The plain facts as to the trusts and the tariff, with chapters on the railroad problem and municipal monopolies;

Preface

This book is written with the belief that there is no

sufficient reason why sound knowledge of the trusts and

the tariff should continue to be confined so narrowly to

the few. To understand these, which, with connected

topics, are the most important questions of the day —

political, economic, and social — the average man of some

education does not seem to lack capacity. The merchant,

Pi the wage worker, or the farmer, discerns keenly the

jv slightest change for better or worse in the conditions by

cc which he is directly affected. Could he not carry his

^ thinking to causes further back — to conditions that affect

him less closely ? When evil, the former conditions, such

g as an ordinary fall in wages or profits, are temporary, and

'2. can be improved, by moving or by varying one's effort ; but

(K the latter conditions, after a lapse of time not very long, as

' when changing methods gradually take away a person's

occupation, are of momentous permanence, and when not

^ foreseen may hold him down inexorably. Among the

flc socially beneficent changes of the latter class are others,

continually approaching, which are portentous to all, and

o which are only to be prevented by timely action from

£ the many.

Not only ou^^/it the average man to carry his thinking further, to become more intelligent in citizenship and more capable in business, but it seems that he desires to do so. As far as leisure permits, he reads the mass of matter placed before him, and with an intention to know, as well as to be entertained. Is not his lack of economic vi Preface.

knowledge due chiefly to the fact that it is not served to him ? That which he gets is too often a one-sided view from partisan sources ; and when it comes from the ablest and fairest writers, it requires too much study, and too much previous information, to be generally appreciated.

The attempt in this book, therefore, is to gather up and convey to the general reader, busy with every-day affairs, a considerable measure of that deeper economic and political knowledge which is usually confined to men of special education or experience. Both sides of a question are presented, but only so far as the truth seems to demand, not with effort to say as much for one side as for the other. For the views presented, it is hoped that the reasons given will be sufficient evidence of soundness. The object is to enable the reader to understand so easily and clearly that he will not rely blindly on platforms and speakers.

The authorities mainly followed, it will be seen from the foot-notes, are men of established leadership, who have written within close view of American conditions as they exist to-day. The list of books cited is given to avoid printing full titles in the notes. Most of the statistics are taken from government reports, and current facts from the reliable periodicals cited. Some additional facts for Part I. are inserted on its closing page, and a few similar additions will be noticed near the close of Part II. The matter was chiefly written last fall and winter, and proofs of the pages in type have been finally revised during the last two months.

George L. Bolen.

Jackson, Mich., June 2, 1902.

Part I. The Plain Facts as to the Trusts

Chapter. Page.

I. Origin and Purposes ...... 3

II. Possibilities for Good and for Evil . . . .17

III. Kinds of Monopolies ..*... 38

IV, The Railroad Problem 44

V. Municipal Monopolies . . . . . •91

VI. Remedies for the Evils of Trust Monopolies . .112

VII. The Proper and Necessary Measure of Monopoly . 160

VIII. The Evil of Railroad Competition . . . .190

IX. The Trusts and the Future of Society . . . 208

Part II. The Plain Facts as to the Tariff

X. Foreign Trade and Protection

XI. The Future of Protection in America

XII. The Arguments for Protection

XIII. Protection and Wages ...

XIV. Protection and Recent Prosperity XV. The Tariff Question as it Stands To-Day.

273 313 356 387 405

LIST OF BOOKS CITED.

( The date given is the year in which the book came from the author. )

Adams, Henry C. Public Debts. 1887. New York : D, Appleton & Co. Bowen, Francis. American Political Economy. 1870. New York :

Charles Scribner's Sons.

Bullock, Charles J. Introduction to the Study of Economics. 1 897.

New York : Silver, Burdett & Co.

Clark, J. B. The Control of Trusts. 190I. New York: The Macmillan Co. Coler,Bird S. Municipal Government. 1900. New York: D. Appleton & Co. Collier, William M. The Trusts. 1900. New York : Baker & Taylor Co. Dabney, W. D. Public Regulation of Railways. 1889. New York:

Ely, Richard T. Monopolies and Trusts. 1900. The Macmillan Co. Hadley, Arthur T. Economics. 1896. New York : G. P. Putnam's Sons. Hadley, Arthur T. Railroad Transportation. 1885. G. P. Putnam's Sons. Ingram, J. K. Article on Political Economy, Encyclopedia Britannica.

