the whole, however, either because of the persistence of competition or because of the policy of the management, prices, down to 1898 at least, were less stable than prior to the formation of the trust. In the later years of its life, notably after 1900, the trust adopted the policy of charging more moderate prices in the hope of keeping competition within bounds.2 Like many other trusts it had found that a grasping policy defeated its own ends by artificially stimulating production, and thus making impossible the maintenance of prices at a profitable level.

That the trust organizers anticipated that the establishment of monopoly conditions would permit the charging of prices above a competitive level is indicated by the huge structure of overcapitalization that they erected.3 Generally speaking, the capitalization of the trusts was twice as large as the value under competitive conditions of the properties and businesses that they acquired. Usually the preferred stock represented the value of the plants prior to their union in the trust, and the common stock the hope of monopoly profits. Returns on the common stock of the trust, unbacked as it was by property, might be reaped were one of two results achieved: first, a reduction of costs consequent upon the realization of the economies of the trust form of organization; or second, the elevation of prices to a monopolistic level. No doubt the trust organizers intended to take full advantage of both of these opportunities in the endeavor to earn satisfactory dividends on the common stock as well as on the preferred stock, yet if the conclusions of chapter XIX are sound, their best prospect of success was through the raising of prices.

That the common stock of most of the trusts was "water," that is, had no actual property behind it, is nowhere seriously questioned. The following well authenticated facts bearing on

1 Bulletin of the Department of Labor, vol. V, p. 731.

2 Industrial Commission, I, p. 814.

3 The term overcapitalization as here employed refers to a capitalization in excess of both the investment and the reproduction cost. A successful trust might be able to earn normal returns on "watered" stock, yet this indicates not so much the reasonableness of the capitalization as the enjoyment of monopoly profits.

some leading trusts would appear to "make assurance doubly sure."

The value of the property acquired by the Steel Corporation in 1901 was the subject of a painstaking study by the Bureau of Corporations. In this investigation three different bases were used, the investment of the constituent companies at the time of their formation, the average market value of their securities from the date of their organization to the close of 1900, and the value of the properties as evidenced by a physical valuation. The conclusion of the Bureau was that the common stock of the Corporation, amounting to 36 per cent of its total capitalization, was water; and that from one-fifth to two-fifths of the preferred stock, this stock also amounting in the aggregate to 36 per cent of the total capitalization, was water, the amount of the overcapitalization depending on the basis of valuation employed. By either the investment or the physical valuation basis, slightly over 50 per cent of the total capitalization had no assets behind it; and by the market value of the securities basis, reflecting, as it did, the monopoly profits of the constituent companies, the percentage was 43. This tremendous overcapitalization, proven in the case of the Steel Corporation, was characteristic also of the earlier steel trusts, as is established in the report of the Bureau of Corporations. This was admitted also by Judge W. H. Moore, a well-known trust promoter, when in testimony before the Industrial Commission he said: "everybody knows what they are getting when they get common stock; they know they are not getting anything that represents assets." 3

The various tobacco trusts were also heavily overcapitalized. The cigarette trust (the original American Tobacco Company) was capitalized at $25,000,000. The Bureau of Corporations 1 See pp. 208-210.

2 See Report on the Steel Industry, part I, pp. 127-133 (American Steel and Wire Company); pp. 133-136 (American Tin Plate Company); pp. 138139 (American Steel Hoop Company); pp. 139-141 (American Sheet Steel Company); pp. 141-144 (National Tube Company); and pp. 144-145 (Shelby Steel Tube Company). See also Brief for the United States (no. 481), vol. I, pp. 22, 26, 29, 31, 33.

3 Industrial Commission, I, p. 963.

found that the tangible assets of the constituent companies amounted to $5,370,462 (including $1,825,354 in notes of the organizers),1 and the good will to $8,954,892; or an overcapitalization exceeding $10,000,000.2 The Continental Tobacco Company (the plug tobacco trust), after acquiring the Liggett and Myers Tobacco Company in 1899, had a capitalization of $97,690,700, one-half preferred stock and one-half common. The company entered $26,831,123 of this on its books as tangible assets, and the balance ($70,859,577) as intangible assets. The Bureau declared that the value of the intangible assets, measured on a cash basis, was not over $16,664,867; and the overcapitalization therefore amounted to $54,194,710.3 Over 55 per cent of the company's securities might therefore be regarded as water. The American Snuff Company (the snuff trust) was also heavily overcapitalized. At its organization in 1900 it was capitalized at $23,001,700, of which $12,000,000 was preferred stock and $11,001,700 common. The Bureau found that the tangible assets of the constituent concerns were worth $4,312,728, and the good will not over $7,689,000, or a total of not to exceed $12,001,728. All of the common stock, therefore, was water.4

Despite their excessive capitalization these trusts all paid large dividends on their stock, water and all. Their ability to do so testified, as said before, not to the reasonableness of the capitalization, but to the possession of monopoly earnings. In contrast, the American Cigar Company, which hoped to monopolize the cigar industry, earned only a moderate return on a capitalization free from water, yet this was because it did not succeed in effecting a monopoly of its branch of the business, and it was therefore unable to raise prices above a competitive level.

