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LIB R ARY

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UNIVERSITY OF CALIFORNIA.

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Received ^^^,189 .
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REPRINTED FROM THE FORUM,
FOR SEPTEMBER, 1889.







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FACTS ABOUT TRUSTS.



By CHARLES F. BEACH, Jr., of the New York Bar.



" The article of Charles F. Beach, Jr., in defense of
Trusts, in the September FORUM, is perJiaps the best
thing that has been said on that side of the question.
Certainly it embraces in brief compass and distinct phrase
all that has been said by others" THE NATION, Sept. 5,
1889.



FACTS ABOUT TRUSTS.



DURING the past eighteen months, "trusts," according to the
popular conception and misconception of them, have been ac-
corded, by thinking and unthinking men alike, an amount of
attention never in this country before bestowed by the public
upon any purely economic question. This is the more extraordi-
nary because the questions involved and the mischiefs com-
plained of are wholly speculative. The people have been ex-
ercised and excited, without smarting under any specific injury
actually and presently attributable to trusts, because the im-
pression is abroad that trusts are in some way or other doing a
public mischief. The present discontent of the working people,
of which trust agitation and trade unionism are only symptoms,
is perhaps a natural result of the lower prices, diminishing
profits, lessening wages, and less work which, as of course, when-
ever they come and however they are caused, bear most hardly
upon the impecunious and unthrifty classes.

Inasmuch as trusts are a sort of alliance among business men
but recently devised, and especially because they are essentially
private arrangements, with the organic constitution of which the
public has no proper concern, it is not surprising, although the
device is very simple, that there should be a general popular
misconception in regard to them. This seems to be threefold,
and consists, first, in mistaking an effect of hard times for a
principal cause of them ; secondly, in mistaking the nature and
essential character and characteristics of the trust scheme ; and
thirdly, in confusing the trust itself with its abuses, or rather with
the specific iniquities which have been charged upon certain
trusts. A trust, let it be at once plainly understood, instead of
being a cause, is a result of lower prices, overproduction, and
diminished profits. If that be clearly perceived, it will be a long
step toward a proper conception of what a trust is. A trust,
then, to begin with a definition of it, and making wide allowance



63 FACTS ABOUT TRUSTS.

for many differences in detail as between one trust and another, is
essentially an agreement among the producers and venders of a
certain sort of merchantable commodity for their mutual protec-
tion and profit in business. It is a wholly selfish arrangement,
without pretense that philanthropy enters into it at any point.
Herein it differs very little from other commercial enterprises.
It is not proposed as any part of the trust scheme that it share its
economies with the public, and it ought not, therefore, to be
judged of as an eleemosynary institution. It is entered into be-
cause the parties to the agreement believe that they can in that
way largely or entirely eliminate or control competition, main-
tain the prices of their wares, check overproduction, and make
money more easily than they can without the trust. The
arrangement which constitutes the trust is something different
from a partnership, a joint-stock company, a corporation, a " cor-
ner," a syndicate, or a pool, but partakes, nevertheless, to some
extent, of the characteristics of them all. It is usually effected
by the incorporation of the several individuals whose property is
to enter into the trust, if they are not already incorporated, into
as many distinct corporations as there are separate enterprises.
The stock in these corporations is allotted to the stockholders, as
usual, in proportion to their interests in the property; and is by
them, as stockholders, transferred to trustees, who* themselves, or
in connection with others, constitute the trust. These trustees
issue to the several stockholders entering into the arrangement
trust certificates to represent the stock transferred to them, in
proportion to the amount of the stock so transferred. The cor-
porations are thus kept distinct from the trust, and are not, as
corporations, parties to the trust arrangement. The property,
however, of each of the corporations is subjected to the control
of the trust, and is managed as one enterprise by it or at its plea-
sure and in its interest. Dividends are paid from earnings either
on the stock to the trust and accounted for by the trustees, or
more usually upon the trust certificates directly to the holders
thereof. This is, in general, the trust scheme. It is a device to
unite corporations and to manage them by a single board of
trustees for their common benefit, by means of a contract between
the stockholders of the several corporations whose property is



FACTS ABOUT TRUSTS. 63

affected by the trust, the corporations themselves preserving
their organization and their formal organic, autonomy, each doing
for itself its own business, and thus conforming to all the rules
of law affecting corporate existence and management.

