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any 1st of January prior to 1917, that is before the
Harriman interests could get an opportunity to vote the
shares and insure the coveted control. The potential power
of retiring the preferred shares generated a conciliatory atti-
tude on the part of the Harriman forces. The Hill-Morgan
interests were allowed to recover by purchase a majority of
the Northern Pacific stock. In order to prevent the recur-
rence of such a situation, a holding company was planned
which should hold the stocks of the two roads. The North-
ern Securities Company was organized for this purpose,
with a capital stock of $400,000,000, and upon an agreed
basis of value the shareholders of the two railroad com-
panies exchanged their stock for the stock of the holding
company. 30 In this way, the Securities company became
the custodian of more than nine-tenths of the Northern Pa-
cific stock and more than three-fourths of the Great North-
ern. The two roads were conducted as one system for the
exclusive benefit of the stockholders of the Securities com-
pany. Competition practically ceased, and the earnings
of the two roads were put into a common fund to be dis-
tributed to the shareholders of the Securities company.

In 1902, the Government brought suit under the Sherman
law to dissolve the company. The Circuit Court in 1903
ordered the company to be dissolved, and in the following
year the decree was affirmed by the Supreme Court. 31 The

80 193 U. S. 327-8.
n 193 U. S. 327.

42 Trust Dissolution

latter declared that no scheme or device could more certainly
come within the prohibition of the law, or could more ef-
fectively suppress competition. It held that the entire com-
merce of the immense territory served by the two roads
was at the mercy of a single holding company, organized in
a distant state. It enjoined the company from exercising
any further control over its stock, but permitted the com-
pany either to transfer the stocks of the two railroads held
in its treasury to their former owners, or to distribute them
to the present stockholders of the Securities Company. The
Morgan-Hill parties chose the latter plan and proceeded to
make a pro rata distribution, but the Harriman interests
objected to this plan, which gave a majority of the North-
ern Pacific stock to Hill and his friends, and demanded that
the original stocks of the railroads be returned to their for-
mer owners. The contest was carried to the Supreme Court
which decided in favor of Hill and his friends. Had Harri-
man won he would have recovered his former control over
the Northern Pacific. 32 The dissolution left the Northern Pa-
cific in the hands of its transcontinental rival, of Hill and
his friends who held a majority of the Securities company's
stock and received a like majority of the stocks of the two
railroads. 33 The Harriman forces received minority hold-
ings in each of the two roads.

Alexander D. Noyes cites the following results of the
dissolution: "Predictions of great financial demoralization
were common when the Northern Securities had been finally
ordered to dissolve; yet the dissolving of that holding com-
pany was accomplished with a minimum of friction or dis-
turbance, and along with a great advance in the stock ex-
change prices. The business of the constituent companies
went on as usual. Not only so, but the Union Pacific Treas-
ury, which retained its holdings during the litigation and
through the dismemberment of the holding company, * * *
sold the bulk of its investment two or three years later at a
profit of $34,000,000." 34 The total profits for the Harri-

82 197 U. S. 258-9.

M Ibid., p. 244.

84 The Forum, V. 43, p. 43.

Decisions and Dissolution Decrees 43

man interests resulting from this extraordinary venture were
approximately $82,943,000. 35

William Z. Ripley, writing in 1915, says that "Since the
legal dissolution of the Northern transcontinental monopoly
in 1905, no outward change, so far as the public is concerned,
is apparent. Harmony in rate policy has been unbroken ;
and in all subsequent changes in rates, all roads have prac-
tically acted as a unit. This is undoubtedly because substan-
tial blocks of the stock of both main lines are still lodged
in the same hands. At all events, everything, except com-
petition in facilities had ceased, and both roads continued in
control of one-half each of the Burlington system. Nor has
the latter ceased to expand in the interests of its joint own-
ers." 36 In 1908, the Colorado and Southern was purchased
through the Burlington company. This purchase gave the
Great Northern and Northern Pacific an outlet upon the.
Gulf of Mexico, and by adding 2,500 miles increased the
total mileage of the affiliated systems to 25,000.

