Economics 15: Research paper
Markets – late 19th Century/early 20th Century
Monopoly, Oligopoly and Trusts
The late 19th - early 20th century was the time of rapid development of American industry. In 1895, the majority of industries were competitive with no dominating companies. As a result of intense competition, many weak and small companies “disappeared”. Large and successful capitalistic associations based primarily on a system of participation got the name of trusts and corporations. One after another, the industries occurred in the hands of small groups of entrepreneurs, who used any methods to achieve complete control over these sectors of the economy. By 1904, one or several companies controlled about a half of production of 78 industries. In that way many corporations became monopolies or formed oligopolies. John D. Rockefeller and J.P. Morgan owned the largest trusts in the country.
The first large corporation in the United States was the Standard Oil Company founded in 1870 by John D. Rockefeller. By 1879, approximately 90-95% of refined oil was under control of this company. Rockefeller managed to come to an agreement with the owners of the railways about low tariffs for transportation of cargoes for his company. This step helped him to win over his competitors. Thus, Standard Oil transformed into the first trust in 1882. The huge trust joined together 14 companies and controlled 26 other companies.
Trusts also appeared in other industries: coal, gas and copper production, steel industry and others. Carnegie Steel Trust and Morgan Steel Trust were the biggest in steel industry. Ford, General Motors and Chrysler were giants of automobile production. Thus, these companies formed an oligopoly.
The transition of market into the oligopoly state is usually followed by sudden increase of labor productivity. Here are the most famous examples. Creation of Rockefeller's gigantic oil trust Standard Oil led to the sixfold reduction of 1 gallon of kerosene price in just six years. Oligopolization of ferrous metallurgy caused an unexpected and rapid reduction of costs and prices. In 1889, Carnegie's giant sold one tone of rails for 23$, whereas in 1880 it cost 68$.
At the heart of such impressive progress lies the economy of scale. The drastic increase of the optimal enterprise size connected with some new technology or product gives the impetus for the progressive transformation of industry. Large companies with their expensive equipment were effective only when their productive capacities were full out with work. Only large businesses could allow huge costs connected with large productivity.
Federal regulatory involvement (Antitrust)
In the 1870s, the American society began to show antitrust mood. Labor organizations were concerned about the concentration of capital in the hands of a few companies and growing power of business barons. Journalists began to attract attention to the activities of trusts and their owners. The creation of Interstate Commerce Commission in 1887 was a response to public mood. It was the first federal regulatory agency.
At the end of the 19th century monopolies threatened the competition - the basis of the American economy. The government had to intervene, because the policy of non-intervention in the free play of competitive forces could not guaranty the freedom of access in any sector of economic activity for all individuals. In 1890, the history of American antitrust law began.
The 51st Congress passed the Sherman Act - the first federal legislative act against monopolies. Sherman Act stipulated that the trusts, which monopolized the industry markets, had to be reorganized into competing businesses without centralized control. This did not happen for several reasons. Sherman Act was full of vague and superficial formulations. Such concepts as “trust”, “monopoly” and “monopolization or attempt to monopolize” were lamely identified. This uncertainty left many ways to evade the law. Sherman Act helped to decentralize only two trusts - Standard Oil Company and American Tobacco Company.
Such low efficiency had another reason. The antitrust law from the beginning was directed not against large-scale companies, but against companies that were trying to monopolize markets by means of restrictive practices: seizure resources and distribution channels, mergers and acquisitions, agreements between companies for the purpose of market division. Using these tools trusts could isolate the areas of competitors' activity, and only in such cases they could be considered as monopolies. In most cases it was hard to prevent monopolization of markets. Big business resisted and maneuvered evading the law and using unofficial measures.
Mentioned disadvantages were largely eliminated in 1914 with the adoption of the Clayton Act and the Federal Trade Commission Act. The Clayton Act did not only specify the basic concepts of antitrust laws, but also expanded the concept of antitrust activity. It paid particular attention to the financial aspects of interaction among monopolies and monopoly power as such. The government's Federal Trade Commission was responsible for monitoring of antitrust laws compliance. Subsequently, the United States antitrust laws more widely interpreted monopolistic behavior.
Wheeler-Lee Act (1938) protected the rights of consumers (against false advertising and misleading information); Celler-Kefauver Act (1950) drew attention to interaction among monopolies in the field of tangible assets. Improvements continued later. United States antitrust laws have had a great influence on the development of antitrust laws of all other industrialized countries.
So, why the American economy was in need of state intervention? Monopolization of the market leads to the situation that monopolies lose interest in innovations, create the prerequisites for stagnation and bureaucracy, decreasing efficiency of production. Antitrust law and its application experience can hardly be assessed unambiguously. But one thing is certain: over time, with evolution of American society, the antitrust law has changed. The principle of reasonableness that is the bases of modern legislation means that each case must be interpreted not formally but in the context of possible economic consequences of such offence against the law. Thus, the antitrust law has never been a formal instruction.