The multitude of trusts which now exist and by which it is
sought to carry on almost every line of manufacturing business,
not only in this country but in Europe, have, with one or two
exceptions, at least as far as this country is concerned, all been
created within two years or a little more ; although, as every con-
siderable merchant understands, at present and for many years
past much of the wholesale business throughout the world has
been carried on under conditions which imperatively require con-
certed action and agreement to maintain prices. This appears
from the published reports of the three legislative investigations
undertaken during the spring of 1888, respectively by the Legis-
lature of the State of New York, the Congress of the United
States, and the Canadian Parliament. The Standard Oil trust
see"ms, however, to have been created in 1882, but to have had a
sort of informal existence for ten years before that time.

Prior to the year 1880, to speak generally, and making due
allowance for the depression which immediately followed the
panic of 1873, manufacturers in this country, in almost all the
staple lines, found a market for as much of their product as they
could furnish, at an adequate profit ; but since then the selling
price of almost every one of the staple articles of commerce
manufactured in this country has declined from sixteen and
two-thirds to fifty per cent. This reduction, although attended
and in part occasioned by a lower price of raw materials, has
not generally been accompanied by a corresponding reduction
in the cost of manufacture or in the price of labor. The
shrinkage, therefore, came largely out of the profits of the
business. The manufacturer was at the same time confronted
with organized and aggressive combinations of laboring men ; so
that, instead of being able to meet the fall in prices and the
smaller profits by a corresponding reduction in the price of labor,
he has been compelled to pay almost the same prices, or, taking
account of the value of money, sometimes a greater price, for
labor^and at the same time has continually been subjected to



04 FACTS ABOUT TRUSTS.

new annoyances and embarrassments in the control of his busi-
ness, growing out of the changed relations between his employees
and himself.

The first step which manufacturers generally throughout the
country took for their protection was incorporation. Therein
they saw a means of saving what they had accumulated, even
though the business itself might decline or be ruined. The
records of all the States attest abundantly the truth of this state-
ment. Everywhere since 1880, hundreds of private manufacturers
have incorporated their businesses ; and there is no doubt that the
reason for this general incorporation was the disposition to guard
against loss in view of the inauspicious outlook.

Other steps for protection were the thousand and one devices
by way of contract and arrangement between manufacturers in
the same line to maintain prices. Experience shows that these
were valueless. Deterioration in the quality of the manufactured
product was another step in the same direction. When times
were good we had sugar ; as they grew harder for the manu-
facturer we sometimes got glucose. In prosperity we had olive
oil from the Mediterranean ports ; in later times we got cotton-
seed oil from the Gulf. Instead of butter we got oleomargarine.
If profit could not be made honestly, some profit must be made
somehow, and the quality of the manufactured product in con-
sequence was lowered.

Passing by the attempt at self-defense by means of pools or
concert of action in the* nature of pools, the last step has been
the formation of trusts. Here, then, is the genesis of trusts. It
is a mischievous confusion of ideas to regard as trusts such things
as the mediaeval guilds, the famous copper syndicate, Conrad
Roth's sixteenth-century attempt to corner pepper at Augsburg,
the Dutch East India Company, and the numerous middle-age
monopolies of which they are in some sort types. The trust is
the nineteenth-century offspring of overproduction, small profits,
competition rampant, and labor organization. It is the protest
of solvency against insolvency.

