The success of large combinations in realizing largely increased earnings has likewise failed to come up to expectations. Individual combinations here and there did earn impressive dividends. The oil, sugar, tobacco and steel consolidations were famous for their large earnings. The sensational earnings of certain combinations received much publicity, and so gave rise to the popular belief that practically all combinations were making excessive gains. The true facts of the case are carefully summarized by H. R. Seager: "Of the 183 industrial combinations investigated by the Census Bureau in 1900, but 121 had paid dividends. . . . One-third of the total number paid no dividends at all and another one-third paid no dividends to common stockholders. Nor has this showing been greatly improved in the years that have elapsed since 1900. An intensive study of the thirty largest trusts which were organized prior to January 1, 1904, shows that, while eight have been phenomenally successful, and seven moderately successful, ten have proved unsuccessful and five have been disastrous failures." 22 The combination movement thus fell far short of its hopes and promises. The anticipated economies too often proved to be illusory, and the advantages of large scale production which had loomed so attractively in the arguments of promoters proved to be offset time and again by even greater handicaps and disadvantages arising from unwieldiness and overgrowth. The history of the combination movement, in all its ups and downs, teaches preeminently one economic lesson of the greatest significance, namely, that the economies and advantages of large scale business tend to disappear after the business unit gets beyond a certain size. A point is reached beyond which the economies and advantages are offset by wastes, inefficiencies and disadvantages of the severest sort. The size of maximum advantage and economy varies from industry to industry and from decade to decade, owing to changes in the state of the industrial arts and sciences.

In a broad way, those industries will accommodate the largest size of business unit which can most thoroughly substitute mechanical processes for the workmanship of human beings. Industries whose processes can be standardized, in which automatic and semi-automatic machinery can be utilized, in which mechanical conveying and transporting and hoisting can be taken advantage of, and in which the human element can. be reduced to a subordinate importance, realize most fully the economies of large scale production. As the mechanical technology advances in a branch of industry, and methods of standardization are improved, the way is paved for large units of business organization. To the extent that labor is involved in such highly developed mechanical processes, its efficiency is guaranteed by the necessity for keeping up with the machine. In the meat packing plants, for example, the animal is conveyed by machinery past the worker, and it is necessary for him to perform a single specialized operation completely, while the animal is traveling in front of him. The speed of the carrying machinery thus

22 Principles of Economics, 1917, pp. 455-456. See, also, A. S. Dewing, Quarterly Journal of Economics, Volume 36, pp. 84-102.

regulates the speed of the worker. The same is true in standardized automobile manufacture, and in any number of other mechanized industries. In lines of production where definite regulation of the worker's speed by the mechanical processes is not so fully possible, his labor is still a minor part of production cost even if he is inefficient.

However, the possibility of large scale economies is sharply reduced. where skill, workmanship, personal interest, and individual devotion to duty are major factors of the business process. The large company loses the human touch with the workers. Workers come to think of the executive officials often as remote and mysterious powers, interested solely in grinding out maximum profits, and the psychological reaction is sulkiness, indifference to work, disloyalty to the company, and personal inefficiency. Combinations in industry have found it exceedingly difficult to avoid diminishing labor efficiency with increasing size. The human factor has stubbornly resisted efforts at standardization, and the failure of the original promoters of the great combinations to take into account this basic psychological element explains in large measure the repeated disappointments in the efficiency of these combinations. Primarily for the reason that human factors play a dominant part in their processes of production, the cotton manufacturing industry and the men's and women's clothing industry have not been brought under the régime of large scale production.

It is also true that in those branches of industry where standardized mechanical processes can be drawn upon, the independent corporation may secure substantially as great efficiency as the enormous combination. In such industries there is no insurmountable difficulty to the attainment of efficiency under the large organization, but, on the other hand, the gigantic organization is not necessary for the attainment of maximum efficiency. Reasonably strong independent companies can install the mechanical equipment as well as the huge companies, and can realize in good measure similar economies. Gigantic combination in such lines of industry is not an essential condition of the greatest efficiency.

