III. CONCENTRATION OF PRIVATE CONTROL OF INDUSTRIAL ACTIVITIES A. Problems at Issue By concentration of private control of industry we mean the power of a given individual or group of individuals to exercise an amount of control over industry quite out of proportion to their numerical importance. This control may be exercised in one of two main ways: It may mean control of the apportionment of productive energy into various channels, or it may mean the control of the activities and operations of a given business, granted that productive energy has already been committed to this particular channel. This latter form of control may flow from a simple ownership of a controlling interest in the business, no matter what form of business organization may have been used; or from the use of various devices in connection with the corporate form of organization; or from various other controlling devices which may or may not constitute what is popularly known as a trust" or "industrial combination." Concentration of the ownership of wealth and concentration of private control of industrial activities may or may not go hand in hand. Take the case of a capitalist who invests heavily in the bonds of a single company. Since he is a wealthy capitalist, we have here a case of concentration of the ownership of wealth. There is also concentration of private control of industrial activities in the sense that this capitalist is able through his ownership of wealth to direct social energy into a given channel. Once his wealth is in that channel, however, he has little to say with respect to control of the activities and operations of the specific business, since he is only a bondholder. Or, take the case of a wealthy capitalist who invests lightly in the bonds of many companies. Here also we have concentration of ownership and accordingly concentration of control of the flow of productive energy, but no concentration of control of the operations and activities of the businesses. On the other hand, if a wealthy capitalist invests heavily in the stocks of a single company, we have a case of concentration of ownership, concentration of the control of the direction of productive energy, and, provided the amount of his holdings is sufficient, concentration of the control of the activities and operations of the particular business. If, finally, this capitalist invests very lightly in the stocks of many companies, we have concentration of ownership, concentration of control of the flow of productive energy, but there is nothing in the case which necessarily means concentration of control of the particular activities of the plant. In this section, concentration of the control of the flow of productive energy into various channels will not be considered at length. The topic is a very important one but it has already been treated to some extent in Selections 105-12 on the apportionment of productive energy, and it will be taken up again when we discuss the guidance of economic activity in chapter xii. In this present section our attention will be given mainly to a consideration of the concentration of control of the activities and operations of given businesses, once it has been decided to commit productive energy to these enterprises. In popular discussions of this subject, the trust or industrial combination movement has received an amount of attention quite disproportionate to its importance. The trust movement is, of course, a significant phase of our modern industrial life, and it is clearly a case of concentration of private control of industrial activities. If, however, this monopolistic phase of concentration of control had never taken place, we should nevertheless be justified in giving extended treatment to the concentration of private control of industrial activities. The occasion for this concentration is found in many of the outstanding features of our industrial system. The devices used in bringing the concentration about may or may not be devices which are also used in trust formation. QUESTIONS 1. Define or explain: (a) the one-man corporation, (b) the voting trust, (c) limited voting, (d) cumulative voting, (e) preferred stock, (f) holding company, (g) trust, (h) monopoly, (i) pool, (j) interlocking directorates, (k) community interest, () reorganization, (m) rebates, (n) merger, (o) amalgamation, (p) vertical combination, (q) sequence combination, (r) horizontal combination, (s) Interstate Commerce Commission, (t) Federal Trade Commission. 2. "The corporation has made possible a centralization of power." Just how? Is the corporation an indispensable antecedent of concentration? 3. "Very frequently a solid block of 20 per cent of the stock of a corporation will give effective control of that corporation. Ordinarily it is not necessary to have as high as 51 per cent of the stock in order to control." How can this be true? Would it be true under a system of cumulative voting? 4. Explain in detail a process by which the holders of ten million dollars' worth of securities may be able to control one hundred million dollars' worth. 5. What is meant by saying that the drift of modern industry in America has caused the stockholder to have a small sense of responsibility? Is it true? If so, why has it occurred? 6. Do you understand that a voting trust is designed to protect minority stockholders or designed to guarantee continuity of the policy desired. by majority stockholders? 7. "In time of reorganization the defenseless securityholders must take whatever plan is offered, however unjust." On what grounds can this be said? 8. "Concentration of control can be brought about through the manipulation of securities." What does this mean? 9. Make a list of ways in which corporations may be "associated." 10. "Interlocking relationships are brought about for these reasons: (a) interlocking for financial or credit purposes; (b) interlocking for industrial and commercial purposes; (c) interlocking for the purpose of construction and operation; (d) interlocking to restrain competition." Show how there could be any advantage in each of these four cases. Is the advantage to the manager or to society? 11. What is meant by saying that an interlocking directorate runs counter to the whole scheme of organization of the corporation in that it permits a director to have conflicting interests? 12. Is there any causal connection between the corporation and the concentration of the ownership of wealth? 