«-f--- BUSINESS ORGANIZATION I AND COMBINATION HANEY H3^ 1 a- 3' , — » BOUGHT WITH THE INCOME J>'ROM THE SAGE ENDOWMENT FUND THE GIFT OF 189X ^.tiJAH-f . al^'i^ '?.i'>iiiii^iiy 97»4 %; 1 m DATE DUE MAY2 1950 APR18 :« W A T Oo igg g '^^ ^ 196? ^B! Cornen UnWersiW UbrarV .ii— olin Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/cletails/cu31924030067205 BUSINESS ORGANIZATION AND COMBINATION THE MACMILLAN COMPANY NEW YORK • BOSTON • CHICAGO • DALLAS ATLANTA ■ SAN FRANCfSCO MACMILLAN & CO., Limited LONDON • BOMBAY • CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, Ltd. TORONTO BUSINESS ORGANIZATION AND COMBINATION AN ANALYSIS OF THE EVOLUTION AND NATURE OF BUSINESS ORGANIZATION IN THE UNITED STATES AND A TENTATIVE SOLUTION OF THE COR- PORATION AND TRUST PROBLEMS BY LEWIS H. HANEY, Ph.D. PROFESSOR OF ECONOMICS IN THE UNIVERSITY OF TEXAS AUTHOR OF "A CONGRESSIONAL HISTORY OF RAILWAYS," AND "HISTORY OF ECONOMIC THOUGHT" THE MACMILLAN COMPANY 1913 All rights reserved COPTBIOHT, 1918, bt the macmillan company. Set up and electrotyped. Published July, 1913. l^otisootr ]P»as J. 8. Cushlng Co. — Berwick & Smith Co. Korwood, Mass., U.S.A. MY MOTHER PREFACE This book deals with the organization of business enterprises, chiefly in the United States. While the author has designed the book for use in American colleges and universities, he has kept in mind the interests of the business man and of the general reader. It is hoped that the book will be of service to that large class of thoughtful busi- ness men who desire a comprehensive knowledge of the economic and legal aspects of the organizations with which they are asso- ciated. To accomplish his design the author has avoided unduly technical language wherever possible, and has sought to explain any unusual usage. Numerous concrete illustrations of business organization are given. Indeed, the author believes that in no similar work will so large a mass of up-to-date illustrative data be foimd. It is believed that the reader may secure from the following pages a good general knowledge of the legal principles which concern the various forms of business organization and combina- tion. On several important points the leading cases are cited. If the book has any merits, one of them must be its careful definition of terms and its accurate classification of forms. Much thought has been given to accomplishing these ends with- out going so far from the current usage as to make the defini- tions and classifications impracticable. It is modestly hoped, therefore, that the work may serve as a step toward a more sys- tematic and scientific knowledge of the forms of business organ- ization. Especial study has been given to the problem of making the corporation a more desirable citizen than it now is. In connec- tion with that problem, the reader's attention is invited to the suggestion that a new form of organization is needed in the United States, — a limited-liability association which will occupy the gap between the partnership and the corporation. The " trust," or monopolistic combination, is a form of busi- ness organization, and the trust movement is a movement in the viii PREFACE world of business organization ; and, accordingly, the student of the trust problem will find a concise and definite analysis of the evils of combination, followed by suggestions for specific reme- dies. Perhaps the author has gone too far in making detailed suggestions ; but he has done so in the hope of making general principles more definite and concrete than they generally are. The general scherne of the work is as follows : First comes a series of chapters describing and analyzing the various forms of business organization in such a way as to bring out the centuries- long evolution which has molded them. Then, the corporate form, being clearly dominant, the life history of a corporation is set forth in a series of chapters which describe in some detail the main events : promotion, underwriting, reorganization, and the like. Finally, great evils having appeared in corporate organization, the question of public policy is raised, and an attempt at a comprehensive and scientific solution of that ques- tion is made. For two general reasons, a wide range of topics has been cov- ered : first, such a treatment meets the needs of the general reader ; second, it should make the book available to a greater number of instructors. Instructors differ in the scope of the work done in their courses in business organization and allied topics ; and, in using this book, one instructor can omit the part which deals with public policy ; another, the discussion of the simpler forms of organization ; a third, the account of internal organization, promotion, etc. It is the author's pleasure to acknowledge the receipt of kindly criticisms by which he has profited from Professor Richard T. Ely of Wisconsin, Professor A. A. Young of Washington Uni- versity, and from his colleague. Professor Ira P. Hildebrand of the law faculty of the University of Texas. The reader's attention is called to a collection of source mate- rial which comes to hand as this book goes to press. In Stevens' Industrial Combinations and Trusts (N. Y., 1913), a valuable supplement will be found to that considerable portion of the present volume which deals with combination organization. LEWIS H. HANEY. Austin, Texas, January, 1913. ■ TABLE OF CONTENTS PAGES Preface vii BOOK I INTRODUCTION: GENERAL NATURE OF BUSINESS ORGANIZATION CHAPTER I. Business Organization in General .... 3-15 Business organization defined, 3 ; Social point of view, 4 ; The entrepreneur and business enterprise, 6 ; Risk, 7 ; Profits, 11 ; Importance of business relations, 12 ; Effects on property, 14. II. Classes of Business Organization, their Evolution, AND THE Tests of Efficiency .... 16-36 Size of establishment, 16; Conditions determining size, 20 ; Materials, 22 ; Processes, 23 ; Products, 24 ; Markets, 25 ; Advantages of combination, 26 ; Relative importance of the factors of production, 27 ; Household stage, 28 ; Gild system, 28 ; Domestic system, 28 ; Fac- tory system, 29 ; Relation of labor and capital to direc- tion, 31 ; Cooperation, 31 ; Classes of business organiza- tion according to complexity, 32 ; Industry combination, or integration, 33 ; Tests of efficiency, 35. BOOK II EVOLUTION AND FORMS OF BUSINESS ORGANIZATION III. Individual-Entrepreneur Organization . . . 39-48 Definition, 39 ; Origin, 40 ; The farm as a business unit, 41 ; The gild, 43 ; Present extent, 43 ; Advantages, 45 ; Disadvantages, 45 ; Social point of view, 46. ix TABLE OF CONTENTS CHAPTER IV. PAGES 49-62 Partnership Organization Common-law partnerships : Definition and nature, 49; Emphasis of personality, 50 ; Articles of copartnership, 51 ; Origin and development, 52 ; Present extent, 54 ; Advantages and disadvantages, 55 ; Limited partner- ships, 58 ; Social point of view, 61. V. Joint-stock Company Organization . . . 63-80 Definition and general nature, 63 ; Comparison with corporation, 65 j Articles of association, 66 ; Origin and development, 67 ; Present extent, 73 ; Related forms : Mining partnerships, 74 ; Advantages and dis- advantages, 75 ; Social point of view, 77. VI. Corporation Organization 81-99 Definition and general nature, 81 ; Legal entity idea, 85 ; Limited liability, 86 ; The certificate of incorpo- ration, 87 ; Objects, 91 ; By-laws, 94 ; Classes of cor- poration, 95 ; Public-service corporation, 98 ; Financial corporations, 99. VII. Corporation Organization (Continued) . . . 100-116 Historical sketch, 100 ; Roman forms, 100 ; English beginnings, 101 ; Development in the United States, 102 ; General laws, 105 ; Some conclusions, 106 ; Pres- ent extent, 108 ; Advantages, 108 ; Disadvantages, 111 ; Social point of view, 112; The "charter" as a fran- chise, 113. VIII. Simple Business Trusts 117-127 Legal and illegal trusts, 117 ; Origin of trusts, 118 ; Classes of trusts, 119; Real estate trusts, 119; Car trusts, 120 ; Securities-holding trusts, 121 ; Voting trusts, 122 ; Advantages and disadvantages of trusts, 123 ; Trustees as entrepreneurs, 125 ; Social point of view, 126. \y IX. Combination Organization in General . The cycle in the development of business organiza- tion, 128 ; Classes of combination organization, 129 ; Industry combination, or integration, 133 ; Causes of the combination movement, 134 ; Prerequisites for ef- fective combination, 139 ; Legal principles, 139 ; Mo- nopoly, 140 ; Restraint of trade, 141 ; Conspiracy, 141 ; Public policy, 143 ; Anti-trust laws, 143. 128-144 TABLE OF CONTENTS XI CHAFTER X, XI. XII. XIII. XIV. F^dERATioN Organization: Simple Agreements AND Price Combinations 145-163 Definition and general nature, 145; Extent, 147; Illustrations, 148; Classification, 148; Trade condi- tions agreements, 149 ; Chambers of commerce, etc., 149 ; Baking Powder Association, 151 ; Cordage Manu- facturers' Association, 151 ; Fruit and Truck Growers' Associations, 152 ; Price agreements, 152 ; Gunpowder Trade Association, 153 ; California Tile and Grate As- sociation, 154; Retail Druggists' Association, 155; Sales association agreements, 156 ; Southern Truck Growers' Association, 156 ; Patent control, 157 ; Fac- tors' agreements, 157 ; Buyers' price agreements, 159 ; General characteristics of agreements, 159 ; Advantages and disadvantages, 160 ; Social point of view, 162. Federation Organization : Pools .... 164-176 Definition, 165 ; Main types, 166 ; Output or traflSc pools, 167 ; Gunpowder pool, 167 ; Steel rail pool, 168 ; Memphis cotton pool, 170 ; Territorial pools, 171 ; As- sociated Pipe Works, 172 ; International tobacco pool, 173 ; Income and profits pools, 174 ; Pipe works pool, 174. Federation Organization: Voous (Continned) . . 177-192 Sales associations, 177 ; Chesapeake and Ohio Coal Association, 177 ; General Paper Company, 180 ; Char- acteristics of successful pools, 180; Advantages and disadvantages, 182; Stability, 184; Legality, 186; Social point of view, 187. Combination Trusts Definition, 193 ; Classes of trusts, 195 ; Origin of thi combination trust, 195 ; A typical trust : The Standard Oil Company, 197 ; Advantages and disadvantages, 198 ; Legality, 201 ; Conclusions, 203. — community-of-interest organization, with the Beginning of Complete Consolidation and THE Transition to the Holding Company . 205-214 Standard Oil Trust resorts to community of inter- est, 205 ; Definition, 207 ; Classes of community of interest, 207; Railway community of interest, 209; National Packing Company, 210 ; Merits of community of interest, 211 ; Sugar Trust resorts to consolidation, 212 ; Cotton Oil Trust, 214. xii TABLE OF CONTENTS CHAPTER PAGES / £ XV. Holding Company Organization .... 215-237 Standard Oil becomes a holding company, 215; /Definition and general nature, 216; Holding com- pany m. Trust, 218 ; Origin and development, 219 ; Some typical holding companies, 221 ; United States Steel Corporation, 223 ; Classes of holding company, 226 ; Finance and investment holding companies, 228 ; Advantages and disadvantages, 229 ; Concen- tration of control, 231 ; Legality, 235. XVI. Complete Consolidation : Amalgamation and Merger 238-255 Definition and general nature, 238 ; Amalgamation 1 distinguished from merger, 241; Reasons for the , / movement to complete consolidation, 242 ; Amalga- mation illustrated : the American Tobacco Company, 243; Merger illustrated: the Powder Trust, 244; Railway consolidation, 246 ; Advantages and disad- vantages, 248 ; Legality, 250 ; Social point of view, 251 ; Conclusions concerning combination, 253. BOOK III STRUCTURE AND LIFE HISTORY OF A TYPICAL BUSINESS CORPORATION XVII. Internal Organization of a Going Corporation 259-281 Accounting and economic points of view, 259 ; Classes of interests, 261 ; Organization of ownership and. administration, 263 ; Stockholders, 263 ; Bond- holders, 266 ; Directors, 268 ; Executive, 270 ; Or- ganization for operation, 272 ; Departments, 273 ; Line vs. Staff Organization, 277 ; Departmental vs. Divisional Organization, 277 ; Management vs. Direc- tion, 280. XVIII. Promotion as a Step in Organization . . . 282-300 Definition and illustrations, 281 ; Rubber Goods Manufacturing Company, 284 ; Fraudulent promo- tion : The Asphalt Company of America, 287 ; Steps in typical promotions, 289 ; The problem of capital- ization, 290 ; Choice of State, 293 ; Necessity of pro- motion, 295 ; Classes of predatory promotion, 297 ; Relation of promoter to corporation, 299. TABLE OF CONTENTS xiii CHAPTER PAGE^ XIX. Underwriting as a Step in Organization . . 301-311 Definition and illustrations, 301 ; Syndicates, 302 ; Classes of underwriting agreements, 304 ; Methods of payment, 307 ; United States Steel underwriting, 308 ; Services and compensation of the underwriter, 309. XX. Marketing and the Stock Exchange . . . 312-326 Origin, 313 ; Definition and general nature, 313 ; The machinery of the New York Exchange, 314 ; Listing requirements, 315 ; Committees, 315 ; Loan corner, 317 ; " Money crowd," 317 ; Clearing house, 318 ; Classes of members, 319 ; Method of conduct- ing business, 319 ; Forces which determine prices on the Exchange, 321 ; Manipulation and pools, 323 ; Good and bad features, 324 ; Remedies, 325. XXI. Reorganization and Receivership . . . 327-341 Optional reorganization, 327 ; Inevitable reorgani- zation and insolvency, 329 ; Causes of inevitable re- organization, 329 ; Receivership, 332 ; Sources of funds, 334 ; Friendly receiverships, 335 ; Receivers as entrepreneurs, 336 ; National Cordage Company's reorganization, 337; Classes of security holders as sources of funds, 340. POOK IV PUBLIC POLICY : THE CORPORATION AND TRUST PROBLEMS XXII. Public Policy : Evils and Causes .... 345-362 Introductory statement of problem, 345 ; Evils stated and analyzed, 346 ; Interrelation of trust and corporation problems, 348 ; Causes : Monopoly, 349 ; Uneconomical production, 352 ; Clash of interests, 355 ; Multiplicity of securities, 356 ; Easy transfera- bility, 357 ; Small holdings by directors, 358 ; Other causes, 358 ; The fundamental cause, 360. XXIIL Public Policy : Remedies 363-376 Postulates, 363 ; Particular remedies, 366 ; Gen- eral regulation, 366 ; Simplification of securities, 367 ; HV TABLE OF CONTENTS Limited transferability, 368 ; Directors' holdings, 369 ; Other remedies, 369; Cumulative voting, 372; di- rectors' responsibility, 373. XXIV. Public Policy: Remedies {Continued) . . . 377-394 Overcapitalization, 377 ; Holding companies, 379 ; Postulates for a solution of the trust problem, 382 ; Natural monopoUes, 383 ; Segregation of limited natural resources, 384 j Local price discriminations, 385 ; Legalized agreements and consolidations, 386 ; Tariff reduction, 389 ; Sherman Anti-Trust Law, 390 ; General basis of the plan, 391 ; The alternatives, 392. XXV. The Limited- Liability Association : A Remedy . 395-397 The need of a new form, 395 ; Outlines of such a form, 396. APPENDIX A. Simple Articles of Copartnership 401 B. Articles of Pierce Fordyce Oil Association (Joint-stock Company) ""403 C. By-laws of a New York Corporation 409 Z>. Trade Conditions Agreement (Feed Dealers' Association) 414 E. California Coal Dealers' Association .... 427 f. International Agreement (American Gunpowder Asso- ciation) 434 G. Trust Agreement (Distillers and Cattle Feeders) . . 436 If. Reorganization Agreement (American Cotton Oil Trust) 441 /. Typical Amalgamation (American Snuff Company) . . 449 J. Typical Merger (American Tobacco Company) . . . 455 JC. Promoter's Contract 460 L. Underwriting Agreement (United States Shipbuilding Company) 462 M. Underwriting (and promotion) Agreement (United States Steel) 464 N. Syndicate Agreement (United States Steel) . . . 