Part 6

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.

VI. SPECULATION AND CRISES.

An unavoidable element of risk enters into all modern business. In the old handicraft stage of industry goods were made upon order; demand preceded supply very definitely, and there was little possibility of mistakes in production. Nowadays, as we have seen, production is for a distant and often uncertain market. It is carried on by machine methods and roundabout processes; sometimes the result is a very remote one and the uncertainty of success is correspondingly great. Production is not based upon order, but upon a forecast of the possible demand, upon a future market. Chance and change are inseparable from productive enterprise--natural chances from the elements, political changes, as war or unfavorable legislation, industrial mistakes or sickness or death of oneself or others, and economic changes, as the invention of a new machine or a change in fashion. These are the unavoidable incidents in industry and are not 52 under the control of the individual business. Some of them, however, are so regularly recurrent that they can be foretold on a large scale for any industrial society, and can be guarded against by insurance. Everyone recognizes the desirability of having such risks as those of fire, shipwreck, lightning, death, etc., assumed by certain individuals or companies who make a business of such risk-taking. A small premium is paid by the individual for protection, and he is freed from anxiety from mischance and is able to devote his whole energies and capital to his business; the insurance company has specialized in this one department and by equalizing the chances over a wide field has practically eliminated them. In doing this it performs a service of recognized and undoubted social value.

There is another kind of risk-taking the social utility of which is not at first sight so clear. Among the chances of productive enterprise are those due to the rise and fall in the prices of the raw materials, the labor, and the finished product between the time when the process of production is begun and the time when it is completed. Every farmer, every manufacturer, every student even who invests capital in his own education, is to some extent a speculator. Along certain lines he can protect himself by insurance, but that is not possible in all. Is there no way, then, by which he can guard himself against price fluctuations and assure himself of the legitimate gains of his business? This, it may be answered, is the function of the speculator in modern business, and in performing this service he is benefiting society in much the same way that the insurance company does. We must, however, clearly distinguish between legitimate and illegitimate speculation; we are discussing only the former.

One way in which the speculative risk attaching to price fluctuations is reduced for the manufacturer and assumed by the speculator is by the establishment of a continuous open market, as the stock and 53 produce exchanges. If a miller, for instance, engages to deliver flour a year hence and expects to begin milling in six months, he must know at what price he can buy his wheat when he needs it, or his anticipated gain may be turned into a loss by an unexpected rise in the price of wheat. He is able, however, to buy a “future” in wheat on the produce exchange from some broker who makes a specialty of this business. He buys his needed wheat now for delivery six months hence, and on the basis of this price is able to accept an order for his flour a year from now, allowing himself a fair profit as a miller but wholly eliminating the speculative risk of price fluctuations. Or a building contractor, before making an estimate of the cost of erecting a structure, will secure options at definite prices from dealers on the materials he will require. So, too, in the iron and steel business it is customary for manufacturers to contract in advance for materials at the same time that they accept orders for the delivery of the finished products. In all these cases the business of dealing in futures is assumed by a particular class, who have developed a special skill and ability in forecasting price variations, and who can do so very accurately. It is not a matter of luck or chance, but the result of wide knowledge and careful study. “To foretell the price of wheat one must know the rainfall in India, the condition of the crop in Argentina, must be in touch as nearly as possible with every unit of supply that will come into the market.” Sometimes the speculators make mistakes, but they are certainly less apt to do so than men who are without their special talent and training.