A history of the National Cordage Company, with a supplement containing copies of important documents

Front matter

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COPYRIGHT DEPOSIT.

A HISTORY OF

CHAPTER I The Promotion and Failure

The antiquity of the industry, 3; early pools, 5; the National Cordage Association, 7; organization of the National Cordage Company, 8; expansion of the National Cordage Company, 1 1 ; increase of stock and public offering, 1 2 ; manipulation of hemp and buying competition, 16; financial operations, 23; failure, 28.

Chronological Summary

1 86 1. First trade agreement.

1878. First pool.

1887. Incorporation of the National Cordage Company.

i88q. Beginning of policy of expansion.

1890. Increase of capitalization and public offering of stock.

1892. Maximum control of the Company.

1893. Stock dividend of 100%.

Failure.

Our interest in the manufacture of cordage lies in the fact that here is to be found one of the first instances in which competing businesses united to form a large industrial consolidation for the sake of exacting monopoly profits. In its brief career the National Cordage Company illustrated almost every economic and financial problem that could ordinarily present itself in the history of any industrial consolidation. On the economic side it showed the gradual concentration under one control of upwards of ninety per cent of the American production in an industry where every condition favored competition. It dominated the market for the raw material and controlled as well the essential machinery used in the process of manufacture. To accomplish these ends every device was resorted to for creating a monopoly, — the " gentlemen's agreement," the pool, the legal trust, the leased corporation, and the holding corporation.

The financial history was no less varied. The common stock was issued to the promoters and the preferred stock to the public; the stock was marketed by a professional operator; officers of the Company participated in speculative "pools"; a stock dividend was declared on the basis of fictitious earnings in order to aid the speculation in the Company's securities. Unable to carry the burden of an oversupply of raw material and finished product, with its trade position undermined by new competitors, the consolidation collapsed in a day. Receivers were appointed and the Company was reorganized. All this occurred at the beginning of the panic of 1893, before the depression of the middle nineties, fully five years before the majority of our large industrial corporations sprung into being, and nearly ten years before the ill-fated among them had been reorganized. This early, one might say precocious, attempt on the part of the cordage manufacturers to create a monopoly gives the consolidation a particular interest for the student of economic history.

At the time of its strength, moreover, the National Cordage Company was a giant. The Commercial and Financial Chronicle, usually sparing in adjectives, referred to it as the " great industrial corporation." l It occupied the center of the stage, with the American Tobacco, the General Electric, and the American Sugar Refining Companies of minor importance. Powerful New York Bankers were behind it. When, therefore, the whole house of cards fell to pieces in one crash, the collapse carried with it a disturbance and contraction of business confidence which contributed, more perhaps than any other single failure, to the acuteness of the crisis of 1893. After that time the reorganized Company led an uneven existence, reorganized and reorganized again, all the while diminishing in importance, until there remained hardly a vestige of its former prominence. Created originally to stifle competition, the consolidation was itself stifled by it.

The spinning of rope was among the first industries set up in colonial days. A rope walk was to be found in Boston as early as 1642; and John Harrison was granted a monopoly by the Massachusetts Bay Colony, for his " rope field," to extend down to 1663. " In the federal procession of 1788, the men employed in the industry outnumbered any other class of mechanics in Boston." From Massachusetts, the industry extended to other colonies. A picture of New York, in 1728, shows " Tucker's Rope Walk." l In all this early period, rope making was dependent on the business of shipbuilding; so that, with the gradual decline of the latter industry, it became relatively unimportant. After the invention of the self -binding harvester machinery, a sudden impetus was given to the industry through the demand for binders' twine.

