REFERENCE has been made earlier to the

difficulty of finding men who could keep in hand these vast combinations of corporate properties effectively enough to produce results in competition with smaller concerns. It was the testimony of experience that the capacity for management was one measure of how large a combination might safely become. In combining various properties it has often been the case that the unfit had to be taken in with the fit, thus handicapping the management from the very start. In this lies the reason for not a few of the failures of trusts to make good, either financially or otherwise.

The first test of management of a combination is shown by its ability or inability to earn normal returns on its outstanding obligations. Of these the bonds, usually limited to half the value of the property underlying them, have first claim in the form of interest. Preferred stock, secured by the balance of the tangible property, has the next claim on net income; and the less tangible or intangible assets, such as patents, good will, and expectation of economies of combination represent the residual earning power of the common stock.

1. Management a Cooperative Service

It is probably true that the success or failure of the average trust, as Fay puts it, may be judged from the market price of its common stock. If so, then the financial organization of possibly the majority of these corporations is so heavily water-logged as to justify no fear to conservatively capitalized concerns under fair competitive conditions. Over-capitalization is a handicap on successful management. The management that makes good is as a rule favored by two features-moderate capitalization and competitive efficiency. "The successful trusts," says one who speaks with authority, "have gained their power and wealth in not one case before us by the power of combination, but by the power of destructive competition; not by monopoly but by efficiency."

The real test of management is competitive service-financial, industrial, commercial and


On the service side of this question a higher order of economic responsibility is no doubt emerging. Prof. Lewis H. Haney's apology is pertinent here. "The critics of the modern business world are too prone to underestimate the real social service performed by those who direct the industrial process, the business men. In the main these men are no mere exploiters. Without their leadership the effectiveness of

In a

industry would be far less than it is. social order in which private ownership of the instruments of production exists, we have separate groups of laborers and of capitalists, and some one must undertake to bring the labor and the capital of these groups together, so that they may cooperate.'

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2. Interest Service of Capital

Every wise management goes slow on increasing fixed charges of which interest is the main feature. There are always two elements in any rate of interest. One is the payment for the use of capital; the other is compensation for risk. The larger charge pays for service, the other for hazards assumed. In the security issues of large combinations, bonds, preferred stocks and common stocks represent these two elements in varying proportions. In bonds, the risk element is at the minimum, hence the interest rate is lowest. Preferred stocks pay higher rates partly because they bear more risk of repayment of principal than bonds. Common stocks assume the main risk of income after bonds and preferred stocks have been compensated for services and for insurance against loss of principal.

Maintaining price levels under combinations has a direct bearing on the interest cost of

*Business Organization and Combination, L. H. Haney. The Macmillan Company, New York, p. 5.


capital. Higher prices cause capital to flow in that direction for investment or for working employment. Whether these prices be maintained by a protective policy securing the home market or by control of market through consolidations, the result is much the same. the competition for capital the flow follows the path of higher interest rates, in which the risk is not too prominent. In combinations, as Hobson rightly holds, "part of the rising interest and profits are due to the establishment over large markets of prices above the level which free competition would have maintained. The era of large gold output, of expanding credit and of new large productive areas of investment, has also been the era of trusts, cartels, conferences, and combines of every size and strength, all directed primarily to secure a higher rate of interest and profit than competition would secure for the group of business engaging in the operation." * Thus trust capital is usually high-cost capital.

Interest payments on capital invested in large corporations is one of the monthly features of the money market. Payments from every part of the globe are made at the large financial centers through fiscal agents in each one of the industrial nations. Here loan funds tend to accumulate and find an investment or a speculative market. The commercial uses of surplus * Gold, Prices, and Wages.

capital also influences the industrial interest rates. Both uses compete constantly, and the discount rates in foreign exchange often determines whether or not corporate financing shall be undertaken or postponed.

Three main fields of investment in trust securities are open to the public. Not including railways, the two main classes are industrials and public utility issues. Of these the interest rates are lowest for railway securities, highest in industrials, and midway on public utilities. The more nearly any of these approach legalized monopoly in the control of its field the more attractive does it become as an investment for safe income purposes. The competitive industry is the more hazardous and commands the higher rate of interest.

Owing to the higher rate of interest and margin of safety borne by public utility bonds they have tended to displace other securities. This class of investment is found over a period of years to have had average annual earnings on the aggregate capitalization of public utilities of 8.45 per cent, while railroads showed average annual earnings of 4.25 per cent, and industrials 7.79 per cent.

Over a similar period it is shown that while an average of 1.84 per cent a year of capital invested in railroads was in the hands of receivers, and 2.07 per cent of industrial capital, there was an average annual receivership risk

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