<h2>CHAPTER 34</h2>
<h3>GROWTH OF TRUSTS AND COMBINATIONS IN THE UNITED STATES</h3>
<h4>§ I. GROWTH OF LARGE INDUSTRY IN THE UNITED STATES</h4>
<div class="sidenote">Distinction between large capital</div>
<div class="sidenote">Large production</div>
<div class="sidenote">And monopoly</div>
<p>1. <i>In the discussion of the so-called trust problem three things must
be distinguished: large individual capital, large production, and
monopoly power.</i> Capital, in the sense of valuable agents, is found in
the smallest as well as the largest industry, and every owner, from the
small shop-keeper to the wealthiest bondholder, is a capitalist. In
popular discussion, however, the word frequently implies great wealth in
a single hand, though this wealth may be invested in a large number of
small industries. Large production is the concentration of capital into
large units of industry. The capital may be the same as before, the
ownership may or may not be widely diffused, but the control and
management are unified. Large factories may or may not have monopoly
power; as factories grow in size, competition among them often becomes
more, not less, complete and severe. On the contrary, monopoly, as
before defined, may exist where the industry is small, as the waterworks
in a small town, or a small factory for making patented articles. In
periods of depression a business with a capital of ten thousand dollars
may go on and prosper, while one with millions may be forced into
bankruptcy. These three ideas—great individual wealth, large industry,
and monopoly power—are often hopelessly confused in the discussion of
present-day questions.</p>
<p><span class="pagenum"><SPAN name="Page_313" id="Page_313">[Pg 313]</SPAN></span></p>
<div class="sidenote">Stages of tools and household industries</div>
<div class="sidenote">Of simple machines</div>
<div class="sidenote">And of large industry</div>
<p>2. <i>Three industrial stages may be broadly distinguished: that of tools,
that of machines and small factories, and that of large production.</i> Men
are prone to forget that all the world is not doing just as they are.
Over two thirds of the people on the globe are still in the first
industrial stage. One billion people use only tools, and have no better
source and means of power than domestic animals. This is true in the
most of Asia and Africa, in the greater part of South America, and in
many portions of North America. About two hundred million people live in
the stage of simple machines and small factories. These are found in
eastern and southern Europe, small portions of South America, some parts
even of the United States. In this stage there is not enough
manufacturing power in the community to supply much more than its own
needs. About two hundred million people in the United States and western
Europe have reached the third and highest industrial plane, where the
highest mechanical devices are employed and industry becomes highly
specialized. These differences are broadly stated; there are contrasts
within every nation. Three hundred miles from here, in the Alleghanies,
people still can be found spinning and weaving and wearing homespun as
in colonial days. In a trip of twenty miles in Tyrol or Switzerland one
can observe every one of these industrial stages. The most striking
development, if not the typical form, in America to-day is large or
concentrated industry.</p>
<div class="sidenote">Household industry in America</div>
<div class="sidenote">Recent changes in number of factories</div>
<p>3. <i>In the last half century the unit of organization in leading
industries has tended to grow larger.</i> Seventy-five years ago a
tool-using household industry, on farms and in homes where the greater
part of the things used were produced in the family, was still the
typical organization in the United States. The early factories growing
out of the household industry were small. A family specialized in
producing cloth and exchanged with its neighbors; so with shoes,
candles, soap, canned goods, cured meats, etc. Since that time two
counter forces have been at work to affect the ratio<span class="pagenum"><SPAN name="Page_314" id="Page_314">[Pg 314]</SPAN></span> of manufacturing
establishments to population. The number of establishments has been
increased by specialization of farming which has called for many
industries to produce the things once made on farms, and by increasing
wealth and invention, which has made possible many small industries
supplying things before almost unknown. The number of establishments has
been diminished as the staple products that can be transported have come
to be made in larger factories. The resultant of these movements during
the thirty years ending in 1900 is somewhat surprising: the ratio of
factories (with an output worth five hundred dollars) to population has
somewhat increased. In 1870 there were two hundred and fifty-two
thousand establishments; in 1890, three hundred and fifty-five thousand,
and in 1900, five hundred and twelve thousand, a ratio to population of
one to one hundred and sixty-two, one hundred and seventy-seven, and one
