We have already seen how production upon a large scale has superseded
production upon a small scale in most important branches of
manufactures. We have now to inquire whether production upon a large
scale is in turn to be supplanted by single consolidated enterprises,
by those combinations of capital known as trusts. Under one of these
three conditions industry must be carried on; few people wish to
revert to the stage when production was carried on in small
establishments, but warm controversy and difference of opinion still
exist as to whether centralized management by a single company or
combination offers superior advantages to production by independent
competing establishments. The concentration of production in a few
large establishments has been followed by the consolidation of these
larger units into a single whole. Since the days of Adam Smith capital
has tended to combine for the purpose of fixing prices, and these 40
combinations have passed through several phases. The earliest form is
the agreement of independent concerns to fix prices, as was done by
the American railroads in their early traffic agreements. The next
step was to divide the field, as has been done by the French railways
and the American express companies. A third phase of combination was
the pool, which attempted to regulate the output rather than to fix
the price or divide the field. Railway, whisky, beam, and other pools
were organized for this purpose, but all broke down because of the
difficulty of enforcing the agreement and the temptations to each
member to break it secretly for the sake of the large profits
obtainable. By this time it had become clear that if a real permanent
consolidation of interests was to be secured by the competing
enterprises some closer form of combination must be devised which
could not be broken at will by any member. An industrial union and not
a loose confederation must be attained. Accordingly the next step was
taken in 1882 by the formation of the Standard Oil Trust, so called
because the constituent concerns handed over their business to the
complete control of a central board of trustees, receiving in return
trust certificates which entitled them to dividends. Similar “trusts”
were formed in the whisky, sugar, and other industries, but were
speedily declared illegal by the federal Supreme Court. By this
decision the form of combination was changed, but the movement was not
at all checked. The next phase and the last was the establishment of
holding corporations, which are organized to buy up and hold the stock
of a number of individual corporations, which still retain their
corporate existence. In this way unity of control is secured, to which
is added a certain flexibility; but it is really the trust under
another legal form. Where pooling and combination by means of holding
companies have been forbidden by law, as in the case of railroad
companies, actual consolidation has often taken place, though when 41
trusts are spoken of the other form of combination is more often
meant. From the point of view of business organization the holding
company is simply an extension of the principle of the corporation,
and to a consideration of this we must therefore turn.
There are three classes of establishments by which industry is carried
on--those that are the property of an individual, those which belong
to partnerships or firms of unlimited liability, and those belonging
to corporations of limited liability. The usefulness of the individual
system is of course limited to small undertakings, where but little
capital and credit are necessary; this form of organization still
dominates the field in agriculture, in the small retail trade, and in
the repairing industries. The partnership is a joint undertaking by
two or more individuals, and makes larger enterprises possible, but as
each individual is liable for all obligations of the firm or his
partners his personal liability is greatly increased. While it is well
adapted to certain undertakings, as moderate mercantile establishments
and professional firms, owing to a certain elasticity in the
contractual relations of its members, it is not suited to large
industrial ventures, both because of the excessive personal liability,
and because of the necessity of dissolving the partnership upon the
death, withdrawal, or insolvency of any member. The advantage of the
corporation lies in the fact that it has a continuous existence, and
that the liability of the shareholders is limited to the amount of
capital actually contributed by each; it is well adapted to modern
enterprise because it permits the summation of large amounts of
capital from a number of small savers and centralizes the use of this
capital in the most economical manner. There may thus be concentration
of management without concentration of ownership. The federal census
of manufactures in 1905 showed that, although less than one-quarter of
the manufacturing establishments were organized as corporations, yet
they produced three-quarters of the total manufactures in money 42
value. In the field of transportation, corporations are in almost
exclusive control, most banks and insurance companies are organized
under this form, while mercantile and industrial undertakings are
being more and more generally organized as corporations. Not merely
are most of our business enterprises being conducted under corporate
form and organization, but most recently, as has been already pointed
out, there has been a movement to combine individual corporations into
larger concerns, or trusts. The trust is usually thought of as a
monopoly and, while not necessarily so, it usually does exercise
monopoly control; but for the present we shall consider the trust
problem from the standpoint of business organization, deferring to the
end of the section the discussion of monopoly.
The trust movement may be said to have begun with the formation of the
Standard Oil Trust in 1882, but down to 1898 its progress was slow.