It ought not to be overlooked that a potent factor in inducing
trusts, has undoubtedly been the various aggressive combinations
or trusts of laboring men which now exist, and the concerted at-



FACTS ABOUT TRUSTS. 65

tempt on the part of labor to dictate how the factories are to be
run, who are to be employed, and what wages are to be paid. The
manufacturer finds himself verily " between the devil and the deep
sea"; between all sorts of embarrassments incident to competition
with insolvent rivals and a bear market on the one hand, and the
labor organizations on the other. It is also true that the at-
titude of the politicians upon the question of labor and its alleged
rights, and the truckling tone of a considerable portion of the
press, have materially contributed toward organizing capital and
forcing capitalists to protect themselves on their part, as laboring
men are doing on theirs.

A trust is, then, from this point of view, a self-protective in-
stitution, a counterpart of the trade union, a capitalists' " District
Assembly No. 49." Illustrations of the truth of this view are
at hand. Commence, if you will, with the iron industry. Only
something more than a year ago the great manufacturing firm of
Cooper, Hewitt & Co., when they were threatened with a strike
on the part of a thousand or more of their operatives at Trenton,
made a formal proposition to the workmen to turn the establish-
ment over to them and to furnish an adequate capital to conduct
the business, if the laborers would guarantee a return of five per
cent, upon the investment. Merciless competition and infinitesi-
mal profit account for the Sugar Eefineries Company. So also
of combinations to control the production of salt and certain
kinds of oil. The manufacturers of straw board were in the
same position. Prices had run down, and they were doing or
were likely to do an unprofitable business. They had developed
an extensive and useful industry and were possessed of a costly
plant. They could not stop, and they could not, as things were
tending, safely go on. Their trust is, therefore, essentially self-
protective. The ammunition trust furnishes another pertinent
illustration. Western hardware merchants were making their
product what is termed in the trade a " leader " ; that is to say,
they were selling cartridges at five per cent, below cost in order
to sell other goods, just as certain houses sell periodicals below
cost in order to attract customers for other sorts of merchandise.
Here, then, an agreement in the nature of a trust was entered into
in order to protect the manufacturers of ammunition from a ruin-
5



66 FACTS ABOUT TRUSTS.

ous and inequitable competition. So it has been and is in many
other lines.

Inasmuch as such trusts as we are here considering are, from
a legal point of view, absolutely new contrivances, the legal
questions which their creation and existence raise are entirely
open ones, and are to be determined, not by reference to ancient
statutes and the learning of what Bentham contemptuously called
"the report books," but rather on more general considerations of
equity, expediency, utility, and public policy. It seems to me,
therefore, that the strictly legal arguments made against trusts
have been in the main aside from the point really at issue. The
old statutes against regrating and kindred acts were not directed
to any such mischief as their citation in an anti-trust argument
assumes. Neither are decisions of thirty, or seventy-five, or three
hundred years ago available for such an argument, except by way
of a somewhat strained analogy. What Lord Coke or Lord
Kenyon thought about "conspiracies," is of no value in fixing
the legal status of modern trusts. General Pryor's masterly
argument in the sugar refineries case is, from the standpoint of
the law reports, conclusive and unanswerable. But are we not
confronted, in a philosophical consideration of these questions,
with facts and conditions which, in the forum where all these
issues must finally be decided, seem to sustain a sort of equita-
ble demurrer to such reasoning? Can we not concede what
General Pry or claims, and still move for a judgment for the
trust? When the reason of the rule fails, is it not a legal
maxim that the rule itself also fails? Does not the case chang-
ing, change the case, and is not the gravamen of the indictment
rather against the wrong-doings of the trust than against the trust
itself? Is it not a mere figure of rhetoric to call the salt com-
bination or the straw board trust a conspiracy; and are these
and other such trusts, as trusts, any more like a mediaeval mon-
opoly than like a modern missionary society?

