REVIEW OF EVIDENCE.

INTRODUCTION.

Since the publication of the preliminary report on industrial combinations a large amount of new evidence on the subject has been taken. In the main this evidence tends to confirm conclusions reached in the earlier report; but several new lines of investigation have been followed, so that somewhat more complete statements can be made and the conclusions formerly reached are made substantially certain. Additional information has been secured, particularly on the subjects of the promotion and financiering of industrial combinations; on the causes for the failures of those which have not proved successful; on the practices of combinations in connection with the export trade; on prices for export goods as compared with those sold within the country, and on the relation of the tariff to industrial combinations. The details regarding the various subjects will be given each under its separate heading.

CAUSES OF COMBINATION.

It is clearly the opinion of most of those associated with industrial combinations that the chief cause of their formation has been excessive competition. Naturally all business men desire to make profits, and they find their profits falling off first through the pressure of lowering prices of their competitors. The desire to lessen too vigorous competition naturally brings them together.

A second way of increasing profits is through the various economies which they think will come by consolidation. The special details of these savings will be given under another heading.'

One or two of the witnesses considered the protective tariff as the chief cause of the trusts. They urged that high tariff duties, by shutting out foreign competition, make it easier for our manufacturers to combine to control prices, and they think that the experience of the last few years justifies the assertion. Likewise, they say, through the high profits that come from the exclusion of foreign competition by the tariff, capital has been attracted into industries here to so great an extent and with the expectation of so high profits that home competition has been unduly stimulated, thereby leading to the formation of combinations.2

Some other witnesses believe that the tariff, while not the most important cause, has, nevertheless, some influence toward encouraging combinations;3 while one witness, Mr. La Taste, believes that the monopoly of natural opportunities, under our present system of taxation, is to be considered the fundamental cause.*

Nearly all of the witnesses who have considered excessive competition as the chief cause do not agree that the tariff is to be looked upon as a cause, nor as a rule do

1 Chapman, pp. 93, 98, 99; Pitcairn, pp. 227, 241; White, pp. 253-266; Burn, pp. 284-303; Hopkins, p. 346: Chisholm, pp. 431, 435.

#Holt, pp. 552, 553, 569; Spalding, pp, 1–4

Hillyer, p. 13.

4 P. 29.

they concede that those engaged in the organization of combinations have any intention of securing a complete monopoly. It is, of course, true that the restriction of competition is a step toward monopoly, but competition has not been suppressed entirely, and they do not believe that monopoly has been or can be secured. In most cases they would deny that a monopoly was in any respect desirable.

THE SAVINGS OF COMBINATION.

(a) Among the economies that are generally recognized as resulting from combination is the regulation of production. Where there is no general understanding among producers there is a strong tendency to overproduction, so that markets become demoralized and competition excessive. The combination is able so to fit the supply to the demand that while customers can be fully supplied at reasonable prices there is no danger of overproduction. It is thus a means of preventing panics and periods of depression.1

(b) Closely allied with this adaptation of supply to demand is the advantage that comes from the possibility of carrying much smaller stocks of goods. This saves not merely the investment of capital, but also interest on running capital, insurance, storage charges, shop-work charges, etc.2

(c) This same control of production enables the combination to keep its factories running full time, thus keeping labor fully employed. It has been found in several special cases that the percentage saved in the cost of production in the rubber industry by running a factory full time instead of half time was from 4 to 8 per cent. In other cases it is doubtless more.3

(d) When a large proportion of an industry is under the control of one central management, it becomes essential to success that the various products be standardized. In this way the quality of goods can be made much more uniform than would otherwise be the case, and its excellence can be guaranteed. Furthermore, the number of styles of goods can regularly be very much reduced, thus lessening the cost of manufacture and effecting a saving in the amount of stock that needs to be carried.' (e) The same influence leads to the larger use of special machinery, and to the adaptation of the workmen and the superintendents to the special departments for which they are best suited. In many cases through this specialization more can be saved than through the introduction even of new machines. In one case, in connection with the manufacture of rubber goods, as much as 20 per cent of the cost was saved by thus specializing the machinery. Mr. Schwab, president of the United States Steel Corporation, mentions the specialization and adaptation of material as a great saving in the steel industry.5

(f) The specialization mentioned above saves also materially through a lessening in the cost of superintendence, which is sometimes very large. Likewise the increased efficiency often enables the manufacturer to lessen the number of laborers per unit of product."

(g) There are also noteworthy savings along somewhat similar lines in connection with the cost of selling; for example, the number of traveling men can often be greatly reduced. In the case of the United States Rubber Company there was a saving of 25 per cent in the number of traveling salesmen. Substantial economies can be made through direct sales instead of through middlemen; and the cost of advertising can be materially lessened, owing to more intelligent distribution and method of advertising. Advertising in a large way permits also the securing of

1 Flint, pp. 35, 92; White, p. 264; Spalding, p. 9; Chapman, p. 109; Schwab, pp. 450-452. 2 Flint, p. 35.

Flint, p. 34; Spalding, p. 9; White, p. 264; Schwab, pp. 453, 454; Waterbury, pp. 128, 129. 4 Flint, p. 35; White, p. 263.

Flint, p. 34; Schwab, pp. 450-452; Duke, p. 327.

Flint, p. 85; White, p. 256.

more favorable rates.1

The popularity of a trade-mark can be more readily secured

when the sales are direct. (h) There is often through combination a better knowledge and control of credit conditions, so that bad debts may be guarded against. During the year 1890 the United States Rubber Company, doing a business of about $28,000,000, lost less than $1,000 by bad debts. The loss by the separate companies on that volume of business would have averaged doubtless over $100,000 per year."

