The great increase in the size of the manufacturing establishment and
of the capital invested in the manufacturing industry which
necessarily followed the adoption of expensive machinery for
manufacturing purposes was followed by a tendency toward co-operation
and mutual agreements among the great organizations engaged in similar
lines of work, the purpose being to reduce expenses, increase profits
and control prices. Originally the persons, firms or companies engaged
in manufacturing disposed of their products as best they could and in
direct competition with others in their own line of manufacture. If
the market for their product was good they demanded higher prices. If
there was an oversupply they sold for whatever profit they could get,
or if necessary at cost or even lower than cost, in order to prevent
accumulations of stocks or the closing of their factories. The
competition thus grew intense. In order to dispose of their goods they
must put many salesmen into the field, they must advertise freely, 223
and often their orders came from such distances that the cost of
delivery formed a large percentage of the cost of the goods by the
time they reached the purchaser.
This competition of one manufacturer with another making the same line
of goods was not only expensive but resulted in working at cross
purposes in many ways, and in loss of energy and money. So certain of
the companies or corporations engaged in like industries began to make
agreements among themselves by which they could co-operate in
distributing their supplies to a given field and reduce the expenses
of supplying that field. It was argued that the people of any section
would only use a given amount of any standard product, and that the
expense which the various manufacturers were incurring in competing
among themselves for their respective shares in that trade might be
materially reduced by an agreement through which the extraordinary
efforts to sell in competition with each other should be abandoned and
each manufacturer receive the share of the sales to which his
proportion of production would entitle him. Not only would this reduce
unnecessary expenses but it would in some degree render possible the
maintenance of prices as they might be mutually agreed upon.
The first steps in combinations or agreements of this sort are known
as “pools.” “This form of agreement,” says J. Russell Smith, “provides
that each of the makers of a certain material for a certain territory
should make a stipulated proportion of the product to be sold at an
agreed price. If a factory made more than its share the owner made a
cash payment to the pool and the money went to some manufacturer who
had made less than his share. The weak spot of these pools was their
absolute lack of power of coercion and that no member had faith in the
others.” Often members took advantage of technicalities to violate the
spirit of the agreement, and the agreements were short-lived. The 224
system, while it is still working satisfactorily in Germany under the
name of the “cartel,” failed to give satisfactory results in the
United States, and also met with disaster in the fact that the courts
held it to be a combination in restraint of trade and therefore
unlawful.
To overcome these defects and create a system of division of
production, control of prices and distribution of profits in
proportion to the value of the plants co-operating, a new form of
agreement was devised. It provided that the companies or corporations
entering the agreement for mutual operation and proportionate
distribution of profits should transfer the shares of their respective
properties to a new corporation with full powers to manage the same,
receiving in lieu thereof certificates which should entitle the holder
to his proportionate share of the net earnings of the new corporation.
“Under this form of organization,” says the Universal Encyclopedia,
“the stockholders of each of the separate companies assigned their
stock to a few trustees, giving thus an irrevocable power of attorney.
In lieu of the stock assigned the trustees issued stock certificates
to the stockholders of the separate companies and upon these trust
certificates profits were divided. All of the earnings of the
different members of the company were pooled and each manufacturer
received his proportionate share as evidenced by the certificates,
regardless of the question whether his establishment was running or
closed. The trustees, having in their hands the voting power of all
the stockholders, elected whatever persons seemed to them best as
officers of the separate companies. In this way the management was
absolutely unified and the interests of all parties concerned became
as one. The courts finally holding that this trust agreement was
illegal, the plan was later adopted of organizing a new company which
should buy up all of the separate plants of the different companies
entering the combination, so that in this way a unified management was
secured within the law. In order that a more convenient form of 225
handling the properties of the different companies might be secured, a
third form of organization was later adopted in which a new company is
organized as a stockholding company. This company then buys up all, or
a large proportion of, the stock of each of the companies coming into
the organization and controls these stocks. The officers of the
central organization are thus in a position, by voting the stocks of
different companies, to elect the directors and officers of those
companies and thus control their policy.”