hundred and forty-four respectively. The last date was one of great
industrial prosperity, and doubtless many ephemeral enterprises had been
called into existence, thus giving a somewhat abnormal result. Moreover,
there has been a large increase in the number of things made in
factories which were formerly made in the homes, and which then did not
appear at all in the census of manufactures.</p>
<div class="sidenote">Large production in some industries</div>
<p>In cotton-weaving, however, the unit of industry is growing, factories
in 1870 numbering nine hundred and fifty-six; in 1890, nine hundred and
five; in 1900, one thousand and fifty-five, the later increase being due
to the fact that many new factories in the South have been started in
the last decade. The population meantime doubled. This movement has been
going on for seventy years, there being about the same number of mills
in 1900 as in 1830, though population had multiplied six-fold. Iron- and
steel-mills numbered one thousand three hundred in 1880, one thousand in
1890, and nine hundred and sixty-five in 1900. In industries having
local markets and sources of supply for materials, the change has been
less rapid. There were twenty-four thousand grist-mills in 1880,
eighteen thousand in 1890, and twenty-five<span class="pagenum"><SPAN name="Page_315" id="Page_315">[Pg 315]</SPAN></span> thousand in 1900, a change
of ratio from two thousand one hundred to three thousand population per
grist-mill. There were twenty-six thousand sawmills in 1880, twenty-two
thousand in 1890, and thirty-three thousand in 1900, a change from about
one thousand nine hundred and twenty to two thousand two hundred and
seventy persons per sawmill.</p>
<p>But while the number of establishments in these staple industries was
decreasing, the number of employees per establishment in most cases was
increasing. The average in all industries, in 1870, was eight; in 1890,
twelve; in 1900, ten and four tenths. In cotton-mills, in 1870, the
average was one hundred and eighty-four; in 1890, two hundred and
forty-four; in 1900, two hundred and eighty-seven. The grist-mills, in
1880, had two and four tenths persons per establishment; in 1890, three
and four tenths. The sawmills, in 1880, averaged six employees each; in
1890, fourteen; iron- and steel-mills in 1880, one hundred and
twenty-one each; in 1890, one hundred and ninety-six.</p>
<div class="sidenote">Growing concentration of capital into large industries</div>
<p>4. <i>The amount of capital per establishment is tending to increase in
the leading lines of industry.</i> The amount of capital is not so easy to
determine as the number of employees, and it is recognized that the
census figures on this subject are only approximately correct. We are
told that in cotton-mills, in 1830, the average capital invested was
fifty thousand dollars; in 1890, nearly four hundred thousand dollars;
in 1900, four hundred and forty thousand dollars. It is easy to observe
the large increase in investment of capital in flouring-mills since the
new processes came into use. The average capital of all industries does
not grow as in the staple ones, for many smaller industries have come
into existence. In 1880, the average capital was eleven thousand
dollars; in 1900, it was eighteen thousand dollars.</p>
<div class="sidenote">Recent formation of combinations</div>
<p>The years between 1890 and 1900 saw the rapid formation of trusts and
combinations, and of larger industries. Consolidation took place on a
great scale in railroads and in manufactures. Much of this has been of
such a kind that it does not appear at all in the figures showing the
number of establishments<span class="pagenum"><SPAN name="Page_316" id="Page_316">[Pg 316]</SPAN></span> and of employees. Many discrepancies appear in
the data regarding this movement given by different authorities, as
there is no generally accepted rule by which to determine the selection
of the companies to be included in the lists, and as the conditions are
changing from day to day. A competent financial authority<SPAN name="FNanchor_1_1" id="FNanchor_1_1"></SPAN><SPAN href="#Footnote_1_1" class="fnanchor">[1]</SPAN> gives the
following figures regarding the "industrial" trusts (manufacturing and
commercial) and gas trusts, organized in the United States between 1860
and 1899, not including combinations in such businesses as banking,
shipping, railroad transportation, etc. The figures refer to the
reorganization and consolidation of industries into larger units, some
of which have much and others little or no monopoly power.</p>
<div class="center">
<table border="0" cellpadding="4" cellspacing="0" summary="">
<tr><td align="center">Decade</td><td align="center">Number Organized</td><td align="center">Total Nominal Capital</td></tr>
<tr><td align="right">1860-69</td><td align="right">2</td><td align="right">$13,000,000</td></tr>
<tr><td align="right">1870-79</td><td align="right">4</td><td align="right">135,000,000</td></tr>
<tr><td align="right">1880-89</td><td align="right">18</td><td align="right">288,000,000</td></tr>
<tr><td align="right">1890-99</td><td align="right">157</td><td align="right">3,150,000,000</td></tr>