Trusts seem, when soberly viewed, to be a natural develop-
ment or evolution in business, precisely as corporations were
half a century ago. The opposition to them is also strikingly
like that to which corporations were exposed when they began
first to be extensively organized. They are a product of univer-



FACTS ABOUT TRUSTS. 67

sal peace. Men are now organizing great commercial unions for
the conservation and increase of material wealth, instead of
equipping armies and building navies to destroy it. They are
upon us, too, in a flood, like the tides; a manifestation of the same
tendency of things in this generation which has otherwise shown
it sr If in the creation of the German state out of a score of half-
feudal principalities, in the union and consolidation of our rail-
ways into trunk lines, in the Postal Union, in the agitation for
the annexation of Canada and Mexico and Cuba to our already
overgrown Republic, and in the fight for an international copy-
right. It is the same evolution, the same centripetal force, that a
century ago gave us our federal union of States, against the gravi-
tating force of which, a quarter of a century ago, the great armies
of the Confederacy marched to defeat. It is that trend in things
by which business, in this year of grace, sets the planet, in the racy
phrase of Emerson, to do its chore, against the gathering and
growing momentum of which frontier legislation and the small
arts of truckling politicians are no better than Mrs. Partington
with her broom, and as certain to be futile as an act of Parlia-
ment to stay the precession of the equinoxes.

Many serious men, however, believe that these new com-
mercial organizations constitute or tend to a monopoly which, by
suppressing competition and curtailing production, enables their
promoters to reap inordinate and unconscionable gains out of their
business at the expense of the public ; and for this reason they
sympathize with any effort which they think well directed to
destroy them. This brings us at once to the question whether
competition in business along the lines on which our present
commercial enterprises move, is, in and of itself, unconditionally
good. There are many who in answer assert that the waste
of competition is incalculable; that competition, as business is
now conducted, costs the public a million of dollars where mon-
opoly, such as is possible under modern conditions, can extort a
penny ; and that the very class in the community who are most
injured by unrestricted competition are the poor and improvi-
dent, who are as a rule the loudest in their denunciation of trusts.

The slightest reflection enables the most unthinking man
among us to understand that when two men employ them-



68 FACTS ABOUT TRUSTS.

selves in doing what one man can do alone, there is a waste of
energy for which, unless it vanish in the air, at last the consumers
of the product of those laborers must in some way or another pay.
If this supererogatory service, or any part of it, be paid for in
money or money's worth, then the waste, quoad hoc, is charged
to the consumer; but if the service be wholly or partially lost,
then it comes, to the extent of the loss, out of the wear and tear
and nerve force of the laborer who . performed it, or else it is
distributed around among the entire class. In any event there
is a waste for which somebody must pay in full, and whereby
the public is by just so much the poorer. If it be true that
the trust idea tends substantially to check this waste of competi-
tion, that is a very strong point in favor of trusts. It may well
be doubted that unrestricted competition is a public benefit. " I
do not think," says Judge Gray, of the Court of Appeals of
New York, in a late decision, " that competition is invariably a
public benefaction ; for it may be carried on to such a degree as
to become a general evil." To this dictum many wise men will
instantly assent.

Before trusts are condemned as monopolies in the offensive
sense, account must be taken of the fact that no business can be
made excessively profitable in this country without attracting
outside capital. Nothing is so certain as that the profit of any
sort of business can never be raised, by increase of price to the
consumer, beyond a normal amount, for any length of time, with-
out tempting the cupidity of men in other lines and creating at
once an outside competition. No combination of manufacturers,
not protected by government patents, by an iniquitous tariff,
or by unholy alliances with railways, can, by never so stringent
a compact between themselves, prevent any other set of men
from going into their business, whenever the condition of the
trade promises more than an average profit. No truth is any
truer than this ; and it makes an end of the objection that trusts in
these United States and in this year of our Lord 1889 are, or can
ever be, monopolies in any mischievous way. People who are op-
posing trusts upon this score of monopoly, may profitably con-
sider this proposition seriously and try their hand a little at its
defenses. Whenever, if ever, profit grows excessive by reason of



