Trade Associations and Combines are rapidly increasing in this country and may within no distant period exercise a paramount control over all important branches of British trade.* I shall discuss the social effect of combinations presently; all that I wish to establish now is that the free competition of the theoretical text-books does not exist. It is as much an abstraction as the economic man. Its elements are there, but they are in combination with modifying and opposing elements. And I wish to emphasize the fact that so far from the system of private Capitalism being one based on competition, its urgent tendency is to limit competition, and confine it to the smaller and less organized transactions on the margin of the trading field—the small booths on the outskirts of the great show. In considering how far the present system works for the communal well-being, we must not make the mistake that that system is one of free competition. Rather it is one of economic monopoly tempered by the fear of a return to free competition. Such is Capitalism.


When the features of capitalist combination are studied, the first thing that must strike one is the overmastering advantage which it gives to capitalist interests. To begin with, the combinations are generally over-capitalized and that means that their advantages, if they succeed at all, belong to capital. The process is easy to understand. A business succeeds and can pay a high percentage on its original capital. It then enters a combination where, by the elimination of competition, its dividend-earning value

* “Report,” p. 11.

is enhanced, or it is turned into a limited liability company, with the result, in either case, that the burden of capital which it has to carry and upon which it has to return satisfactory profits to its new owners, is multiplied five, ten, or twenty-fold. Its original success was due, perhaps, in a small degree to the capital invested in it, and in a great one to the brains and business ability spent upon it. In its new phase it has been turned into a purely profit-making machine—a means of earning incomes for shareholders who bought not the business but the profits, paying for them the market rate of industrial capital. If the combination or company should succeed and earn profits so ample that great reserves have to be accumulated, the reserves may be distributed in the form of shares, and so the burden of capital which has to be borne is again increased without increasing by the fraction of a cent the amount of capital required in production. Capital harnesses to its service all available surpluses, however created. Capital seizes for itself the product of brains, the marginal profits that cannot affect price,” the power of the economic concern to keep prices above cost of production. Capital is often hard squeezed by finance, by rentowners, by labour and so on, but it is the residuary legatee of production, and were it not dissipated by folly and redistributed at death it would soon be in absolute control of Society. The facts upon which this estimation of the power of capital is based lie plentifully at one's hand and can be drawn from every department of industry. Let me instance what was done in 1918 by the shareholders of the Powell Duffryn Coal Company. This company gave each of its shareholders one share for every three held, and in addition paid them dividends of 20 per cent, free of taxation. When it was known that that would happen the £1 shares of the company were quoted at 74s. An apologist for the transaction defended it in these simple words, to which the most avowed enemy of Capitalism need ask no addition. “A distribution of shares in this way is more advantageous to the shareholders than cash, as the bonus shares are themselves dividend earning.” The meaning of the state of things described is not difficult to see, and can be put in this way. The Powell Duffryn Company required £8, as assistance from capital for its development, and upon that capital it was very successful. On account of the dividends it paid, the £8 were sold on the market for something like £7 10s., and the new holders of the bought shares would not, therefore, be content unless they had dividends of an average amount on what they paid for their shares. The management had, therefore, to produce results on a capital which had been multiplied by two and a half without an extra pound having been sunk in the undertaking. Then by a resolution of a meeting, the three pounds became four,” but on the market, the money articles told us, they became about ten guineas. Thus, capital, by seizing upon all the surpluses, had increased its hold upon the industry three and a half fold. The Metropolitan Carriage, Wagon and Finance Company, in 1912, gave to its ordinary shareholders one bonus share for every two they held, and, in June, 1917, one new bonus share for every old one held. On this watered capital it paid dividends of 15 per cent. free of income tax which is equal to 60 per cent. on its true capital. In other words, the capital in this company gets six or seven times its economic share. Of the British American Tobacco Company's capital of £8,359,272 (in 1918) the astonishing sum of £5,571,128 was created by the issue of bonus shares. In May, 1919, the chairman of this company boasted that whereas the net profits distributed in the first year of its existence were only £148,541, for the year 1918 they were £3,140,174, and 80 per cent. free of income tax was to be paid as dividend. This abnormal dividend represents nothing but the exploiting value of combination. That year a further issue of 2,181,783 shares at bonus rates was made, Lord St. Davids remarking : “As nearly as I can reckon, the shares that have been allotted to the shareholders at £1 per share are a bonus to the shareholders of something like £10,000,000 sterling.”f In August, 1916, the company which owned the White Star Line increased its capital of £750,000, to one of £8,750,000, by distributing £8,000,000 of reserves not as dividends* but as shares. When the Moor Line was wound up in 1920, £180 was paid to every holder of shares that were issued at £10. This is enough to prove my case, but, did I care to multiply examples, I could cite what has been done by companies like the Birmingham Small Arms, Brunner Mond, Maypole Dairy, Babcock Wilcox, and others all engaged in industries of the most vital importance to the general system of national production.f These profits are accumulated from prices. They can come from no other source, for even if they are possible only by reason of the economies and efficiencies of combination, they ought, on all theories of the virtue of competition or of the social ends of production, to be used to reduce price, after the proper charges for services have been met. I have just noted that one of the justifications put forward by a possessor of an enormous fortune madepossible bycombination was, that though the profits were large they were accumulated from such vast numbers of units of purchase that, if distributed in a reduction of prices, they would be dissipated without helping the customer to any appreciable degree. With the im

* This takes into account the contention made, particularly by the directors of the thread combine, that though their aggregate profits amount to millions and their dividends to Midas proportions, the number of reels of cotton sold is so great that if these profit balances were used to reduce price the gain would be an infinitesimal portion of a penny per reel. Supposing the contention is sound and that the colossal fortunes made by the chief capitalists in this industry represent profits that cannot be distributed amongst consumers, the question has still to be answered : “Why should they go to capital 2 ” Why should capital claim the right of residuary legatee, and why should it use that right to fix upon industry obligations to pay for vast sums of capital which it never has used, never will, and never can use ? On the moral side capital has less right to those surpluses than labour or the community; on the business side, their capture and use by capital is a handicap to production and an injury to the body of consumers.

* So far as I have been able to find out this is literally what happened. If the fourth pound had been used as capital for development or other profitable expenditure, the real capital of the company would have been increased and would have been drawn from reserves, a legitimate proceeding. But there appears to have been no increase of real capital, and the extra shares only represented a power

to draw dividends earned by the original capital without appearing to be drawing too much. ...

t It may :: * observed that when the British .*.merican section of this combination was declaring a dividend equal to 37% per-ee...., it was discharging Liverpool employees and congratulating itself on its charity for giving them a month's wages I

* As I shall not return to this again, I note in passing that this method of dealing with what are really dividends and income, incidentally cheats the nation out of Income Tax.

f In some cases these share bonuses are true additions to capital, as when reserves have been used for development and the amounts sunk ultimately distributed amongst the shareholders. Cf. Sir Hugh Bell’s statement to the Horden Colliery shareholders; Common Sense, 11th December, 1920.

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