1

Among the other trusts that were overcapitalized, some of

1 Against these notes an entry was immediately made on the books of the company to surplus, so that the capital and surplus amounted to $26,825,354.

2 See p. 123.

3 Report on the Tobacco Industry, part II, pp. 12, 99.

4 Ibid., pp. 28-29.

5

them quite heavily, were the following: the American Sugar Refining Company,' the American Can Company, the Distilling and Cattle Feeding Company and its successors, the National Starch Manufacturing Company (the starch trust),4 the Glucose Sugar Refining Company (the glucose trust), the Corn Products Company (the starch and glucose trust), the Corn Products Refining Company (the successor to the Corn Products Company), the International Paper Company, the American Bicycle Company, the American Malting Company, 10 the Asphalt Company of America, the Mount Vernon-Woodberry Cotton Duck Company, 12 the National Cordage Company, 13 the National Salt Company, 14 the National Shear Company,1 15 the New England Cotton Yarn Company,16 the Rubber Goods Manufacturing Company, 17 the United States Leather Company, 18 and the United States Rubber Company.19

11

Some trusts, on the other hand, have been capitalized on a moderate basis. Among them the most conspicuous illustrations

121.

1 Industrial Commission, I, p. 13 (Review of Evidence). See also pp. 120

2 230 Fed. Rep. 870-871, 877.

3 Industrial Commission, I, p. 14 (Review of Evidence).

4 Ibid., XIII, p. 673.

5 Brief for the United States in United States v. Corn Products Refining Company (no. E-10-122), p. 485; and Dewing, Corporate Promotions and Reorganizations, pp. 79, 532.

Dewing, op. cit., pp. 89, 93-95.

7 Ibid., pp. 106, 108-109.

8 Industrial Commission, I, pp. 409-410, 415-416, 419-420, 432-433, 441. 9 Dewing, op. cit., pp. 254, 532.

10 Ibid., pp. 278–279, 296, 532. 11 Ibid., pp. 432-433, 532.

12 Ibid., pp. 342-343, 532.

13 Industrial Commission, XIII, p. 130; Dewing, op. cit., pp. 123, 532.

14 Industrial Commission, XIII, pp. 249-250; Dewing, op. cit., pp. 207

208, 532.

15 Industrial Commission, I, p. 1044.

16 Dewing, op. cit., pp. 313-316, 325, 532.

17 Industrial Commission, XIII, pp. 37, 47.

18 Dewing, op. cit., pp. 20, 23, 532.

19 Industrial Commission, XIII, p. 48.

? are the Standard Oil Company, the International Harvester Company, the Pittsburg Plate Glass Company, and the meatpacking companies.1

The ability of the trusts to charge excessive prices and to capitalize the increased earning power thus created must be ascribed in many cases to the protection afforded by the tariff. Had it not been for the prohibitions, partial or complete, imposed by the tariff, foreign competition would have operated to prevent prices in this country from being raised above the foreign cost plus transportation expenses. And if prices could not be much advanced as the result of the elimination of domestic competition, there would have been no justification, even on the earning power basis, for the issuance of a mass of watered securities, unless indeed the trust should prove to be much more efficient than the producing units that it displaced.5 //The protective tariff thus promoted the trust movement by offering to the manufacturers prospects of large profits-profits large enough to induce them to overcome their inherent repugnance to relinquishing their independence and the control of their own business-and by offering to the investing public a chance to share in the speculative gains. //

However, the influence of the tariff must not be exaggerated. Trusts were formed in industries not protected by tariff duties as well as in industries enjoying such artificial support; and they were formed in industries in which such protection was purely nominal as well as in industries in which the trusts required

1 If we compare the capitalization of the Standard with the actual investment (exclusive of the reinvestment of surplus earnings) it was overcapitalized in 1906; if we compare it with the cost of reproducing the property on that date it was distinctly undercapitalized. See Brief for the United States (no. 725), vol. II, pp. 4-5.

2 See p. 236.

3 Industrial Commission, XIII, pp. 227, 241.

Report of the Commissioner of Corporations on the Beef Industry, pp. 39-40.

5 This matter is discussed in ch. 19.

• The tariff also furthered the trust movement by intensifying competition in the protected industries. On this point see Bullock, Quarterly Journal of Economics, 15, pp. 208-209.