CHAPTER VII.

THE TRUST MOVEMENT IN MODERN INDUSTRY.

ONE of the chief features in modern economic life is the creation of devices for the limitation of competition. In the field of wages this has been done by trade union organization, or by government regulation. Competition between workmen for jobs has not been abolished, but the principle has been laid down that such competition shall not be allowed to push wages below a recognized standard rate. This idea has been adopted by capital also, with great success. The various forms of agreements and business organizations which we describe generally as "trusts" have for their aim either the elimination of competition altogether, or the imposing of such restraints upon competing firms as will prevent prices and profits from being dragged below a certain level. From this defensive attitude trusts have in many instances passed on to an active offensive, which aims at realizing the greatest possible return to capital, if necessary by the exploitation of labour and the consumer. It may be worth while to analyse these aims a little further.

Aims of Trusts. (1) To take advantage of a protective tariff. A stiff tariff frees the home producer from some foreign competition, and places the local market more at his disposal. But home producers may still compete fiercely, unless they agree to abandon that competition and share the spoils more amicably among themselves. Many trusts have arisen in this way, behind the shelter of a high tariff wall.

(2) To remove the destructive effects of excessive competition, and guarantee reasonable profits by keeping prices steady and by reducing "competitive costs." By competitive costs' we mean the money spent in persuading a customer to buy A's goods instead of those of B. Such costs are advertising, fees to agencies, salaries and expenses of commercial travellers, etc. A glance at the newspapers, advertisement hoardings, and the army of commercial travellers employed to-day will indicate the extent to which competitive costs form part of the price paid for any article. Any movement, therefore, which reduces the need for such a large outlay has a beneficial effect on the annual balance.

(3) To get control of the market, local or international, and establish a monopoly.

(4) To get by combination the benefits of large-scale purchase, production, and sale. This may mean either the union of firms producing the same thing a horizontal combination-or the union of firms doing different but inter-related tasks-a vertical combination.

(5) To present a more united front to labour demands, and strengthen the hands of employers in any struggle with their employees. These and other minor aims have been responsible for an almost universal trust movement since the seventies of last century. Trusts are almost as common in Australia as in America; they abound in Germany; they have multiplied in Great Britain since 1900.

The predominating type varies from country to country; but three types stand out clearly. Competition is restricted in one of the following ways:-(1) By making agreements (rings) among rival producers, which, while leaving each firm free in most respects, impose upon it certain conditions as to minimum price, area of market, etc., in the sale of its wares. (2) By establishing some definite machinery-some central selling agency, known in Australia as a pool and in Germany as a kartell-which takes out of the hands of the producers the sale of their goods, and thus controls prices in the interests of all. (3) By merging various competing or interrelated firms into one unit, with a central board of control for all, which orders production and sales alike. Of the three types, the first is found the world over; the second is most common in Germany, the third in the U.S.A. Australia provides instances of all three.

Beginnings. Attempts to limit or abolish competition are as old as trade itself. Aristotle, writing about 350 B.C., declared that "the endeavour to secure oneself a monopoly is a general principle of finance,'' and gave an account of two corners." All through the Middle Ages men attempted to corner supplies of foodstuffs, etc., by buying up all available stocks, and municipal and central governments frequently hurled decress against such actions. Many industrial and commercial groups in the 17th century secured official grants of monopoly over the industry in which they were engaged or the area to which they traded. But the trust in its modern form does not appear until the Industrial Revolution had worked out some of its chief results. In the various boom periods described in the last chapter, new firms arose to compete with old ones, and for a time took advantage of the flowing tide of prosperity. But when the crash came it was seen that there were too many firms in existence. Competition became very keen, plants worked at only a fraction of their productive capacity, and prices were unprofitably low. Capital and labour alike suffered, and so men began to feel that competition was not nearly so blessed as the politicians and economists said it was. Something must be done to remove the worst evils; competition must be limited in its severity if industry was to continue.

This feeling first made itself felt in America, and that country became the birthplace, and later the stronghold, of the trust. The American Civil War was followed by an outburst of industrial development. Industries and railways shot ahead, and finally went beyond the needs of the country. There were too many factories, too many railways. Hence, when the collapse came in 1873, those firms which survived were driven to fierce competition and consequent price-cutting. At one time so keen was rate-cutting on longdistance journeys that it was possible to travel from Chicago to Kansas City, a distance of over 400 miles, for 2/1. Such a state of affairs threatened to overthrow the whole economic system, and in sheer self-preservation the first anti-competitive step was taken.

