Tuesday, September 19, 2017

Antitrust in the 1520s: Diet of Nuremberg, Martin Luther, and the City of Augsberg

Monopolies can come into existence for reasons that are beneficial to consumers: for example, perhaps a monopoly has patent protection for an innovative new product, or perhaps economies of scale allow a big company to sell at a cheaper price. However, once the monopoly is in place, it then has incentives to increase its profits by raising prices for consumers. Thus, the ongoing challenge of antitrust law is to encourage behaviors that are beneficial to consumers. like innovation and economies of scale, while offering consumers some protection from the price-fixing power of monopolies. This story has of course played itself out numerous times in US economic history, from the trusts and "robber barons" of the late 19th century to more recent arguments about IBM, Microsoft, and the most recent batch of high-tech giants.

But these issues of the benefits and costs of monopoly behavior have a much longer historical pedigree. One prominent example is the situation that had arisen in Germany in the 1520s. It's described in some detail in "Social Reform and the Reformation," by Jacob Salwyn Schapiro, which was published in 1909 in a series of volumes edited by the Columbia University Political Science Department alled  Studies in History Economics and Public Law (Volume XXXIV, number 2). Here I'll focus on the story that Schapiro tells in "Chapter 1: The Growth of Monopolies." 

To set the stage, the end of the 15th century and into the 16th century is a very prosperous time for Germany. Schapiro writes:
The end of the fifteenth century witnessed Germany's high noon of prosperity. Old and insignificant towns like Augsburg Nuremberg and Ulm blossomed forth into wealthy and populous cities. The great merchants vied with princes and kings in magnificence and luxury. Their gardens palaces and entertainments were the envy of the poorer nobility. Aeneas Sylvius writing in 1458 says: "We proclaim it aloud Germany has never been richer or more prosperous than to-day. She takes the lead of all other nations in wealth and power One can say truly that God has favored this land above all others On all sides are seen cultivated farms cornfields and vineyards and gardens Everywhere are great buildings, walled cities and well-to-do farmers." Jacob Wimpheling, the famous humanist, declared fifty years later that Germany was never more prosperous than to day and she owes it chiefly to the untiring industry and energy of her people artisans as well as merchants. The peasants too are rich and prosperous."  The desire for wealth became the all absorbing passion and we find the popular preacher Martin Butzer denouncing the materialistic spirit of the time. "All the world," he says, "is running after those trades and occupations that will bring the most gain. The study of the arts and sciences is set aside for the basest kind of manual work. All the clever heads, which have been endowed by God with capacity for the nobler studies are engrossed by commerce, which nowadays is so saturated with dishonesty that it is the last sort of business an honorable man ought to engage in." The headquarters of German capitalism was the city of Augsburg which because of its situation acted as a distributing center for all Eastern goods received from both Lisbon and Venice. 
But the importance of ports and trade routes shifting. Venice, which was relatively close to German merchants, was declining while farther-away Lisbon was rising. Doing business at this greater distance tended to favor the larger German merchants, who could afford to have dedicated representatives in Lisbon to manage their transactions, warehouses, and shipping. As Schapiro explains, this shift provided a launching pad for Germany's wealthier merchants to act as price-fixing monopolists. He wrote:
The wealthier merchants quickly took advantage of this condition and organized themselves into associations or "companies." At first they united for the purpose of buying and transporting in common in order to reduce expenses; but very soon they united for the purpose of selling as well. These associations quickly developed into monopolistic combines that controlled the entire Asiatic trade in and arbitrarily fixed the prices of all Eastern articles. The small merchant found himself crowded to the wall. All methods familiar to monopoly everywhere and at all times were used to drive him out of business. 
Schapiro cites a number of contemporary complaints about the situation. Here are three, one from from Martin Luther, and the other two from religious and civil assemblies of that time:
Luther complains in his pamphlet On Trade and Usury, printed in 1524: "The monopolists succeed in driving out the small merchants by buying up large quantities of goods, and then suddenly raise the prices when they are left masters of the field. So, these monopolists, have everything in their hands and do whatever they wish raise and lower prices at will and oppress and ruin small dealers, just as a great pike swallows up a lot of little fishes. They have become lords over God's creatures and free from all bonds of religion and humanity ..... If monopolies are permitted to exist, then justice and righteousness must vanish." ...
The Diet of Nuremberg complained in 1522: "The companies take special care to monopolize those spices that are most needed. If one company is not rich enough it associates itself with another and so gets the article in its hands. If a poor merchant desires to deal in these wares, the companies are immediately at his throat. They are able to ruin him, because having more money and more goods, they are able to sell cheaper and give longer credit .... The companies are responsible for lessened business. To-day, there is one great concern with many branches where formerly there were twenty independent merchants ..."   
The Landtag of the Austrian hereditary dominions at Innsbruck in 1518 declared: "The great companies have monopolized all things and are not to be borne any longer. All sorts of merchandise-- silver, copper, steel, iron, linen, sugar, spices, corn, cattle, wine, meat, tallow. and leather--have fallen into their hands Through their money power, they have become so strong, that no merchant having less than 10,000 florins is able to compete with them. They raise prices arbitrarily when it is to their advantage and as a result their incomes are as great as those of princes. They are a great harm to our land."
The tensions created by these monopoly powers were then heightened by an enormous rise in the overall price level. Schapiro writes: "During the first quarter of the sixteenth century there occurred a most remarkable revolution in prices. Every article foreign and domestic rose enormously in some cases one hundred per cent and over Naturally the monopolies were blamed by all classes for this extraordinary advance in the prices of the necessities of life." As he is also quick to note, monopoly is not the only cause here, and may not have been the primary cause. For example, there were wartime shortages resulting from the conflict between Venice and the League of Cambray. There was also an enormous increase in the volume of currency in circulation, with large increases in silver and copper production in Germany and Hungary, as well as imported silver from the new world by Spain.