In this dissolution the legal requirements were apparently
considered of more importance than a proper distribution
of the equities. The dissolution left the control of the two
great railway systems in the hands of a few persons who
constituted a "controlling community of interests." It did
not restore competition. Its chief significance was the firm
declaration that not even a state, still less one of its arti-
ficial creatures, can stand in the way of enforcing the fed-
eral antitrust laws. It put an end to the holding company
as a legal instrumentality for the attainment of monopoly,
and monopolistic combinations seldom took this form. Many
sought refuge in the consolidated corporation or in some
system of co-operation. The chief purpose in the latter
was to secure a harmony of policy among competitors re-
garding volume of output and prices through tacit under-
standings and the exchange of information. These arrange-
ments were generally known as a "gentlemen's agreement."

"Ripley. Railroads, Finance and Reorganization, p. 506.
"Ibid., p. 499.

44 Trust Dissolution


The Miles Medical Company decision, rendered in 1911,
limited the scope of power conferred by patent rights. This
company, which manufactured patent medicines, sought to
control directly the entire trade in the medicines it made.
To accomplish this the company employed two forms of re-
strictive contracts. 37 One form was signed by over 400
jobbers and wholesale dealers and the other form by more
than 25,000 retail dealers. In either form the jobbers or
dealers agreed not to resell below the prices fixed by the
company. Only those who signed the contracts could obtain
the medicines. In this way, the company fixed the price of
its products for the jobber, the retail dealers and the con-

Suit was brought by the company against Park and
Son's Company, jobbers, who had not signed the binding
contracts and were selling the company's medicines to retail
dealers at cut prices. The retail dealers were at liberty to
sell to consumers at their own price. Park and Son's pro-
cured the medicines at cut prices from other wholesale deal-
ers who violated their contracts with the Medical company.
The company complained that the sales at reduced prices
injured the business of the other retail dealers selling their
medicines, and also that it damaged the company's reputa-

The Supreme Court held that the wholesale dealers and
jobbers were the owners of the medicines purchased from
the company and that the restrictive contracts, which elimi-
nated competition among most of the wholesale dealers and
jobbers, as well as among a majority of the retail druggists
of the country, were illegal under the Sherman law. 38 It
declared that the holder of a patent did not acquire thereby
the power to fix future retail prices of the product.


The fourth important decision which helped to establish
the scope and meaning of the antitrust law respecting indus-
"220 U. S. 374-394.
"220 U. S. 399-400.

Decisions and Dissolution Decrees 45

trial monopoly was in the Beef Trust or Meat Packers' case.
The packers' combination affected all classes of people and
all sections of the country.

The center of the live stock industry had passed the Mis-
souri River in its westward movement by 1890. Ten years
later two-thirds of the cattle, including most of those raised
for beef, were produced west of this river. The shifting of
the industry was determined largely by the grazing and
grain districts of the West. The slaughtering and packing
industry tended to follow the movement of the live stock in-
dustry. The shifting of the former depended largely upon
improvements in the methods of preserving and transporting
meat. With the invention of the refrigerator car in 1868,
the packing industry rose rapidly in the West.

The economies and advantages of marketing live stock
at a few centers, and of slaughtering and packing in rela-
tively large establishments resulted in concentrating the
slaughtering industry of the West in a relatively few large
| packing centers. About 60 percent of the total value of the
; output from slaughtering and packing establishments in
1 1903 was slaughtered at Chicago, Kansas City, South Oma-
jha, St. Louis, and St. Joseph. In this year 3,000,000 head
were slaughtered at Chicago. This was four times as many
as at any other center.

For some years prior to 1904 the bulk of the slaughtering
and packing was done by six companies. The names and
capital stock of these companies in that year were as fol-
lows: 39

Name ' Capital Stock

Swift and Company $35,000,000

Armour and Company 20,000,000

National Packing Company 15,000,000

Nelson, Morris and Company 6,000,000

Schwartzschild and Sulzberger Co 5,000,000

Cudahy Packing Company 7,000,000

The first four companies named were known as the "Big
Four," while the six were often called the "Big Six." Each
** Report of the Commissioner of Corporations on the Beef Industry,
1905, p. 10. Hereafter this source will be referred to as the Report of

