Trust Fund Doctrine

A theory adopted by the United States courts, to the effect that the capital stock of a corporation is a Trust Fund for the payment of its debts. This theory probably originated in the rule that subscribers for stock are liable up to the par value of the stock subscribed for by them. The incidents of an equitable trust are not applied in case of an insolvent
corporation. 

Any diligent creditor may satisfy his whole claim, even to exhausting the entire assets of the corporation, if he levies execution before the other creditors, and in absence of a statute to the contrary an insolvent corporation may make a preference of creditors in paying debts. If the assets and capital stock were a true trust fund for the benefit of creditors, a court of equity would compel an equal distribution of the assets among all the creditors. The term "trust fund", therefore, seems an unfortunate misnomer of a just and equitable rule, but no hardship is created thereby. See TRUSTS.

Trusts

The word Trusts in this article is used of large corporations or associations of corporations or of individuals mostly engaged in manufacturing, which possess sufficient power to fix the prices of their products, in part at least, on the principle of monopoly. It does not include railways or combinations of railways, or Trusts in the technically legal sense.

Industrial Conditions Leading To Formation of Trusts

The Trusts are a late development, since, until late in the nineteenth century, industrial conditions were not favorable for their formation. In earlier times organizations possessing monopolistic power were either created by law or secured their power through the possession of some natural advantage, such as the exclusive possession of certain natural resources, as mines, etc., or through the advantage which comes from the exclusive occupancy of positions of advantage in doing their work---railroads, telegraphs, etc. 

In the modern Trust we often find combined with the advantages of great capital and perfected business organization also some of these natural advantages, but they are not the essence of the Trust advantage. The chief causes, from the industrial point of view, which have led to the organization of Trusts, are: (1) The existence of competition which was practically ruinous in its nature, brought about in part by the ease of intercourse between persons in different localities, and by the difficulty of withdrawing readily capital once invested in fixed plants. Such competition almost of necessity at times will become so fierce that all parties concerned will fail of making any profit. (2) The possibility of saving industrially many of the wastes which come from the competitive system, provided the interests of the various competitors are harmonized.

Without discussing in detail these wastes of competition, there may properly be mentioned the salaries of traveling salesmen, the expense of keeping up expensive show windows, the cost of competitive advertising, the loss from undue extension of credits, the loss of custom which comes from carrying only a partial instead of a complete stock, the loss from the payment of cross freights, the loss from running manufacturing plants to only part of their capacity or part of the time. There may be mentioned also as a gain from combination the saving from standardizing the machinery and from prevention of the waste of time due to stopping and changing machinery, the saving from the most efficient organization of laborers and from managing all plants in an enterprise by the most skillful men instead of having part of them directed by men of meager ability, the certainty of a regular supply of raw material, and the most efficient use of by-products.

Other Influences As Causes:

Aside from the industrial conditions that have led to the organization of Trusts, certain other influences are to be noted. (1) The promoters of the large enterprises have in many cases succeeded in making very large profits from the organization. Likewise the financiers who have underwritten the stock have been able to exact very large payment for the risks which they have taken. The immediate personal interest of the promoter and financier has thus been a very powerful factor--sometimes even the most powerful factor in bringing about the combinations. (2) Governmental favors of various kinds have sometimes tended in the same direction. 

Although the protective tariff can scarcely be mentioned as a direct cause of the organization of industrial combinations, it is doubtless true that when an industry which otherwise would not have prospered has been first made very profitable by a protective tariff, so that numerous rival establishments have invested large sums of money in it, the consequent rivalry has led to the formation of combinations.

It is also probable that in certain instances the protective tariff, by lessening foreign competition, has promised to the promoters of a combination the opportunity for greater profits than could have been anticipated without the existence of the tariff. In this indirect way, therefore, we may well consider the legislative favor of the protective tariff under certain circumstances as an indirect cause of the Trust. Similarly, the monopoly granted by the patent laws, by copyrights, by trade-marks, and other legislative benefits, have led to the organization of some of the great combinations.

Extent of Combination Movement

As yet, there are no satisfactory statistics regarding the extent of the combination movement in this county. The only material of this nature that is trustworthy is that secured by the United States Census of 1900, published in volume vii., part I., of the Report on Manufactures. This report included only those "Trusts" which consist of a number of formerly independent mills which had been brought together into one company under a charter obtained for that purpose. Accordingly many establishments which might properly have been included under the word "Trusts" were excluded.

Moreover, many of the largest corporations organized during the last few years, including the United States Steel Corporation, were organized later and hence were not included. The figures given, however, include 185 combinations with 2040 plants. The total capitalization was $1,436,625,910. The total cost of materials used was $1,089,666,334, and the value of the products $1,667,350,949. The total gross value of all manufactured products enumerated in the census was $13,004,400,143. 

For the purpose of comparison there should be subtracted from this total the value of the products of the hand trades or the mechanical and neighborhood industries, since these are not adaptable to the form of management known as the industrial combination. There remains a total gross product of industries susceptible of combination into Trusts of $11,820,784,665. Comparing this with the product of the industrial combinations, it seems that in 1900 the Trusts produced nearly 14.1 per cent. of the total gross product of the manufacturing industries of the country, as enumerated by the census.

Doubtless at the present time this ratio would need to be somewhat increased. Yet it would probably be fair to say that even at the present time the Trusts do not manufacture more than 25 to 30 per cent. at the outside of all the industries in the country readily susceptible of industrial combination. It is impossible at the present writing to say more that that the Trusts have developed very rapidly of late years and that they apparently, though not certainly, are absorbing steadily a continually growing percentage of the entire industries of the country. 

It seems, however, to be equally clear that there are many lines of industry which are not susceptible of management under the Trust organization, and a point will probably be reached within the not far distant future when industries which, from their nature, can be advantageously organized into Trusts will all substantially be so organized, and those not capable of advantageous organization in this form will be recognized as industries normally managed by independent producers.