seek new fields, such as existed in control of manufacturing industry through combination. At the same time, a development in the character of markets and business risks which had long been unfolding came to a head. As markets became more truly continent-wide, or world-wide, that part of production which consists in moving goods from place to place and holding them from time to time became more important, and the conditions of exchange seemed to dominate the technical conditions of manufacture, etc. Business risks arising from changes in expenses and prices came to bulk larger in comparison with technical problems. Now the way to control the business situation, and reduce the risks of exchanges which involve widely separated places and time, is to-combine the direction and management of the various producers. But doubtless the most active impelling force was the increasing severity of competition. In the days before the Civil War, business was on a relatively small scale. There was generally a close personal relation between producer and consumer, and less specialization existed. Capital, too, was relatively less important; and this was notably true of fixed and specialized capital, so that the danger of great loss was less. As a result of such conditions, competition was less intense. But with modern large-scale capitalistic production, competition often becomes cut-throat and intensely wasteful. So much for the more important driving or impelling forces. On the other hand, certain conditions invited combination, the beckoning conditions. Thus, in the potential gains to be secured by regulating prices and trade conditions, the obverse of the driving force of intense competition was to be seen. Even at low prices, if economies could be effected, there was still an opportunity for gain. More particularly characteristic of the time, however, was an almost conscious realization of the possibilities of profits on a large-scale production of the common necessities of life-coal, ice, lumber, nails, meat, salt, tobacco, sugar, etc. Captains of industry arose who saw, first, that great profits might be made by selling large quantities of such products even at a small gain per unit; and second, that in selling such things monopoly would have great power because the demand for them does not fall off rapidly when prices are raised or kept up. Both of these visions were based on the width of the market or the inelastic character of the demand for such necessaries. A distinct feature of this phase of the matter was formed by the tariff protection afforded to these industries. Though excepting his own industry, Mr. Havemeyer, of sugar-trust fame, testified before the Industrial Commission that the tariff had been the occasion for the formation of most of the large combinations prior to 1900. It is too obvious to need discussion that whenever a tariff wall is built the control of prices is made easier and combination is invited. Another condition which invited the combination movement was the possibility of gain by overcapitalization. By watering stock and making two shares grow where one grew before, it was possible to reap large speculative profits, and such profits were reaped from bountiful crops. There is no doubt that several large combinations have been promoted chiefly because the promoters believed that they could sell an increased capitalization for more money than they had to pay for the properties combined. But had these driving and beckoning conditions not operated in conjunction with certain facilitating conditions, the combination movement would not have come just when it did nor in just the same way. The tariff, for example, was such a condition. Under Republican administrations the principle of protection was more and more strongly applied, reaching a high point in the McKinley Tariff Act of 1890 and a climax in the Dingley Act of 1897. While it can hardly be maintained that tariffs cause trusts, they certainly facilitate their formation by raising a wall against foreign competition, and such cases as salt and sugar, rails and nails, paper and window glass, are evidence to the fact. Last, but by no means least, the development of corporate organization was itself a factor in facilitating combination. Prior to 1850 the use of the corporation in business had not been great, and it was not until the seventies that the general corporation laws were much utilized. The result was that capital was limited in amount and combination difficult. Through the agency of joint-stock shares, control over a large number of business organizations may readily be concentrated in the hands of a few men. They have merely to purchase enough stock to control each corporation and vote that stock with a united policy, and to make the purchase they need only form a new corporation whose shares may be exchanged for the controlling holdings. By proceeding in this way they do not have to gain the consent of the organizations which they desire to combine, nor do they increase their financial liability. Such a means of combination sharpened one of the most effective weapons of the trust builder-secret control of plants used locally to cut prices under those of particular competitors while keeping them up elsewhere. In so far as the corporate form could be used to minimize legal responsibility, it also facilitated combination. See also 136. Types of Business Organization. 