Global Economy – Mid to late 20th Century
1930s trade protectionism and collapse of Gold Standard
The Great Depression in 1930s is the main example of how the exchange rate policy can create problems for foreign commerce policy. The splash of protectionism in the field of foreign commerce was characteristic for this decade. The policy of protectionism contributed to the creation of barriers to world trade.
In fact, trade barriers became the reason of approximately a half of 25% decline in world trade during the period between 1929 and 1932. These barriers held back the growth of trade until the end of the decade. At the same time there were essential differences between countries in how they raised tariffs and introduced import quotas. The main factor determining reaction of a country’s trade policy was not how this country suffered from the decline of production and rising unemployment but its exchange rate policy within the limits of Gold Standard.
In the framework of Gold Standard the amount of gold reserve in the central bank defined a country’s monetary policy. In conditions when every country determined the value of national currency trough gold, the countries following Gold Standard also had fixed exchange rate regarding each other.
At the end of 1920s, the United States started attracting gold from all over the world. But the central bank did not increase the money supply with the accumulation of reserves. This step caused the deflation shock for the global economy that contributed the Great Depression. Many countries had to choose how to reduce the outflow of gold and overcome problems in the balance of payments: change their exchange rate or impose restriction on imports. Depending on the degree of adherence to the Gold Standard, countries made a choice whether to retain the fixed exchange rate or let it off and remain open for a free trade.
Many economists and politicians responsible for economic policy considered the situation in 1930s the currency chaos. Since countries rejected the gold standard in different time, the changes of exchange rates were significant and severe, striking the international trade and financial markets. Consequently, the majority of experts could not see that flexible exchange rates allowed conducting independent measures of exchange rate policy depending on the economic situation in the country.
Changes of rates could not be named competitive devaluations. In the 1930s, countries did not conduct intentional reduction of national currency rates in order to create competitive advantages for own export. Instead, they strived against the pressure on their national currencies on the currency market. They tried to support the value of national currency by increasing interest rates and attracting emergency currency reserves from other central banks.
Bretton Woods System and business without borders?
However most experts learnt only one lesson from the 1930s: fixed rates were necessary in order to guarantee currency stability and avoid chaotic fluctuations. For example, John Maynard Keynes thought skeptically about the idea that updating exchange rates may contribute to regulation of payments misbalance. Therefore Keynes suggested using quantitative limitations of import.
In 1944, currency issues led officials of different governments to the conference at Bretton Woods, where a system of fixed but adjustable exchange rates was established. This step was taken to prevent repetition of intensive exchange rates fluctuations that occurred in 1930s. This conference marked the beginning of such organizations as IBRD and IMF. The US dollar has become one of the world currencies.
The price for gold was fixed on the level of 35 dollars for one troy ounce. As a result the United States got a huge authority over the currency system. In fact, these events led to the establishment of dollar standard. By the middle of 20th century, the USA owned about 70% of the world gold reserve. Dollar as the currency convertible into gold became the base of currency parities, prevailing mean of international payments and reserve assets.
The Bretton Woods Agreement recognized that some countries may be forced to change the currency value in the face of persistent balance of payments problems. Therefore, it was assumed that exchange rates could be corrected. But such changes were not welcomed, and the countries were not disposed to change the parity of their currency in practice.
The function of IMF was to provide the countries with short-term financing so that they did not have to change the rates to overcome the difficulties with the balance of payments. The IMF Agreement obligated its members to avoid manipulation with exchange rates in order to prevent payment balance destabilization or getting an unfair advantage in competition with other countries. At the same time, some countries leading by the United States tried to eliminate protectionism which was the obstacle for world trade flows.
Bretton Woods system contributed to international cooperation. In addition to the fact that it helped the United States to strengthen in the role of economic leader, it contributed to the rapid economic recovery of Europe through implementation of Marshall Plan and the Dodge Plan for Japan. Implementation of these plans has contributed to compliance with the principles of the Bretton Woods system and the growing influence of international financial organizations.
A feature of the US economy in 50s and 60s was the growth tertiary sector businesses, the emergence of business conglomerates, growth multi-national corporations and the growth of “franchise businesses”. For example, such companies as Ford, Procter & Gamble, Coca-Cola started conducting their activities worldwide. These processes were results of liberalization of international trade rules. In this regard, even a new indicator came into wide use – we started using GDP to measure manufactured product instead of GNP. The main achievement of Bretton Woods system was a greater degree of cooperation between the countries. In 1947, 23 countries signed GATT. By 1995, 136 countries had joined the agreement.
Despite the plenty of positive consequences of Bretton Woods agreements, there were some negative points. The main flaw is the emergence of imbalances between rich and poor countries (the US with five percent of the world population consumes 35 percent of the world's resources). Also, the international financial institutions offer unequal conditions for different countries. And there is a new kind of protectionism when governments support domestic producers too much. This kind of help puts them in a more favorable conditions comparing with their competitors from less developed countries. Governments also introduce standards and licenses that contribute to discrimination of foreign products.
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