46 Trust Dissolution

of the companies controlled from three to twenty-four sub-
sidiary companies. 40 None of the companies were over cap-
italized. The stock of each, except in the case of the Swift
company whose stocks were listed on the stock exchange,
were largely held by a few individuals, and exchanges of
stock were infrequent. With the exception of the National
Packing Company, the stock of the different companies were
held by separate groups of shareholders. The National had
been organized in 1902 by the other three members of the
"Big Four" group, the Swift, Armour, and Morris inter-
ests, who held all of its capital stock. The company was
used to acquire control of the principal packing plants at
St. Louis, Omaha, Kansas City, and certain other cities. It
also acquired or established a large number of branch
houses, selling agencies, and stock yard interests. The joint
ownership in this company firmly established the community
of interest among the "Big Four" companies. Publicity con-
cerning the affairs of the companies was almost negligible.

The dominant position of the companies in the beef in-
dustry is shown by the proportion of the business done by
them. The six companies killed 5,503,714 head or about 90
percent of the cattle inspected for slaughter in all the cities
east of the Rocky Mountains in 1903. 41 Of this number
5,206,983 head were killed at eight of the leading western
markets where the six companies did 97.7 percent of the busi-
ness. The high percentage is significant in view of the fact
that over three-fourths of the beef cattle are in the district
lying west of Chicago and east of the Rocky Mountains.
The rest of the country depend largely upon the surplus of
this region for its beef supply. Of the cattle slaughtered at
the eight leading western markets in 1903, the six com-
panies had 100 percent of the business at Omaha, Fort
Worth, and Sioux City; 99.6 percent at Kansas City; 99.1
percent at St. Joseph; 97.5 percent at St. Paul; 96.5 per-
cent at St. Louis ; and 95.8 percent at .Chicago. 42

The proportion of the total supply of beef sold by the
six companies was large, but it varied much between dif-

40 Report of Bureau, pp. 28-30.

41 Ibid., p. 58.

Decisions and Dissolution Decrees 47

ferent sections of the country and also between towns of
different sizes. In some sections their control was almost
complete. They sold from 70 to 75 percent of the fresh
beef consumed in New York and vicinity, 60 to 75 percent
in Pittsburg, and 45 percent in Philadelphia. 43 The smaller
towns depend less upon the large packers than the larger
cities. From computations based upon a large number
of towns the Bureau estimated that the six companies fur-
nished the following proportion of the beef supply: towns
having a population of 2,000 to 5,000, 30 percent ; 5,000 to
10,000, 40 percent; 10,000 to 50,000, 155 percent; 50,000
and over, 60 percent. 44 The six packing companies sold
75 to 85 percent of the fresh beef consumed in New England ;
50 to 75 percent in New York, New Jersey and Pennsylvania ;
to 25 percent in the Southern, Central, and Western
States; and 15 to 20 percent in the Mountain and Pacific
States. 45

These figures indicate the nature of competition en-
countered by the packers. The large packers have no com-
petitors who ship beef extensively and only a few who ship
any at all. The more important competitors are the large
local slaughtering establishments in the larger cities. The
ability of the latter to compete with the packers depends
upon (1) a local supply of beef cattle which saves freight
charges; (2) efficient plants to utilize by-products; (3)
upon the preference of consumers for locally killed beef.
Other competitors consist of local butchers in the smaller
towns. Since the big packers had no particular advantage
in patents and no direct control of raw materials, and since
the capital requirement for setting up local slaughter houses
was not large, local competition tended to spring up when-
ever the margin of profit permitted.

One advantage secured by the large packers resulted from
owning their own spur lines and shipping cars. The six com-
panies owned about 25,000 cars in 1904. 46 These included
refrigerator, fruit, packing, stock, tank, and a few box cars.

43 Report of Bureau, p. 67.

44 Ibid., p. 73.
46 Ibid., p. 74.
48 Ibid., p. 270.

48 Trust Dissolution

In owning their own cars the packers were less dependent
upon the railroads and were provided with adequate trans-
portation facilities at all times. It also enabled them to
secure excessive mileage payments from the railroads for the
use of spur lines and cars and this in effect was to secure
rebates. Some of the packers also had their own ice-packing
stations to repack their cars while in transit.