171-175 on Indirect Costs and Social Control. 275-292 on Instruments of Concentration. 345. 347. What Firm Shall Survive Within an Industry? 294. CONCENTRATION AMONG THE RAILROADS (1906)1 [The following table shows the extent to which railway securities, both stocks and bonds, are held by other railway companies. These PAR VALUES, RAILWAY SECURITIES AND HOLDINGS, JUNE 30, 1906 'Adapted from Interstate Commerce Commission, Special Report No. 1, "Intercorporate Relationships of Railways in the United States as of June 30, 1906," pp. 44-48. data may be supplemented by a statement showing the rapid increase of mileage under single operating control. Down to 1870, 700 to 1,000 miles was regarded as the maximum for efficient operation under one management; by 1890 this had increased to 5,000 miles; by 1898 to 10,000 miles; and by 1900 to 15,000 to 20,000 miles.] A final word of explanation seems necessary as to the use of the term "in the hands of the public." This investigation has had to do solely with the holdings in railway securities by steam railway companies, and it has, therefore, been necessary to regard all securities not held by steam railway companies as "in the hands of the public.” It is recognized that large amounts of securities are held by corporations and by individuals so closely identified with other railway corporations that such securities are not in the hands of the public in any real sense, but should properly be regarded as the holdings of those railways with which such corporations and individuals are associated. It must be obvious, however, that any attempt by this office to interpret the statistics in this manner would have resulted inevitably in difficulties which could have been removed only by arbitrary methods. All that can be done is to introduce this word of explanation in order to guard against the danger of an improper use of the results obtained. 295. CONTROL OF MONEY AND CREDIT If by a "money trust" is meant an established and well-defined identity and community of interest between a few leaders of finance which has been created and is held together through stockholdings, interlocking directorates, and other forms of domination over banks, trust companies, railroads, public-service and industrial corporations, and which has resulted in a vast and growing concentration of control of money and credit in the hands of a comparatively few men— your committee has no hesitation in asserting as the result of its investigation up to this time that the condition thus described exists in this country today. This increased concentration of control of money and credit has been effected principally as follows: First, through consolidations of competitive or potentially competitive banks and trust companies, which consolidations have in turn been brought under sympathetic management. 1 Adapted from the Report of the Committee to Investigate the Concentration of Control of Money and Credit, February 28, 1913, pp. 55-56, 130–33. Second, through the same powerful interests becoming large stockholders in potentially competitive banks and trust companies. This is the simplest way of acquiring control, but since it requires the largest investment of capital, it is the least used, although the recent investments in that direction for that apparent purpose amount to tens of millions of dollars in present market values. Third, through the confederation of potentially competitive banks and trust companies by means of the system of interlocking direc torates. Fourth, through the influence which the more powerful banking houses, banks, and trust companies have secured in the management of insurance companies, railroads, producing and trading corporations, and public utility corporations, by means of stockholdings, voting trusts, fiscal agency contracts, or representation upon their boards of directors, or through supplying the money requirements of railway, industrial, and public utilities corporations and thereby being enabled to participate in the determination of their financial and business policies. Fifth, through partnership or joint-account arrangements between a few of the leading banking houses, banks, and trust companies in the purchase of security issues of the great interstate corporations, accompanied by understandings of recent growth-sometimes called "banking ethics"--which have had the effect of effectually destroying competition between such banking houses, banks, and trust companies in the struggle for business or in the purchase and sale of large issues of securities. The parties to this combination or understanding or community of interest, by whatever name it may be called, may be conveniently classified, for the purpose of differentiation, into four separate groups. First: The first, which for convenience of statement we will call the inner group, consists of J. P. Morgan & Co., the recognized leaders, and George F. Baker and James Stillman in their individual capacities and in their joint administration and control of the First National Bank, the National City Bank, the National Bank of Commerce, the Chase National Bank, the Guaranty Trust Co., and the Bankers Trust Co., with total known resources, in these corporations alone, in excess of $1,300,000,000, and of a number of smaller but important financial institutions. This takes no account of the personal fortunes of these gentlemen. |