FACTS ABOUT TRUSTS. 69

an increase of selling price or a greater demand, outside capital
will come in, or the trust will disintegrate. lie is a somewhat
m-dulous man, therefore, who can keep his countenance and insist
upon this line of argument in opposition to trusts, because it is at
precisely this point that the public safety is assured. The trust,
even though it secure what no trust has ever yet secured a com-
plete unification of a given business contains within itself the ele-
ments of dissolution the moment it ceases to serve the public by fur-
nishing its product at a price below that at which outside capital
can compete. Every one of the existing trusts has the competition
of outside dealers, and it has also the menace of other and new
competition, unless the selling price of its product be kept so low
as to deter outside enterprise from embarking in its business.
It not only must meet the competition that is, but it must also
forestall the competition that may be. We have, therefore, this
paradox: the same selfish motive that prompts the individual
dealer to charge the highest prices, moves the trust to charge the
lowest. The individual charges all his customer will pay ; the
trust charges all it can without provoking competition. In each
case all that the traffic, regarded from the selfish standpoint of
the seller, will bear, is charged. The same self-interest that
makes the price charged by the individual as high as possible,
makes that charged by the trust as low as possible ; the same sel-
fishness working in the two cases this opposite result. The trust
enlarges the margin of profit at the bottom by cheapening produc-
tion, rather than at the top by increasing selling prices. It cannot,
with safety to itself, raise the price to the consumer to a point
where other capital will be tempted to embark in its business that
is, to a point beyond the normal profit but it can, by new econo-
mies in manufacture, cheapen without limit the first cost of its
product, and thus enlarge its gains within the four walls of its
own factory without inviting competition. Here the self-inter-
est of the trust works benefit to the public. It keeps present
selling prices low, and it stimulates economies in production
which must eventually inure to the benefit of the public.

The trust, moreover, is, equally with the individual trader,
subject to the competition of product with product. Thus
a wheat-flour trust, if one were possible, would, if it raised



70 FACTS ABOUT TRUSTS.

too much the selling price of its product, find a check in the in-
creased consumption of other farinaceous foods. So also the
higher price has a correlative in the smaller consumption,
and this equally whether one concern monopolizes or ten thou-
sand concerns compete for the business; as, for instance, less
people will mail letters when the postage is five cents than when
it is one, and fewer will ride in public conveyances when the
fare is a dime than when it is half as much.

We are also confronted, when considering the matter of
profit, with such questions as these: Have men a moral right
to do business at a profit? Is the public morally entitled to
the benefit of such economies in the production by private enter-
prise of a given article as accrue from the aggregation of capital
and the concentration of interest in its manufacture? Are the pro-
moters of a trust entitled to such profits as they can secure by rea-
son of the economies incident to the trust? Is it morally wrong
by concerted action among manufacturers to prevent the manu-
facture of more sugar, or oil, or straw board, or what not, than can
be sold at a profit? Have the public a right to insist upon over-
production, so that manufactured products must be sold at a loss?
Is one man morally entitled to the advantage of another man's
foresight and economy in the conduct of his private business? Is
not a fair price for a thing morally better than a low price for it?
Is not a certain price for a thing economically better than a
fluctuating and uncertain price? Do the politicians really be-
lieve that competition unchecked and overproduction unre-
strained, and the low prices, the low wages, the glut of markets,
and the sacrifice of energy which are incident thereto, will better
the condition of that class whose rights they especially cham-
pion? Is anybody so credulous as to believe that trusts of capi-
tal can be legislated out of existence while trusts of labor con-
tinue? None of these questions need be answered here, but
some of them answer themselves.

So far as the trusts are a real grievance, it is unfortunate
that the opposition to them has taken on a political form, and
that politicians of the baser sort have in general been noisiest in
their denunciation. It is well when evils in the body economic
are of such sort and take such form that the best and most sub-



FACTS ABOUT TRUSTS. 71

stantial classes in the community array themselves in opposition.
The noise of the ward politician about trusts, arid his xeal to
make something for himself out of them, has doubtless detcnv.l
some more representative and reputable people from expressions


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