The advantages of this combination over competition are summed up by
the Encyclopedia Britannica, in its 1902 edition, as follows: (1) The
cost of selling may be greatly lessened; (2) the salaries of
commercial travelers and their traveling expenses can be largely
reduced; (3) if different manufacturing establishments, scattered
throughout the country, are brought under one management it will be
possible for orders for goods to be distributed so that goods can be
dispatched to customers in each case from the nearest establishment
and freight expenses reduced; (4) when several establishments are
combined the most skillful of the managers can be selected for the
general manager; (5) each business manager is likely to have some
special excellence in his methods of management, and by combining the
establishments it is possible to so distribute this managerial skill
as to give to each branch of the work the man best suited to its
conduct; (6) it is also possible to distribute the various branches of
the manufacturing to the various mills or factories of the combination
best suited for that particular branch of the work; (7) the advantages
of unifying in one establishment the machinery of selling the product
of all; (8) the ability of an establishment to fill large orders on
short notice gains and retains business; (9) the great financial and
business strength and skill of the combined organization gives it
special facilities for pushing its goods into foreign markets, as is
shown by the success abroad of the Standard Oil Company, and the 226
American Tobacco Company; (10) better facilities for dealing with
credits and thus aiding the business community.
Whether trusts, through their control of prices of the particular
commodities which they manufacture, have actually advanced the selling
price to the consumer, has been and is still the subject of much
discussion. It has been urged that the mere reduction of the cost of
production and distribution which results from the combinations would
enable them to realize larger profits than formerly, even if the
manufactures are sold at former prices, and that although their
profits have doubtless been large it has not been accomplished through
an actual advance in prices to the public, but rather through
economies of production and sale. Nelson’s Encyclopedia, issued in
1908, discussing this subject, says, “The weight of evidence indicates
that, judged from the margin between price and finished product and
cost of raw materials, prices are increased somewhat by the existence
of trusts. It is a fair conclusion that the actual prices of goods
have as a rule been somewhat increased by trusts, although not in the
measure that was anticipated at the inception of the trust movement.”
The Encyclopedia Britannica of 1902 in discussing this subject says,
“Experience seems to show beyond question that whenever the
combinations are powerful enough to secure a monopolistic control it
has usually been the policy to increase the prices above those
obtained during the period of competition which preceded the formation
of the combination.”
As to the effect of trusts upon wages it may be said that up to the
present time no very strongly marked change is perceptible in the
matter of rates of wages paid by the trusts as compared with other
employers in the same line. Doubtless the combinations of numerous
establishments under one general management have reduced the numbers
of employes in certain lines, but in those lines in which the trusts 227
require labor for the carrying on of their work no marked changes in
the rates of wages have been developed as a result of the
combinations. In steadiness of employment for the men and women
engaged in the work of the establishments it seems probable that the
trusts or great combinations of this character offer certain
advantages, since their business is less liable to fluctuations than
that of the smaller, and even in the absence of orders they are more
likely to continue work accumulating stocks for future use than is the
small manufacturer with limited capital or credits. In the matter of
relations with the labor organizations certain of the trusts have made
long time agreements with the labor organizations, thus adding to the
steadiness of employment, though in some cases the trusts have
declined to recognize the demands of labor organizations.
An example of the causes and methods of the combination of kindred
manufacturing interests under one general central organization is
found in the United States Steel Corporation as described by J.
Russell Smith, in his “The Story of Iron and Steel.” No industry, he
says, is naturally so uncertain and consequently so competitive as the
steel industry. The demand for the product is fitful and uncertain
because most of it goes into new constructions and new enterprises,
and these are notorious for the spurts and depressions of demand which
affect them…. The uncontrolled iron and steel market can make wild
rises unknown to many commodities, because it is difficult to suddenly
increase the amount of manufactures in response to sudden demand. A
wave of prosperity sends a thousand industries which must have iron
and steel clamoring, begging for steel. When the industrial sky
darkens purchases of iron and steel cease as suddenly as they began
and the price must tumble if the output is sold. These were the normal
conditions through which all steel makers lived down to the depression
of 1893-98. The numerous independent manufacturers thought that if 228
they could get together and agree upon prices they could improve their
condition. Attempts to achieve this in the form of pools provided that
each of the makers of a certain material should make a stipulated
proportion of the product to be sold at an agreed price, and if a
factory made more than its share, the owner made a cash payment to the
pool. The weak part of these pools was their absolute lack of power of
coercion, and the further fact that no member had faith in the other.