468 O. Proxy Form 476 Select List of References 478 BOOK I INTRODUCTION: GENERAL NATURE OF BUSINESS ORGANIZATION CHAPTER I BUSINESS ORGANIZATION IN GENERAL Business Organization Defined. — The term " Business Organization " has a very definite meaning to the scientific student of industrial affairs. In the first place, he would ex- plain that the idea of " business" is capable of pretty accurate definition. Business may be defined as human activity directed toward producing or acquiring wealth through buying or selling goods. Men do not, as a general thing, enter business for their health, but for the purpose of making money, and, as a rule, money making involves the production of things which men desire. Business reaches its culmination at the end of the tech- nical processes of production and at the beginning of the con- siuning process ; for everywhere in the world of industry "prod- ucts " are being turned out by plants, mills, farms, stores, offices, etc., and taken over by other plants, mills, farms, stores, and offices as producing consumers, or by individuals as " final " consumers. Such transfers mean buying and selling, and in buying and selling lies the essence of business. On the one hand, business rests on technical processes of trade and manufacture ; on the other .hand, it looks to the market. At the jimction stands the business man, either directing the technical process of production or gauging the market, or doing both ; but always engaged in buying and selling for the purpose of gain. Burglars make money, but burglary is not business — at least not ordinary burglary. Neither the economist nor the law can recognize anti-social and unlawful activities, for such activities tend to destroy society, without which business would be impossible ; and they are carried on outside the pale of the laws, without which society could hardly exist. Business is 3 4 BUSINESS ORGANIZATION AND COMBINATION founded upon the exchange of goods, and for exchange to exist there must be both an exchanger and an exchangee: without mutuality based on a quid pro quo exchange, business would soon cease. Two kinds of business, however, must be recognized : busi- ness that is productive from the social point of view, and busi- ness that is productive only from the individual point of view. According to the social point of view, business is productive when it adds to the net sum of goods and services which men want; that is, when the amount of food, clothes, books, auto- mobiles, teaching, medical service, etc., is increased. But individuals may grow rich in ways which do not increase the net sum of goods and services and stUl be actively engaged in business, or in production from the individual standpoint. A large part of advertising is merely acquisitive, not adding any- thing, but taking for one business man what another business man loses. So it is with some " speculation," and some middle- men's activities. But all this, when recognized as lawful and when the price is freely paid, is " business " ; and in the long run the test of a good business man is simply the amount of income or private gain which he acquires legally. Business thus includes some activities which do not add anything to the sum total of society's wealth. Most thinkers who are not socialists, however, believe that, while there are many hitches and mistakes, and while individuals may merely acquire without increasing total wealth, on the whole and in the long run it is true that in the fields where com- petition prevails the more eflScient business men there are, and the larger their total gains, the greater is production from the social point of view. This conclusion, of course, rests on the fact that men can generally make money in legal ways only by mak- ing things other men want. Or, to put the idea another way, it rests upon the fact that exchange — in which business subsists — must ordinarily be mutual, and be based upon a gain in utility — though not necessarily an equal one -^ to both parties to the exchange ; otherwise exchanging will become one-sided and decline. Of course, this works out more readily under BUSINESS ORGANIZATION IN GENERAL 5 competitive conditions than under monopoly ; but the ability to buy what one wants is in any case related to the ability to sell what one has. Again, the critics of the modern business world, while sound on several points, are too prone to underestimate the real social service performed by those who direct the industrial processes, the business men. In the main these men are no mere exploiters. Without their leadership the effectiveness of industry would be far less than it is. In a social order in which private ownership of the instruments of production exists, we have separate groups of laborers and of capitalists, and some one must undertake to bring the labor and the capital of these groups together, so that they may cooperate ; and especially under our present complex organization of industry it is highly important to have economi- cally combined labor and capital skillfully directed to the use of our best natural resources. Moreover, the motivation behind such direction is strong. As one of the critics has observed, the stimulus to activity in production under the leadership of business men is so keen, that even if there is fraud and waste, there stiU remains so large a product that none need suffer want.i " There seems, therefore, to be no tenable ground for thinking that under competitive conditions the working of the modern business system involves a curtailment of the com- munity's livelihood. It makes up for its wastefulness by the added strain which it throws upon those engaged in the produc- tive work." Inasmuch as the test of business ability is private gain, gov- ernment activity, when conducted according to the principles of public finance, must be ruled out of consideration. Public finance is the science of getting and spending funds for carrying on political activity, and in such activity there is no question of profits : income is adjusted to expenditures, and a surplus is regarded as dangerous. But when, as is the case with German railways, an industry is prosecuted by government partly for the sake of gain, the state becomes a sort of business man. " Organization " is a harmonious adjustment of specialized 1 Veblen, Theory of Business Enterprise (N. Y., 1904), p. 65. 6 BUSINESS ORGANIZATION AND COMBINATION parts for the accomplishment of some common purpose or pur- poses. Economists have long agreed that the parts or factors of a business organization are " land," — including all the con- tributions made by man's physical environment, — labor, and capital (instruments used for production, hke machines) . When these factors are harmoniously combined for the purpose of producing or acquiring wealth, we have a business organization. But in order to effect such a combination, a fourth factor is necessary. This factor is business enterprise, or entrepreneurial ability, as economists often call it ; and it thus constitutes the kernel or essence of the business unit. We may define a busi- ness unit, then, as a more or less independent complex of land, labor, and capital, organized and directed for productive purposes by entrepreneurial ability. Plainly, no pains must be spared to gain a clear understanding of the nature of this entrepreneur element. ■^ The Entrepreneur and Business Enterprise. — Entrepreneurs, or business enterprisers, are the men or groups of men who or- ganize and direct business units. The exercise of this fimction involves an expenditure of human energy which might be classed as labor ; but the entrepreneur's service is so pecuUar and weU- defined and is associated with so characteristic a risk that it is best not confused with labor in any ordinary use of that term, and his function will be treated as single, separate, and distinct. In the first place, the entrepreneiu: stands over labor, land, and capital in a position of independent responsibility. When a laborer, say a carpenter, becomes a contractor, and so an entre- preneur, he may keep on laboring as before, but something has been added. As entrepreneur, he stands over and directs labor, land, and capital ; and he becomes responsible for the functioning of those factors which he directs. He makes the ultimate decisions on business plans: What shall be made? How shall the other factors be proportioned? Shall much capital be put in a tall factory building where land is high in value and must be economized, or shall less capital be expended and more land be used in a cheaper location? Shall he use more imskilled labor and less valuable machinery or shall he combine less labor of a BUSINESS ORGANIZATION IN GENERAL 7 skilled kind with the most machinery? How much shall be made? Under what conditions shall it be marketed? These are his problems. We shall find that entrepreneurial ability has in the past generally been associated with possession — not ownership, necessarily — of capital. This is true, at least, of the time since the factory system became common. It would be wrong, however, to think of the business enterpriser as a capitaHst in the strict meaning of the word. His distinctive service is the direction of the business unit, including capital. Through his foresight and ability he directs the appUcation of human energy in the shape of labor-power and capital-saving to the exploitation of the opportunities afforded by nature, and the possession of capital is simply a means to this end, a tool in his hands, Nat- urally, his profits are apt to be in proportion to his equipment of capital. But it would be erroneous to confuse the entre- preneur with the capitalist as many English and German economists have done; such connection as exists between the two is merely an expression of the peculiar relation which the entrepreneur bears to a combination of labor and capital and land. As independent organizer and director, the entrepreneur acts as a distributer of the gross income of the business and under- takes to guarantee wages to his employees and interest to those who have lent him capital. These payments he makes generally at market rates regardless of the prices at which he can sell his output. His expenses are largely stipulated in advance. It follows from the foregoing facts that the enterpreneur is subject to a relatively large and intense element of risk. Risk is found in all occupations, including the services of laborers and capitalists ; but in none is it so intense or of such a quality as in business enterprise. The entrepreneur's position is more like that of the stockholders of a corporation ; for they run the risk of there being no dividends and they must pay interest to the bondholders even if their stock loses its value as a result ; and just so he must pay his rent, wages, and interest even if his profits become a negative quantity. Indeed, this is more than 8 BUSINESS ORGANIZATION AND COMBINATION an analogy. The stockholders of a corporation as a group ultimately form its entrepreneur, and the bondholders merely supply the capital factor. The entrepreneur's risk arises from the impossibility of controlling prices and the consequent likeli- hood that the price of his product will not cover the expense. It concerns values, not physical products. Any one can make a thing; but few can make profits by selling things for more than they expend in making them. A well-known French economist estimated that out of every one hundred new businesses, twenty fail almost immediately; between fifty and sixty continue on a dead level, making no profits or losses; while only ten to fifteen — a little over one tenth — succeed.^ This conclusion is supported by the common though not unquestioned obser- vation that about 90 per cent of the would-be entrepreneurs fail. This condition of affairs is closely connected with the fact that no market exists for entrepreneurial ability in the sense that there is a labor market. This is the reason for speaking of the " in- dependent " responsibility. No one hires or discharges the entreprenemr. No one stipulates a certain return to him in ad- vance. Indeed, entrepreneurial ability proper, in the nature of the case, cannot be hired nor delegated, and this suggests the distinction between the entrepreneur and the manager. If we Uken the former to the commander in chief of an army, or the admiral of a navy, who has made the plans which determine the maneuvers, then the officers who, like lieutenants and captains, see that these plans are all carried out on the pre- determined lines are the managers. Such work may require high executive ability, but it can be hired, and superintendents and " managers " are salaried employes. In their capacity as managers they do not share the risks of the business, and, accordingly, they do not make the ultimate decisions as to its conduct. We conclude, then, that the entrepreneur's function, however subdivided or combined with other functions it may be, is yet single and distinct ; that it is the organization and direction of the other factors of production as assembled in business units. 1 Leroy Beaulieu, Repartition des Richesses, Chap. XI. BUSINESS ORGANIZATION IN GENERAL g In exercising this single function, the entrepreneur necessarily plans the organization and relative amounts of the factors; as independent planner and designer, he directs their operation; and, of course, he pays rent, wages, and interest out of the gross income of the business. All this involves the risk that there will be nothing left over to compensate himself, but, if his entre- preneurial ability is good, " profits " will remain as his reward. The ability required, the service performed, and the risk borne are inseparable, and are but different aspects of the same func- tion. Natiurally, ability of the highest order is required to make the more successful business enterpriser. It takes some brains to rim a peanut stand on one's own hook, and to direct a rail- way system or a steel corporation is a giant's task. The man or men by whom it is best done must have ability to judge the markets, including the money market, to judge the men into whose hands the management of important branches will be put, to say nothing of ability to judge the bigger technical problems that are peculiar to the business organization. Not the least of the qualities required is the ability to bear risk, the moral quality of responsibility. Not every man can bear the strain of business risk with level head and mind unaffected by worry. The test to which all these quahties are put has become more and more severe. It is a far cry from the single entre- preneur at the head of his Uttle shop to the captain of industry who from his New York office directs the world-wide operation of a "billion-dollar trust." The amount of capital embraced in a business unit has increased steadily. Operations have expanded both in scale and in period of time covered ; and, at the same time, the relations with laborers, capitaUsts, and the pubUc have become more complicated. Paralleling such de- velopments, also, there has been an evolution in the forms of business organization from the simple to the complex, which will occupy our attention in the succeeding chapters. It is no wonder that a division of labor has taken place in the field of business enterprise, and that the entrepreneur's function has been subdivided. Now it has become a separate branch of 10 BUSINESS ORGANIZATION AND COMBINATION enterprise to organize the business and start it going: the " promoter " discovers the " proposition," assembles the ele- ments, and plans its organization on the larger lines. This branch of the entrepreneur function is illustrated by such men as Judge Moore and John W. Gates. They turn the enterprises over to the entrepreneurs who direct them as going concerns. These are the men who, like Carnegie and Harriman, are generally associated with the name " captain of industry." As stock- holders and directors they plan the general commercial policy of the plant or plants under their control, receiving not salaries but " profits " for their services. The preceding sentence suggests another way in which the function now under discussion has been divided. In the simpler forms of business organization the owners are generally the ones who organize and direct the operations ; but in the big business corporations of to-day it is quite impossible for all the stock- holders so to participate. They therefore delegate authority to