The first trade agreement among cordage manufacturers was consummated February 23, 1861. 2 The object was " to establish certain customs in the trade," correct abuses and misbranding, and to come to an understanding regarding prices. Weekly meetings were held in all the eastern cities where the cordage manufacture had secured a foothold. In July, 1874, the old agreements were entirely rewritten, and the " manufacturers pledged themselves, as men of honor and integrity, to the true and faithful observance of the rules." This proved ineffectual to prevent underselling, and the agreement was strengthened in 1875. Since this, too, proved of little avail as competition became stronger the manufacturers concluded to adopt a pooling system. The first pool was established January 1, 1878. A committee in conference with the manufacturers agreed that certain percentages of the total production of the country should be assigned to each manufacturer. " The percentages ranged from eleven and one-fourth per cent to one per cent." 3 When the business of a concern for a given

1 Predecessor of the Tucker and Carter Company, one of the four chief constituents of the National Cordage Company.

2 Much of the information in this paragraph was derived from The Cordage Industry by Benjamin C. Clark, Boston, 1895; a brief summary in eight pages, prepared for " The Memorial Centennial of 100 years of American Commerce."

3 The Cordage Industry, by Benjamin C. Clark, p. 5. J. M. Waterbury testified before the Industrial Commission that L. Waterbury and Company had the largest percentage in the pool. XIII R. I. C. 127. As has become notorious in connection with the steel industry, price fixing and pooling agreements were frequently armonth exceeded the assigned percentage, that concern paid into the pool 2 cents a pound on the excess. The manufacturers whose production fell below their assigned percentages drew out from the pool 2 cents per pound on the difference. 1 " In

1880, the amount of the pool was reduced from 2 cents to 1 cent per pound, and in June of that year to J cent; but in January,

1 88 1, the pool was abolished." 2 Associations, conducted along the same lines, were formed in 1882 and in 1885. The last was to exist until February, 1888, but was broken up about a year previous, just before the organization of the National Cordage Company, on account of price cutting and false returns. Indeed, the reason for the failure of all these pools seems to have been that always some men would undersell their competitors, or make false returns to the organization. 3 There seems no doubt that competition was particularly severe during this period and the manufacturers regarded the agreements as means of mitigating its severity. Yet the ease with which they were broken up shows clearly that their influence was nominal. The pools controlled, however, a large percentage of the production, 4 and were probably able to reduce somewhat the amount

ranged at " dinners." For example Edwin H. Fitler gave a " banquet " to the trade at the consummation of the arrangements for the pool of 1885.

1 An excellent account of the operation of such a " pool " is given by Henry- Hudson in an account of " The Southern Railway and Steamship Association " which was operated among southeastern railroads, during this period. V Quarterly Journal of Economics, 70. Also reprinted in Railway Problems, edited by Wm. Z. Ripley, p. 98. See also. Hadley, IV Q. J. E. 158; Bradstreet, December 15, 1888; E. B. Andrews " The late Copper Syndicate," III Q. J. E. 508.

2 Clark, The Cordage Industry, p. 5.

3 This generalization is also borne out by the testimony given to the Industrial Commission by various men (XIII R. I. C. 11 2-1 7 2) and by the reports that early cordage men gave to the writer in conversation. J. M. Waterbury testified, " They were always broken up by other new competition starting, or by some men not being willing to act up to the agreement." (XIII R. I. C. 126.)

4 The production of cordage during the life of the United States Cordage Manufacturers' Association, the first pool, is seen from the following table. Statistics from Clark's The Cordage Industry.

Pool

1879 59,808,000 "

1880 70,480,000 "

These estimates averaged at least 70 % of the total American output.

THE NATIONAL CORDAGE COMPANY J

of cordage manufactured. They were hampered, and perhaps helped in a certain sense, by the enormous expansion in the cordage industry resulting from the manufacture of binder twine for the McCormick self -binding harvesting machinery.

In order to obtain the advantages of combined action four of the largest manufacturers formed among themselves two separate organizations, one a " trust " and the other a corporation. The first was an actual " trust " in the old legal sense of the word. 1 The owners of the stocks of the competing companies assigned them to a central board of " trustees," who issued certificates of proportionate interest or shares in the total property held by them as trustees. In this way the trustees had absolute control, as legal owners, of the subsidiary companies, yet these subsidiary organizations were kept intact as ostensibly competitive units. The legal trust was a logical development out of the " pool," when it was recognized that the managers of the pool had no legal control over the operations of its members. As trustees of the trust they were the legal owners of the property of the members, and could therefore administer each separate mill in the interest of the whole organization. In this case the trust was called the National Cordage Association. It controlled four separate companies. The L. Waterbury Company with a mill in Brooklyn, was distinctly the largest single manufacturer of rope and twine in the country. It had been in profitable operation for years as an independent mill, and it entered the new combination with a large surplus and high commercial credit. Its financial rating was well above a million dollars. The Tucker and Carter Cordage Company was one of the oldest concerns in the business. In the early part of the eighteenth century, the great-great-grandfather