Vol. XIX. 1885. New York : Charles Scribner's Sons. Jenks, Jeremiah W. The Trust Problem. 1900. New York : McClure,

Phillips & Co.

Levasseur, E. The American Workingman. 1900. The Johns Hopkins Press. Nettleton, A. B. Trusts or Competition. 1900. Chicago : Leon Pub. Co. Newcomb, H. T. Railway Economics. 1898. Philadelphia : Railway

World Publishing Co.

Patten, S. N. The Economic Basis of Protection. 1890. Philadelphia :

J. B. Lippincott Co.

Political Science Quarterly. Boston and New York : Ginn & Co. Roberts, Ellis H. Government Revenue. 1884. Boston: Houghton,

Mifflin & Co.

Rogers, J. E. Thorold. Article on Free Trade, Encyclopedia Britannica,

Vol. IX. 1878. Boston : Little, Brown & Co.

Shearman, Thomas G. Article on Free Trade, Encyclopedia of Social

Reforms. 1898. New York : Funk & Wagnalls Co.

Spahr, Charles B. America's Working People. 1900. New York :

Long;mans, Green & Co.

Stebbins, Giles B. American Protectionist's Manual. 1883. Chicago:

C. H. Kerr & Co.

Sumner, William G. History of Protection in the United States. 1876.

New York : G. P. Putnam's Sons.

Von Halle, Ernest. Trusts. 1895. New York: The Macmillan Co. Wright, Carroll D. Industrial Evolution of the United States. 1895.

PART I.

THE PLAIN FACTS AS TO THE TRUSTS.

Chapter I. Origin And Purposes

The First and Greatest. — The purpose for which most of the trusts have been organized is some degree of monopoly. The advantage of being practically alone in a business, and able to raise price without losing customers, can easily be imagined by a business man. Both the name and the purpose were learned from the first and greatest of all the trusts — the Standard Oil Company, worth ;^842, 000,000 at the highest market price of $842 a share (May, 1901) and paying ;^48, 000,000 in dividends in the year 1900. Here market value rose, as usual with corporations, until the dividend rate was about 6 per cent.^ The name trust was derived from the organization by the leaders of the Standard, in 1882, of a number of petroleum refiners in Pennsylvania, Ohio, and adjacent states, into one consolidated concern, managed by trustees for all the separate refining corporations, of each of whose stock the trustees were given a majority to hold and vote. During the preceding eleven years the separate corporations had

> Of course, the total is not a selling value when the property of a corporation is based on market prices of its shares. Offering many of them for sale causes prices to decline. As the Standard paid ^48,000,000 again in I901, while the price of its shares has lately ranged as low as $645, it is to be presumed that investors do not expect a continuance of the large annual dividends. At par value the Standard's capital is ^100,000,000, in shares of ^100 each.

4 The Plaiji Facts as to the Trusts.

been united by simpler agreement, and more or less from the start had acted together, charging the same price for oil, and diAiding territory in which to sell. They gradually monopolized the oil refining business, driving out independent refiners by selling oil for awhile in their localities below a living profit, and by getting from the railroad companies, as the principal shippers of oil, freight rates materially lower than those charged to competitive refiners.

Public Opposition Aroused, — The Standard trust from the first was rich and powerful. By 1885 definite information of its secret agreements with railroads began to arouse public fear of monopolistic combination ; though several years before the alarming extent of discrimination by railroads was revealed by state investigations. Before 1890, the American Sugar Refining Company and various other trusts having appeared in the meantime, anti-trust legislation began to be agitated. The building up of one shipper and the pulling down of his competitors, by means of discrimination in freight rates, led to the enactment by Congress of the Inter-State Commerce Law of 1887, designed to secure for all shippers impartial railway service. The Sherman Anti-Trust Law was passed by Congress in 1 890, and similar laws have been made by the legislatures of thirty-one states. But these laws have had little or no effect to prevent the formation of trusts. From lack of clear understanding on the part of their framers, and of definite purpose, the laws have in most cases not even checked the evil practices. With some of the laws the main object perhaps was to gain party advantage by meeting a demand of the people, without much concern as to effective results. In a few cases these laws have been declared unconstitutional, for excepting from penalty combinations of workingmen or farmers.* Trusts could not be lightly brushed aside. They rested on economic causes too strong.

