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THE

INTRODUCTION

HE historical development of the so-called Trust Problem in the United States naturally falls into five more or less clearly defined periods. The revival of industry following the long depression of 1873-1879 began the modern development of large-scale production. Corporations embodying the principles of limited liability, delegated management and indirect ownership became increasingly prominent after 1880. The first period in our trust history may be said, therefore, to extend from about this time until 1887. It was characterized by a steady increase in the size and number of large-scale industrial units. Various pools and the Standard Oil Trust foreshadowed the future. The decade from 1887 to 1897 forms the second period. It was the time of the trust in the strict legal sense. Standard Oil Trust success since 1882 invited imitation in the two important industries of distilling and sugar refining. The progress of monopoly was such that an outbreak of state antitrust laws from 1889 to 1893 indicated how fully public interest had turned from the regulation of railroads to that of industrial monopoly. It was assumed, in. fact, that the railroad question had been in a large measure settled by the enactment of the Interstate Commerce Act in 1887. As instanced later in this brief review, the entire failure of the trust expedient, however, in furnishing a legal basis for monopoly led to various other devices, notably pooling. And the continuation of industrial depression, during the four years to 1897, rendered constructive development unlikely. The third period, from 1897 until the Northern Securities decision in the spring of 1904, was largely influenced by the phenomenal prosperity which began in the former year and culminated in 1902. The organization of combinations in various branches of iron and steel manufacture,

followed by the great outbreak of corporate promotion in 1899, led up to the formation of the U. S. Steel Corporation in 1901. This time it was the holding company, organizing under the laws of the charter-mongering states which seemed to offer a convenient substitute for the old and discredited form of trust.

The fourth period in the development of monopoly begins with 1902. It was characterized by sore trial and bitter experience, both economic and legal. Speculative scandals hereafter discussed; the panic and bankruptcies of 1903; the failure of bright promises of promoters; keen popular interest in railroad legislation and the tariff; each and all of them were accompanied by a growing demand for publicity. An outstanding event was the Supreme Court condemnation in 1904 of the device of the holding company in the Northern Securities case. In the same year the United States Bureau of Corporations was established and at once initiated an elaborate series of reports upon industrial combinations. Within two years after 1905 came, successively, the Hughes New York insurance investigation, the "Beef Trust," the Metropolitan Street Railway, the Harriman railroad and the Havemeyer sugar episodes. Suggestions of additional restrictive legislation came from the National Civic Federation, as well as from a number of Congressional committees. The tide of progressivism was evidently rising, manifested on all sides, concerning pure food, labor and transportation as well as industrial monopoly. The climax came in the vigorous application of the antitrust law by the Taft administration, which surpassed even the Roosevelt régime in its insistence upon strict compliance with the law as it then stood upon the statute books. The logical outcome of this mass of litigation was the great Standard Oil decision of 1911, which brought the fourth period in the development of the trust problem to a close. It unquestionably favored, if it did not actually necessitate, the legislation of 1914 with which the latest period in our chronicle is largely concerned. The full significance of that event will appear in due course.

During the generation which has now elapsed since industrial monopoly first took its rise in the United States, as it thus ap

pears, a succession of distinct legal devices have been utilizedas a basis for organization. In order of appearance these have been, the pool, the trust, the simple corporation, and the finance company or holding corporation.

The pool is probably the oldest, the most common and at the same time the most popular, mode of obviating the evils of competition. Industrial pools, in fact, appear at every stage of our economic growth since the Civil War. They are not even eliminated by gigantic mergers, so long as the latter fall short of complete monopoly. Thus even the most powerful presentday combinations, such as the United States Steel Corporation, have at times found it necessary to become parties to pooling arrangements with independent producers. The secrecy of these agreements, owing to a wholesome fear of the law, has rendered them apparently less widespread and effective than they perhaps were in fact. Such agreements may even be international in their scope, as shown by the allotment of the European export trade in steel rails in 1904 between the great German steel combination, known as the Stahlwerksverband,1 and the English rolling mills. A seemingly undue amount of attention has been devoted to the subject of pools in this volume, because of their persistency and of the light which they throw upon the disadvantages of excessive competition.

