Lesson 11: Monopolies and Trusts
Definitions - In many cases, the words monopoly and trust are used interchangeably, but they are different. A monopoly is when one person has control of an entire market. An example of this would be if I owned all the shoelace companies so that the only place shoe companies could get shoelaces is by buying them from me. A trust is where many owners of the same product decide together to lower the prices on their product to put other owners out of business. If there were ten shoelace companies in Utah and three of them agree to lower their prices so low it will put the other shoelace companies out of business, the three owners have made a trust. As this lesson progresses, monopoly and trust may be used interchangeably, but know that they are different.
There are three main types of trusts/monopolies. Each has a person who successfully created one of these monopolies (though trusts could have been created as well). Andrew Carnegie built a vertical monopoly. John D Rockefeller successfully created a horizontal monopoly. Lastly, JP Morgan would outdo both of them, creating and interlocking directorate.
There are three main types of trusts/monopolies. Each has a person who successfully created one of these monopolies (though trusts could have been created as well). Andrew Carnegie built a vertical monopoly. John D Rockefeller successfully created a horizontal monopoly. Lastly, JP Morgan would outdo both of them, creating and interlocking directorate.
Vertical Monopoly
A vertical monopoly is where you own everything from the beginning (resources) to the end (finished product). One with a vertical monopoly would not need to buy or use supplies from anyone else. Andrew Carnegie owned a business called U.S. Steel. When his monopoly was complete, he owned the mine and mining materials, the trains to ship the ores, the steel refinery, and the "stores" that sold the steel all over the country, already shaped for whatever the buyer needed. If there is a good kind of monopoly, it would be this one. Let's compare one company doing all the work (*earning a 10% profit for each sale) versus multiple companies doing the same job. (These numbers were completely made up and are in no way accurate.)
Multiple Companies U.S. Steel
Cost of mining $10 $10
Company's share $1
Buy/sell ores $11 (no sale)
Cost of shipping $8 $8
Cost of refining $15 $15
Company's share $3.40
Buy/sell refined steel $37.40 (no sale)
Shaping steel $9 $9
Company's share $4.64 $4.20
__________________________________________________________________________________________________________________
Total cost to consumer* $51.04 $46.20
Remember, Americans like a good deal, so price makes a huge deal. Cheaper was better. Though it has a lot of potential to be dangerous to the capitalist economy of the United States, it is difficult to create, so it poses a lower threat than other monopolies to capitalism.
Multiple Companies U.S. Steel
Cost of mining $10 $10
Company's share $1
Buy/sell ores $11 (no sale)
Cost of shipping $8 $8
Cost of refining $15 $15
Company's share $3.40
Buy/sell refined steel $37.40 (no sale)
Shaping steel $9 $9
Company's share $4.64 $4.20
__________________________________________________________________________________________________________________
Total cost to consumer* $51.04 $46.20
Remember, Americans like a good deal, so price makes a huge deal. Cheaper was better. Though it has a lot of potential to be dangerous to the capitalist economy of the United States, it is difficult to create, so it poses a lower threat than other monopolies to capitalism.
Horizontal Monopoly
If a vertical monopoly is to own everything from beginning to end of production, then a horizontal monopoly is owning all of one part of the production. John D Rockefeller accomplished this type of monopoly. He owned an oil refinery company called Standard Oil. He lowered his prices on oil so low that the other oil companies couldn't afford to stay competitive with him. Slowly, the other oil companies went out of business and Rockefeller began buying the other companies up. The more oil companies he bought, the easier it was to lower his prices to put other companies out of business. In the end, Rockefeller was the only oil company left. This allowed him to raise his prices to whatever price he wanted because there was no competition. He could also choose who he wanted to sell the oil to because he was the only one anyone could get oil from. This is a very dangerous monopoly to a capitalist economic system.
Interlocking Directorate
An interlocking directorate is by far the most dangerous type of monopoly, but it is also the most difficult to create. We have only ever had one person successful at creating an interlocking directorate: JP Morgan. He began as a banker. When companies would come to get loans, part of his agreements with them was to put one of his people on their board of directors. He did this so that he could pull each company's strings. When he wanted a company to do something, he would send the message through his person on their board of directors, reminding them that their loan was through him and they better do what he said. This way, he didn't just run a bank, but many, many companies (although indirectly). It is like a spider in a spider web, where the spider can control every part of the web.
The people
These monopolies, in and of themselves, are not good for a capitalist system. However, this doesn't mean that the people running the companies were necessarily bad. Rockefeller and Carnegie are both known for their contributions to the arts. Morgan single-handedly paid off the national debt, without expecting to get paid back.
Monopolies and trusts are not legal today. Theodore Roosevelt was the first president to go after monopolies. Roosevelt became known as a "trust-buster". He believed that there was such thing as a good and bad monopoly though. He only went after monopolies that threatened the capitalist system. William Howard Taft would be the president who really went after trusts and monopolies. He believed there was no such thing as a good monopoly. From that point on, monopolies would be closely watched by the government. Although monopolies could still be created today, the United States government works hard to break them up. Because new monopolies don't appear too often, our knowledge of monopolies and trusts come from the game Monopoly, where you try to take over the entire board.
Monopolies and trusts are not legal today. Theodore Roosevelt was the first president to go after monopolies. Roosevelt became known as a "trust-buster". He believed that there was such thing as a good and bad monopoly though. He only went after monopolies that threatened the capitalist system. William Howard Taft would be the president who really went after trusts and monopolies. He believed there was no such thing as a good monopoly. From that point on, monopolies would be closely watched by the government. Although monopolies could still be created today, the United States government works hard to break them up. Because new monopolies don't appear too often, our knowledge of monopolies and trusts come from the game Monopoly, where you try to take over the entire board.
Assignment #11
1. Explain how a horizontal trust would work for the milk industry.
2. Explain how a vertical trust would work for the milk industry.
3. What is the difference between a trust and a monopoly?
4. How does an interlocking directorate work?
5. What is the difference between a vertical and horizontal trust?
6. What game teaches people about monopolies?
2. Explain how a vertical trust would work for the milk industry.
3. What is the difference between a trust and a monopoly?
4. How does an interlocking directorate work?
5. What is the difference between a vertical and horizontal trust?
6. What game teaches people about monopolies?