The Trust Craze. — Previous to the panic of 1893 many trusts were organized ; including the American Tobacco Co. (cigarettes), the American Book Co. (school books), the American Cereal Co. (oatmeal), the United States Baking Co. (crackers), the Diamond Match Co., and the National Lead Co. But after 1898 the trust craze reached its high-water mark. About two hundred trusts now exist, occupying some division of the field in nearly every general line of business.^ Large demand for products at high prices, increasing dividends and rising market value of shares, with the consequent eagerness of people to invest money that hard times had kept idle, then enabled the promoters of a new trust to obtain from its shares and bonds the means to buy out at enormous prices the separate concerns to be

1 Collier, 152. A decision of the United States Supreme Court in March, 1902, setting aside the Illinois law for excepting farmers, will have the result of setting aside laws with the same defect in twelve other states.

^The Number of Trusts. — Nettleton, page 295, gave at the beginning of 1900 a list of 130 trusts, having each a capital stock of over ^10,000,000, aggregating in all ^5,000,000,000. A long list, compiled by Byron W. Holt, appeared in the Review of Reviews oi June, 1899 ; and another list of 163, corrected by him up to Dec. I, I901, and giving facts in some detail, is published in the World Almanac for 1902. Perhaps the most accurate count of industrial trusts is that of the national census of 1900, from which pools and loose combinations are excluded. A summary of its figures is given by Superintendent Merriam in the Atlantic for March, 1902. The total is 183, with 2,203 plants, and with a capital of ;53, 569, 6 1 5, 808. Their total output for the census year, ;^i, 661, 000. 000, shows that they absorb less of the industrial field than is commonly supposed. The total output of all manufacturing (not yet computed) is expected to reach about ;? 1 3, 000, 000, 000. In iron and steel products there are 69 trusts, with 469 plants ; in food products 23, with 277 plants.

united, and to reserve for themselves great fortunes in trust stocks readily convertible into cash. Trusts sprang up like mushrooms, people buying everything offered in stocks, without being particular to investigate the promises of earnings.

Millions in It. — Such opportunities for a shrewd financier or business solicitor to make money quickly, the world never knew before. There have been millions in trust making for these promoters, for bankers advancing capital, and for the separate concerns selling out. The men of the latter have generally remained in control of their plants sold, sometimes without change of the concern's name ; and payment for plants has been made chiefly in preferred stock or mortgage bonds of the new trust. The selling price has usually been so high that whatever becomes of the trust, the important concerns selling to it have been richly rewarded for their part in its formation. Some estimates in figures of promoters' profits are given in Chapter II.

Large Capitalization. — To provide money from buyers of the new shares, and plenty of common stock for promoters, and to throw in extra to sellers of plants, the total capital stock of a trust is made very large, from two to five times the actual cost to reproduce the physical property it buys, but perhaps not larger than as a monopoly it might pay five or six per cent dividends upon in the present flood tide of vast business and high prices for products. The capital stock of an ordinary trust ranges from ten to seventy-five millions of dollars. The largest of all the trusts is one of the latest. This is the United States Steel Corporation, organized in March, 1 90 1, under the leadership of J. Pierpont Morgan, by consolidating the Carnegie Steel Company with nine other great concerns, most of which had previously been formed by combination of smaller ones. Other concerns were absorbed afterward.^

Sale of Stocks and Bonds. — The bonds issued by a trust, bearing a fixed rate of five or six per cent interest, and secured by mortgage on property, are applied on the purchase price of plants bought, and are sold for cash, at about face value, to investors of large sums. The shares of preferred stock, on which a fixed dividend of five to eight per cent is paid first from net earnings, come next in value to the bonds, being based on substantial property, and are disposed of in a similar way. There have been cases, it is said, in which bonds and preferred stock exceeded the cash value of a business when fairly computed. The shares of common stock, on which a dividend of some percentage is paid if any balance is left after paying the fixed dividend on the preferred stock,