Ultimately, these issues arose again in the Diets of Nuremberg from 1522-24. The main agenda of these gathering was to coordinate a response to Soliman the Turk, who had just invaded Hungary, and to Martin Luther, who was posing a danger to the established Catholic Church. But the issue of monopoly came up as well, and as Schapiro explains, a committee was appointed which "sent a questionnaire to the councils of the towns that represented the trading interests." The reply of the city of Augsburg has been much-quoted over the years, because it offers a defense of the large monopoly firms. Here are some snippets of the response from the city Augsburg, as quoted (and translated) by Schapiro:
Where there is no business, the country is of little account. Hence it follows that commerce is useful to kings and princes and good for the common weal. The more business a country does, the more prosperous are its people. There are lands where business interests are better protected than in Germany and where they do everything to encourage and attract the merchants .... Commerce adds to the coffers of princes and is besides absolutely essential to the common welfare where there are many merchants there is plenty of work. Only the great merchants are able to do business on a large scale, because the small traders have not enough capital.  ...
It is impossible to limit the size of the companies for that would limit business and hurt the common welfare; the bigger and more numerous they are the better for everybody. If a merchant is not perfectly free to do business in Germany he will go elsewhere to Germany's loss. Any one can see what harm and evil such an action would mean to us. If a merchant cannot do business, above a certain amount, what is he to do with his surplus money? It is impossible to set a limit to business and it would be well to let the merchant alone and put no restrictions on his ability or capital. ... Some people talk of limiting the earning capacity of investments. This would be unbearable and would work great injustice and harm by taking away the livelihood of widows, orphans and other sufferers, noble and non-noble, who derive their income from investments in these companies. Many merchants out of love and friendship invest the money of their friends--men, women and children--who know nothing of business in order to provide them with an assured income. Hence any one can see that the idea that the merchant companies undermine the public welfare ought not to be seriously considered. ... 
Of course, discussions making similar points have continued up to the present. Countries with lots of business activity are better off, and create jobs. If the companies are overregulated at  home, they will move elsewhere. Limiting what investment can earn would be unbearable. Out of love and friendship, the giant monopolists will look out for the widows and orphans. The committee for the Diet of Nuremburg didn't buy these arguments! But its report is an interesting mix of opposition to the big companies and admitting that their defenders are not altogether wrong. Here's Schapiro quoting from the committee report:
"The companies have done more injury to the common man than all the highwaymen and thieves put together yet the monopolists and their associates strut about in all the magnificence and luxury that wealth can buy. ...  We have already given reasons why the great companies should be destroyed but that does not mean that all business associations should be done away with. Such a course would be foolish and harmful to the whole German people, for the following reasons: In the first place, it would give the foreigners an opportunity to take over our business and then the companies could exploit Germany at will. Secondly, if we permitted only single individuals to trade, failure would be sure to result, which would be avoided by permitting associations of moderate size only. This, too, would give an opportunity to an individual who possesses great capital to do exactly what a company does and yet be within the law. Finally, a single individual cannot go to many places for goods and he cannot afford to hire agents as this costs money Therefore the foreign companies will have a great advantage over the German merchant."
Ultimately, the Diet of Nuremberg passed a set of anti-monopoly laws. Schapiro writes:
After a great deal of debate, the Diet passed a series of laws designed to mitigate the evils of monopoly. These provide that:
I. Companies are not to be capitalized for more than fifty thousand gulden and are to have only three branches. A statement of its membership and business must be filed with the government.
II. The profits must be divided every two years and the authorities notified of the fact.
III. No money may be loaned at usurious rates of interest.
IV. No commodity shall be entirely under one control.
V. No merchant shall buy during a single quarter of a year more than 100 cwt. of pepper, 100 cwt. of ginger, and 50 cwt. of other spices.
VI. The companies shall not impose a minimum selling price.
VII. The government shall regulate the prices of wares because the companies secretly agree to raise prices.
VIII. Each article imported shall be taxed by the imperial government a fixed sum on the hundredweight.
IX. Voyaging to Portugal is to be forbidden because of too much speculation there and the king of that country is to be asked to send the spices into Germany.
X. The penalty for violating these laws is to be confiscation of the property of the company one half to go to the imperial and the other half to the local government 
Whatever the merits and demerits of these rules, they made little difference. This early round of the anti-monopoly battles was won by the monopolists. As Schapiro explains: "In spite of the denunciations, petitions, laws, and decrees, the monopolies were not seriously disturbed. The vast wealth of the great companies, the political importance of the cities which they controlled, the weakness of the central government and the intimate relations of the merchants with the governing powers, were proof against all laws aimed at them."