While the report of the Bureau does not give the propor-
tion of hogs and sheep slaughtered by the six companies, it
shows that the bulk of the business in these branches of the
industry is also concentrated in the chief western beef pack-
ing centers. The six companies which dominate these centers
so completely appear to control the packing of hog and
sheep products in a similar way. 47 They slaughtered about
14,000,000 hogs and 6,000,000 sheep in 1903.

The figures of the Bureau show that the margin be-
tween cattle prices and beef prices was $2.02 per hundred-
weight from July 1, 1902 to July 1, 1903, and for the suc-
ceeding year when cattle prices were much lower the margin
was $2.10. 48 The packers received less for the carcass than
they paid for the live animal, depending upon the hides and
other by-products to make up the difference and to leave
a profit. The beef itself made up only about three-fourths
of the selling value, by-products making up the other fourth.
Of this fourth, hides made up about half of the value. The
value of by-products ranged from $9.50 to $12.00 per head
during the years 1902 to 1904.

The profit derived from the beef industry by the packers
was computed to be about $1.00 per head. 49 However the
Bureau believed that there might be an additional profit
per head not to exceed fifty cents derived from subsidiary
manufacturing processes and the use of private car lines
and cars. 50 This may seem small but as the number of beef
cattle slaughtered was about 7,000,000 annually the aggre-
gate was considerable. There was also the profit derived
from the slaughter of about 20,000,000 head of hogs and

* 7 Report of Bureau, p. 11.

48 Ibid., p. 268.


80 Ibid., p. 34.

Decisions and Dissolution Decrees 49

sheep, and from handling of other products such as fruits
and eggs. If rebates were received, as alleged by the Govern-
ment, the profit would be further increased. The packers se-
cured from 14 to 17 percent upon the investment in their car
line business. 51 For some companies the rate ranged from 17
to 3 percent. These excessive profits came wholly from pay-
ments allowed by common carriers, and were in effect rebates.
They gave an enormous advantage over would-be competitors.

The packers who dominated the industry used various
means to restrict meat prices throughout the country. 52
They united in requiring their purchasing agents to refrain
from bidding against each other, except perfunctorily and
without good faith. This compelled owners of stock to sell
under non-competitive conditions. In a similar way they
had their agents to bid up the prices for a few days at a time
to induce large shipments of stock and then reduced the
price. The packers also combined to fix and maintain uni-
form prices at which they sold their products to dealers.
The price agreements, which were effected at secret meet-
ings, were enforced by imposing penalties for violations, by
establishing a uniform rule of credit to dealers, by keeping
a black list of delinquent dealers, by refusing to sell meats
to dealers who departed from the set prices, and by restrict-
ing shipments of meat. The packers also established uniform
cartage charges for the delivery of meat sold to consumers
where no charge could be maintained except by united action.
They were also aided in monopolizing the trade through
rebates and concessions from the railroads.

Viewed as a whole, the monopolistic control of the com-
bining packers was not very permanently secured. It did
not have direct control of the raw materials nor have control
of essential patents. The control was largely dependent,
first upon the co-operation of separately owned companies
to depress live stock prices and to maintain sale prices of
fresh meat products, and, second upon outside aids, chief
among which were tariff duties, railroad concessions and re-
bates received through excessive allowance for private cars,

"Report of Bureau, pp. 283-5.
62 196 U. S. 391-3.

50 Trust Dissolution

stockyards, and spur lines. The economies of large scale
production could not be materially increased through com-
bination among the large packers. Also, local competition
was present in various degrees in the stock-growing regions
and this could be extended somewhat whenever the margins
of profit became great enough. However, the monopolistic
control of the packers in so great a necessity of life was so
effectively maintained and used as to concern greatly both
the consumers and live stock growers.

In 1902, the Government filed a petition under the Sher-
man law, alleging that seven corporations, including the
"Big Six" companies and one other, and twenty-three indi-
viduals had entered into a combination and conspired to sup-
press competition in the purchase of live stock and in the
sale of beef, and to monopolize the fresh meat trade, by the
various means described above. The defendants did not
contest the charges and in 1903 the Circuit Court entered
an injunction prohibiting all the acts charged by the Gov-
ernment. 53 The Supreme Court sustained the decree of the
lower court by a unanimous vote early in 1905. 54 Such
combination as had existed among the packers was perpet-
ually enjoined. There appeared to be no doubt on the part
of the courts that the Sherman law applied to such a com-
bination and practices.