1 The World's Greatest Corporation.— The total of the Steel Corporation's shares, nearly all issued to stockholders, is ^1,1 00,000,000, divided equally in preferred and common stock ; and besides, it issued ^304,000,- 000 in 5 per cent bonds, all of which are believed to have been paid Mr. Carnegie for his 60 per cent interest in the steel company bearing his name. (Indus. Commission, Vol. XIII.) The Steel Corporation's total capitalization is therefore ;? 1,404,000, 000. Its net earnings for its first nine months, ending November 30, were 584,779,298, exceeding 10 per cent on its stock. In August it was said to be negotiating for absorption of the trust comprising the great iron companies of Tennessee and Alabama ; and lately it was reported to have bought iron mines in Sweden. The Steel Corporation supports a million people, counting families of employees, controls two-thirds of the American steel industry, owns 115 lake ships, 6 railroads, 80 per cent of the known deposits of Lake Superior iron, 105,000 acres of land in Pennsylvania, and leases 98,000 acres of gas land. To this list must be added 50,000 acres of coal land recently leased in West Virginia. See article in McClure's Magazine, Nov. I901, and the corporation's full report in New York Financial Chronicle, Feb. I, 1902.

are sold at lower prices in the stock market, according to prospects of earnings, and are divided liberally among the promoters as payment for services, and among the sellers of plants as extra portions of purchase price. Only 9 out of 30 trusts reported their common stock as sold for cash, and but i mentioned cash alone. Good will was usually the consideration mentioned — earning power prospective, or under favoring conditions.^

Common Stock Based on Water has long been the rule with American railroad and street car companies, the necessary money being paid in on preferred stock or mortgage bonds. The advantages of this method are that the organizers need furnish only a little cash for starting expenses, the rest being practically borrowed, and that when monopoly gains arise they are hidden, being but a low percentage on a capitalization doubled with watered stock. Monopoly gains publicly known may cause trouble, such as legislation to lower fares, or taxation to take a share for the public. The later trusts have usually issued preferred stock instead of bonds. With such stock, though often similar to bonds in being a lien on the property, the company's business is not passed by the court to a receiver in case of failure to pay the interest, but is left in control of its directors. Except on false pretense of earning power, issue of common stock on expectations requires some monopoly, at least in good will not soon to be taken by a competitor.

• United States Labor Bulletin, No. 29. Good will here includes patents and trademarks, and also the favor of customers. The latter kind is often lost, to some extent, by entering a trust. By the census of I900 the trusts had a total capital of $3,569,615,808, but only $1,458,522,573 of tangible property ; less by $216,600,000 than the total of bonds and preferred stock, leaving for good will and water J2, 01 8, 000, 000. ( The Atlantic, March, 1902.)

Origin and Purposes. g

The Change from Trusts into Corporations. — Most of the trusts are now regularly organized corporations, though some are still united by pools or agreements. The separate concerns forming the oil, sugar, and other trusts united in each case into a single corporation about ten years ago, laws having been enacted in some states against combination by means of trustees holding and voting the shares of stockholders, and courts having decided such action to be outside the powers of a corporation.^ In combining now, as a rule, the separate

' " The Secrecy of the Trusts, their power to refuse information, and their complete lack of responsibility, was indeed a very great danger." (Von Halle, 109.) This very secrecy was evidence that the motive of consolidation was not good — an indication of preparedness to resort to bribery or corrupt lobbying. An evil influence from such organizations on legislatures is inevitable (on courts also some have believed), in view of the necessity they make for restraint by law ; though blackmailing legislators sometimes propose a bill against a corporation to force it to buy them off — demanding in one case it seems, as pay for passing a good bill, ^I50>- 000 for the party in power. (Jenks, 191.) Among the charges against trusts, apparently truthful in a few cases, were attempting to blow up rival plants, burning record books, stealing public documents, and mutilating court records. The ablest lawyers were employed to draw the trust agreements, embodying in them as little information as possible. And after the change to corporations the secrecy in some cases continued. More publicity was desired, but instead there was a more complete withdrawal from publicity. " Nothing shows more clearly the mistake of the present anti-trust legislation. The trusts comply with the letter of the law only to more safely circumvent its intentions." (Von Halle, 102.) The Standard trust dissolved into twenty separate corporations, but as the nine trustees held a majority share of each, they continued to control as before, and have since increased the stock of one, the present Standard Company, to be exchanged for the shares of all the others. (Jenks, 114. )