elected boards of directors, who in turn elect officers. Clearly, as bearing the risk of loss and as being the final source of au- thority for making the ultimate decisions, the body of stock- holders hold the entrepreneur function, and that function is therefore divided among many individuals. But on most or- dinary occasions the board of directors — or perhaps an executive committee of the board — ■ passes upon important matters. Fre- quently, one personality dominates the board and is de facto the directive entrepreneur. In any case, all this suggests that the two aspects, risk and direction, almost necessarily become nearly dissociated ; for under existing laws the directors may own merely nominal holdings of stock. Thus, in the business cor- poration, the entrepreneur's function is diffused, and is far more complex in its working than in the single-entrepreneur business unit or in the partnership. Nevertheless, in the same sense that " the people " govern in the United States, the voting stockholders of a corporation direct its general poUcy. This delegation of authority and subdivision of ownership which characterize the corporation, while not fundamentally changing its nature, exert no small effect upon the nature of BUSINESS ORGANIZATION IN GENERAL ii the entrepreneur. The risk itself is modified by the fact that the stockholder's liability is limited: he bears only a fixed maximum risk, and generally he cannot lose more than he has invested. On the other hand, his chance of gain is commonly imlimited. The very fact, too, that the risk and the directive authority are divided among so many men makes a difference : both are less concentrated, and are less closely correlated than in simpler forms of business organization. Thus, we conclude that with the complex business units of to-day there may be promoter entrepreneurs and director entre- preneurs; and within each of these classes, but especially the latter, the directive and the risk elements of the entrepreneur fimction may be largely dissociated. This latter fact may open the door to irresponsible direction and clash of interests. So it is that in poUtics a dictator or " boss," whose interests are not those of the people, may do great harm. Profits. — This is not the place to enter into the niceties of the problem of determining profits ; but, as profits are the reward of the entrepreneur, or enterpriser, a brief statement is called for. It follows from the explanation of the entrepreneur's work which has just been presented that profits are the reward for certain valuable services in organizing and directing business imits, and in taking the risks involved. The demand for entre- preneurial service then, like the demand for the services of the other factors, depends ultimately upon the prices which con- sumers are willing to pay for the products which business units are turning out, as modified by the relative abundance of the remaining cost factors. If demand prices are high, and labor and capital are abundant, profits will be great. The supply of entrepreneurial ability, in turn, depends upon the number and ability of men who are available for the conduct of business enterprise. If such men are scarce in relation to the demand, profits will be high. On the supply side, too, one must con- sider the costs of the entrepreneurs ; and if the risks of business are enhanced by uncertainty, by difficulty of organizing the other factors, and so forth, profits must be relatively high in order to maintain the force of entrepreneurial ability which is demanded. 12 BUSINESS ORGANIZATION AND COMBINATION To sum up, the rate of profits tends to be such that, in view of the quantity of entrepreneurial ability available at any given time, the share of the gross income which entrepreneurs get just compensates them for their costs, — just equilibrates demand and supply. This way of explaining profits is not in conflict with that which is often taken by the business man. When the business man figures his profits simply as what remains of the gross income of the business after all expenses are paid, he is virtually taking his gross income for granted. To say that this income is due to the cooperation of all the productive factors jointly is correct, if the element of organization and direction which the business man himself contributes is included. But unless this element, with its attendant risks, is allowed for, no adequate explanation of the gross income is forthcoming. The same reasoning also applies to expenses. To dismiss profits as a residuum of scraps of net income which in some haphazard fashion are left over from various sources is no explanation. One gets the same result if one looks at profits in either of these two ways, but the second way of solving the problem throws Uttle light upon the questions — why are profits what they are ? why must they be paid? Importance of Business Relations. — Having thus outlined the nature and functions of entrepreneurial ability, this intro- ductory analysis may well be concluded by returning to the sub- ject of business organization in general. The significance of the purely " business " part of industry has seldom been discussed, for its separate significance is the result of a relatively recent development, a development in the nature of a division of labor. Time was when the business enterpriser owned his plant and personally directed its operations. He knew the details of the business from A to Z. Industry was comparatively stable, for the markets were not so wide nor was either progress in process or change in taste so rapid as now. Not only this, but credit played a smaller part in business transactions, and the joint- stock corporation with its dependence upon mobile investment funds was not as common. The result was a closer relation BUSINESS ORGANIZATION IN GENERAL 13 between business management and technical management. Financial relations were simpler. There was relatively little opportunity for manipulation. How different the business world of to-day with its " trusts " and Wall Streets, promotions and " melon cuttings " ! Nowa- days, we have a vast force of " business men " in a new and nar- rower sense. As already indicated, these men seek gain in bu)dng and selling. They need know Uttle or nothing of the technical processes of extractive industry, transportation, or manufacture. With large use of credit, with capital raised by " floating " transferable stocks and bonds, and with technical management in the hands of salaried managers, they run their businesses with their eyes on the stock markets and the financial columns. Markets are wider and less stable, financial relations more complex, and manipulation common. Technical manage- ment and business management are frequently separated, and the former is more dominated by the latter. Businesses are interrelated in a complex network of " pecuniary relations," to borrow Professor Veblen's suggestive terminology. These relations have become the sensitive means for transmitting " panics " and " booms." A new field for highly speculative and chance gains has been formed, within which by manipula- tive strategy business men may make and unmake the indus- trial balance. A relatively high degree of mobility charac- terizes the situation, and by shifting investments great changes may be wrought in the technical operations. One instance may be cited to illustrate how these forces work. Many will remember how the " Sugar Trust," the American Sugar Refining Company, dealt with its rival, the Arbuckles. The latter company which had been engaged chiefly in the spice and cofiee business began to compete with the trust in the re- fining of sugar. Immediately the trust retaliated by purchasing a plant which handled spices, and began vigorously cutting into that part of the Arbuckles' business. It forced an " under- standing." Thus, through mobile investment funds and stock exchanges, technical manufacturing units are made subservient : the whole machinery for importing, manufacturing, and dis- 14 BUSINESS ORGANIZATION AND COMBINATION tributing coffee and spices was ready, and the trust through pecuniary power directed it at will. For further suggestions, let the reader turn to the recent hearings of the Pujo committee of Congress which investigated the so-called "money trust." Here he may learn how groups of financiers through control of financial houses can sometimes control the marketing of securities and the direction of investment. While there are obvious limits set by material environment and technical conditions, it is interesting to reflect how, by shifting investments, the fundamental material side of production may be deeply affected by this buying and selling side. In hne with the foregoing conclusions is the fact that the forms of business organization which now predominate are working a profound change in the significance of property rights. The significance of private property has often been explained. We know that the pride of ownership spurs most men to put forth their best efforts in production. Direct ownership often begets an interest in the business or property, and diffuses tech- nical and business knowledge. It means stability, economic and social: as the saying is, " make proprietors and you make good citizens." Now all this refers to direct ownership, — to personal familiarity with the property. What, then, must be the effect of a system which makes ownership indirect, and takes away personal contact with property ? And is this not the effect of reducing business property to ownership by " stockholders " ? The holders of the shares of a joint-stock company need know little of their property and can take little personal interest in their products. They are too far removed from the property. And what shall we say of a " holding company " in which shares of stock represent ownership of other shares in subsidiary cor- porations ; those shares, in turn, represent ownership in sub-sub- sidiary companies ; till finally, by a ' devious route, we reach the tangible technical property ? The result must be a vastly differ- ent relation between owner and property, and the institution of private property itself must change in significance as the scope of ownership by shares grows. The more readily transferable the interests in property (stock certificates), and the more per- BUSINESS ORGANIZATION IN GENERAL 15 manent and distinct the business organizations (corporations), the stronger becomes this tendency. We see here a transformation which is analogous to that which took place in industrial technics when handicraft was supplanted by machine production. Indeed, it is the " busi- ness " aspect of the same evolution. The single business en- terpriser and the ordinary partner are, so to speak, the handi- craftsmen of business. As with productive processes, so now with property, there is less stability and more flexibility. Senti- ment is either less influential or of a different sort. Interest in the thing concerned is less personal. More than ever, " business is business." We should not forget that this transformation has its bene- ficial features, just as the industrial revolution had. While technical processes and ownership are both becoming more roundabout, the possibUities of diffusing goods and property are becoming greater. Few men can own factories, but many can own a share of factory stock. And if the many have some voice in the affairs of the organization whose stocks they hold, need they lose all interest in property and products? Truly, the transformation has great potentialities for good or for evil, and it should be the aim of the statesman to retain the interest of the mass of stockholding proprietors in their real productive property, and to insure such a democratic conduct of corporate affairs that corporate shares may become the means of diffusing property and of democratizing business. CHAPTER II CLASSES OF BUSINESS ORGANIZATION, THEIR EVOLU- TION, AND THE TESTS OF EFFICIENCY It is no simple matter to understand and discuss business organization, even when the purely economic point of view is taken and attention is confined to forms of business units. Something must be left out. Some basis of classification must be adopted and followed at the expense of other bases. It is the purpose of this chapter to mention several classifications and to discuss theni briefly before passing to a fuller discussion of the one selected for detailed treatment. Also, the general tests which have operated in determining the evolution of the forms of business organization and which may be applied in judging their efficiency to-day will be outlined. Classes of Business Organization and their Development. — I. Size of Establishment. — The most obvious point of difference in business imits is their size. Large business units came first in foreign trade and banking. In the former industry relatively large risk-taking ability and capital have always been required. Operations must extend over a great territory and a long period of time, and accordingly the joint-stock plan of raising capital was very early applied in this field. Banking and insurance, too, require great funds to insure the public against loss, and have always been associated with relatively large-scale operations. But when one turns back into history, going to the seventeenth century in England and to the eighteenth in America, one finds none but small business units in manufacturing and agriculture. The typical unit was the family and the typical market, if it can be called a market, was the family or immediate locality. Toward the end of the eighteenth century Alexander Hamilton i6 CLASSES OF BUSINESS ORGANIZATION 17 referred to American industry as *' a vast scene of household manufacturing." Though early in the eighteenth century there were in England some few large establishments in the cotton and silk industries which employed a hundred or more men under one roof, it was not vmtil the importance of capital was realized that large-scale business units became common. This develop- ment came with the invention of machinery and the application of mechanical power. These new factors made it economically necessary to divide labor, and to utilize as fully as possible the expensive machines and the buildings required to house them. In England the big factory came in late in the eighteenth century, beginning in the cotton industry ; but its rise was re- tarded in America. The census of 1900 truthfully observes: " It seems probable that until about the year 1850 the bulk of general manufacturing done in the United States was carried on in the shop and the household, by the labor of the family or individual proprietors, with apprentice assistants, as con- trasted with the present system of factory labor, compensated by wages, and assisted by power." ^ The chief exceptions were in the New England towns Uke Lowell and Lawrence, where cotton mills of considerable size were established as early as 1830. Although one must be extremely careful not to imagine that any establishments just like the average are actually to be foimd, and not to forget the great variety of sizes and kinds of busi- nesses that exist, still it is of some significance to note the change in the size of the average manufacturing estabUshment which is indicated in the figures which follow: Census Date Amount or Catital Number of Wage Earness Value op Produce 1850 2 .... 1890' .... 1900 1910 $ 4,300 18,300 43,200 64,800 7 II 22 2S $ 8,200 26,000 54,900 76,900 • Vol. VII, p. liii. ' Figures include hand and neighborhood industries. 