13. "Competition these days tends to become cut-throat competition. The modern business man cannot know when to stop competing. He cannot stop if he could know." What does this mean? How far is it true? 14. "The Interstate Commerce Act of 1887 forbade pooling in railroads and ordered them to continue competing. The inevitable consequence was a more permanent and solid form of consolidation." Why was this an inevitable consequence? 15. "Large-scale production tends strongly to pass over into monopoly." Why or why not? 16. "Monopoly is merely the final stage of a sequence which starts with the introduction of machinery." In what sense is this true? What is the relation of indirect costs to the trust movement? 17. Is monopoly a new problem? Make a list of as many forms of monopoly as you can. 18. Can you cite any cases where a method of competition that would be deemed unfair in one industry or in one set of circumstances would be deemed fair competition in another industry or under another set of circumstances? 19. What is the standard which enables one to judge whether competition is fair or unfair? Draw up a list of the forms of unfair competition. 20. Make a list of the various instrumentalities of concentration of control. What ones may be parts of the trust problem? What ones are inevitably parts of the trust problem? 21. Were there any trusts before the industrial revolution? Why? Is "trust" synonymous with "monopoly"? 22. "The emergence of our modern trust is closely connected with the fact that in our generation production has been outrunning market." What does this mean? 23. "The trusts are the result of natural growth." "The trusts are the result of artificial conditions." With which of these quotations do you agree? Why? 24. "Of course the trust originated in private gain. In some respects the private gain went hand in hand with social gain, in other respects with social loss. Sensible handling of the trust problem involves control which allows society to reap what advantages it can out of the trust." What specific measures would such a policy involve? 25. Review the alleged advantages of large-scale production. Consider whether, in each case, monopoly is necessary to secure that particular advantage. 26. What, if any, is the relation of the trust to (a) the pecuniary organization of society, (b) machine industry, (c) the corporate form of organization, (d) large-scale production, (e) the protective tariff, (f) railway rebates, (g) discriminating prices, (h) factor agreements? 27. In discussing the forces making for combination, one writer differentiates between the "driving forces," the "beckoning conditions," and the "facilitating conditions." Make as long a list as you can of each of these kinds of conditions. 28. "The pool was the dominant form of combination from 1870 to 1880. From 1880 to 1890 trustee control operated. Since 1890 we have used the holding corporation and other devices." What were the difficulties with the pooling method of control? What were the difficulties with trustee control? 29. Many people are more disturbed over the concentration that has occurred among our financial institutions than they are over concentration in any other line of business activity. Is there good reason for this? 30. Draw up in parallel columns the charges made in Selection 295 and the answers made in Selection 296. Which seems to you to have the better argument? Has the loser stated his full case? 31. In the table in Selection 294, railroad companies are shown to hold a larger proportion of one another's stock than of one another's bonds. Why should this be true? Is not a bond a safer investment? 32. Do you think that concentration of control tends to bring about more stable conditions in business and to prevent the recurrence of crises? 33. Why should the regulation of railroads and of capitalistic monopolies be regarded as among the most critical problems in social organization? 34. Draw up in parallel columns the advantages and disadvantages of concentration of control. Do you need to subdivide the question according to social advantages and disadvantages and individual advantages and disadvantages? 35. Can there be such a thing as a good big business? If not, is the remedy to be found in diminishing the size of the business or in increasing the size of government ? 36. Federal incorporation is frequently urged as one means of controlling our big businesses. In what ways would federal incorporation assist in this control? 37. What effect would the abolition of proxy voting have upon concentration of control? What would be the effect of limited voting? 38. Make a list of things which have been done in the field of corporation finance to counteract the evils of concentration in that field. 39. What is meant by the "sprinting contest" between legislators and corporation lawyers? 40. "It is a great mistake to confuse the corporation problem with the trust problem." What are some of the issues of the corporation problem? What are some of the issues of the trust problem? 41. Why should we be concerned with preventing certain kinds of interlocking directorates? Should we try to prevent all interlocking directorates? 42. Why do the corner grocer, the druggist, the barber give us no great concern? Are they made of sterner moral fiber than are the railroad magnate or the trust promoter? 43. "The necessary inference from the foregoing analysis is, then, (1) that combinations are inevitable, (2) that regulation is equally inevitable." Do you agree? 44. "In some cases probably the regulation of trusts will have to go as far as the limitation or the fixation of selling prices. But in any case, (1) profits of promotion will have to be limited; (2) the issues of securities supervised; (3) the separation of ownership from control, through various combinations of securities, prevented; (4) full publicity required; (5) interlocking directorates prohibited-though this is likely to avail little; (6) adequate taxation imposed; (7) progressive participation by government in the dividends provided for." Explain the significance of each proposal. 45. Compare the program for limiting the evils of the trust in 1900 (Selection 304) with the program of 1913-14 (Selections 305-8). What are the outstanding points of similarity? Of difference? 46. "The history of trust legislation represents an attempt to restore competition and to regulate its plane." Do the Sherman Act, the |