CHAPTER XX

"TRUSTS"

CAPITAL in land is conservative; capital in banks and investments, ultra-conservative; capital in manufacture and trade militant. Competition in manufacture tends to efficiency and low prices, but it also tends to ruinous prices and bad practices, especially in discriminations and rebates in transportation. The irresistible tendency of manufacture, the same as with railroads and other public service corporations, is towards consolidation and the elimination of competition. The instincts and convictions of the people, however, are against monopoly, and in America at least legislatures and courts have tried to prevent it. But manufacturing on a large scale, called "mass" manufacture, is so cheap and profitable, especially where competition is eliminated, that it is as irresistible as the tides. It cannot be prevented. It leads to consolidations and vast aggregations of capital. It has produced a new type of civilization, a civilization of material comforts. It has produced a new type of men captains of industry. It has also produced a new problem for the Republic, namely, Can its influence on the government be controlled? It is well to refer briefly to the history of the "trusts."

The word "monopoly" first meant an exclusive privilege granted by the Crown. The word "trust," as applied to combinations, was first used to mean an agreement, between many stockholders in many corporations, to place all their stock in the hands of trustees and to receive therefor trust certificates from the trustees. The stockholders thereby consolidated their interests and became trust certificate holders. The trustees owned the stock, voted it, elected the officers of the various cor

porations, controlled the business, received all the dividends on the stock, and used these dividends to pay dividends on the trust certificates. The trustees were periodically elected by the trust certificate holders. The purpose of the "trust" was to control prices, prevent competition, and cheapen the cost of production. The Standard Oil Trust, the American Cottonseed Oil Trust, and the Sugar Trust were examples of this method of combination.

Later the word "trust" was given a wider and more popular meaning. It was used to designate any combination of producers for the purpose of controlling prices or suppressing competition. In this sense of the word all schemes whereby those who were competitors combine their interests are "trusts."

For twenty years trusts were a subject of great prominence. They multiplied rapidly and extended into many branches of business. They were the object of great popular opposition, and their legality was assailed, both in the courts and by prohibitory statutes.

The courts have held with great uniformity that these combinations are illegal if their purpose is to restrict production, raise prices, and restrain trade. The law is clear that any combination of competing concerns for the purpose of controlling prices, or limiting production, or suppressing competition, is contrary to public policy and is void. This principle of law has been applied with great rigor to some of the trusts. The two leading cases on the subject were the Sugar Trust decision in New York and the Standard Oil Trust decision in Ohio, decided in 1890 and 1892. There at first was much litigation in the state courts and little in the federal courts on this subject, but gradually this was reversed, as the anti-trust act of congress of July 2, 1890, was applied more vigorously by the supreme court. After the Sugar Trust decision and the Standard Oil decision, referred to above, were rendered, the great trusts reorganized by conveying all their property to a corporation organized for

the purpose of taking over the property. At first the federal act was ignored by the business public and practically nullified by the decisions of the United States courts, especially in the Sugar Trust decision in 1895. In 1897, however, the supreme court passed upon the legality of an interstate railroad pooling contract, and held that such a contract was in violation of this anti-trust act of congress of July 2, 1890. This was followed by a still more important decision by that court in 1899, when it was held that congress had power to regulate the purchase, sale, and exchange of commodities between the states, and hence, under the anti-trust act of 1890, the United States government might enjoin a combination in restraint of trade by means of contracts, the purpose of which was to destroy competition and increase prices. Twelve years later came the Standard Oil Company decision, and the American Tobacco Company decision, and then the Union Pacific decision. In 1920, however, the supreme court held that the United States Steel Corporation does not violate the act and that mere bigness is not illegal. The pendulum is swinging towards greater liberality. The principle of combination is no longer the test, but unreasonable restraint or improper methods are not tolerated. For instance, the "open-competition" plan of manufacturers to have a central agency collect and distribute prompt information as to sales and prices, the purpose and effect being to suppress competition, is illegal under the anti-trust act of congress.

Two schools of thought exist on this subject.

One favors more legislation, more prosecutions and jail sentences. It relies on national and state action rather than on the workings of natural laws. It points out the innumerable trusts, big and little, which control business. It favors abolishing the tariff on articles controlled by a trust. It points out that the trusts sell their product cheaper abroad than at home. It says that a protective tariff enables the trusts to raise prices to the American consumer above prices already raised by combination.

The other school claims that the big combinations are the only safe ones, on account of publicity of profits and the fact that those profits are due largely to saving of overhead expense, greater use of improvements, and concentration of production. They point to England, where such combinations are permitted, and to ante-war Germany, where "cartels" were encouraged and aided by the government. They say the uses of large open combinations should not be confused with the abuses of small ones, which work in the dark. As to jail sentences, they say that juries are reluctant to convict and courts apt to be lenient when business men combine, often as the only way of stopping ruinous competition. They mention that the certainty of justice is more important than its severity. They admit that injunctions are like a sword cutting water, but nevertheless claim that injunctions are readily granted and molded to fit the case. As to the protective tariff argument, they point to England, where under free trade combinations flourish and are not interfered with. But free trade and foreign competition keep prices down. It is another illustration that the less government the better, except to preserve law and order.

Meantime the courts are working out the problem, aided by a healthy public sentiment, which realizes the saving by combination and yet the danger of misuse of power. Each case is tested by whether the public is injured by excessive prices or whether competing producers are injured by unfair practices. The whole problem is still in the melting furnace, with a tendency to allow natural forces to work themselves out.

Public opinion is rapidly changing in regard to the proper way of dealing with monopolies and combinations. This change is as follows:

First as to public-service companies. Competition among them is no longer insisted on. Congress recently authorized the consolidation of railroads and also of telephone companies. In New York, Pennsylvania, Ohio, and other states, as stated by the New

York court of appeals, "It is the settled policy of the state arising through an extended and instructive experience to withdraw the unrestricted right of competition between corporations occupying through special consents or franchises the public streets and places and supplying the public with their products or utilities which are well nigh necessities." And now by statutes the states generally prohibit the construction of new competing railroads unless a commission certifies to the desirability of the same. The Interstate Commerce Act forbids an existing interstate railroad constructing another line unless the commission permits it. So also generally in the states, in lieu of competition, the rates of gas companies, street railway companies, steam railroads, telephones, and waterworks are regulated by statutes, ordinances, or commissions, subject to review by the courts.

Second, as to industrial companies public opinion is in a transition state. Where a combination or monopoly unduly raises prices public opinion condemns them, but where they reduce prices or improve the product or even make a saving in overhead or by mass production, public opinion is not inclined to apply anti-trust statutes to them, even though they become enormous in size and do most of the business. The difficulty is in breaking up the bad ones, even when convicted. The courts are vigilant, however, and gradually are inculcating better business ethics, and that too by imprisonment when necessary.

The fact is that the industrial movement of the age is irresistibly towards consolidation and combination, in connection with the expansion and extension of trade at home and abroad. The law is designed to check any abuses in this tendency, and has been successful in so doing. The law, however, is not intended to interfere with the legitimate demands of trade, and the anti-trust act of congress, as now construed and applied by the supreme court, will serve to check the abuses without interfering with the uses of great corporations. It was demonstrated in England many years ago in connection with statutory pro