1 8 BUSINESS ORGANIZATION AND COMBINATION One may form a rough picture of the average manufacturing establishment of 1850 having a capital of $4300, employing 7 wage earners, and turning out products valued at $8200. Over against this may be put the establishment of 19 10 with its capital of $64,800, its labor force of 25 men, and its output valued at over $76,000. In contrast with Hamilton's characterization one may put the words of a living economist: " The typical unit of production is no longer a single family or a small group of persons working with a few cheap, simple tools upon small quantities of material, but a compact and closely organized mass of labor composed of hundreds of individuals, cooperating with large quantities of expensive and intricate machinery, through which passes a continuous and mighty volume of raw material on its journey to the hands of the con- suming public." ^ The thirteenth census of the United States reported that in 1909, out of a total of over 268,000 manufacturing establishments, sUghtly over 3000 made products valued at $1,000,000 or more. These very large establishments formed i.i per cent of the total number. This was an increase of 0.2 per cent over 1904, when they equaled 0.9 per cent. The medium-large establishments, which produced products valued at from $100,000 to $i,oco,ooo, formed about 10 per cent of the total niunber in both periods, wlule those which produced to the small amount of $5000 or under made about one third of the total number. This makes a little over 3000 of the very large establishments and 93,300 of the very small establishments, with such increases in each class that the percentage each forms of the total number has not changed much of late years, — a fact which seems to show little tendency towards concentration in large businesses. It is not numbers that count, however, but output. On this latter score we find that the i.i per cent of very large establishments employed 30 per cent of the laborers en- gaged in manufactures — nearly one third — and contributed over 3S per cent of the value that manufacturing added to the value of the raw materials used. Here is striking evidence of ' Hobson, The Evolution oj Modern Capitalism (London, 1901), p. 88. CLASSES OF BUSINESS ORGANIZATION 19 the great concentration of manufacturing in very large estab- lishments ! Nor is this all. The percentage of output coming from such establishments is increasing. The very large estab- lishments produced 38 per cent of the total value of products in 1904, while, as just indicated, they produced nearly 44 per cent in 1909. The next census may show that 2 per cent of the number of establishments produces 50 per cent of the value of products ! Another indication of the trend of developments is seen in the fact that during the five years 1904- 1909 the average value of products per manufacturing establishment increased from $68,400 to $76,900. Because of a great increase in the number of laborers in small establishments the average number of wage earners per establishment remained stationary at 25 during this period. A more general indication of the movement in this regard is found by comparing the increase in number of establishments with the recent increase in capital, employees, and the value of products. If the former item increases less rapidly than the latter ones, a larger average estabUshment may be inferred. The facts are as follows: FivE-TiEAH Period Increase in Nttmber of ESTABLrSHMENIS Increase in Capital Increase in Wage Earners Increase IN Value of PRonncTS 1899-1904 . . 1904-1909 . . Per Cent 4 24 Per Cent 41 45 Per Cent 16 21 Per Cent 30 30 During the decade covered by the statistics, value of products increased 60 per cent, but there were only 28.4 per cent more establishments at the end than at the beginning. The situation is similar in the case of railways. There were 1224 operating roads in 1900; in 1910 there were 1306. Mean- while the railway mileage increased from 193,300 to 240,400, with a tremendous increase in tonnage. The insurance busi- ness also shows an increase in the size of its business units. 2b BUSINESS ORGANIZATION AND COMBINATION Taking banking as a whole, however, the average unit estabHsh- ment does not seem to be increasing in this country, on account of the large number of young, growing communities ; but there is a marked tendency to large-scale banking and big establish- ments in the " reserve cities," and in the older European nations. Agriculture is stUl the home of the small business unit, the latest statistics showing a smaller average acreage per farm for 1910 than for 1850. The average value of all farm property has increased greatly, but this is largely due to in- creases in land values, the amoimt of capital used in farming being relatively small. The manufacturing industries in which in 1909 very large establishments clearly predominated, together with the per- centages of the value of the products made by such establish- ments, are as follows : smelting and refining, lead (99.2 per cent) and copper (99 per cent) ; iron and steel, steel works and roll- ing mills (91 per cent) ; petroleum refining (88 per cent) ; iron and steel blast furnaces (85.8 per cent) ; slaughtering and meat packing (85.8 per cent) ; railway car manufacturing (80.7 per cent); liquors, distilled (72.5 per cent); automobiles (68 per cent) ; agricultural implements (64 per cent). If statistics were available for sugar refining, that industry would un- doubtedly appear in this list. Conditions Determining Size of Establishment. — In con- cluding this brief statement of the facts and tendencies as to the size of business units, it is fitting to analzye the factors which determine the scale of business. It is no mere chance that in some industries there are many large business units and in others not. According to pretty definite conditions within and with- out the industry, there is a certain size of establishment which will give the maximum efficiency of production, and toward this size all estabUshments tend. Chance and the character of the entrepreneur may, of course, modify this tendency. At the outset care must be exercised lest we confuse two separate problems: the problem of large-scale production, and the problem of combination. The former concerns the size of the single industrial plant, and the plant and the business or- CLASSES OF BUSINESS ORGANIZATION 2 1 ganization are conterminous ; the latter concerns the size of a group of industrial plants combined under a single business or- ganization, and here the plant is narrower than the business or- ganization. Both are problems of business organization, but the question of large-scale industry is more closely connected with industrial technique, while combination is more a matter of management and finance. We will first consider those con- ditions which affect the size of the simple operating plant, or establishment — the question of large-scale production. A. Simple Establishments. — In any particular case two groups of conditions determine the size of the establishment: I. The capacity of the entrepreneur, and II. The industrial conditions outside the entrepreneur, including the nature of the industry and the character of the market. I. The first condition stands alone as opposed to all extra- human factors. It is, so to speak, a subjective condition. The qualities requisite in a successful business enterpriser were indi- cated in the preceding chapter, and it is clear that according to the degree in which a man possesses such qualities his capacity to direct a business unit will vary. The larger and more com- plex the unit, the greater will be the capability required. As an entrepreneur, or business enterpriser, enlarges his business establishment, his powers are more and more taxed, until he reaches his limit. His direction becomes more remote from the details of his business and at the same time more diffused, so that sooner or later it becomes impossible for even the greatest Napoleon of industry to secure further economies by enlarging his establishment. Executive committees or " finance com- mittees " may be put in charge, but this is apt to bring a lack of unity in direction which diminishes efficiency. One conclusion from these facts is that at any given time the size of the average business establishment is limited by the average capacity of the existing business enterprisers. II. Under the head of industrial conditions comes a large number of interesting factors, some of which are within the in- dustry and some outside in the market. These factors may be discussed under the following heads : nature of materials, nature 22 BUSINESS ORGANIZATION AND COMBINATION of productive processes, nature of product, and nature of the market. I. Materials. — Industries differ greatly in the nature of their raw materials and the proportion of their expenditures for such materials. To some extent this is a factor in determining size. The ease and expense of obtaining materials affect the size of the establishment. In some cases, if the material is bulky, the scarcity and localized character of the sources of supply cause large plants to prevail, as is the case in the paper and wood- pulp industry, and to some extent in the tanning of leather with its use of tanbark. In the latter case the high specific value of hides facilitates concentration. Where the supply is limited in area or necessarily involves large transportation expense, and, at the same time, the percentage of total expenditures for materials is high, the tendency will always be toward the predominance of large plants. This may be explained on the ground that here large investments in circulating capital are required to buy and handle the large quantities which economy dictates. It is an interesting fact that census figures show a very high percentage of expenditures for materials in the great majority of busi- nesses in which large-scale production is predominant,' and a cor- respondingly low percentage in industries characterized by rela- tively small establishments.'' With relatively few exceptions the big establishment industries are of thesmelting-refining-slaughter- ing type and have a direct dependence upon extractive materials. ' Percentages oj total expenses incurred f or materials: Smelting and refining le£vd 94.8 per cent Smelting and refining copper 94.4 per cent Sugar and molasses . 92.6 per cent Slaughtering and meat packing . . . ... 91.3 per cent Butter, cheese, and condensed milk ... . . 91.0 per cent Petroleum refining . . 89.6 per cent Iron and steel blast furnaces ... ... . 88.4 per cent ' Printing and pubhshing . 32 per cent Marble and stonework . . 39 per cent Lumber and timber products ... 51 per cent Fmniture and refrigerators 51 per cent Clothing, women's ... 61 per cent Leather goods ... 64 per cent Bread and bakery products 69 per cent CLASSES OF BUSINESS ORGANIZATION 23 It is very desirable in such cases to acquire control of the sources of supply, and this can only be done by large units. Moreover, great economies lie in large-scale handling of ore, grain, and such bulky, durable materials by tram, crane, and other mechanical devices not available in smaller plants. On the other hand, when the raw material is not bulky and has a high specific value, that fact may faciUtate concentration and large-scale production induced by the other factors mentioned. Such a condition is illustrated by the boot-and-shoe and leather-goods industries whose raw material consists of hides. In some cases the refractory or resistant character of the material may necessitate large investment in machinery. 2. Processes. — As to the methods and processes of pro- duction, the chief conditions are : the complexity of the industry, its potentiality for specialization and division of labor, its potentiality for integration and utilization of by-products, and its adaptability to machinery, (a) Obviously where the in- dustry is simple in the sense that it lends itself to routine methods it wiU be relatively easy, other things being equal, to direct a large estabUshment ; but where great complexity arid variety of process abound, the point of maximum profitable size will be sooner reached. It has long been recognized that banking, insurance, and transportation furnish examples of routine in- dustry, whereas agriculture and retail trade show great variety of process. Accordingly, large-scale business came very early in the former industries, (b) The possibility of speciaUzation and division of labor is a very important factor on the industry side. The greatest division of labor is only possible in the larg- est plants. In order to allow that minute speciahzation which brings the maximum skill and best utilization of each individual's capacity, it may be necessary to subdivide the process of making a single article into scores of steps or sub-processes; and this can be done only where the output and the number of employees are large. In a small establishment, one man may slaughter the cattle and prepare the beef ; but in the large and eflScient packing house many groups do the killing, removing hides, cutting up carcasses, and so forth. 24 BUSINESS ORGANIZATION AND COMBINATION (c) Closely related to division of labor is the question of po- tentiality for integration and utilization of by-products, but here we deal with a union or composition rather than a division of labor. Of course, the labor will be divided as it is integrated. Many establishments are confined to one branch of industry like the manufacture of steel from iron. If, now, there are great economies in an integration which will bring the mining and smelt- ing of iron ore within the same business unit, that development will probably come. So it is with by-products. In the petro- leum industry, for example, great economies have been effected by the saving of such products in the shape of volatile oils, residual materials, and dyes, — savings which only production on a large scale could have made profitable. The same results have been gained in the industry of slaughtering and packing. (d) The adaptabihty of an industry to machinery is interwoven with such points as complexity of process and division of labor, as well as with market conditions, and in many instances is only an external sign of the large-scale production. But it has its separate significance ; and when machine methods can prof- itably be applied, the business establishment is apt to be large. 3. Products. — The character of the product that is turned out by the plant is of primary importance in determining the size of that plant. The industries of ice making and pie making, furniture making, dressmaking, and cigar making, will wait some time for the era of the giant factory. In the first two clses, the commodity is perishable; in the second, it is not sufficiently portable; in the next, the article is so changeable imder the dictates of fashion as to defy standardization for large-scale production ; cigars, unlike cigarettes, are of such a construction that manufacturing by power machinery cannot be successfully appUed in making the finer grades. Other instances occur in the case of artistic products such as lace, oriental rugs, pictures, and the like. In all cases in which the estabUshment furnishes a service which must be used locally in connection with the plant a pecul- iar condition arises. For example, the statistics of the printing and publishing industry show little if any tendency toward con- CLASSES OF BUSINESS ORGANIZATION 25 centration, largely because of the great numbers of newspaper publishing establishments whose products are wanted only by the local communities. If the industry is one that tends to monopoly, that tendency will be facilitated within the locality, as is the case with gas, electricity, and street railway transportation; and the establishment will be relatively large. Otherwise, the business imit which produces local consumption goods will be relatively small. Doubtless the ability to standardize products facihtates the building up of large establishments: when the commodity can be easily graded and marketed in a vmiform manner, large-scale methods can be adopted where a widespread demand exists. This is the case with petroleum, salt, sugar, and whisky, and the standardization of machine parts has made the manufactmre of machinery a large-scale industry. 