1 The references on the old legal " trust " are numerous, see especially W. W. Cook, Trusts, 1888; G. H. Wald, "Two Recent Trust Cases," I Ear. Law. Rev. 201; F. J. Stimson, " Trusts," I Ear. Law. Rev. 132; T. W. Dwight, " The Legality of Trusts," III P. S. Q. 592; N. Heinsheimer, " The Legal Status of Trusts," IV P. S. Q. 190. For good description of the operation of a trust see J. W. Jenks, " The Development of the Whiskey Trust," IV P. S. Q. 296 (reprinted in Trusts, Pools, and Corporations, edited by Wm. Z. Ripley, p. 22). For later legal opinions see Boisot, so Am. Law Reg. 751; Dodd, 7 Har. Law. Rev. 157.

of the then head of the Company was a shipping merchant, who started a rope walk in order to manufacture his own rope. In 1887, the mill was capitalized for only $500,000. Its business had permitted of thirty per cent in dividends, besides allowing upwards of $600,000 to be deflected into improvements. The W. Wall's Sons and the Elizabethport Cordage Company were old concerns quite as successful. It is true, therefore, that the cordage consolidation began its life with four well established, conservatively capitalized businesses, which had yielded high profits as separate organizations. These four companies operated 2800 spindles and manufactured about thirty per cent of the rope and cordage produced in this country. 1 The Association had not the proportionate control over the industry that some of the early pools had had, owing to the fact that several of the largest manufacturers would not deed their mills to the trustees. All the Association's affairs were kept secret. After the American Sugar Refining and Standard Oil decisions, 2 the attorneys for the manufacturers advised them to give up the trust form of organization because of its doubtful legality. The advantages of combination had already been secured in the corporate form of organization.

The other means of combination was through a corporation in which the four manufacturing concerns had a joint interestl On July 20, 1887, the certificate of incorporation for the Nationa. Cordage Company was filed with the New Jersey Secretary of State. The Corporation was under the direct control of the four large cordage manufacturing companies referred to in the pre-

1 The estimate given by J. M. Waterbury before The Industrial Commission was forty per cent to fifty per cent. (XIII R. I. C. 127.) It was excessive, however. In the latter part of 1891, a writer in the New York World, apparently conversant with the situation, estimated the spindle capacity of the country at 10,386. The checks available by the present writer at this time would indicate that this estimate is thoroughly reliable. The four mills just mentioned had 2800 spindles. Allowing for the growth of competition in the meantime, we may estimate roughly the control of the four mills just mentioned, at the time of the early " trust " and the formation of the National Cordage Company in 1887, at thirty per cent of the country's production. This was the nucleus of the whole consolidation.

2 People v. North River Sugar Refining Co., 121 N. Y. 582, 1890. State v. Standard Oil Co., 49 Ohio St. 137, 1892.

vious paragraph. Its authorized capital was $2,500,000 and the initial cash subscription was stated as $1,000,000. This was soon increased to $1,500,000. The Corporation was at first merely a legal device for enabling the members of the National Cordage Association, the " trust," to cooperate with each other in the purchase of hemp and sisal and in the sale of the finished rope and twine. The capital, contributed by the manufacturers themselves, was used to finance the purchase of raw hemp and sisal for the members of the Association and to assist in carrying the considerable load of floating debt always present in a seasonal business like that of the manufacture of binder twine. The Company was conceived as a convenience to help in the conduct of the manufacturing business, a financial prop to help maintain the control of the market secured by the Association. The stock was all held by the manufacturers themselves and none was placed on the market during the first three years of the Company's history. The Directors were men thoroughly familiar with the cordage business. 1 In fact promoters, bankers, and stock market interests were conspicuously absent during the early years of the National Cordage Company's history.