The greatest single obstacle in the way of large scale enterprise is a psychological one. For one thing, it is next to impossible to find leaders with the instinctive and intellectual equipment requisite to the direction of the large undertakings. Business organizations suffer from a dearth of the very best managerial ability. The salaries offered range from $15,000 to more than $100,000 a year, and the positions carry such power and prestige that they are coveted intensely by the leading men of the country. But there is a limit to the tasks which even the best brains can master, and there is a very narrow limit, very commonly lamented by boards of directors in search of executives, to the supply of the best. brains.23 A billion dollar corporation entails problems of administration and control which only the rarest executives can solve effectively.

23 See A. Marshall's Industry and Trade, pp. 360-364; Stevens's Industrial Combinations and Trusts, pp. 574-575.

The large combinations embrace a dozen, or a score, or a hundred or more separate plants, scattered across the country. Each subsidiary plant must have executive officials of high ability, and it is no small task to find a sufficient number of this sort and for the president of the combination, who is seldom in personal contact with them, to inspire them with his ideals for the business. The various subordinates have to be infused with the spirit of the head of the combination, understand the application of the broad policies and basic ideas which he desires to have worked out in the several plants, made to feel a keen sense of responsibility and loyalty to the combination. When the managers of the various plants do not have their own money tied up in the property, there is a double difficulty in leading them to devote their best energy and ability to their position. They do not plunge into the task with all their strength as they might if the business were their own. Especially are they apt to assign the burdensome, tedious, aggravating parts of the position to others, and to neglect the drudgeries which might not seem so onerous if the plant actually belonged to the manager, and all the pride of personal fortune were at stake. In cases of independent corporations, of the small or moderate sized variety, no amount of plugging, no amount of indefatigable, painstaking effort is too great for the taste. of the men whose all is at stake in success or failure. The modern corporation president must be able to create morale among his subordinate executives, and in the largest business organizations, this is a most difficult task. Big business is largely a question of the best motives of the biggest men in the country. And the problem of bringing forth the best psychological powers of executives, yet not overstraining the human equipment; of securing maximum efficiency from the best minds, yet not subjecting them to a business unit so great in its scope as to baffle their judgment and thwart their personality, is one which largely limits the size to which modern business enterprises can successfully grow.

The psychological difficulty extends down the line from the topmost executive to the common laborer. Foremen are men subject to strong bonds of habit and tradition, and all attempts made by superiors to better their contact with laborers come up against the recalcitrance and fixity of the foreman's psychology. In the mind and experience of the laborer, the foreman represents the company, and is the symbol of what the company stands for. In most companies, workers are at the mercy of foremen, bossed by them, paid by them, chosen by them, fired by them, promoted by them, and in the eyes of workers, modern industrial autocracy very widely means simply the petty tyranny and capricious domination of foremen.24 The personal touch between the owner and worker in the small plant is gone, and the large corporation is a great impersonality, interpreted to the workers through the medium of petty bosses and foremen.

24 S. Webb, The Works Manager Today, p. 27. See, also, Whiting Williams, What's On the Worker's Mind?, Chapters 11-14.

The imperfect human relations of large corporations have been prominent factors in the disappointments and failures of large businesses in the past. It is most significant, however, that in recent years, and particularly as an outgrowth of the World War, pioneer leaders of great corporations have demonstrated the practicability of a new science of human relations. Many leading corporations have created Departments of Industrial Relations, the basic purpose of which is to organize the human factor in industry. Practical experience has already resulted in a body of scientific principles of labor management applicable in the effective treatment of the human industrial problem. This body of principles calls for such policies as the inauguration of employees' representation in the form of works councils or shop committees, the adjustment of questions of hours and wages in frank consultation with workers, the systematic stimulation of right incentives and motives in the worker, the improvement of lighting, heating, ventilating and other working conditions, the development of confidence in company policy by suggestion systems, collective bargaining, medical care, vacations, and insurance aid. This new science of human administration goes far toward overcoming the original handicaps of large business organizations in dealing with the labor factor. Once labor has been brought under adequate control, psychologically speaking, the economies of large scale production need not be confined primarily to industries operating under mechanical and standardized processes, but will be possible to an increasing degree for industries in which human skill and personal interest are major factors. The very recent developments in the science of industrial relations have a direct bearing, therefore, upon the most efficient size of business units, and upon the possible economies of large consolidations.