4. Markets. — The nature of the market, as determined by the character and number of consmners, reacts upon the size of the business unit in several ways, (a) For one thing, the area covered is of some importance, as it will ordinarily require a larger imit to handle an extensively scattered business. (b) The quantity demanded has an obvious influence. (c) The complexity and (d) the stability of the market also have their influence. If the demand is large and stable, the op- portunity for business on the largest scale is good. Great stocks may be accumulated, and a large, well-organized plant be run on full time. This has been a characteristic featiu-e of the de- velopment of large scale manufacturing in the great staple in- dustries of to-day : cloth, iron, boots and shoes, leather, paper, and others. If, moreover, the market is simple in that it is rather uniform and does not require careful and minute attention, the tendency to large-scale production is facilitated. It is to be remembered also that these factors act to encourage the use of machinery and the division of labor, which use, in turn, reacts to encourage large units. Certain economies in selling are also to be mentioned in connection with market conditions. When advertising is a large factor in marketing the product, there is a tendency to 26 BUSINESS ORGANIZATION AND COMBINATION large-scale production, though this tendency need not necessarily work itself out fully. The reason is that the larger the output, the less the cost per unit for the advertisement: it costs no more to advertise the products of a big firm than those of a little one. So it is with salesmen: a given number can attend to a given territory regardless of the quantity sold. It has been one of the economies of large industry to dispense with much com- mercial traveling. Finally, a large establishment can fill orders, more promptly and carry a more varied line of goods than a smaU one. In many cases this fact helps determine the size of the business organization. B. Compound Establishments. — The problem of combina- tion arises out of a tendency to form large business units by federating existing establishments, while retaining their separate existence as operating units. Such compoimd establishments are the " trusts " and combinations of the day. It goes with- out saying that such compound organizations are generally larger than simple ones, and that the discussion is incomplete until just a word has been said about the factors which deter- mine combination. We return to the subject elsewhere in this volume. In general, the conclusion must be that three^ desires are the chief active factors in bringing about combination : the desire (i) to save the wastes of competition, (2) to acquire monopoly power, and (3) to make the economies of large-scale production. The last factor has just been treated, and most of what was said about its working in the simple business establishment will ap- ply to the combination, — except that in the combination the large-scale is obtained by federating different plants and spe- ciaUzing by plants. Furthermore, combination is generally re- sorted to to secure production on the very largest scale. It is probably the first factor, the ehmination of competition, that is the real moving force in a majority of cases. Without attempting a careful analysis of the wastes of com- petition at this point, it may be said that the chief ones are the acquisitive expenses of advertising and salesmen, and the un- economic use of plant. Under the latter head come the wastes CLASSES OF BUSINESS ORGANIZATION 27 of duplicated plants, — especially the fixed capital part, — leading to burdensome fixed charges on all competitors ; failure to use the most productive devices, and suppression of patents ; waste transportation and needless "cross freight" bills; and irregularity and idleness, leading to incomplete utilization of capital and skill. Such is the case against competition as it often works, and the preceding points outline the forces that tend to cause the formation of large compound business estab- lishments. The desire for monopoly power is an interesting cause of combination, but is one which may be more logically discussed in later pages. The pessimist is apt to assert that most com- binations are impelled by that desire rather than by the effort to make economies and save wastes. Certainly this is sometimes the case ; and it must be recognized as a distinct cause of com- bination. The census of 1900 attempted to present statistics of combi- nations, and the results are not without interest. There were found to be 185 " combinations " ' in manufactures, control- ling 2160 separate plants. These plants formed a little over 0.4 per cent of the total n\miber of establishments; they em- ployed over 8 per cent of the total number of wage earners; and they were reported to have turned out over 12 per cent of the value of aU manufactured products. By far the largest niunber (489) were in the iron and steel industry, with a large nxmiber in " food and allied products," chemicals and allied products, and " liquors and beverages." The census of 1910 will certainly show a larger proportion of products turned out by combinations or " compound establishments." 2. Relative Importance of Factors of Production in the Estab- lishment. — If we regard the business unit as a complex of land, labor, and capital, operating under the direction of entrepre- neiuial ability, we may find another basis of classification in the relative importance of these factors within the unit. Which is the dominating element, — land, labor, capital, or entre- preneur? One great development has been in the increasing ' Unions of previously separate plants. 28 BUSINESS ORGANIZATION AND COMBINATION relative importance of capital ; and to-day two great classes of business units may be distinguished on this basis: the shop- handicrafts class and the factory-machine class, the former being often regarded as a survival of early days. From the point of view of evolution, one may see at least four stages and as many types of business organization. First came the primitive household stage. " The mdustrial family, owning the raw material and the requisite tools, and working with the power of their own bodies in their own houses, produce commodities for their own consumption." ' Here, in one sense, there was no question of dominance of any factor ; but capital was relatively unimportant and could have been produced by an individual's labor time of a few months at the most. Such a productive unit — it can hardly be called a business vmit — can now be foimd only on the receding outskirts of civilization. Next came the gild system and handicraft production. Pri- marily the gild was a means of regulating the business imits of medieval times ; but it was associated with a characteristic type of unit organization, which differed from the preceding type chiefly in that family lines were less closely followed, more capital was used, and the entrepreneur's function emerged more clearly. The master workman who directed the business organization owned the capital and worked at the trade along with his journeymen and apprentices. Human power was still mainly used, and, as goods were produced only as ordered by customers, no great stocks were maintained. Thus both fixed and cir- cfulating capitals were small, and relatively unimportant. As has been well observed, " The size of the representative firm under a system which compelled the master to be a skilled artisan, a shrewd financier, and an able salesman, but insisted on each article bearing the impress of his individual skill, must of necessity have been very small." ^ The " domestic system" which followed is characterized by the fact that the workman owned his tools' and simple machines, and worked at home, whereas the marketing of the ' Hobson, Evolution of Modern Capitalism, p. 35. ' Galloway, Business Organization (Chicago, 1910), p. 6. CLASSES OF BUSINESS ORGANIZATION 29 product was done by a middleman. Gradually the workman became dependent upon the merchant middleman for his raw material, and the same condition began to appear in the owner- ship of such simple machinery as existed, e.g. the "frames" used in weaving stockings. But the domestic system flourished in the pre-machinery era, and, although some small develop- ments occurred, fixed capital still played a slight part. Further- more, the markets were narrow and processes slow, so that cir- culating capital in the shape of stocks of materials and products were also small. Labor still predominated on the whole, and small business units held their own. The transition to the " factory system " came in the middle part of the eighteenth century. The business unit xmder this system is characterized by the relatively important part played by capital, especially fixed capital in the shape of machinery and buildings, by a wage-earning class which is almost divorced from the ownership of capital, and by an employing entrepreneur class which is closely connected with the ownership of capital. With the separation of labor and capital the entrepreneur's function of coordinating the factors became more important. Perhaps the time has come to distinguish a fifth stage, the stage of combination or the " trust system." In this stage the business unit is generally compound, and while it embraces more capital then ever, the entrepreneur — the promoter and director — is the dominant factor. The capitalist class is more and more separated from any direct participation in the direction of industry. A glance at the census figures reveals recent tendencies as to relative amounts of labor and capital. Since 1850, both value of capital and cost of materials used in manufactures have pretty steadily increased at a far more rapid rate than the number of wage earners and the total wages.^ This is the tendency, taking manufacturing as a whole. But still one may see all the types mentioned above : handicrafts system in the various " custom " trades, cigar making, farming, etc. ; domestic system in the clothing industry ; simple factory system in most manufactur- 1 Nineteenth Census, Bulletin on " Manufactures : United States," Abstract o£ Statistics for states, cities, and industries, p. 5. 30 BUSINESS ORGANIZATION AND COMBINATION ing ; " trust system •" in iron and steel, petroleum refining, sugar refining, etc. Moreover, within the factory system in- dustries, labor forms a relatively more important part in the organization of some than in others, and the same is true of the capital factor. On the last point, the following statement of the census bulletin just referred to is of interest : — " Some of the industries that hold a very high rank in gross value of products rank comparatively low in the number of wage earners employed and in the value added by manufacture. Where this is the case it indicates that the cost of materials represents a large pro- portion of the total value of products, and that therefore the value added by manufacture, of which wages constitute usually the largest item, is not commensurate with the total value of products. Thus the slaughtering and meat-packing industry, which ranks first in gross value of products, and the flour-miU and gristmiU industry, which ranks fifth in that respect, both hold a comparatively low rank with regard to number of wage earners and value added by manufac- ture. The blast-furnace industry, the smelting and refining of copper, the manufacture and refining of sugar and molasses, the manufacture of butter, cheese, and condensed milk, the refining of petroleum, and the smelting and refining of lead are other industries which rank much higher in gross value of products than in number of wage earners or the value added by manufacture. " There are several industries the rank of which according to number of wage earners and the value added by manufacture is decidedly higher than the rank according to value of products ; in other words, the cost of material is relatively a smaller part of the total value of products for these industries than for most others. Among the in- dustries of this class are the making of women's clothing, the manu- facture of automobiles, furniture, electrical machinery, apparatus, and supplies, hosiery and knit goods, silk goods, and agricultural implements, and the confectionery and marble and stone work in- dustries." It will be observed that the industries having the highest con- centration in large establishments generally have the highest proportion of capital. Relation of Labor and Capital to Direction. — So much for the relative importance of labor and capital. It remains to CLASSES OF BUSINESS ORGANIZATION 31 note that in none of the types discussed. so far, has the entre- preneurial function or the direction of the business been placed in the hands of labor. It has not been associated with wage earners. Beginning with the handicrafts system, where we find production for gain, which is business proper, always there has been at the head of the lousiness an employer who has been the owner of more or less capital or allied with the owner thereof. Always, in a more or less distinct fashion, allowance has been made for expenses of labor, capital, and land, and anything left over has remained as profits in the hands of an individual or group of individuals who have not been mere wage earners. In no case has a type been maintained in which, after the rise of a wage-earning class, labor and directive ability have been com- bined. All this is to say that the industrial tj^es so far men- tioned have been types of entrepreneurial business organization. But there is another way of organizing the factors which is called productive cooperation, and the cooperative unit must be set over against the entrepreneur unit. In the cooperative organization the business is managed by one elected by the wage earners. With their own or borrowed capital, a group of laborers form a business unit. They choose a manager. From the total income of the business they pay the manager, the interest on capital, the rent, and then, if anything remains, it is shared among themselves. In this way the conflict of interests between labor and capital is removed by making labor the con- trolling element and associating the direction of the enterprise with it. Productive cooperation has met with little success, and the number of business units organized on that basis is relatively small. It has worked in a few cases where industrial processes were simple, where labor was more important than skillful direction and management, and where the market was stable and easily gauged. But when these conditions have not existed, cooperation has shown serious defects in the motiva- tion of the entrepreneur function: its councils have been divided and its managers have been underpaid. As to sociaUstic and communistic units, they can hardly be called business organizations, save in the case of a communistic 32 BUSINESS ORGANIZATION AND COMBINATION community like Amana, which as a unit carries on industry for gain. In such an organization, land and capital are owned by the whole community, and direction on a democratic basis is provided for through the election of directors by popular vote. Here the entrepreneur function is fundamentally modified by delegation and the representative principle, and lacks much of the stimulus of private initiative. All sociaUstic schemes aim to make labor the dominant factor ; but in reaUty they neces- sarily tend toward a diffusion of the functions of the various productive classes throughout society, as they make each indi- vidual at the same time a laborer, a capitalist, and, to the extent of his vote, an entrepreneur. 