<tr><td align="right">——————</td><td align="right">——</td><td align="right">———————</td></tr>
<tr><td align="right">Total, 40 years</td><td align="right">181</td><td align="right">$3,586,000,000</td></tr>
</table></div>
<p>The number organized and the capital represented by this movement in the
last of these decades are eight times as great as in the thirty years
preceding. In the last ten years can be traced the influence of general
industrial conditions.</p>
<div class="center">
<table border="0" cellpadding="4" cellspacing="0" summary="">
<tr><td align="center">Year</td><td align="center">Number Organized</td><td align="center">Total Nominal Capital</td></tr>
<tr><td align="right">1890</td><td align="right">6</td><td align="right">$82,000,000</td></tr>
<tr><td align="right">1891</td><td align="right">13</td><td align="right">168,000,000</td></tr>
<tr><td align="right">1892</td><td align="right">13</td><td align="right">140,000,000</td></tr>
<tr><td align="right">1893</td><td align="right">5</td><td align="right">226,000,000</td></tr>
<tr><td align="right">1894</td><td align="right">2</td><td align="right">35,000,000</td></tr>
<tr><td align="right">1895</td><td align="right">7</td><td align="right">104,000,000</td></tr>
<tr><td align="right">1896</td><td align="right">3</td><td align="right">40,000,000</td></tr>
<tr><td align="right">1897</td><td align="right">6</td><td align="right">93,000,000</td></tr>
<tr><td align="right">1898</td><td align="right">22</td><td align="right">574,000,000</td></tr>
<tr><td align="right">1899</td><td align="right">80</td><td align="right">1,688,000,000</td></tr>
<tr><td align="right">——————</td><td align="right">——</td><td align="right">———————</td></tr>
<tr><td align="right">Total, 10 years</td><td align="right">157</td><td align="right">$3,150,000,000</td></tr>
</table></div>
<p><span class="pagenum"><SPAN name="Page_317" id="Page_317">[Pg 317]</SPAN></span></p>
<p>The first three years enjoyed great prosperity and the number of
combinations were six, thirteen, thirteen. In 1893, the number was less,
but the total nominal capital (preferred and common stocks and bonds)
was still the greatest it had ever been in any year. Then came the
period of depression, 1894-97, when both the numbers and the capital
were comparatively small. Then followed the period of the greatest
formation of trust companies the world has ever seen, which extended
from 1898 to 1901, and ended in 1902.</p>
<div class="sidenote">Trust statistics for 1904</div>
<p>In a list recently revised by another authority<SPAN name="FNanchor_2_2" id="FNanchor_2_2"></SPAN><SPAN href="#Footnote_2_2" class="fnanchor">[2]</SPAN> it appears that the
data for all "industrial trusts" (nearly, but not quite, comparable with
the foregoing figures), are in round numbers as follows:</p>
<div class="center">
<table border="0" cellpadding="4" cellspacing="5" summary="">
<tr><td align="center">Date</td><td align="center">Number</td><td align="center">Number of Plants<br/> Acquired or Controlled</td><td align="center">Total<br/> Nominal Capital</td></tr>
<tr><td align="center">Jan. 1, 1904</td><td align="center">318</td><td align="center">5288</td><td align="center">$7,246,000,000</td></tr>
</table></div>
<p>These figures would indicate that the industrial trusts more than
doubled within four years, most of the growth being within three years.
The same authority, in a more comprehensive list, classifies in six
groups all so-called "trusts" of the United States, at the date of
January 1, 1904, as follows (the figures just given above are the totals
of the first three groups):</p>
<div class="center">
<table border="0" cellpadding="4" cellspacing="5" summary="">
<tr><td align="center">Date</td><td align="center">Number</td><td align="center">Number of Plants<br/> Acquired or Controlled</td><td align="center">Total<br/> Nominal Capital</td></tr>
<tr><td align="left">1. Greater industrial trusts</td><td align="right">7</td><td align="right">1528</td><td align="right">$2,660,000,000</td></tr>
<tr><td align="left">2. Lesser industrial trusts</td><td align="right">298</td><td align="right">3426</td><td align="right">4,055,000,000</td></tr>
<tr><td align="left">3. Other industrial trusts in process<br/> of reorganization or readjustment</td><td align="right">13</td><td align="right">334</td><td align="right">528,000,000</td></tr>
<tr><td align="left">4. Franchise trusts</td><td align="right">111</td><td align="right">1336</td><td align="right">3,735,000,000</td></tr>
<tr><td align="left">5. Great steam railroad groups</td><td align="right">6</td><td align="right">790</td><td align="right">9,017,000,000</td></tr>
<tr><td align="left">6. Allied independent railroad groups</td><td align="right">10</td><td align="right">250</td><td align="right">380,000,000</td></tr>
<tr><td align="left"></td><td align="right">——</td><td align="right">——</td><td align="right">———————-</td></tr>
<tr><td align="right">Total,</td><td align="right">445</td><td align="right">8664</td><td align="right">$20,000,000,000</td></tr>
</table></div>
<p><span class="pagenum"><SPAN name="Page_318" id="Page_318">[Pg 318]</SPAN></span></p>