One of the chief weaknesses of the decree was the failure
to dissolve the National Packing Company. It was the
joint ownership of the extensive assets of this company,
which were strategically located throughout the country, by
the other members of the "Big Four" group that gave the
combination much of its stability. In view of the relations
existing among the largest packing companies, and of the
proportion of the business controlled by them, a restraining
injunction could hardly be expected to restore competitive

Unfortunately this was not the end of combination among
the packers. In March, 1905, the Government secured an

"122 Fed. Rep. 529.
M 196 U. S. 375.

Decisions and Dissolution Decrees 51

indictment against those who were the chief defendants in
the preceding suit, charging that they were continuing to
conduct their business in ways enjoined by the decree. The
defendants now claimed immunity from criminal prosecution
on the ground that they had been compelled to incriminate
themselves through information given at the request of the
Bureau of Corporations. After a year of litigation the
court gave a decision in favor of the claim of immunity as to
the natural persons but not as to the corporations. 55 No
appeal could be taken from this decision, and as a result
the individual packers were completely freed from prosecu-
tion. Thus the prosecution under the Sherman law failed
on a point of law after an injunction decree had been ob-
tained. The decision in favor of immunity gave rise to the
phrase "immunity bath" and it aroused strong public pro-
test. This easy way of avoiding prosecution was promptly
removed by an act of Congress which limited immunity to
natural persons giving testimony or evidence under oath in
obedience to a subprena. The public dissatisfaction at this
time was further increased by Upton Sinclair's sensational
novel, "The Jungle," and by several federal investigations,
each describing the unsatisfactory sanitary conditions in the
packing industry. These disclosures led to an act of Con-
gress in 1906 which provided for rigid regulation and inspec-
tion of meat slaughtering and packing.

The legal war against the packers was destined to con-
tinue for many years. Many investigations of the alleged
beef trust were made. Near the close of 1906 a federal grand
jury began an investigation which was soon discontinued.
Three years later the investigation was resumed, and in 1910
an indictment was returned against the National Packing
Company and ten subsidiary concerns, charging a combina-
tion to restrain trade in fresh meats. At the same time a
dissolution suit was filed against the same defendants on the
same charges. 56 The latter was soon dismissed in order to
facilitate the prosecution of the former which was later
quashed. A special grand jury was called to renew the in-

"142 Fed. Rep. 976.

"The Federal Antitrust Laws, 1916, p. 62.

52 Trmt Dissolution

vestigation, and this resulted in the return of an indictment
against ten of the chief packers, including the leaders of the
"Big Four." 57

In the meanwhile the packing industry had grown rapidly
from 1905 to 1912. Since the business of the Big Four
companies increased almost proportionally, the Swift com-
pany may be used to illustrate. The capital stock of the
Swift company increased from $35,000,000 to $75,000,000
in seven years, and its sales from $200,000,000 to $300,-
000,000. 58 The regular cash dividends of 7 percent amounted
to $28,962,500 for the period while the total earnings were
$52,777,655, or nearly double this amount. The annual fluc-
tuations in the earnings were not large, tending to show the
absence of strong competition. The company had 7,731 cars
in service in 1912 which were used in transporting its prod-

The trial of the ten packers, including J. O. Armour,
L. F. Swift, E. Morris, and E. Tilden, was concluded early
in 1912. In addition to the general charges of violating the
Sherman law, the packers were charged with refraining from
bidding against each other for live stock, with fixing prices
of meat in the branch markets, and with conspiring through
the National Packing Company to arrange prices, to ex-
change information, and to distribute the buying orders for
each week's business. 59 After a trial lasting over three
months the packers w$re acquitted. This verdict was sharp-
ly criticized by the public press.

Because of aroused public opinion and an impending dis-
solution which was being prepared by the Government

Online LibraryMerle Raymond ThompsonTrust dissolution → online text (page 4 of 26)