3. Classes of Business Organization as to Complexity. — Some- thing has already been said of the differences in complexity of organization that are found among business units, and such differences are related to differences in size. The development of industry has been accompanied by a differentiation through specialization in function and structure, and by an integration through combination of related stages of production. In the earliest stages of business development, the unit was simple and unspecialized. The blacksmith made the whole tool and the carpenter the whole chair. On the other hand, these same men combined such occupations as agriculture, candle making, and brewing with their other activities ; for just as there was little specialization, so each unit in undifferentiated solution contained numerous potentially separate occupations. In the course of time these occupations were precipitated as separate trades, and then ensued the era of trade specialization. Specializa- tion by trades began in England about the handicrafts period and continued to increase well down to the present day. Sepa- rate business units arose from each trade or occupation. At the same time a twofold process was taking place within the unit ; for, on the one hand, there was an increasing subdivision of processes, and, on the other, a massing of processes or trades in larger establishments. On the whole, however, specialization and division of labor were the dominant aspects of business or- ganization during the eighteenth and nineteenth centuries. CLASSES OF BUSINESS ORGANIZATION 33 More recently we have reached the stage of integration by in- dustries, in which, while diflferentiation through divison of labor goes on apace, the distinguishing characteristic is a combining of the stages of production within great branches of industry under a single direction and management. Under this same characteristic, the concentration of closely alhed processes should be treated. The general trend of development, then, has been from unspecialized simple units, through units increasingly spe- cialized by trades, to units highly integrated by industries. As in biological evolution, differentiation and integration have gone hand in hand. And as business organizations have grown larger, they have grown more complex. It is clear that complexity depends upon the twofold process of speciaUzing and of combining. The reason for specialization or division of labor hardly needs discussion here. Common information covers the advantages of splitting processes up so that machinery and special skill can be utihzed to the largest extent. But, as yet, less is known of the integration side of com- plexity. Integration, or industry combination, has two chief objects. In the first place, by integration producers seek control over their raw materials, and, in the second place, they seek control over markets. In addition, of course, the general economies of large-scale operation may be gained. By integra- tion, the United States Steel Corporation, which is perhaps the most striking illustration of this development, gains control over the supply — and so a partial control over the price — of ore and other raw materials. These materials it assembles by means of its own transportation agencies, smelts in its own furnaces, changes to steel in its own converters, and finally rolls, hammers, and draws into raUs, plates, and wires in its own mills. It can insure a steady stream of materials throughout the entire chain of plants, thus using its labor and capital more economi- cally. Waste, through cooling and reheating, and deterioration between stages, is reduced. In a way, each stage in the chain is not only the source of the materials for the following stage, but is also the market for the preceding stage, and so illustrates both of the chief objects. 34 BUSINESS ORGANIZATION AND COMBINATION But by control of the market is meant something nearer the so- called " ultimate consumer." By taking in pipe lines, refrig- erator cars, warehouses, and storage plants, the marketing of the finished products is carried close to the consumer. This phase of integration is best illustrated by the establishment of retail shoe and cigar stores by big shoe factories and the Ameri- can Tobacco Company, respectively. The great department stores of the city illustrate the same thing, and they frequently operate factories of their own to the profit of both industries. Economy of advertising may be a big item in inducing integra- tion on the marketing side ; for when the name of the business unit becomes favorably known, why not profit by attaching it to. other lines of product? If such products are related, the result may be called integration. Sugar, iron and steel, tobacco, petroleum, slaughtering and packing, liquors, etc., are illustrations of highly integrated manufacturing industries. Clothing, bread and baking prod- ucts, leather, furniture, printing and publishing, cotton and woolen cloth, among others, furnish examples of less highly integrated industries. There are marked cases of integration in banking and insurance ; as, for example, in the expansion of fimction by trust companies. In agriculture, however, there is relatively little occasion for specialization of organization by stages, and a proportionately small amount of business integration.! 4. Classes of Business Organization as to Degree of Associa- tion. — The classification of business organization which will be followed in detail in the succeeding chapters is based upon the character of association. In the simple individual-entrepreneur organization there will be no association. When partners are added, we have a simple association with some greater com- plexity of organization. Joint-stock corporations illustrate a still higher degree of association. But in all these forms the unit of association is the individual. Having developed the simple corporate form, the next step is the beginning of a new 1 Where a canning company raises its own products or a packing house its own live stock we have agriculture brought within the scope o£ integration. CLASSES OF BUSINESS ORGANIZATION 35 cycle, with compound units rather than individuals. Accord- ingly we find agreements and pools arising, then trusts and mergers; until finally we come to the securities-holding com- pany — a corporation of corporations. The Tests of Efficiency of Business Organization. — What have been the tests of efficiency which have determined the develop- ment and survival of the different forms of business organiza- tion? What are the tests for judging their relative efficiency to-day? The general test of economy is too indefinite for easy application. We may subdivide it into some five or six more particular and specific tests, as follows: — 1. Facility of Formation. — At the outset, the question of the ease of setting up in business differentiates one form of business organization from another. Aside from the question of raising capital, which is to be made a distinct test, there are questions of suitable associates, of expense, legal restrictions, etc. The problem of promotion is a big one nowadays, and one of the promoter's usual duties is to devise a suitable organization for his enterprise. 2. Amount of Capital. — With the growing importance of capital in production, it has become increasingly essential that the form of business organization shall be one that faciUtates the acquisition of large amounts of that factor. To this end it must afford a maximum degree of security, and appeal widely to the investing class. To be sure, where small capital is re- quired, other tests may decide, but the preceding statement holds for industry as a whole. 3. Liability. — Closely connected with the subject of capital is the liabihty point. Risk is one of the chief elements in all business, and the form which will reduce risk to the minimxmi will most appeal to business men, when other things are equal. A certain amount of liabihty is essential in order to secure a proper motivation and direction of industry, and to insure those who deal with the business organization of fair treatment ; but any greater liabihty than will attain these ends is imdesirable from all points of view. Liability may be of two kinds: financial and legal. The former concerns economic responsi- 36 BUSINESS ORGANIZATION AND COMBINATION bility in case of insolvency ; the latter concerns juristic respon- sibility for criminal and civil offenses. 4. Direction. — • Assuming that the capital has been raised, what efficiency will the form of organization, within which it is combined with the other factors, afford? The test of effective direction is in reality to be reduced to several subordinate tests. First, there is motivation, which concerns the intensity and di- rectness of the stimulus to business activity. Then there are economy of operation, continuity of policy, flexibility of organiza- tion, to mention the more important points. By flexibility is meant adaptability to changing conditions, such adaptability being needed now for capital, now for membership, and again for centralization of management. 5. Endurance and Stability. — The degree of permanence of the various forms of organization varies considerably, and this is a matter of no small importance. It is important to the individual to be able to lay business plans for the future and to make investments running for considerable periods of time. To the society it is important that some agency should exist for continuing in uninterrupted life the undertakings upon which its members depend for the satisfaction of their economic wants. In order to satisfy these needs the organization must both be able when undisturbed to last through a long period of time, and also to resist temporary disturbing influence, — that is, be stable. Finally, (6) a legality test may be mentioned. In every civi- lized society there is a changing body of legal rules which must be observed if the form of organization is to be most effective. A form of organization like the trust, for example, is obviously in- expedient because of legal conditions. Thus the law reacts upon economy. Indeed, from the association standpoint the various forms of business organization are, as such, children whose father is economic expediency and whose mother is the law. That the foregoing tests may be applied both from the point of view of the individual — the " private point of view " — and from the point of view of society — the " pubhc point of view " — must ever be borne in mind. In this volume we are primarily interested from the private point of view, but the other will by no means be neglected. BOOK II EVOLUTION AND FORMS OF BUSINESS ORGANI- ZATION CHAPTER m INDIVIDUAL-ENTREPRENEUR ORGANIZATION The individual-en trepreneiir system, or the single-entrepreneur system, as it is sometimes called, is that industrial order in which business is*carried on mostly by individuals or families. The individual-entrepreneur form of business organization, .accord- ingly, is an organization at the head of which stands an individ- ual — or sometimes a family group of individuals — as the one who is responsible, who directs its operations, and who alone runs the risk of failure. Formerly the predominant kind of business unit, it is still common, and calls up the typical picture of the born business man whose sagacity, boldness, and organizing ability have put him at the head of a imion of land, labor, and capital which he directs with the responsible initiative of a captain steering his own ship. Two great logical stages in the development of the character of the individual-entrepreneiu- system are apparent when its whole course is surveyed. In one, the entrepreneur is but Uttle separated from the laborer and the capitalist; he combines three functions, and, according to circumstance, his function either as laborer or as capitahst may dominate. This condition was general in early handicrafts business, and is common among farmers and professional men to-day. Indeed, wherever the business is small and produces for " custom " trade, it will be foimd that the entrepreneur's function is apt to have little separate importance. As business grows in magnitude, however, a phase of division of labor is evidenced by the emergence of the entrepreneur as a distinct and prominent factor. In this capacity he may own no capital and do no labor, but give his whole energy to organizing and directing the business. Then alone is he entrepreneur piure and simple. 39 40 BUSINESS ORGANIZATION AND COMBINATION Of course all degrees of difference lie between these stages ; and a sort of halfway stage is illustrated by those industries in which a manufacturing entrepreneur is supplied with ma- terials by a separate middleman entrepreneiur who labors and uses his own capital and later markets the product. Such organization existed in the old " domestic system," and is found to-day in the clothing industry. In this way risks are divided, and ability is economized, in that the merchant does not have to supervise labor and materials, while the manufacturing artisan does not deal with the broader problems of marketing.^ The origin of business organization is to be found in the single- entrepreneur form as defined above, and the origin of the single- entrepreneur form as defined above is to be traced to the activ- ities of the family. Doubtless the simply-associated group labor incited by the earlier clans or gens in hunting or fishing, might be mentioned; but this hardly constituted a business undertaking, and certainly in it there was no question of a gain through exchange. Such simple associations based on a rather broad blood relationship could not compete with a more specialized organization. Rather, it is the family with its closer union and more centralized control that has furnished the seed of business organization. True, the early family lacked the business motive, but it was a distinct and lasting organiza- tion which was efiective in combining the labor of a group and in collecting and administering a group property. It facilitated division of labor, while subordinating all to the control of the father. Thus the family is the seed out of which, as a money economy and exchange developed, sprang the business imit. As already indicated, business undertaking of a simple em- bryonic kmd came very early in agriculture and handicrafts. The great estates of the Roman aristocracy (the latifundia) show evidences of it; and the medieval monasteries sometimes pro- duced and marketed a surplus. But custom and feudal rules long hampered such development, and it was not until the rise of a ' In many cases the artisan under this system is merely a sort o£ piecework wage earner. INDIVIDUAL-ENTREPRENEUR ORGANIZATION 41 free labor class beginning in the fourteenth century in England, that we find much of the " business " element in farming. In the earlier cases, the undertaking was not on a basis of free con- tract, but was authoritative and generally carried on under more or less compulsion : at one extreme was slave economy ; at the other, the normal dominance of the father of the family. A word about the latter may not be out of place, inasmuch as some remains of it may be found in backward rural regions even to this day. The small farmer or peasant proprietor may market Uttle or no produce. By long practice, however, he gains considerable skill and special abiHty for his work ; and he is directly motivated by self-interest in all that he does. Control and discipline are provided for through the sense of duty and obedience of the family group. Moreover, such a unit has great capacity for adjusting expenses to meet the ups and downs of crop yield and prices. But the amount of capital and credit available is nar- rowly limited, and a notable lack of technical progressiveness is usually characteristic. But to-day the " farm " is generally subject to the regime of free contract which prevails in the modern business world. It is one of the strongholds of the individual-entrepreneur system ; and it must be remembered that in number of people affected and value of products, farming is the chief industry in the United States. Too frequently we forget the business aspect of agriculture, — indeed this is often forgotten by the farmer himself. To the economist, however, the farm is simply a going combination of land, labor, and capital, each of which factors should be used in such a proportion as to give the maxi- mum net income to the farmer. Obviously, such a business xmit wiU have a minimum size determined by the necessity of maintaining the farmer's family; while