The failures in the attempt at price control resulted in the
consolidation of many companies, formerly rivals, under one control.
The chief companies which later became members of the United States
Steel Corporation formed two distinct groups, each group classified
according to the product. One group included the manufacturers of
unfinished steel, such as ingots, billets, plates and slabs, and
included the Carnegie Steel Company, the Federal Steel Company, and
the National Steel Company. Other companies which purchased the
product of these manufacturers of unfinished steel and turned it into
the finished state included the American Tin Plate Company, the
National Tube Company, the American Steel and Wire Company and others.
The first thought which came to the minds of this finishing group when
hard times compelled them to cut down costs was to cheapen their raw
material (such as pig iron, steel ingots, billets, etc.) by becoming
manufacturers of their own pig iron. The Carnegie Steel Company had
already done this and had obtained facilities for transporting the ore
to the coal fields of Ohio and Pennsylvania and facilities for
transforming the ore into the classes of material which it supplied.
The Carnegie Steel Company thus became independent of other companies
in the supply of its fuel, its ore, and the transportation of the
same, and all of the requirements of operation. When the finishing
companies announced their purpose to also supply themselves with the 229
same facilities for producing their own raw material through the
ownership of ore lands, transportation, facilities for smelting,
manufacture of pig iron and the steel which they themselves required,
the raw materials group could not view this operation with unconcern.
It meant the loss of their market and necessity of seeking new markets
in the United States or in foreign countries. As a consequence, the
companies designated as the raw materials group, making pig iron,
steel billets, etc., announced that they would establish their own
finishing plants and thus compete directly with the group of companies
which had formerly occupied the field without interference by the
great organizations transforming the ore into the earlier processes of
pig iron and steel billets. Mr. Carnegie announced that he would build
a finishing mill in northern Ohio at the end of his ore railway which
would eclipse anything that the world had ever seen and would be in
equipment without a rival in the world. The Federal Steel Company
increased its holdings of ore and coal, of upper-lake railways, and of
lake steamers, and prepared to establish its plants for turning out
finished products. Thus was threatened a doubling of the capacity of
production of iron and steel in all of its stages, a capacity already
far beyond that of the markets of the United States. Pools had failed,
and the earlier trusts, aiming at monopolizing each line of the iron
trade, had in the first temporary depression come face to face with
the immediate prospect of ruinous competition among themselves. Then
came the supreme effort at controlling prices through the creation of
the most stupendous corporation that man has yet dared to launch--the
United States Steel Corporation. This combination included most of the
companies of both groups referred to--the producers of unfinished
steel and those transforming the same into the finished product. The
combination formed under the leadership of Mr. J. Pierpont Morgan 230
controlled two-thirds of the steel output of the country.
The new company began business in April, 1901, and a comparison of
prices since that date with those of earlier years shows regularity
and steadiness of prices rather than any marked decline or advance.
“This price-steadying,” says J. Russell Smith, “is of incalculable
benefit to the independent manufacturer (as well as to the
combinations) even when it limits the heights to which a price spurt
will go. Rapidly rising prices start a feverish, intoxicated condition
of the market very pleasant while it lasts, but followed by a more
unpleasant reaction; therefore the Trust tries to keep sober and keep
its little brothers sober also, and all are profiting by the new
temperance…. Despite its efforts at control, the Trust is not as
near monopoly as it was the day it began. The four full years of its
operation, 1902-1905, inclusive, did not indicate any increased share
of production. The bulletin of the American Iron and Steel Association
shows that during these four years there was an almost universal
decline in the percentages of iron and steel products made by the
Trust.”