Beginning with the revival of prosperity in 1898, however, there
ensued a veritable stampede of business managers to enter into
combinations. During the next three years 149 large combinations, with
a capital of over $3,000,000,000, were formed. The movement spent most
of its force by 1902, though it is by no means at an end yet, as the
recent floating of the Dry Goods Trust indicates. A few figures from
reliable authorities will make clear the extent of the movement.
According to the New York Journal of Commerce, industrial (i.e.,
manufacturing and commercial) and gas trusts were organized in the
United States between 1860 and 1900, not including combinations in
banking, shipping, railroads, etc., as shown in the accompanying
table.
Another more recent list by John Moody[4] gives the number of
“industrial” trusts organized down to Jan. 1, 1904, as 318; these have
-----------------+------------+--------------- 43
Decade. | Number | Total Nominal
| Organized. | Capital.
-----------------+------------+---------------
1860-69 | 2 | $ 13,000,000
1870-79 | 4 | 135,000,000
1880-89 | 18 | 288,000,000
1890-99 | 157 | 3,150,000,000
-----------------+------------+---------------
Total, 40 years | 181 | $3,586,000,000
-----------------+------------+---------------
acquired or control 5,288 plants, and have a total nominal capital of
$7,246,342,533. A movement so general and widespread, and of such
gigantic proportions, must have had some powerful and intelligible
causes behind. For it was not confined to the United States, but was
equally observable in such industrial diverse countries as England,
France, Germany, Russia, and other European nations.
The most important and general cause was the desire to secure the
legitimate economies of large-scale production. A combined or
federated industry may secure even greater economies than a single
large factory. These have been concisely stated as follows[5]: “The
cost of management, amount of stock carried, advertising, cost of
selling the product, may all be smaller per unit of product. A large
aggregation can control credit better and escape loss from bad debts.
By regulating and equalizing the output in the different localities,
it can run more nearly full time. Being acquainted with the entire
situation it can reduce the friction. A strong combination has
advantages in shipment. It can have a clearing-house for orders and
ship from the nearest source of supply. The least efficient factories
can be first closed when demand falls off. Factories can be
specialized to produce that for which each is best fitted. The
magnitude of the industry and its presence in different localities
strengthens its influence with the railroads. Its political as well as
its economic power is increased.”
Many of these economies of production are not new to these trusts, but 44
have been secured equally by large-scale manufacturing establishments.
Some of the savings, especially in buying raw material and marketing
their products, are peculiar to the trusts and mark a more efficient
mode of organization than mere concentration of industry in single
large establishments. Thus, it has been found possible to dispense
with a great number of traveling salesmen, of whom it was said that
30,000 lost their positions in the year 1898 alone. When the whisky
trust was formed only twelve of the eight distilleries entering into
the combination were kept running, but as these were the largest, best
located and best equipped, and were run at their full capacity, they
were able to turn out as much as all had done before and at an immense
economy. The saving of cross freights by having an order filled from
the plant most conveniently located is considerable; Mr. Gates
estimated the saving of the American Steel and Wire Company in this
single point at $500,000 a year. Such an economy could not be secured
by a single establishment, no matter how well organized or on how
large a scale. The specialization of particular factories to do
special processes is well illustrated by the organization of the
United States Steel Corporation.
The growth of this latter combination is an example not only of
consolidation, but of the integration of industry, that is, the
grouping together under one control of a whole series of industries.
From the mining of the ore and coal, through the processes of carrying
it to the furnaces, coking the coal and making the pig iron,
manufacturing the latter into the finished forms of iron and steel
products, and down to the marketing of the latter, every step is
carried on under the control of the United States Steel Corporation.
The assets of the company were stated as follows soon after its
organization, and illustrate the magnitude and scope of its operations:
Iron and Bessemer ore properties $ 700,000,000 45
Plants, mills, machinery, etc. 300,000,000
Coal and coke fields 100,000,000
Railroads, ships, etc. 80,000,000
Blast furnaces 48,000,000
Natural gas fields 20,000,000
Limestone properties 4,000,000
Cash and cash assets 148,251,000
--------------
Total $1,400,281,000
In addition to economies due to improvements in methods of
organization, production and marketing, another cause for the sudden
and vigorous outburst of trust promotion in the years 1898-1902 may be
found in the profits to be secured by promoters and organizers. After
the successful launching of the first few trusts, with their undoubted
economies and advantages, the movement was taken in hand by
professional promoters, who organized combinations, often with the
help of underwriters, in every branch of industry where there was any
promise of profit. That many of these were artificial or premature is
evident from the financial results: of the 183 industrial combinations
enumerated by the census in 1900, one-third paid no dividends whatever
after their formation and another one-third paid no dividends to the
holders of common stock. As an indication of the profits obtained by
the successful trust promoter may be cited the testimony given before
the Industrial Commission in the case of the Tin Plate Trust stating
that this promoter realized from $2,000,000 to $3,000,000 profit from
the undertaking. When to this is added the profit obtained by the
owners of the constituent plants, which were usually taken over by the
trust at an exorbitant valuation, it is clear that the stimulus of
financial gain was probably stronger in many cases than that of
economy in production. The bill was of course paid in most cases by
the investing public, which absorbed large amounts of industrials in
the years of their active promotion.