The practical common sense of the Directors of the Cordage Company is indicated by their method of conducting the business of the separate mills. Each one of the four manufacturing companies managed the operation at its own mills, while the organization of the National Company merely attended to the purchase of the raw material and the sale of the finished product. To stimulate economical production the Directors of the National required each operating company to bid a price at which it would manufacture for the central organization. In case the bid was not as low as that of the other subsidiary operating companies the unsuccessful competitor was required to close its mill at its own expense. This entailed considerable loss,

1 James M. Waterbury, President, and Chauncey Marshall from the L. Waterbury & Company; Willard P. Whitlock and Elisha M. Fulton from the Elizabethport Company; Frank T. Wall from W. Wall's Sons; John A. Tucker and Caleb P. Marsh from Tucker and Carter. (Marsh had been hired by the Tuckers to look after their interests in the Cordage Association and the National Cordage Company.)

IO THE NATIONAL CORDAGE COMPANY

although the Company would, of course, derive an income from its interests in the National Company and the National Association. The lower the price at which the manufacturers were willing to spin the cordage, the larger the margin of profit between the raw hemp and the finished rope and twine, and incidentally the greater the earnings of the National Cordage Company. This method of preserving individual responsibility in the face of consolidation, of stimulating efficiency of personal attention to detail without relinquishing the economies of large scale production, is possibly unique, and certainly worthy of careful consideration. Later, when the listing committee of the New York Stock Exchange were passing judgment on the securities of the Company they are said to have called it " a novel idea " and " a pretty sound scheme of consolidation." 1 " All the economies of consolidation are secured by this plan of organization, as well as the wholesome effect of free and keen competition among the manufacturers." 2 The fact that the Cordage Company discovered this device for solving some of the difficulties of concentrated ownership and control in the very earliest years of the combination movement is indeed worthy of note.

Stimulated by the success with which they were managing the four large mills, the Directors of the National Cordage Company conceived the plan of a combination of cordage mills which should exert a monopolistic influence throughout the industry. To this end the Directors leased for ninety-nine years the properties of the four large cordage companies, and used the $1,500,000 of money paid into the Company's treasury as working capital. In this way the National Cordage Company began to assume some of the functions of the Association, and to play, therefore, a more important role. It was to be the nucleus of a larger combination. Furthermore, the Directors began to negotiate for the acquisition of various small mills throughout the east and by the end of 1890 they controlled by lease or option ten small mills besides the four already in the

1 Quotation of J. M. Waterbury's testimony. XIII R. I. C. 127.

2 Belmont and Vermilye's Prospectus for the sale of the preferred stock, p. 3.

THE NATIONAL CORDAGE COMPANY II

National Association. These mills altogether had a nominal capacity of upwards of 3900 spindles. 1 The total operating spindles of the United States amounted in 1890 to something between 9500 and 10,000. The first expansion of the National Cordage Company, therefore, gave it a nominal control over something like forty per cent of the rope and twine production of the country.

In the spring of 1890 three circumstances prompted a further extension of this policy on the part of the National Cordage Company. The first of these was the advice of the Company's attorneys that the old National Cordage Association, being of the nature of a trust, should not be continued. Much discussion was current concerning the Standard Oil and especially the American Sugar Refining trust cases, then pending in the Ohio and New York courts. The attorneys assured the Cordage Association managers that the same ends could be attained under a corporate form of organization. This corporate form could be supplied should the National Cordage Company take over the entire functions of the Association. The second circumstance that prompted an enlargement of the National Cordage Company was the desire of the Directors to secure a public market for the Company's securities, and thereby extend the business beyond the limits of their own capital which had been very much depleted by unfortunate speculations in raw hemp to be described presently. The public was not aware of

1 Original four operating compaDies of the National Cordage Company: —

L. Waterbury & Co Brooklyn, N. Y. 900 spindles

William Wall's Sons Brooklyn, N. Y. 500 "

Elizabethport Cordage Co Elizabethport, N. J. 800 "

Tucker & Carter Cordage Co Brooklyn, N. Y. 600 "