A type of the earliest form of pool is afforded by the Michigan Salt Association, dating practically from 1868. As described hereinafter in detail, this was an agreement for the purchase of the entire output of all the important producers in a certain field. Similar agreements were certainly operative in the decade 1880-1890, as in the manufacture and sale of cotton bagging, wherein was controlled perhaps two thirds of the output of the country. The most notable pools twenty years ago, however, arousing widespread attention, were in the distilling industry. In 1882 and even probably earlier, until the formation of the trust, a limitation of output and allotment of sales was cer

1 Described in Chapter XXIV, infra.

2 Stevens, Industrial Combinations and Trusts, p. 1. ff., reproduces several such early agreements. The economic background is described in Ripley, Railway Problems (rev. ed.), p. 216 et. seq.

2

tainly relied upon to prevent undue competition.1 The wellknown pools in the cordage manufacture dating from 1860 are also cases in point. A far less defensible scheme from a moral point of view, revealing the possible evils inherent in pooling, is illustrated by the case of the Addyston Pipe Company. Our record of this combination shows it to have consisted of an agreement among competing producers to fix a monopolistic price by means of fictitious bids, with a division of the field to insure complete local monopoly for each plant. More recently still, and developing a peculiar vigor since the failure of other attempts at monopolization, either by outright purchase or a holding company, were the pools in the iron and steel industry. These, as described in Chapter III, sought to promote stability of prices in a field peculiarly subject to violent industrial fluctuations. When reasonably and fairly administered, having due regard, that is to say, to the welfare of the consuming public, such agreements might well serve to steady prices; but when otherwise managed, rapaciously enhancing prices, such pools have miserably failed, with greater evils both to the public and their own membership than those whose prevention was sought. These pools are veritably protean in form, ranging from simple "business meetings with a social aspect" like the Gary dinners of 1897-1898 in the steel trade (p. 178), to the most elaborate arrangements like the Wire Nail Association of 1895-1896, and the German Kartells, exemplified in this volume by the potash syndicate and the Stahlwerksverband. These German pools, it will be observed, are all tolerated by the government under the law concerning monopolistic combinations. The Prussian government actually participates as a syndicate member in the potash agreement. What a contrast in policy with that pursued by the United States!

A highly specialized form of monopolistic agreement known as the patent pool was apparently derived from the experience 1 See pp. 22 et. seq.

2 Pp. 78 and 533, infra.

3 Chapter III, infra.

4 Chapters XXIII and XXIV. The German coal Kartell is carefully analysed by Dr. Francis Walker in Pubs. Amer. Economic Ass., 3d ser., vol. V., 1904.

5 Chapter XX, infra.

of the wire nail combination, the details being worked out by the attorneys formerly in charge of that organization. Until it was brought to book finally in the bathtub proceedings, reprinted herein, the plan was extensively employed, with large profit to the managers. One office in New York alone managed something like fifty organizations of this type. The pool was at once rendered stable and enforceable by making use of the form, if not the substance, of patent privileges. Such patents as bore upon the process or commodity were first united in the hands of a single individual or corporation. All participants in business thereafter were controlled by means of licenses, under which royalties based upon sworn statements of production were turned in to a central treasury. Good behavior, — that is to say, the maintenance of prescribed prices and practices, was enforced by deposits resembling in form the deferred rebate contracts of the British shipping rings. Thus under the bathtub agreement each licensee paid $125 monthly for the privilege of operating a furnace, on the understanding that $100 of this was to be paid back at the end of three months. This left, after the first four months, $300 continuously on deposit for the good behavior of each furnace regularly operated. Security aggregating almost $50,000 was in this manner given for a continuance of the established trade practices. The bathtub case, reprinted in Chapter XVIII, is chosen from among several because it affords the clearest exposition of the plan and also because its successful prosecution by the government brought a considerable series of pools of this type to an end. The entirely artificial nature of the plan is evident from the fact that the patent selected was not vital, but was utilized merely as a means to the end of effective restraint of trade. The abortive patent pool in the Portland cement business in 1911 affords another example in this regard similar to the bathtub case.

The common patent pool was so specious in character that it presented little difficulty to the economic analyst. But the case is quite different where widespread combination is based upon the ownership of patents which are really basic. For, as repeatedly held by the courts, a patent monopoly will be upheld only when it is essential and not when it serves merely as a

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