<h4>§ II. ADVANTAGES OF LARGE PRODUCTION</h4>
<div class="sidenote">Economical use of machinery in large production</div>
<p>1. <i>A great technical advantage of large production is the better and
fuller use of machinery.</i> A large factory with a large output can keep a
special machine adjusted for each pattern and process, whereas in a
small factory much time and energy are wasted in adjusting one machine
for various processes. The machinery in a large factory is thus more
fully utilized. Compare the machinery used in a large ax-factory with
that used in twenty-five small ax-factories having the same total
output: the one hundred and fifty workmen in twenty-five small factories
would use twenty-five shears, one hundred trip-hammers, fifty
grindstone-pits, fifty polishing-frames, a total of two hundred and
twenty-five machines; the same one hundred and fifty men in one large
factory would require three shears, a saving of twenty-two; twenty
trip-hammers, a saving of eighty; thirty-seven grindstone-pits, a saving
of thirteen; thirty polishing-frames, a saving of twenty; a total of
ninety machines, a saving of one hundred and thirty-five machines. The
difference in cost due to machinery is not so great as these figures
indicate, as the unused machines last longer; but in the small factory
there is more depreciation from rust and decay, and a larger
proportionate investment of capital for which interest must be earned.
The average amount of stock and materials required in a large factory is
not so great in proportion to the output.</p>
<div class="sidenote">Economy in labor power</div>
<p>2. <i>In a large factory the division of labor may be more complete and
effective.</i> The technical economies of the division of labor can be
realized in large measure only when a number of men work together.
Partly because of the advantages in the use of machinery, but partly
from other causes, labor in a large group is proportionately more
effective than in a small group, especially in producing form-value. In
making plows, nine men working separately will<span class="pagenum"><SPAN name="Page_319" id="Page_319">[Pg 319]</SPAN></span> average sixty-six plows
each per year, while one hundred and eighty men working together will
average one hundred and ten each per year, the output per man being
increased sixty-six and two thirds per cent. In a rifle-factory with a
daily output of fifty, eight men are needed for the same product that
can be supplied by three men in a factory with an output of one thousand
daily.</p>
<div class="sidenote">Miscellaneous economies</div>
<p>3. <i>In the larger industry the costs of management, supervision, and
marketing are relatively less.</i> Division of labor decreases the
difficulty of supervision in larger factories, where the processes are
divided, systematized, and made a matter of routine. The necessary
inspection of the results is more rapid and easy. The advertising of
certain kinds of goods involves a large and inevitable outlay, which is
relatively less for a larger business, as the greater the output the
smaller the burden on each unit of the product. Combination effects a
great saving in the number of commercial travelers, a result partly due
to the decrease in competition, but partly also to better organization.
Each of twenty different factories must send its drummers into every
part of the country to seek business. In combination they can divide the
territory, visit every merchant and get larger orders at smaller cost.
Supplies can be purchased more cheaply in large amounts, and shipments
in car-load and train-load lots make possible special (sometimes
illegal) concessions from railroads and from carriers on waterways.</p>
<div class="sidenote">Limits to the growth of a single factory</div>
<p>4. <i>There are some disadvantages in a large industry which put a limit
to the growth of a single local establishment.</i> There is practically a
limit to the advantages of size in a factory. When each man is working
on the smallest possible subdivision of the product, doubling the number
of employees will not increase his skill. When the finest machinery can
be kept constantly in use, economy in its use has reached the maximum.
As large factories tend to create cities around them, land rises in
value and higher wages<span class="pagenum"><SPAN name="Page_320" id="Page_320">[Pg 320]</SPAN></span> must be paid the workmen. Small factories are
constantly seeking out lower rents, taxes, wages, salaries, cheaper
local sources of materials, cheap though limited sources of power, and
thus they compete successfully in many markets. The point is reached in
the growth of establishments where oversight cannot be as perfect and
complete; the eye of the master cannot be over all. The market that can
be reached by one factory is limited by distance, as the cost of
transportation finally offsets all the other advantages of large
industry.</p>
<div class="sidenote">Do not necessarily limit consolidation</div>
<p>It is evident that most of these reasons apply to a single local factory
with far greater force than to a federation of locally scattered plants.