The ten mills acquired by lease or option during the latter part of 1889 and the

early part of 1900: —

Xenia Twine & Cordage Co Xenia, O. 100 spindles

J. Rinek's Sons Easton, Pa. 100 "

Akron Twine & Cordage Co Akron, O. 150 "

Victoria Cordage Co Dayton, Ky. 400 "

H. R. Lewis & Co Philadelphia, Pa. 100 "

Randall, Goodale & Co Boston, Mass. 100 "

Baumgardner, Woodward & Co Philadelphia, Pa. 50 "

G. C. Pooley & Sons Buffalo, N. Y. 100 "

New York Cordage Co New York City 36 "

(soon dismantled) Altas Cordage Co New Orleans, La.

(soon dismantled)

List from Belmont and Vermilye Prospectus, and capacity from New York World, article quoted in 54 Chron. 34, January 2, 1892.

these circumstances and the Directors believed that the high financial standing of the four constituent cordage companies would enable them to sell the National Company's securities to the public. Whether or not the desire to recoup the treasury from the losses sustained by unsuccessful speculations was the primary motive that led to the extension from a private to a public corporation, it was at least incidental. In addition the Directors believed they could make a promoter's profit through the sale of the securities. The business community assumed in 1890, as it did in 1899, that immense profits could be made from the mere promotion of large industrial combinations. The third reason was the fever of extension then prevalent in the community and the belief that through a nominal control over the country's production of cordage the National Cordage Company could both exert a monopolistic influence on prices and also secure great profits from the economies of large scale production. No expectations of profits through combination and trade monopoly seemed too extravagant in 1890. The first " boom " period of consolidation was at its height and in sympathy with it the Directors sought to acquire the actual ownership of the mills previously held through leases. As the floating debt was unusually large during certain times of the year, on account of the seasonal character of the business, investments in fixed assets could not be carried by means of bankers' loans. Extensions in the direction of purchasing real estate could be financed, therefore, only through the increase of capital liabilities. All these changes were alone possible through an increase in the capitalization of the National Cordage Company and an extension of its credit beyond that of the local bankers and note-brokers.

In the summer of 1890 the capital stock of the National Cordage Company was increased from $1,500,000 to $15,000,000, of which two-thirds was common stock and the other third eight per cent cumulative preferred stock. This latter was offered to the public 1 by August Belmont and Company and

1 The public did not subscribe to the preferred stock to the extent that was expected. The Directors of the Cordage Company were compelled to take back a large part of the issue.

Vermilye and Company in an extravagantly optimistic prospectus dated October 9, 1890. 1 The common stock was divided about evenly among the original four companies and in addition some cash was paid to each, from the proceeds of the sale of the preferred stock. 2 With some of the money remaining from the sale of the preferred stock the National Cordage Company purchased outright the ten small mills which it already held under lease or option.

The actual value of these fourteen mills, as operating plants, can be estimated by indirect evidence. In the banker's advertisements, it was said that " the value of the assets," of the National Cordage Company inventoried August, 1890, " exclusive of the proceeds of the $5,000,000 preferred stock to be issued, is $12,000,000 and upwards, over and above all liabilities." 3 We therefore assume that the valuation of the promoters and bankers whose judgment we have already quoted, placed an actual value of $17,000,000 on the fourteen mills, and all the quick assets then owned, or presently to be acquired, by the National Cordage Company. The capacity of these fourteen mills was 3936 spindles. 4 Excellent modern mills could have been erected at the time, for $500 per spindle. The working capital necessary to operate them would represent another $500 per spindle. Conservative figures would place

1 Advertisement and announcement in 51 Chron. 491, October 11, 1890.

2 For example, the Elizabethport Cordage Company received $2,397,300 in National Cordage Company common stock, and approximately $500,000 in cash. Balch v. National Cordage Company. Testimony of J. M. Waterbury before Commissioner C. N. Williams, October 17, 1892.

