shareholders. Corporations do not care to have their dividends appear too large. Large dividends, representing as they do large profits, make the consumer and the wage earner wonder why some greater part of the large profits of the business should not find their way to them, in the shape of reduced prices of products and higher wages respectively. That overcapitalization is injurious to the consumer will be apparent from the following example: A gas company may have a capital of $500,000. 5 per cent interest on the capital = $25,000 Operating expenses There are 50,000 units for sale. = 25,000 $50,000 To cover operating expenses and gain 5 per cent interest, the 50,000 units must sell for $50,000, i.e. $1 a unit. Hence, gas will be sold at $1 a thousand cubic feet. 5 per cent interest on the capital Operating expenses There are 50,000 units for sale. $50,000 = 25,000 $75,000 To cover the operating expenses and gain 5 per cent interest, the 50,000 units must sell for $75,000, i.e. $1.50 a unit. Hence, gas will be sold at $1.50 a thousand cubic feet. There are many who hold that raising the figure of the capital beyond the actual amount of capital contributed is often justifiable and should not be characterized as stock watering. Certain immaterial things should be included in the actual value of a corporation. Thus, there are the earning power of the corporation, the value of the franchise, the good will, the monopoly control of a commodity or a service, the selling value of the securities which may be far above the par value. All these things, it is claimed, entitle a corporation to fix its capital figure in excess of the amount justified by mere tangible property. 6. Corporations have a tendency to drive small individual enterprises out of business. It is impossible in many kinds of business for a small firm to compete with a corporation. The latter is able, because of the large capital at its command, to introduce high-priced machinery which would be beyond the means of smaller capital. The product turned out by the large company can be sold at a lower price than that of the smaller, because of the many economies possible to large-scale industry. The large industry, being able to secure a wide market, adopts the principle that there is more profit in many sales at a low price than in fewer sales at a high price. The smaller industry, not possessing the advantages of the larger, cannot reduce its prices, and the high-priced product of the smaller industry is driven from the market. Hence, many manufacturers who formerly conducted their own business have to-day become the paid employees of the large corporations. The tendency to concentration, however, is not felt in all industries. Certain industries, such as the iron and steel, agricultural machinery, electrical apparatus, cotton, glass, leather, food products, liquor, and shipbuilding industries, have come under the control of concentrated capital. (Cf. Leroy-Beaulieu, The United States in the Twentieth Century, Part III, ch. 2.) II. TRUSTS Definition and Explanation.—The trust is a form of concentration that has arisen in recent times. It is a combination of several corporations under one management. The securities of the corporations are bought up and the holders of such securities receive trust certificates in exchange. A promoter puts before two or more large corporations the advantages to be gained by combination. The corporations combine and are duly incorporated under the laws of a state. The charter having been obtained, the business of the trust may be transacted in any state of the Union. Trusts have increased greatly in number during the past twenty years. In 1900 there were 185 trusts, embracing over 2000 distinct plants. In 1904 the number of trusts was over 790, not including railroads. The largest is probably the United States Steel Corporation, organized in 1901, and combining ten large corporations, with a capitalization of over 1400 millions of dollars. The number of trusts has increased considerably in more recent years. Trusts exist in Europe, but they have little resemblance to the trusts in the United States. In Germany, for example, each firm that enters a trust combination retains to a large extent its own autonomy. (Cf. Staats Lexicon, “Kartelle.”) Competition is not destroyed. One of the important objects of the trust is to regulate the output of the industries, so as to prevent overproduction. Motives for the Formation of Trusts. - In the United States, the primary motive that brings about the formation of a trust is undoubtedly the desire to eliminate competition. Competition amounts to a warfare between different establishments. It entails immense waste and expense. To eliminate it various means have been employed. Pools were formed, in which a common fund was established by several corporations. All the earnings of the corporations were turned into the common fund, and at the expiration of stated periods a distribution was made upon terms adopted by the members of the pool. Again, agreements were executed by which exclusive territory was apportioned to the different concerns, or by which a fixed scale of prices was to be maintained. Finally, "holding companies were organized that bought up the majority of the stock in competing concerns and thus prevented competition. All these methods having been declared illegal, recourse was had to the trust. (Cf. G. H. Montague, Trusts of To-day.) A trust that embraces a number of large corporations effectively abolishes competition between them. If the combination secures a monopoly of the industry, as through the absorption of the sources of supply or the acquisition of patent rights, it becomes complete master of the industry. In cases where a monopoly is not possible, the means adopted to destroy the competition of others in the industry are frequently unscrupulous. The trust seeks to absorb all its competitors, whether individual firms or incorporated companies. It buys them up when possible, and the price paid is determined not so much by the value of the business bought, as by the cost the trust would be put to in order to destroy the opponent by competition. A powerful rival that could wage a protracted war against the trust will command a high price. (Cf. J. A. Hobson, The Evolution of Modern Capitalism, ch. VI, p. 144.) If the opponent refuses to sell out to the trust, a merciless warfare is waged against it. The almost unlimited means at its control gives the trust immense power. By underselling and by agreements with transportation companies, it can ultimately force the opponents to submit, when the only alternative for them is to go out of business. A second motive for trust combination is the power to control the price of the commodity produced. A trust may arbitrarily fix the price of its product if it secures a monopoly of the business. In any case, if a trust can gain control of the major part of the supply of a product, it can in great measure determine the amount of the supply, and thus manipulate to its own advantage that fundamental law of supply and demand which regulates the prices of commodities. Where a trust combines several corporations, it controls the output of them all. It can close down the major part of the plants, or can decide the amount of product each may produce. A trust may thus control the supply and so control the price of the product. (Cf. J. A. Hobson, The Evolution of Modern Capitalism, ch. VI, p. 3.) A third motive that prompts the formation of trusts is the economy that results from large-scale business. Economy will result from a number of sources, such as the reduction of office rent and of salaries, the curtailing of the great army of traveling agents, the cheaper buying of raw material because bought in large quantities, the construction by the trust of its own transportation lines on land and on water, the acquisition of the sources of supply, the withdrawal of competition altogether when a monopoly is secured through combination and the lessening of the expense of competition when there is no monopoly, the saving of transportation charges through ability to ship goods from points near the destination, the power to use waste and to turn out by-products, the lessening of expensive advertising, the saving of wages when several of the smaller concerns are closed altogether or operated on part time. This power of economizing is the great economic benefit conferred by trusts on modern industrial methods. It has brought about a greater efficiency of production. That the trusts are popularly condemned in spite of the widespread economies they have introduced, is due to the fact that many will be injured through the operation of these economical methods. Smaller establishments find difficulty in continuing alongside of the great trusts, individuals are driven out of business, many traveling salesmen lose their occupation, labor is affected by the cessation of operations in many plants and the reduction of operations in others. Such evils, very real to those affected by them, might be regarded as the necessary results of industrial development. The introduction of machinery produced similar results in the past. A more just cause for popular condemnation of trusts exists in the fact that these economies are effected often by iniquitous methods, and that the savings made by the trusts through their economies find their way into the pockets of the few and are not widely distributed among the members of society. The Trust Problem. - Corporate organizations that unite many men and vast sums of capital, in order to carry on largescale productive industries, furnish one of the most serious problems of our times. The trusts that link together in one interest a great number of individual corporations, and that seek to absorb all the corporations and the smaller firms engaged in the same or related industries, have especially come to be regarded as a menace to the welfare of society. The rapid growth of corporations and trusts within the past twenty-five years is. viewed with apprehension by people and governments alike. That there are many evils in corporate organizations, affecting many classes of society, the consumers, the laborers, and the smaller industrial enterprises, cannot be denied. That they bring |