It was once believed that the growing disadvantages of large industry
would set an early limit to consolidation. While there is a truth in
this thought not to be overlooked, the effects must now be recognized to
be more distant than was supposed. The limits to the advantages of
combination have been removed by the application of the federative plan
which makes possible under one management the maximum of advantages with
the minimum of the disadvantages in large industry. That was the
discovery of the early promoters of the trust movement.</p>
<h4>§ III. CAUSES OF INDUSTRIAL COMBINATIONS</h4>
<div class="sidenote">Trusts in the legal and the popular sense</div>
<p>1. <i>Trusts are large combinations of capital with some degree of
monopoly power.</i> The original, legal meaning of the term trust does not
include the idea of monopoly. The old legal idea of a trust is the
confidence imposed in a trustee. The method that was adopted by the
early combinations was the trust method, that is, they made use of this
legal device: the stock of the separate companies was put into the hands
of a board of trustees to whom was thus given the right to control. As
it has been found possible to accomplish the same end without the use of
this legal method, the popular meaning of the word trust, as applied to<span class="pagenum"><SPAN name="Page_321" id="Page_321">[Pg 321]</SPAN></span>
a monopoly, no longer agrees with the legal meaning. The word trust is
popularly used of any large industry, though usually there is connected
with it the idea of some evil power to raise prices to the consumers. A
large number of the corporations called trusts have, however, little
monopoly power, and some have none at all. They are simply large
establishments.</p>
<div class="sidenote">Economies of combination</div>
<p>2. <i>A strong reason for combination of competing plants is found in the
legitimate economies of large production.</i> The economies that are
possible within a single factory may be still greater in a number of
combined or federated industries. The cost of management, amount of
stock carried, advertising, cost of selling the product, may all be
smaller per unit of product. A large aggregation can control credit
better and escape loss from bad debts. By regulating and equalizing the
output in the different localities, it can run more nearly full time.
Being acquainted with the entire situation, it can reduce the friction.
A strong combination has advantages in shipment. It can have a
clearing-house for orders and ship from the nearest source of supply.
The least efficient factories can be first closed when demand falls off.
Factories can be specialized to produce that for which each is best
fitted. The magnitude of the industry and its presence in different
localities strengthens its influence with the railroads. Its political
as well as its economic power is increased.</p>
<div class="sidenote">Integration of industry</div>
<p>A recent phase of corporate growth is the "integration of industry,"
that is, the grouping under one control of a whole series of industries.
One company may carry the iron ore through all the processes from the
mine to the finished product. A railroad line across the continent owns
its own steamers for shipping goods to Asia or Europe. Large wholesale
houses own or control the output of entire factories. The possibilities
in this direction have only begun to be realized.</p>
<div class="sidenote">Combination prevents competition</div>
<p>3. <i>The men uniting to form a trust always declare that<span class="pagenum"><SPAN name="Page_322" id="Page_322">[Pg 322]</SPAN></span> its formation
is the necessary result of excessive competition.</i> The statement is
often true in the sense that a hard fight and lower prices have preceded
the formation of the trust. But as this excessive competition usually is
for the very purpose of forcing the combination, this explanation is a
begging of the question. It is fallacious also in that it ignores the
marginal principle in the problem of profits. Profits are never
homogeneous from factory to factory, and to those that are on the margin
competition may appear excessive. It is generally the largest and
strongest factories, in the more favored situations, that, in order to
get rid of troublesome competitors, force the smaller, weaker,
industries to come into the trust. When, therefore, it is said that
competition is destructive, it may be a partial truth, but more likely
it is a pleasantry reflecting the happy humor of the prosperous
promoters of the combination.</p>
<div class="sidenote">Financial gains of combination</div>
<p>4. <i>Another strong motive for the combination is the profit to promoters
and organizers.</i> There are indirect as well as direct gains to the
managers of a large business. There is the gain from the production and
sale of goods to consumers, and there is the gain from the financial
management, from the rise and fall in the value of stock. The promoters
of a combination often expect to make from sales to the investing public
far more than from sales to the consumer of the product. A season of
prosperity and confidence, when trusts and their enormous profits are
constantly discussed, has an effect on the public mind like that of the
discovery of a new El Dorado, a California, or a Klondike. Then is the
time for the wily promoter to offer shares without limit to investors.</p>
<p>These considerations show that the trust is not simple in its cause, nor
in its nature. In a sense the most artificial of industrial
arrangements, in another sense it is a natural evolution of industry.
More and more it is being recognized that though it has in it something
of evil, it has as well something of good, and certainly much of the
inevitable.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_323" id="Page_323">[Pg 323]</SPAN></span></p>
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