Rings. The first stage was marked by the widespread entrance into agreements or the formation of associations. Rival producers met together, and came to an agreement for their mutual salvation. The agreement, which was generally unwritten an honourable understanding-might be of three kinds. (1) A price agreement. Henceforth, although all the rivals were to compete as before, no one was to allow his goods to be sold below a certain minimum price, which would guarantee a sure profit on each sale. (2) An output agreement. In order to prevent the market from being glutted, each firm was to limit its production to a certain maximum amount. By this step

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all the goods placed on the market would find a sale, and the absence of any surplus would enable good prices to be obtained. (3) A province agreement. Formerly all producers had competed for orders all over the country, and competitive costs were therefore high. Henceforth A was to be given the monopoly of the New York market, B that of Chicago, C that of Pittsburg, D that of Boston, and so forth. Each man in his own particular area was to be free from the competition of other members of the ring. In this way he was assured of a safe market to exploit, and could fix his own prices and output.

Of such agreements there were many during the seventies and eighties of last century, in the salt, steel, cordage, whisky, and other trades. Since that time associations have been formed for nearly every trade, from lumbermen and ice-cream makers to milliners and stationers. Their general motto is "co-operation not competition, is the life of trade," and co-operation means joint action for "price stabilization.'' But the method has its weak spots. There may be no machinery to enforce the agreement or detect breaches of its terms. Fines may be provided for, but how are the offenders to be discovered? In the seventies members broke their bond with impunity. If trade was growing they exceeded their output, reduced their prices, and trespassed on others' preserves in their desire to annex the lion's share of the new trade. If trade was bad, they did the same to avoid bankruptcy. Further, in 1890, Congress declared that the agreement was illegal because it was in restraint of trade, and hence it was impossible to bring any offender to court. For big industries some better device therefore must be invented. In Germany the ring was improved upon; how, we shall see later. In America it gave place to the trust proper.

The Trust. The trust proper had its origin with John D. Rockefeller, whose little oil-refining venture, begun in 1865, grew until it eventually controlled 80 per cent. of the United States oil supply. Within five years of commencing operations, Rockefeller was refining 4 per cent. of the total American output, and in 1872 made an agreement with five of the biggest rival firms, by which all promised to cease under-cutting each other. The ring then went on to demand cheaper freights from the railway companies; this obtaining of discriminating rates, amounting in cases to a reduction of one-half the usual freight, put them in a strong position, and by 1879 the ring controlled 95 per cent. of the oil refineries, and the railway companies were quite under its thumb. The oil-producers and consumers rose in revolt, and Rockefeller was threatened with law-suits and possible penal legislation. But such attacks only drove the ring to make a stronger organization, and in 1882 the Standard Oil Trust was established. Some 40 companies were concerned, and the shareholders in these firms handed over to nine trustees their share scrip, receiving in return trust certificates. nine trustees were the trust, and as they held all the shares in their hands they were able to direct the policy of the 40 firms. They re-organized refining and sale, shut down unprofitable works, reduced competitive costs, and ran the whole group of refineries as one concern. Thanks to their strength, they were able to browbeat the railways and dictate terms to the oil-producers and buyers. Then at the end of the year they paid to the trust certificate holders the profits which had been made.

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The trust method proved highly successful, and the dividends of this first venture rose from 51 per cent. in 1882 to 12 per cent. in 1891. As such results became known, other industries followed Rockefeller's example;

whisky, sugar, lead, tobacco, etc., all became trustified, and flourished. Soon the wider effects of the movement began to be felt. Primary producers, consumers, workmen, railways, and rival dealers found themselves faced by the all-powerful trust, and to their eyes it became something of a demon.

When the full significance of the trust policy dawned upon the mind of the American public a great howl of rage went up on every hand, and an angry people demanded that this new monster should be slain by legislation. In response to this call, about 20 states passed anti-trust laws between 1887 and 1890. The Federal Government awoke to the situation, and in 1890 the Sherman Act was passed. This law was based upon the old English common law idea that nothing must be allowed to interfere with full and free competition. Any restriction on the freedom of exchange was illegal. Therefore agreements and trusts were illegal. The Sherman Act declared that "any contract, combination, in the form of a trust or otherwise, or any conspiracy in restraint of trade" was illegal, as was any attempt to monopolize any part of trade or commerce. Persons convicted of such illegal acts were to be punished by a fine not exceeding £1,000, or by imprisonment not exceeding one year, or by both. The Attorney-General was instructed to prosecute any trust which did not immediately dissolve, and any man whe could prove that he had been injured by trust attacks could claim three times the amount of the damage sustained.

