The Monopoly Character of The Trusts

Many of the Trusts are closely connected with natural monopolies which give them a decided advantage over their competitors. It is well known that the Standard Oil combination, in its earlier days at any rate, derived great advantage from the special rebates which it received from the railroads. There is also reason to believe that many other of the later combinations have received somewhat similar favors. The United States Steel Corporation, as well as some of its constituent companies, has made it evident that one of the great advantages possessed by these organizations is the ownership of mines from which they derive a large part of their raw material. 

Through this ownership of a large percentage of all the available raw material in the country they are able to put their rivals at a decided disadvantage. Certain Trusts also may in certain localities control so large a percentage of the raw material that they may readily crush their rivals in those localities, as, for example, the Standard Oil Company in its local control of oil wells, the salt combination in its control of salt wells and mines, etc. The extent to which a Trust, therefore, may in itself be a monopoly depends often to a great degree upon the extent to which it has a monopoly of the raw material of the industry which it seeks to control The effects of the Trusts upon prices and their legal and social status in the community may in many cases depend upon this one factor.

Promoting and Financing

If, as is often the case, the promoter organizes a new company to take over the various plants which he is intending to combine under one management, or to develop some new patent, it has been the common practice for him to issue stock far beyond the actual cash value of the plants under consideration; then to pay for these plants with as much of the stock of the new company as was necessary to secure them, retaining the balance for his own services. In other cases, when the company is organized, the distribution of the stock among the different parties in interest is agreed upon jointly, and the promoter receives a certain percentage of the entire amount as his reward. 

Inasmuch as he in many cases takes considerable risk, and as the success of the enterprise is practically due largely, if not entirely, to his initiative, it has at times been possible for him to secure for his reward as high as 20 per cent. of the capital of the organization, paid to him in common stock. With such large rewards as are often hoped for and sometimes obtained, it is evident that the interest of the promoter may become a very direct cause for the formation of the Trusts.

Scarcely less prominent than the promoter in this regard is the financier. When either a new enterprise is to be started or a combination of existing establishments is to be made, it is usually necessary to raise a considerable amount in cash, in order that the new institution may start with capital in hand. Frequently also many of the plants purchased need to be paid for in cash. The stock of the new company is ordinarily the source from which it is desired that such cash should come. Inasmuch, however, as the general public is not likely to take the stock immediately and pay for it in cash, it is desirable that some one be found who will underwrite it, that is to say, who will take the stock and agree to furnish in exchange therefore an agreed-upon sum in cash at a certain fixed date in the future. For this service, so speculative in its nature, the financier ordinarily demands and frequently receives very high compensation. In certain instances, which were cited before the United States Industrial Commission, for each $100,000 in cash furnished, the promoter received $150,000 in common stock, while the underwriter, the capitalist, received $150,000 of common stock, and in addition thereto $100,000 in preferred.

Capitalization and Overcapitalization

Of late years there has been a strong tendency toward overcapitalization. The promoters have ordinarily adopted secret methods in the organization of their companies, and many of the larger Trusts have not been ready to give much information, even to the stockholders themselves. In consequence, large blocks of stock have at times been unloaded upon the public in prosperous times which have proved to have comparatively little value. It is usually stated by business men that overcapitalization has practically no influence upon wages or upon prices of products--that in a comparatively short time the stocks are estimated at substantially their true value, and that in consequence an over-issue of stock does little harm. 

On the other hand, it is asserted by many, and there is certainly reason in their contention, that the over-issue of stock by somewhat secret methods gives a decided advantage to those who are managing the organization, and that in many cases without laying themselves open to legal attack the promoters may easily secure from the public much more capital than the actual business would justify. Moreover, even when the organization is running, if secret methods are adopted, the directors who know the exact conditions of the business are often tempted to manage the business for their own benefit as dealers in stocks, rather than for the legitimate profit that would come only from manufacturing.

When a company has once been overcapitalized, also, there is naturally and properly a desire on the part of the directors to pay reasonable dividends to the stockholders. This temptation is at times so great or the pressure from the stockholders themselves is so insistent that often, especially when competition is not severe, prices will be held at rates higher than would be beneficial to the business in the long run. 

So, also, efforts to reduce wages may often be attempted temporarily, in order to secure dividends before the next election of directors. While this policy must in the long run prove unwise, and while in the long run stocks will doubtless exchange for something like their actual value, for considerable periods of time, if secret methods are practiced, overcapitalization may do harm not only to investors, but also to laborers and to the general consumers.