Other causes have sometimes been adduced to explain the growth of 46
combinations, such as the tariff and railroad freight discriminations,
but these are too local in their influence to explain adequately the
world-wide movement toward combination. Trusts exist in free-trade
England, and in Germany where freight discriminations on the
state-owned railroads are practically unknown. It is, however, true
that in the United States both these factors have been of decisive
importance in building up certain powerful trusts. “There can be no
doubt,” said the conservative report of the Industrial Commission,
“that in early times special favors from railroads were a prominent
factor, probably the most important factor, in building up some of the
largest combinations. The receipt of discriminating favors from
railroads has been conceded repeatedly by representatives of the
combinations themselves.” The Standard Oil, beef, coffee, steel, and
other trusts may be cited as illustrations. In the matter of the
tariff Mr. Havemeyer’s statement that “the mother of all trusts is the
customs tariff law” may be set down as the rather peevish utterance of
a disappointed beneficiary; but there is no doubt that combination has
been made easier behind the tariff wall. Instance the sugar trust
itself, the leather, steel, tin plate, and others.
Let us now turn to some of the effects of industrial combinations,
which we may classify according as they bear upon competitors and
producers of raw materials, labor, and consumers. As the number of
competitors is reduced the fierceness of competition among those
remaining in the field is greatly increased, for the value of the
prize to the successful enterprise is correspondingly greater. It is
not surprising therefore that at times this rivalry should have
assumed unethical if not actually illegal forms. The practice by some
trusts of fixing prices below cost at some strategic point in order to
crush out a troublesome competitor, and then correspondingly raising
them elsewhere so as not to sustain any loss, is serious because so 47
subtle. Prof. John B. Clark regards this as so serious an evil that he
would have the Constitution amended in order that power might be given
the Federal Government to prevent it. The producers of raw materials,
as cattlemen, crude oil and coal producers, sugar and tobacco growers,
and others, complain that the prices at which they sell their products
are dictated to them by the trusts, which are practically the sole
purchasers of what they have produced. They claim that prices are
depressed to the lowest point possible and that every gain from
increase of demand goes into the pockets of the trust managers. It may
of course be answered that the trust cannot depress prices below the
point at which a living profit can be secured by the producer of the
raw material or he will stop producing, but there is no doubt but that
the monopoly power possessed by the trust in such cases will sometimes
be used to the disadvantage of those whose product it alone buys.
The effects upon labor of the organization of capital in combined
industries and under centralized control are more complex. As trusts
have superseded single corporations because this mode of industrial
organization was more economical, we must expect to find that one of
the economies was the displacement of labor. The discharge of
traveling salesmen has already been spoken of; with the consolidation
of various plants under one control other high-priced men were let
go--managers, superintendents, etc. The same thing was true at the
other end of the industrial scale and thousands of workmen, usually
the least efficient and capable, were deprived of work. The natural
consequences of these combinations and economies were not clearly
apparent at the time, because they were happily coincident with a
period of business expansion and prosperity which reabsorbed into the
industrial organism most of the displaced workers. Another phase of
the relation between trusts and labor is that of their effect upon
wages.
In general it may be said that there are only two sources out of which 48
an increase of wages can be paid, and these are the profits of the
business organizer and manager or the increased product of the
business itself, and of these two only the latter can serve as a
permanent source of higher wages. Now it is pretty evident that labor
has not been in a position to force the trust magnates to forego their
profits. On the other hand, wages in industries carried on by
industrial combinations have risen, and it must therefore have been
because there was more produced and consequently more to be divided.
If the inefficient workers were discharged and only the best ones
retained by the trusts, here is one explanation why they could afford
to pay high wages--they paid more because they got more done. As yet
labor has not admitted that it is unable to cope with these industrial
combinations; it has however demanded that it be allowed to combine on
a national scale and to bargain collectively for united labor with
combined capital.