the maximum, barring speculative landholding, will tend to be set by the ability of the farmer. The exact size of the farm unit, in so far as determined by normal economic forces, will be limited by the value of the land, the entrepreneurial ability of the farmer, the character of the crop and soil, and the amount of labor and capi- 42 BUSINESS ORGANIZATION AND COMBINATION tal available. Small-scale farming, which is the predominant kind, illustrates that phase of single-entrepreneur organization in which the entrepreneurial fimction is not separate from the other factors, the labor element often seeming most important. But on the " ranch " or " plantation " one finds a business organiza- tion which rivals the factory in division of labor. Especially is this true where a single commodity is being produced, like cotton, wheat, or cattle. Thus, in such cases, the farmer may be nothing but an entrepreneur. He may even delegate active management to a superintendent who buys raw materials and supplies, supervises the planting, growing, and harvesting of the crop, and finally undertakes its marketing. As a rule, however, in this industry such careful adaptation of processes to the vary- ing sou and weather conditions is required that the super- vision of the entrepreneur is most economically limited to rel- atively small areas. It must not be forgotten, however, that a large amount of labor and capital may be applied to a small area of land, and that in such a case the farm is, economically speaking, a large one. This observation is of increasing signifi- cance in these days of rising land values ; for the more valu- able the products of a given quantity of land, the larger the amount of labor and capital — to say nothing of the entrepre- neurial ability — necessary to secure the maximum return. All this is bound to bring into greater prominence the business- organization aspect of the farm. The first simple beginning of the entrepreneur system in manufactures is found in handicraft production carried on in the family by a master workman working alone or with a few helpers. Sometimes the wife and children help him, and his apprentices are virtually members of the family. His capital is small, consisting of his tools and raw materials ; the shop and the house are one. He produces for custom trade and has a direct personal relation with those who consume his wares. The element of risk is small. Yet, withal, the entrepreneurial element is not absent; for does he not buy and sell for gain? Does he not organize his small labor force together with his stock of materials and tools for productive purposes? His INDIVIDUAL-ENTREPRENEUR ORGANIZATION 43 success depends on more than his skill as an artisan : it rests partly on his ability to plan his business. The men of the same craft early united to form the gilds which played an important part in the business organization of the middle ages. These gilds controlled apprenticeship and other relations between labor and capital; they limited com- petition and assured a market for products ; they often aided in purchasing materials; etc. In this way the problem of the early entrepreneur was much sunplified. But during the six- teenth century the gilds lost their power. Among other factors the growth of wider markets and the rise of the labor class put an end to such organization. Closely connected with these developments came an increase in the separate importance of the entrepreneurial function ; for with the changes in markets and production there was put upon his shoulders the duties of organizing larger and more complex masses of labor and capital, and the greater risks attendant upon production for wide and varying markets. It is worth while noting that to-day the numerous associa- tions of retailers, and of the more skilled artisans, to some ex- tent accomplish a part of the work done by the gilds, and this appears to be increasingly true. The individual-entrepreneur organization whose nature and development have been thus briefly sketched has by no means vanished from the face of the earth. It now prevails in small local business, like retail trade, in agriculture, and in the pro- fessions. Furthermore, the handicrafts way of making things survives in such industries as blacksmithing, tailoring, baking, and many others ; and here the single entrepreneur is common.^ In fact, he persists wherever standardization of product is • The census for 1910 shows that the lowest percentage of corporate establish- ments is found in the following industries: Bread and other bakery products; women's and men's clothing ; marble and stone work ; leather goods, butter, cheese, and condensed milk; and boots and shoes. Tobacco manufactures show only 4.6. per cent'of establishments operated by corporations ; but produced over 56 per cent of the value of the product. And a, similar situation is indicated in the printing and publishing business. These facts dearly bear out the generalizations made in the text. 44 BUSINESS ORGANIZATION AND COMBINATION impossible, or wherever a personal relationship between pro- ducer and consumer is important, as in most professions. A study of the census figures shows that the relative field of individual-entrepreneur business organization, while still considerable, is decreasing relatively to the corporate form. In 1900 the number of business establishments under individual ownership was over 171,000 and formed 63 per cent of all estab- lishments. In 1904 the figures were 113,900 and 53 per cent, respectively, showing an absolute and relative decrease. The latest figures for 1909 show some increase in the absolute num- ber of individually owned establishments and an almost constant percentage of the total number, 52.2 per cent. The same gen- eral situation is found] in value of products, the proportion produced by individually owned establishments falling from 16 per cent in 1900 to nearly 12 per cent in 1904, and from that point to 10 per cent in 1909.1 Advantages and Disadvantages. — The great advantages '■ Statistics of the German Empire on the Entrepreneurial Form OE Industrial Management Establishments Persons Employed 189s 1907 1895 1907 All kinds of direction J No .1 (Alle Betriebe) j Per Cent 3,06s 100 3,266 100 10,269 100 14,436 100 Single-entrepreneur J No.' direction [Per Cent (Allein Betriebe) 1,714 SS-9 1,452 44.4 1,714 16.7 1,452 lo-t- Associate direction J No.' (Gehilfen Betriebe) [Per Cent 1,351 44.1 1,814 55-6 8,555 83.3 12,984 90- Associate direction J No.' with single occu-\Per Cent cupant or possessor {Einzelinhahern Ge- hilfenbetriebe) 1,281 41.8 1,674 51.2 5,713 55-7 7,524 52-1 ' The numbers are in thousands, i.e. three decimals are omitted. INDIVIDUAL-ENTREPRENEUR ORGANIZATION 45 of the individual-entrepreneur organization may be summed up under two heads : (i) facility of formation, and (2) effectiveness of motivation. (i) Obviously a minimum of resistance exists to the possibility of starting a business vmder this form of organization. It is applicable to all kinds of business, for it involves the grant of no special powers by the state and is open to all private initiative. A minimum of time and trouble is involved in its formation. Under this head, too, the element of expense may be noted: save for hcense fees collected by some States, it costs nothing for the individual to set up a business, and he does not have to pay the special taxes sometimes levied on the corporation, for example. (2) As to motivation : the directness and intensity of the stim- ulus to industry are to be observed. A fairly exact relation exists on the average between effort and ability on the one hand and gain on the other. The judgment, energy, skill, and determination of the individual entrepreneur are put in a direct relation to his profit or loss. Not only that, but he may act with a promptness and vigor which would be impossible in a more complicated organization. Without consultation or the sanction of others he may seize an opportunity or meet a crisis. A further advantage may be found in the secrecy which the individual-entrepreneur organization facilitates. There is no large group of stockholders who might be interested in other businesses, nor is the state apt to require such information as in the case of some other forms. But if the proprietor chooses to operate under some such title as the " Model Laundry " or the " New Process Company " rather than under his own name, usually he must file information with the state, showing who actually carries on the business, and so let the public know who is responsible, i On the other hand, serious limitations attend this form of organization, (i) For one thing, the judgment and wisdom at the disposal of any individual are limited as compared with those which may be brought to bear upon problems of a part- nership or corporation. It follows that the advantages of direct- 46 BUSINESS ORGANIZATION AND COMBINATION ness of incentive and promptness of action must, to some extent, be counterbalanced by the fact that the one head may not be so good as two. (2) Again, the amoimt of capital which can be got together ■under this single-entrepreneur individual responsibility is decidedly limited. True, considerable amounts have been so applied in certain cases ; but these are exceptional, and in no case could such large capitals as those of the big corporations of to-day be raised. According to the United States Census estimate for 1965, while over 52 per cent of all business estabhshments were owned by individuals, such estabUsh- ments commanded only 7.6 per cent of the capital of all establishments. It is hardly necessary to state that this is partly due to the fact that the mdividual entrepreneur alone de- termines his business policy, the result being that investors can- not readily be induced to give their fxmds into his keeping, and he is generally limited to such funds as he may own or raise on his own personal credit. (3) Indeed, another disadvantage from the individual point of view is the " unlimited UabiUty " of the single entrepreneur : his debts run against his entire property and not merely the amount employed in his business. Thus he has strong induce- ments to " put all his eggs in one basket," for if he goes into several lines of undertaking, he makes each liable for the other, and so may increase risks. Thus, risk is concentrated in what, to the individual, seems a dangerous and uneconomic manner. Social Point of View. — The permanence of any form of organi- zation must be considered in judging its utility to society, though this consideration is also of significance to the individual. What is to become of the organization and of the wants which it served to satisfy when its leader dies, is an important question in the case of most successful business units. Both from social and individual points of view, then, it must be noted that the single-entrepreneur's life and health limit the duration of the business unit which he heads. The persistence and viriUty of the system now under discussion depend on the continued existence of a body of men having the rather high qualities de- INDIVIDUAL-ENTREPRENEUR ORGANIZATION 47 manded for the successful conduct of a business unit by a re- sponsible individual. The principle upon which such continuity must largely depend is that of heredity and inheritance. But only too often the heirs are lacking in the requisite qualifica- tions and the business falls into weak hands in the second or third generations. As Professor Marshall has pointed out, the son of the business man has special advantages in the shape of observing the conditions and problems of his father's business ; he often inherits considerable capital ; and he starts with an estab- lished machine and trade connections. But he lacks the dis- cipline and stimulus of the earlier struggle, and history shows many cases of deterioration, with the result that the unit is either dissolved or else is perpetuated only through the agency of adopting new blood. As to efficiency, and regarded solely from the social point of view, the gist of the matter is this : in the individual-entre- preneur organization society has a form of business which, assuming competition, insures an efficient working of selective processes. This is true because of the direct relation between entrepreneurial ability and income which this form insures. Moreover, the unlimited UabiUty, which is a part of the foregoing idea, means adequate responsibility to the entrepreneur's fellows in society. And the effective, motivation means much for social productivity. But this selective process and this motivation can work only in a limited field; for under the individual- entrepreneur system the scale of production and the division of labor are so restricted that in many industries the most eco- nomical production would be impossible. The conclusion is that (i) this form will survive in that considerable field in which small capital is required and considerable personal Uability is important, and that (2) its merits being what they are, society should insure to it a square deal in competing with forms having more capital and operating on a larger scale. Neither economist nor statesman can afford to forget that the quaUties of self-reUance, responsibiUty, and initiative are of great social importance, and that these qualities are developed among single entrepreneurs. 48 BUSINESS ORGANIZATION AND COMBINATION With reference to the question of permanence, Professor Marshall says, " The oldest and simplest plan for renovating the energies of a business is that of taking into partnership some of its ablest employees." Naturally, then, we turn next to an examination of the partnership form of business organization. CHAPTER IV PARTNERSHIP ORGANIZATION Ordinary Common-law Partnerships: Definition and Gen- eral Nature. — The broadest concept of partnership would make it include any association of individuals acting with a com- mon purpose. In a more specific business sense the partner- ship may be defined as the relation existing between persons who agree to carry on a business in common with a view to private gain. Such an organization involves the combination of the property or skill, or both, of the members and the sharing of profits and losses in certain proportions. In general, there is no legal limitation on the number of partners, but EngHsh law provides that in most cases partnerships of over twenty members must become incorporated. The members of a partnership may be either natural persons, partnerships, or, in some States,^ cor- porations. The general characteristics of a partnership are as follows: (i) It is a contract relationship and does not require a franchise nor special sanction by the State. (2) The partnership and the members who compose it are not legally distinct. For reasons which will appear later the law in general regards the " partners " and the " partnership " as one, and in theory does not recognize the separate existence of the partnership. It follows that, barring special provisions to be mentioned later, each partner can make contracts which within the scope of the partnership business are binding on the partnership and the other partners. Claims against the partner- ^E.g. Delaware, New Jersey, and a few "liberal" States authorize corporations to enter all kinds of contracts with persons and firms, including the partnership relation. E 49 50 BUSINESS ORGANIZATION AND COMBINATION ship, moreover, must be satisfied by suit against one or more of the members — at common law all the partners must be joined ; and a claim upon one partner is a claim upon his fellows. Finally, the partnership is dissolved by the death or incapacity of any one of the members, or by the sale of his share in the business. (3) A third general characteristic of partnerships is the " unlimited Hability " of the members, although in special cases this may not be true of all members. Each member of a partnership is personally liable for the debts of the firm, includ- ing those contracts made by any of his associates on account of the joint