance, and an enormous combination brought about for their realization. No greater mistake could be committed than that made by most writers on this corporation, who have seen in it but a combination on a larger scale similar to those of its constituent companies. The latter, with the exception of the Carnegie company, were pure types of the concentration of industry. The former is a pure type of integration of industry. As the creation of this corporation represents in such a complete way this whole movement of integration, the motives or causes responsible for it, the conditions making it possible, and the probable results of its action, it is worth while to describe its rise with some degree of particularity.

Until 1895 or 1896 the development of the iron and steel industry in the United States may be said to have followed the normal course of most expanding trades. It was marked by the gradual concentration of work in fewer and larger establishments and a parallel geographical centralization in the more favored localities. While it was evident that a dominant position was being attained by certain establishments, this dominance was due almost entirely to the natural advantages that they enjoyed and the skill with which they were managed. Their growth, in a word, was one of natural expansion through the addition of new mills and the development of established lines of work. Only to a limited extent was increase in size obtained by the absorption of hitherto independent plants. There was little or no idea of one or a few establishments reaching such a strength as to be able to exercise monopolistic powers and fix prices without regard to active competition.

This was the condition of affairs up to the closing years of the last century. Suddenly a new means of building up huge concerns was adopted. The possible economies resulting from centralization of work in large plants and production upon a large scale had nearly been reached as regards the actual operations of manufacture. It was now seen that there lay a great field for economies outside the work of production proper, through a better control and organization of the factors of distribution. If a union of the forces of all or a considerable number of manufacturers of the same product could be secured, it would be possible to obtain raw materials at a more advantageous rate or with greater certainty, production could be made to correspond more nearly to demand, markets could be reached more directly, and new ones opened up where existing outlets were insufficient, transportation charges could be reduced, and, finally, if a sufficient control of output could be secured, a more positive influence could be exerted upon the fixing of the prices at which the commodities manufactured would be marketed.

It was the effort to realize these considerations that led to the second phase in the history of the organization of the iron and steel industry in this country. This phase is the one

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marked by the formation of the great national companies, or so-called iron and steel trusts, through the merging of hitherto independent concerns. In rapid succession there were organized the Federal Steel company, the National Tube company, the American Steel and Wire company, the American Tin Plate company, the American Steel Hoop company, and the American Sheet Steel company, to mention only those which afterwards went into the United States Steel corporation, each with its forty, fifty, or hundred millions of capital. Now the characteristic of this period of transformation was that, in the formation of these huge concerns, the motive was the union of likes; that is, the bringing together under the same management of plants manufacturing the same products. It was as if a vessel of several classes of dissimilar particles had been suddenly agitated, and the members of each class had, on the instant, rushed together to form single independent homogeneous aggregations. There was thus constituted a great company for the manufacture of tin plate, another for the making of steel hoops and related articles, another for sheet steel, etc.

For a time it seemed, to the outside public at least, that this was the final step in the evolution through which the industry was passing, and that the immediate future would be devoted to the strengthening of the position obtained by each of the companies. But no sooner was this movement accomplished than new forces were seen to be at work. As field after field came under the central or unified form of organization, the companies in which this organization was vested came more and more into direct contact with, and dependence upon, each other. The finished product of the one was the raw material of the other. One company was the chief purchaser of the products of another, taking in cases a quarter, a half, or even a greater proportion of the entire output of the latter. One company was thus in a position powerfully to control the operations of the others. In numberless ways this dependence of one field upon another led to friction and difficulties whose seriousness was proportionate to the size of the companies concerned.

This condition of affairs could not last long, and signs soon began to be manifest that great plans were on foot for its correction. To do this, there were but two lines of action open. One was that each of the companies should seek to gain its independence of the others by the enlargement of the scope of its operations, so that it would itself mine or manufacture the materials used in its operations. The other was that the different companies could make some arrangement among themselves by which their interests would be harmonized.

Efforts were at first directed towards the first named method. One after another the different companies began to formulate plans for the erection of mills to manufacture products embraced within the field of operations of the other companies. It needs but a casual study of the situation of affairs to see where this policy, if adhered to, would have led. It meant a gigantic struggle between the companies. The company manufacturing sheet steel, for example, could not see with indifference the companies which took almost its entire product reach a position where they were no longer its customers. If they succeeded in doing this, the former company had but one alternative, if it was to remain in the business-that of itself building mills for the conversion of its products into articles ready for final consumption. The announcement by one company that it intended building mills for the production of articles which it had formerly purchased from a second company was consequently immediately followed by announcements of the second company that it would retaliate by entering the field of the first, and erect mills for the conversion of its products for which it, could no longer secure purchasers on an adequate scale. These were no idle threats. It is well known that definite plans for such action were, in many cases, formulated, and the preliminary operations for their execution begun. The tremendous danger to all parties, if this movement had been allowed to continue, was quickly seen. Efforts were, therefore, turned to the second method of bringing about harmony-that of uniting the interests of the companies in some way. The powerful firm of J. P. Morgan & Co. was appealed to. The result was the