3 Prospectus of Belmont and Vermilye, October 9, 1890, p. 3. Quoted also in 52 Chron. 279, and in Listing Application to New York Stock Exchange. The inventory was made by President Waterbury, the Secretary and three members of the Board of Directors. Why a banking house of the standing either one of these possessed consented to lend its name to the marketing of a stock of such unknown value is indeed a mystery. Nor indeed were the bankers guarded in their direct assertions. They state the results of the plant apprisals as based on affidavits " satisfactory to them." The striking difference in tone between this early circular and the prospectuses now published by bankers is deserving of note.

4 Figures taken from writer in New York World, quoted 54 Chron. 34; January 2, 1892. From other evidence the present writer believes this estimate reliable. Supra, p. 11.

the reproduction cost at $1,000 per spindle, 1 including fixed and current assets. The actual value of the property of " going " mills of the most modern construction with a capacity of say 4000 spindles, a half to two-thirds of which spun only binder twine, would not exceed $5,000,000. Mr. J. M. Waterbury, the first President of the National Cordage Company, admitted, in his testimony before The Industrial Commission, that the $5,000,000 of preferred stock " had some good will in there." 2 Considering the antiquated character of some of the mills, and the considerable volume of current liabilities, it would be liberal to estimate the value of the property owned or soon to be acquired by the National Cordage Company, together with the proceeds of the sale of the preferred stock yet unexpended, as $4,ooo,ooo. 3 Against this property stood a capitalization of $15,000,000 upon which the Directors sought, — and succeeded for a while, — in paying eight per cent on $5,000,000 of preferred stock and twelve per cent on $10,000,000 of common stock. This represented an annual charge of $1,200,000 on assets worth less than $4,000,000, — over thirty per cent. And such was the belief in the economies to be secured by consolida-

1 These figures were checked by the writer according to three independent lines of reasoning: (1) opinions expressed by cordage men; (2) cost accounts of " representative mills "; (3) the financial rating of (a) representative mills, and (b) nine of the mills that entered the combination.

Mr. Grimwood testified before the Industrial Commission in 1901, that the cost of erecting a 500 spindle mill was then $500,000 and that the working capital would be $250,000 more. XIII R. I. C. 113. This referred to a cordage mill, which is far more expensive than a twine mill, and a very large part of these mills then owned by the National Cordage Company were equipped only for binder twine. Besides, in 1890 construction costs were less than in 1901, and the machinery was built according to less expensive patterns.

3 This estimate of $4,000,000 for the actual assets of the Company is amply large. Of the fourteen mills, two were immediately dismantled. All of the smaller mills had been acquired at inflated values. The net quick assets, which are considerable with any manufacturing mill, were largely offset by bank loans. The current assets had been much depleted by unfortunate speculations in hemp. From various indirect lines of evidence, the writer feels that $3,200,000 would represent a truer valuation of the mill property and cash assets. He prefers, however, to use the larger figure, to avoid any possible undervaluation of the Company's tion, that the market price of the common stock reached $140 a share in less than two years.

The purposes of the enlarged activity of the National Cordage Company, aside from the change from the trust to the corporation, were to force the stock of the Company into the hands of the public on the one hand and on the other hand to extend the business so that the Company might acquire a nominal control over the industry. The Directors sought to obtain the first object by means of a " stock pool." The preferred stock had already been put on the market by bankers. The common stock was divided about equally among the four original cordage concerns. It was then reassigned in February, 1 89 1, to L. Waterbury and Company, the largest of the cordage companies, under what amounted to a trust agreement l for the marketing of the stock directly through the New York Stock Exchange. 2 The administration of this pool was placed in the hands of James R. Keene, 3 and several New York bankers became directly interested in the success of the pool. While Keene was making a market for the common stock on the Exchange the National Cordage Company's directors for whom, indirectly, he was acting, agreed not to sell any of their personal holdings not assigned to L. Waterbury and Company under the pooling agreement. As a result of Keene's activities and the subsequent financial statements of the Company, the market price of the common stock was forced up from $73 a share in March, 1891, about the time the pool began its life, to $142 a

1 For example, certificate for 23,878 shares of the National Cordage Company's common stock, issued to the Elizabethport Cordage Company, February 24, 1891, was reassigned to L. Waterbury and Company on the same day, under the agreement. Balch v. National Cordage Company. Testimony before Commissioner C. N. Williams, October 17, 1892.