The trials and difficulties of large business lead, moreover, to an analysis of some of their fundamental relations to banking and financial interests. The intimate relations established between new corporation promotions and the investment bankers and syndicate of underwriters which float the corporation securities; the banking connections of boards of directors which are of aid in the maintenance of adequate credit for working capital purposes; the ties formed between railroads and other corporations and their bankers during periods of receivership and reorganization; and the confinement of the attention of boards of directors very largely to questions of finance, all serve to subordinate nearly all other corporation problems to the uppermost problem of corporation finance. The history of the financial relations of the great American trusts certainly bears out the broad conclusion of the English economist, Alfred Marshall, that "a great part of the railways and the chief manufacturing and mining businesses of America are largely under the control, for good and evil, of a comparatively small number of powerful financiers.'' 25

This control is widely exercised by means of interlocking directorates. All the members of a bank's board of directors, and its major executive 25 Industry and Trade, p. 540.

officials may be members of the boards of anywhere from half a dozen to half a hundred corporations. The Clayton Act of 1914 prohibits interlocking directors between corporations which, by the nature of their business, are actual or potential competitors, where interlocking directorates might tend to restrain competition unduly. The act is not a sweeping prohibition of all interlocking directorates, but only such as would involve the building of monopoly advantages or the unreasonable restraint of competition. Interlocking directorates are still permissible where they do not violate this prohibition, and hence they exist at present on a broad scale, and are important financial connecting links between corporations and financial houses. There is nothing in this relationship which indicates a "money trust," or a conspiracy of bankers to dominate the business of the country, a charge which is often loosely made. The true significance of the relationship is simply that "the structure of modern capitalism tends to throw an ever-increasing power into the hands of the men who operate the monetary machinery of industrial communities, the financial class." 26

The financial needs of the large consolidation for working capital are largely accommodated by commercial borrowing from banks; and the greatest vigilance is necessary on the part of the corporation's overseers to have ample funds available to pay off such loans when due, or to have the state of the business strong enough to make bankers feel safe in extending loans instead of exacting prompt payment. In times of business depression or crisis, with the assets of a corporation depreciating in value, and general anxiety throughout the banking community, the corporation must be able to meet promptly its commercial credit obligations in case the banks feel it necessary to liquidate the obligations. Failure to meet the obligations when demanded means a state of insolvency. The constructive aid of affiliated financiers is of life-saving value at such critical periods, and in numberless instances, a lenient and coöperative attitude on the part of the financial institutions is the only factor which makes it possible for the large corporation to "round the corner" of the critical period. Moreover, the borrowings of the corporation for purposes of fixed capital, such as buildings, or machinery, entail certain interest charges which have to be met regularly. Failure to meet the interest charges means a state of insolvency. The ultimate source of payments of all credit obligations is the earnings of the corporation. If these earnings are not large enough to meet the payments when due, no matter whose the fault, the corporation is ready for bankruptcy. But it happens with any number of corporations and their financial backers that during a period of prosperity, with profits running high and business booming, the optimism of the times grips the imagination of the corporate overseers, and impels them to over-expansion, over-capitalization, over-borrowing. Time and again, bankers and corporation directors prove victims of their own psychology, and in the great tide of money making and expanding and building of a period of 26 J. A. Hobson, The Evolution of Modern Capitalism, pp. 235-257.