The discussion of the effects of trusts upon the consumer leads at
once to the discussion of their effects upon prices, for it is through
the agency of price that the trust touches the ordinary man. The
advantages claimed by trust organizers are economies of production and
lowered cost; but the vital question to the consumer is whether
lowered cost increases profits or reduces prices. On this point the
Industrial Commission reaches the following conclusion: “that in most
cases the combination has exerted an appreciable power over prices,
and in practically all cases it has increased the margin between raw
materials and finished products. Since there is reason to believe that
the cost of production over a period of years has lessened, the
conclusion is inevitable that the combinations have been able to
increase their profits.” Moreover the power over prices was greatest
during certain periods when the control of the combinations was
greatest. The problem therefore resolves itself into the question, 49
are trusts monopolies? While a categorical answer cannot be given to
this, it may safely be affirmed that all trusts try to be monopolies.
Nor is it necessary to control the production, sale, or purchase of a
commodity absolutely in order to exercise monopoly power; the control
of 50 or 60 per cent may suffice to secure virtual monopoly. The
purpose of a monopoly is so to fix the price that it will obtain the
maximum net profit. It is conceivable that this result may be attained
by lowering the monopoly price below the point of the competitive
price, but this is unusual. In general a monopoly price has meant a
high price, and a high price has meant a restriction of the output.
Where that has been the result of trust control, society has been
injured, for not only has it not shared in the economies of production
but it actually gets less and has to pay more than it would have done
under competition. It may be said, however, that even in the case of
the greatest monopoly there is always the specter of potential
competition threatening its profits, while the possibility of
substituting some other commodity for the monopolized article protects
the consumer from too great extortion and keeps the price within
limits. Absolute control over price is never exercised by any
monopoly. Nevertheless, we may fairly conclude, in the words of Henry
D. Lloyd, that “monopoly is business at the end of its journey,”
control over prices is the object of combination.
There remains to be considered another charge of monopoly which has
been brought against the trust, the monopoly of opportunity or the
suppression of individual initiative. It is no longer possible, it is
claimed, for the man of small means, even with good talents, to engage
in business for himself: he must accept some subordinate position in a
corporation where his individuality is checked and his power of
initiative does not find free play. So far as this is true it would
seem to be the result not so much of the trust movement as of 50
large-scale production. We have seen that the tendency of machine
production is to enlarge the business unit and to call for the
investment of constantly larger amounts of capital in up-to-date
establishments. Some writers even point out that the average business
man who engages in business on his own account fails, and that he
should therefore be grateful if more efficient producers offer him a
remunerative and steady salaried position. Without insisting upon this
point it may still fairly be noted that there are large fields of
enterprise that lie outside the area of monopolistic control.
“Large-scale production is best adapted to articles that can be turned
out in large quantities according to uniform patterns and standards;
individual initiative is still free in those lines of production that
call for artistic ability or appeal to individual tastes, or which,
like agriculture, are dependent upon variable conditions.”[6]
There are, however, other evils connected with trust organization and
management that are more easily remediable and that call for
legislative regulation. “The evils of combination, remedied by
regulative legislation,” concludes the report of the Industrial
Commission,[7] “come chiefly from two sources: (1) the more or less
complete exercise of the power of monopoly; (2) deception of the
public through secrecy or false information.” Various remedies have
been suggested to meet the first class of evils, those of monopoly,
generally in the direction of strengthening the powers of the Federal
Government. We have however no lack of legislation on this subject
already: thirty-four states and territories have passed anti-trust
laws, and the federal Anti-Trust Law of 1890 explicitly provides that
“every contract, combination in the form of a trust or otherwise, or
conspiracy in restraint of trade or commerce among the several states,
or with foreign nations, is hereby declared illegal.” The severe 51
restrictive measures of the states have been largely nullified by the
loose legislation of three or four “charter granting” states, in which
95 per cent of all the trusts have accordingly been chartered, while
the federal enactments have been found very difficult to enforce. It
is not easy to define or to prove monopoly or conspiracy in restraint
of trade. The second class of evils has been met by statutes requiring
publicity and more definitely fixing the responsibility of corporation
officials. Such measures of control must be the first step toward
intelligent regulation, and are to be commended as thoroughly
reasonable. The establishment of the federal Bureau of Corporations
with power to “investigate” industrial corporations engaged in
interstate commerce has already led to the publication of some
valuable reports. We must first proceed along the lines of publicity
and intelligent information before we attempt more drastic remedies.