(i) Of course there is a very material saving in many instances through shipping goods to customers from the nearest plants. In this matter of freight saving also the large combinations can often supply themselves with storage facilities at central points and then ship their goods in large quantities during the seasons of the year when freight rates are lowest, thus often securing the advantages of water transportation which otherwise would not be available.3

In the case of local combinations, as, for example, the Cleveland and Sandusky Brewing Company, a similar saving is made in the cost of delivery of goods. Before the combination was made each brewery delivered beer to every part of the city. Now each brewery delivers to the portion near which it is situated.*

FORM OF ORGANIZATION.

In the case of the newer combinations in the United States it has been found that practically all of the important ones are put into the form of a single large corporation. In many cases the new corporation buys the individual plants which it seems desirable to combine and thus becomes a single owner of all the establishments.

In other cases, and this is perhaps true especially with reference to the largest combinations, the stock of the constituent members is all bought by the single unifying company. The constituent companies then retain their organization intact, being controlled simply by the central corporation, as a stockholder, which can elect directors and officers at will and thus guide the management absolutely.

PROMOTION AND FINANCIERING.

(a) Method of organizing.-Considerable new evidence has been taken regarding the methods of promotion and the part which the promoter plays in the organization of the combinations, as well as regarding the relations between the promoter and those who finance the organization. (It is quite a general custom for a syndicate to be organized of individuals, bankers and others, who furnish whatever cash may be needed to purchase the different plants entering the combination, and who agree to take a certain proportion, if not all, of the new stock which is not taken by the vendors of the plants and by the public. Perhaps the most usual method followed is for the so-called "promoter" either to secure options upon the various plants entering into the combination, or to purchase them outright for cash or for stocks of the new combination; (then to sell them to the new combination, taking as pay therefor its stock or stocks and bonds.) The financiers furnish, to the promoter the cash to pay for the plants or for the stocks of the individual establishments. They receive from the promoter, for the cash, stocks of the new corporation. All the exchanges of securities are frequently effected at the same time and place by the different parties entering into the transaction, so that there is no especial necessity for any large sums of money to be transferred, and the bargains made beforehand between the different parties are all consummated at once."

1 Flint, pp. 34, 35; Duke, pp. 327, 328; Campbell, pp. 309, 310.

2 Flint, pp. 36, 37.

*Flint, pp. 35, 36; White, pp. 253, 254.

Chapman, p. 105.

Chapman, pp. 93, 94.

(b) Pay of the promoter.-There are various ways for the promoter to receive his pay. In certain instances, as, for example, the United States Rubber Company, the promoter received for his work 5 per cent of the total stock issued, but had to pay out of this the charges of lawyers, accountants, appraisers, and bankers.

A more usual form of remuneration is to give to the promoter a certain amount of stock with which to buy the plants required and to pay expenses, permitting him to retain the surplus for his profits. In the case of the Rubber Goods Manufacturing Company the syndicate subscribers furnishing cash received for each $100 paid in $100 in preferred stock and $90 in common stock. The promoters had to purchase the plants and were given the entire issue of preferred and common stock. If they could buy the plants for the proceeds of the 100 per cent of preferred stock and 90 per cent of common, they made the 10 per cent of common stock for their profit; if they had to pay more than that sum their profits were correspondingly lessened; if they could buy for less, naturally they made more than the 10 per cent of the common stock. They were under the express limitation that no preferred stock was to be issued in excess of tangible assets, and no common stock in excess of an amount determined by the earning capacity of the plants, as shown by previous experience, capitalized on a 7 per cent basis.1

In the case of the American Smelting and Refining Company syndicate subscribers received for each $100 paid in cash $100 in preferred stock and $70 in common stock. The promoters received the remaining $30 in common stock, out of which they had to pay the entire expenses of organization. They retained the remainder for their profits. Speaking generally, Mr. Chapman states that when a financiering syndicate receives for its subscriptions par in preferred stock and something less than par in common stock, the usual custom is for the promoters to receive the remainder of the common stock as pay for their services and for covering the costs of organization. In most cases their profits will depend upon the rigidity with which they can hold down their expense accounts, and, in many cases, where the purchase of plants is entirely in their hands, upon the skill which they can show in making purchases. Usually, of course, a careful appraisement has been made of plants beforehand, so that the basis of the stock issue is well known to all parties interested in the deal. A certain speculative chance is also often given to the promoters through the fact that it is within their discretion to buy for cash or stocks as they can best make agreements with the vendors. In that case they can sometimes make much better bargains for themselves by paying cash, or, on the other hand, by persuading the vendors to take securities, thus lessening the amount of cash that needs to be paid out. It is regularly the case that the promoter receives his pay in common stock.

(c) Pay of the financier.-Within the last two or three years there seems to have been a more conservative tendency shown by the bankers and others interested in financing the industrial combinations. The man who advances money to buy the various plants is, in many instances, taking a considerable risk and expects often to secure high pay therefor. The extent of his pay is dependent nevertheless largely upon his judgment as to the future course of development of the business of the combination in question. He practically buys securities of manufacturing establishments. If they earn high dividends his earnings will be great, provided he retains the securities; if he sells them his profits will be determined by the market rate of the securities, that being dependent again in the long run upon the earning capacity of the establishments. The more usual terms probably, under which within the last two or three years the financial agreements have been made, are that for each $100 cash paid in the subscribing member of the financial syndicate receives par in preferred stock with a bonus in common stock equal to the preferred less the amount reserved for the pay of the promotor. This reserve has sometimes been as high as 50 per cent of the common stock, sometimes 30 per cent, and sometimes only 10 per cent.2

1 Flint, p. 38.

2 Chapman, pp. 93, 94; Flint, pp. 37, 38, 51, 66–73.