The Failure of "Trust Bursting." For the moment it seemed as if the Sherman Act would kill the trust; but soon people realized that the passing of the Act had simply ushered in a battle of wits between the trust magnates and the government. Trusts had proved themselves too valuable to be allowed to disappear at the word of the legislator. Hence every attempt to smash them was met by strenuous opposition or by a change in the shape of the organization. Financial interests had a sufficiently strong grip on the governing machine to prevent prosecutions from being undertaken; should a trust be dragged into court it secured the services of the most able lawyers, and frequently won its case on a purely technical point. If it lost, it disappeared from view for a time—nominally dissolved-only to appear again shortly in a different and, often, a stronger form. For instance, the Standard Oil trust was dissolved in 1892 into 20 constituent companies. But instead of each shareholder receiving back his original shares in one company, he was given a few shares in each of the 20 companies. The big shareholders, such as Rockefeller, thus became the chief holders in the separate companies, and were able to dictate the policy of each as effectively as they had done in the old days.

This new arrangement, however, did not work well, and so a better way still was sought. It was found in a law, passed in New Jersey in 1889, which allowed holding corporations" to be formed. A holding corporation was a company established, not to buy produce or sell goods, but to buy shares of other companies, paying for them with its own stock. Thanks to this device, the trusts were able to ride roughshod over the Sherman Act. For instance, in 1899 Rockefeller established a Standard Oil Holding Corporation. This company set to work to buy up a majority of the shares (51 per cent.) of the various companies formerly in the oil trust. They were paid for by giving the seller shares in the holding corporation. Then, when the new company had acquired its 51 per cent. it had a majority of votes at the shareholders' meetings of the different companies. It could elect its own men as directors, shape the policy of each unit, and so work the whole on a united plan.

The Billion Dollar Trust. The holding corporation quickly became a popular idea, and between 1898 and 1900 149 such companies were formed, with a total nominal capital of £700,000,000. But in some cases the new trust was not satisfied merely to acquire a majority of the shares. Why should it earn high dividends for the minority shareholders as well as for itself? Hence many corporations set out to obtain all the shares in the component companies. Chief among these was the United States Steel Corporation, established in 1901. This trust was really a trust of trusts, and gathered under one control the ten big companies which at that time dominated the American iron and steel industry. The corporation took them over, and gave to their shareholders its own share scrip to the value of over $1,100,000,000-hence the popular name applied to it, "The Billion Dollar Of this vast nominal capital Carnegie was the chief holder, receiving $213,000,000.

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Trust Methods. The American corporations show trust methods in their fullest development. The chief features are as follows:

(1) When the trust is established, the less efficient works are closed down and their orders handed over to those which are better equipped. The Sugar-refining Trust began by shutting up 18 out of its 24 establishments, the Whisky Trust abandoned 68 out of its 80 distilleries.

(2) The remaining works are organized and used to the highest possible pitch. A small board of directors at the head controls the whole policy, and receives daily reports from each works. Each branch manager is pitted against the rest, and gently persuaded to increase his output to the utmost. In order to get the most out of the industry, the trust is willing to pay good salaries to its responsible men, and spend money on scientific investigation.

(3) The trust aims at owning all the plant and sources of supply necessary for its work. The Steel Corporation has its own iron ore deposits, its own ships, railways, coal, limestone, and gas supplies. The complete plant for turning the raw iron into any kind of steel goods is in its hands, and finally it has its own selling and distributing organization. This complete control of all processes and needs is known as integration. But integration is taken even farther. A trust recognizes that it is to some extent dependent upon the financial, railway, and other concerns. Therefore it strives to get as its directors men who have big interests in these various branches of business. A steel trust will try to get bankers, railway magnates, ship-owners, oil kings, etc., on its board, so as to create friendly relations with possible customers, rivals, and other men who are in a position to do harm or good. This policy of interlocking directorates is a common feature of business control everywhere to-day.

(4) The trust endeavours to dominate the local, and, if possible, the world market. This it does either by killing rivals or by coming to terms with them. It will sell its goods at a loss for a time in order to capture the trade from a rival. It will refuse to supply goods to agents who persist in stocking those of a rival firm. It will establish its own shops. Failing to crush a 1ival, it will suggest an honourable understanding, by which prices are kept up or markets shared out. In order to capture some foreign market, or prevent a glut in the home market, it will resort to dumping—i.e., selling its wares at a lower price abroad than is asked at home.

(5) The trust is able to take up a strong attitude in politics, and present a solid front to labour. President Wilson once described the American government as the "foster-child" of the big interests. In its dealing with