The Armor-plate Scandal

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Economists from Adam Smith on have written about the evils and dislocations that monopolies bring to an economy. What has been much less written about over the years, however, are the evils of monopsony.

In the interest of saving wear and tear on three hundred thousand dictionaries, let me hasten to offer a definition. A monopoly is any entity that effectively controls the supply of a commodity. A monopsony, on the other hand, controls the total demand for a commodity.

Obviously monopsonies are much rarer than monopolies. The only one I ever enjoyed happened years ago when I was traveling in Greece. A photographer, quite unasked, snapped pictures of the members of a tour I was on, and the next morning he went from table to table in the hotel dining room, offering eight-by-ten glossies at outrageous prices and doing a brisk business.

When he came to me, however, I told him I’d give him one-tenth his asking price for the photos he had taken of me. He indignantly refused, so I suggested he call up the newspapers and see what they would pay for pictures of an utterly unfamous college student walking around Delphi with a guidebook in his hand. He took the money I offered him and said something in Greek that would probably lose nothing in translation. The same to you, buddy, and welcome to the world of market forces.

But monopsonies can have largescale pernicious effects for much the same reasons as monopolies: they prevent the determination of real prices while their possessors invariably come to abuse their power. And like most monopolies nowadays, monopsonies tend strongly to be government ones—state textbook boards are one example—and the greatest of them are military in nature.

After all, how many customers are there for, say, nuclear-missile submarines? Mercifully, perhaps, there is only one, and Electric Boat sells to the Navy or it doesn’t sell at all.

These military monopsonies are nothing new. A hundred years ago, when battleships, not nuclear submarines, were the measure of naval power, the government had a thirty-year dispute with the country’s steelmakers over armor plate. It’s an instructive tale.

The battle between the Monitor and the Merrimack in 1862 had spelled the doom of wooden navies. By the 188Os the monitor form had evolved into the battleship, armed with the biggest guns afloat and protected by belts of armor plate. The U.S. Navy, however, had quickly shriveled to insignificance after the Civil War and bought what little armor plate it required from abroad. Then the Arthur administration decided to expand the Navy and wanted domestic sources to assure supply in case of war.

The steel manufacturers were not interested in building highly specialized plants that could make only armor. Why should they have been? Demand was subject to the vagaries of politics, the Navy would be virtually the only customer, and the technology was very difficult to handle. Because of inevitable variations in the distribution of impurities and in cooling, each batch of armor plate varied considerably in thickness, tensile strength, and resistance to penetration.

Nevertheless, both Andrew Carnegie and the Bethlehem Iron Company, under government prodding, began to construct armor plants. Carnegie, however, suspended constructions when Navy bureaucrats insisted that government inspectors be present during every phase of manufacturing and that rigid specifications for the very factors that were inherently difficult or impossible to control be adhered to. Carnegie thought, quite correctly, that the only thing that really mattered was the armor’s resistance to gunfire and therefore that a ballistics test should be the sole criterion by which the Navy should judge his armor plates.

Bethlehem continued to construct its armor plant but, with far smaller resources than Carnegie, soon ran into financial trouble. So President Benjamin Harrison personally appealed to Carnegie to resume construction of his armor-plate mill at the Homestead Works, and he did so.

By 1892 it was in operation, but the great Homestead strike of that year ended production for a time, and when it resumed, after the strike had failed, disaffection among the workers was, understandably, intense.

The following year an attorney representing four of the workers went to Carnegie’s partner, Henry Clay Frick, whose actions had been mainly responsible for the strike, and offered to sell him “evidence” of fraud on the part of the company in fulfilling its armor contracts. Frick—the very opposite of a wuss—sent the lawyer for what he called the “vermillion-hued” workers packing. But the lawyer then went to the government, which agreed to give the men 25 percent of any fines levied on the basis of their evidence.

The government proceeded to name a board of inquiry, which investigated the matter using only the information supplied by the informants, and not surprisingly submitted a report finding the company guilty. The first that the Carnegie Steel Company knew of this was when Frick was summoned to Washington to be told that the Navy intended to levy a fine equal to 15 percent of the value of the contract.