The Objection to Trust Stocks. — One reason why trust stocks, called "industrials," are held in disfavor has been dishonesty in some cases by managers, who, knowing disaster was to happen, sold out their stock and threw losses on innocent buyers. There have evidently been cases where, in order to lower their fellow stockholders' shares for their own buying, trust managers have closed down plants, injuring the business, and reducing workmen to idleness. Real prosperity in the company has been kept firms and corporations sell out their plants and business to the one great new corporation that is to include them all. Some of the largest combinations bought the shares, not plants, of the uniting concerns. This method is described further on.

Yet the Word Trust is Still Properly Used. — It has a meaning of its own, distinct from that of the word corporation. The latter means a company of persons, owning and holding its capital in shares, organized to carry on some business through directors and officers. The word trust includes all this, but with the additional meaning that it owns most of the plants in its line of business, and holds in some measure a monopoly of the supply of the commodity it produces, which monopoly enables it to charge a higher price than its members could have obtained while they were yet separate and competing producers.

Latest Form of Trust. — The United States Steel Corporation is a new form of trust, though but one among a number of its kind, organized since 1898, and called "parent" or " holding " companies. Its purpose is to perform the service of owning and controlling the stock of the separate corporations united ; that is, it owns the shares for the owners — does for them the work of owning and managing, and especially of uniting and harmonizing all their varied business. Its shares were exchanged for the shares of the separate companies, according to the differing values of the latter ; and being the majority stockholder, it manages each of the companies through its absolute power of choosing their directors. They still

hidden for the same purpose. (Jenks, i86, 214. ) In some cases, it has been believed, trust managers buying their own company's shares made the purchase a personal transaction when there was a gain, but a company transaction when there was a loss. (/'. S. Quarterly, 1895, p. 2)i3-)

exist as before, and operate their mills, though the Steel Corporation succeeded in buying 99^4^ per cent of all their stock. The remaining fraction of 5^ of i per cent probably accounts for the frequent sales on the New York stock exchange of shares of the Republic Steel Company, one of the concerns united.

Its Business is to Own Stock. — The Steel Corporation^ therefore, which has no mills, only an office, exists for I the same purpose as did the old Standard Oil Trust, j The difference is that the oil trust had no legal right to / exist, not being incorporated, and resting on agreements which the law forced the separate corporations to annul. But the steel trust has taken as its business the owning and voting of the stock of the companies it has united, and has been legally incorporated to perform that service. It manages each of them, and from its income, all derived from dividends on their stock it holds, it pays the dividends on its own stock. As dividends from the old stock are used to pay dividends on the new, organizing the Steel Corporation was not a watering of capital stock in manufacturing except so far as it may have bought / stock in its companies at inflated prices with its own / stock, of which its total issue exceeded the total of the united companies by ^484,000,000.*

^ Detailed information of the Steel Corporation was given in testimony to the Industrial Commission, Vol. XIII.

Railway Parent Companies. — In November, 1901, the Northern Securities Company, with a capital stock of ^400, 000,000, was organized in New Jersey to hold the stock of the J. J. Hill railway combination, composed of the Great Northern, Northern Pacific, and Burlington systems. As consolidation of parallel roads is contrary to their statutes or constitutions, Minnesota and the states further west are seeking in the United States Supreme Court to dissolve this parent company ; and consequently, the Southern Securities Company, organized a few weeks later to hold the stock of roads not yet made known, provided in its charter that state laws

Methods of Securing- a Monopoly. — With many of the newer trusts there was doubtless little expectation among the competitors combining, that theirs was to be a monopoly of permanence. A manufacturer willingly entering sold to the combination because its promoters paid high prices for his property, and still left him in charge of his factory, with territory in which his branch was to have all sales in reach, and in which he might go on alone as before in case the combination should be dissolved. There is very little property that cannot be bought if a price high enough is offered. A firm or corporation not consenting readily to enter a new trust has often been induced to join from fear that the trust w^ould force it out of business by selling in its territory for less than a living profit. An aggressive ink maker says he was warned that he would be " crushed like a caterpillar." A leading concern, specially desired to head the list for the influence of its action upon others, may be induced to join by offering an exceptional price, and by tendering to its chief owner the presidency of the trust. Sometimes a separate producer sells out for cash, not taking any stock, and engages in other business. Purchased plants not well equipped, nor favorably located, are usually closed out by the trust, sooner or later. Some other than the territorial basis for dividing business is adopted where that is unsuitable.

Need Not Control All the Supply to be a Monopoly. — The nearer a trust attains the position of a complete

were to be observed. By this method of parent companies, sometimes called proprietary companies, the simpler agreement of community of interest among leading owners is changed by adding the strength and permanence of the old trust combination. For twenty-five years the Pennsylvania Company has existed as such a corporation, formed to unite control of the companies it absorbed, such as the Fort Wayne and the Panhandle, with the original Pennsylvania proper.

monopoly, the better as a rule are its immediate chances to get high prices from consumers, and the greater its power to keep competitors out of its field. Though the word monopoly originally meant control of the whole supply, cases of absolute monopoly probably do not exist aside from copyrighted books and patented articles. The Standard Oil Company for some years has produced from 80 to 85 per cent of the total American output of refined petroleum, and in June, 1901, it bought out a leading competitor of Cleveland — Scofield, Shurmer & Teagle. The sugar trust at one time produced 98 per cent of the total output. Yet a monopoly business falling short of completeness by 15 or 20 per cent may often be more desirable to its owners than if it produced the whole of the supply. The existence of competing concerns, which are thought sometimes to be really owned by the trust or in alliance with it, relieves it to some extent from the public disfavor in which a monopoly is held ; while a few weaker concerns in its field, at the mercy of its monopolistic club, and sometimes having to sell lower because too small to be depended on for a supply, will not be able nor disposed to interfere substantially with its designs. Even with an output composing but half the supply of a commodity — perhaps less — a producer, by withholding from market, might obtain a price somewhat monopolistic in a time of strong demand.^ Independent concerns permitted to live make a good profit when the trust raises price.

Monopoly Buying as well as Selling. — A strong monopoly may be practically the only buyer of its raw material, as well as practically the only seller of its fin-

1 Sidgwick, quoted by Bullock, 302.

14 Tlic Plain Facts as to the Trusts.

ished product. In that case it may exact monopoly gains at both ends, arbitrarily lowering the price at which it buys, and raising the price at which it sells. The Standard Oil Company has been the only important customer of owners of oil wells. At times it paid the well owners of a district very high prices for crude oil, until the capital of a rival pipe line, having to pay as much, was exhausted, forcing it to sell out cheap to the Standard ; and then, having the w^ell owners in its power, the Standard made its prices to them very low, sometimes forcing them to sell out to it also. Such action, proved by testimony of well owners, has been admitted by the Standard to be substantially true in some cases, ^

' Jenks, 155. Also in North American Review, June, 1901.

Some Extreme Cases of Forcing Down Price. — Producers of some farm, forest, or mine products, on which price is not fixed by export to world markets, may fall under the power of a trust as a monopolistic buyer. The Big Four meat combination or pool, consisting of Messrs. Armour, Swift, Morris, and Hammond, have regularly set and changed prices for cattle in some markets. " They annihilate independent butchers by cheaper sales through their own agents. If a seller of cattle refuses to take the first bid, he is generally forced to accept a lower one. The purchasing agents are instructed never to overbid each other. The principals do not interfere with each other in certain localities. They bid jointly for public contracts, and ruin those who dare to appear against them." (Von Halle, Trusts, 1895, page 22.) The above was probably a true statement of conditions when at their worst.