undertaking, and when the firm becomes insolvent, he may be forced to pay the full amount of his property. The thoughtful reader will at once observe the emphasis on personality that the partnership retains. It arises out of con- tract between persons, which persons are sued rather than the organization and are personally liable to the full amount of their individual property. We say that the partnership " retains " such an emphasis, because the individual personality might* easily be dimmed in association and the main characteristics of the single-entrepreneur organization be lost. But in the form of organization now under discussion a remarkable combination of association activity and distinct individual personality is apparent. The individual is not submerged, but stands federated with his associates in a copartnership. The law and business usage are somewhat at variance in their attitude toward the collective aspect of the partnership, or " firm," as this form of business organization is often called. Although, in case of hability for damages, the firm's property must be exhausted before the property of the members can be taken, and to that extent the courts recognize the partnership as distinct from the partners, in English and American law the tendency has been to emphasize the individual personal element : in the abstract, at least, the firm has generally been regarded as a mere collection of individuals. According to the mercantile conception, however, the firm is looked upon as an entity having some considerable distinctness from the partners ; and this view PARTNERSHIP ORGANIZATION SI is taken by the law of such countries as Scotland and France. The underlying reason for the mercantile conception is the simple fact that the business of a firm is carried on as a unit and its accounts are kept as though it were a separate entity, which could be debited and credited in relations with the individual partners. The element of " good will " and the value of a firm name also play a part ; for frequently a firm gains such a rep- utation for fair and efficient dealing as to constitute an impor- tant asset, the value of which would be impaired by disturbing the partnership. It is not to be wondered at, then, that business men, in their desire to retain this asset, have emphasized the entity aspect of the firm. Their attitude is perhaps illustrated by the common custom of having a retiring partner agree not to set up a competing business in the same locality for a year or more, and it appears in the transfer of good will in connection with the firm name. Business practice has not been without its affect upon the law. Some English decisions have virtually treated the firm as a distinct entity, and in England actions can now be brought against partnerships in the firm's name. Indeed, some American writers speak of the partnership as an entity, and some of the States by statute have authorized suits against partnerships as such. In France and Italy partnerships may be formed by written agreement only, while in England and the United States the agreement may be oral. Generally, however, written articles of copartnership are drawn up, and this is always desirable. Such a contract should include statements of the purpose of the part- nership, of the rights and duties of the several partners in manag- ing the business and the powers of majorities, of the interest pay- able on advances of capital and salaries for services, and of the division of profits. As Con}Tigton puts it : " The plan of salaries drawn from the firm business for partners has several advantages. It not only affords a ready means of adjusting the varying claims of the partners upon the earnings of the partnership, but also reduces the amount which each partner draws from the firm for personal use to a fixed and definite sum. Also it makes more apparent the real results of the partnership undertaking." 52 BUSmESS ORGANIZATION AND COMBINATION Too often salaries and profits are confused. Profits cannot be declared until after salaries have been deducted, the latter being an expense of the business. Sound economic policy dictates the closest possible relation between service and reward, and this can only be secured by (i) rewarding each class of service (labor, risk-taking, etc.) separately, and (2), within each class, rewarding each individual according to his contribution. In this way only can accounts show the true condition and earnings of the business. In this way only can doubt and distrust be prevented. In this way only can the maximum motivation be gained. Provisions concerning the dissolution of the partner- ship and the rights of the partners to carry on other business in competition with the firm are often included in the partnership contract. It is especially desirable that the articles should clearly define the scope of the firm's business, as this sets limits to the field within which the acts of any partner bind the others. By covering such points as the preceding in a carefully drawn contract, the partnership may be made far more safe and effi- cient than is often supposed. This brief statement of the general characteristics of the part- nership should not neglect the various forms which that type of organization may take. Thus there are " general " and " special " partnerships, the former comprising ■ those which exist for the continuous exercise of a general line of business, the latter including only those formed to carry on a single and more special line of business, or a single transaction. Ordinary mercantile and professional firms illustrate the former class; partnerships to deal in a particular piece of land and syndicates to finance particular corporations illustrate the latter. The purpose of the special partnership being restricted, the powers of the partners are proportionally limited. The law also dis- tinguishes trading or mercantile partnerships from those which, Uke professional, brokerage, and farming firms, are non-trading or non-mercantile. " Commandite " and " limited " partner- ships will be described below. Origin and Development. — Without going into the details of the origin and history of partnerships, it may be said that the PARTNERSHIP ORGANIZATION S3 modern partnerships can be traced to the family. In Roman days the societas probably arose out of the need of a family group for administering an inherited estate in common ; though later, voluntary contractual associations, also called societates, were formed for the purpose of private gain, and the Roman law of partnership became pretty detailed. The societas, however, in some respects resembled the corporation, and the modern partnership, as described above, does not descend directly from it. Rather it is to be traced to the small ventures in fishing, trading, and handicrafts carried on by family groups beginning at least as early as the eleventh century and reaching full de- velopment about the sixteenth century. Such partnership ventures reached their earliest complete development in the Italian cities ; but everywhere the story is similar : Family groups, remaining together for various reasons, — sometimes limited land in cities, — held property in common, and, under the stimulus of a money economy and growing commerce, ex- panded their activities beyond the supplying of the group's needs and pursued an enterprise for common gain. As the mem- bers worked in common, with a common purpose, and all shared the risks and profits of the enterprise, the group name became personified, as it were, and each member was recognized as a representative or agent of the firm or company, — cum-panes, those who ate bread together. On their part, the members of the group came to look upon their common property as something in which each had a share, a view which was reenforced whenever independent property and income outside the group developed. Indeed, the capital used in the enterprise was early separated from the individual property of the members, and the debts of one member did not always make the other members personally liable, although those debts lay against such property as was held in common.^ Just as, in early days, a " clan " as a body paid damages for personal injuries inflicted by its members upon others, so it was the idea that the common property of the household industrial group should pay the debts of a member. But gradually the present custom of holding each partner liable 1 See Weber, Zur GeschichU der Bandelsgesellschafkn im Milklalter, p. 62 ff. 54 BUSINESS ORGANIZATION AND COMBINATION to the extent of his individual property developed,' and here the question of origin and growth is not so clear. Perhaps individual personal Uabihty also had some connection with the clan idea of personal responsibility for personal injuries. However that may be, it is certain that the growing commercialization of the group's activities was an important factor ; for, ere long, family lines became less closely drawn, and, from including only blood relatives, the business unit extended its bounds to bring in skilled and trusted persons who were not relatives, until finally unrelated individuals came to form voluntary contractual as- sociations to trade under a single name with a single capital. All this is illustrated by the familiar stories which tell of the medieval fathers, some of whom took one or more sons or sons- in-law into their business organizations, either to provide for the said sons' welfare or to perpetuate the business; while others brought in trusted apprentices. At the same time labor groups were organized, which in form were probably influenced by the family group, but whose membership was not held together by family ties. Not imnaturally the tendency was to demand more stringent liability of these more loosely knit organizations. Moreover, as credit relations developed, it became more im- portant to strengthen the credit of the group by making its members personally liable. Certain it is that by the sixteenth century unlimited-liability partnerships had become the leading form of business organization. All this came to pass under pressure of business necessity. Organization was needed for production on a larger scale. Larger capital and credit were required, and the individual-entrepre- neur was unable to meet the situation. The necessary result was an association of individual entrepreneurs, and the most natural form of association was along personal family lines. This meant the partnership. To-day, the partnership appears to be losing groimd as a form of business organization. It is common in retail trade and moderate-sized mercantile establishments; not a few small manufactiuing businesses are conducted under the partnership form; and in the professions partnerships are still prevalent, PARTNERSHIP ORGANIZATION ss though probably decreasing. Census figures show that in 1900 " firms " equaled 23 per cent of the total number of establish- ments and produced goods having a value which was 19 per cent of the total value of all products ; whereas in 1904 firms com- prised 22.2 per cent of all establishments and produced only 14 per cent of the total value of products. In 1909 the statistics indicated a continued decline : the number of estabUshments had fallen to 20 per cent though the absolute number had increased, and the proportion of the value of products had fallen from 14 per cent to 10.6 per cent. Advantages and Disadvantages. — Inasmuch as the ordinary common-law partnership retains such a large personal element, it partakes of several of the characteristics of the individual- entrepreneur organization. Like that organization, (i) the partnership enjoys great facility of formation and is widely ap- plicable to varying industries. Naturally, assuming the other factors to be equally available, it will be somewhat more difficult to get a group of men organized than to start with the individual ; and the personal relationship involved tends to confine partner- ships to men who are known and trusted ; but, aside from these Umitations, all that was written of the individual entrepreneur xmder the head of facihty of formation will apply here. (2) So it is with motivation. So great is the risk arising from un- limited liabiHty, so direct is the relation between effort and re- ward, so personal is the relation between partners, that the stim- ulus to production operates powerfully. Yet the association element is not without its effect in modifying the directness of relation between effort and reward, and cases of manipulation and fraud within the firm are by no means unknown.' (3) Closely connected with the foregoing point is the " flexi- bility " of the firm organization. The partnership being a con- tractual relation, its objects, membership, and capital may easily be adjusted to meet varjring business conditions. ' Obviously to make a contract in which salaries and interest rates, shares of profits, and limitations in management are specified and to have it perfectly just and satisfactory to all, would be difficult, to say the least; but unless this is done motivation must be to some extent impeded. S6 BUSINESS ORGANIZATION AND COMBINATION (4) On the other hand, as an association the partnership has certain advantages coming from combined abihty and resources. In some cases, and in some types of business, the possession of the combined judgment of several heads is an advantage. Furthermore, association allows some degree of differentiation and specialization, so that each partner may give his attention to that part of the business in which he is most efficient. But, historically, the most important advantage lies in the possi- bility of collecting greater capital than is possible under a single individual. It is not necessary to say that the resources of one man are more limited than those of many, and as larger capital became necessary, both in commerce and manufactures, part- nerships grew in number and size. (s) In this cojmection, it must not be forgotten that the great hability for debts which attaches to general partners gives the partnership excellent credit. Its borrowing capacity is not only increased above that of a single individual, but also it is greater in proportion to capital than that of corporations and other limited liabihty organizations. (6) Finally, it is sometimes — not always — an advantage that the minority interest in a partnership may often secure adequate representation. A dissatisfied partner may withdraw and dissolve the firm, or, if that be undesirable, he may so ham- per its affairs as to force his partners to buy him out. Because of this advantage in their position, minority partners are gener- ally loath to have their firms incorporate. The foregoing point suggests the hkelihood of friction within the firm, and, as compared with the individual entrepreneur, (i) the chief disadvantage of the partnership hes in a frequent lack of prompt and united management. " Too many cooks " may spoil the business broth, and a divided council may act with indecision, though ordinarily in most questions of manage- ment a majority decides. And if the partners seek to meet this difl&culty by delegating management to one of their number, they soon realize that their unlimited liabihty will not allow them to forego passing upon questions of vital significance to the business. All this is on the assumption that the partners act PARTNERSHIP ORGANIZATION 57 in harmony and honesty ; but too often this is not the case. Over 2000 years ago Aristotle wrote : " The partnerships of fellow-travelers are an example (of the difficulty in men living together and having things in common) : for they generally fall out by the way and quarrel about any trifle which turns up." While a recent writer who is pretty pessimistic concerning part- nerships concludes that, " Among a large number of persons there is almost sure to be at least one who would develop dis- honest traits or prove imwise, and whose action would involve all the members in unfortunate complications." ^ In short, a serious problem in partnership organization is to secure harmony of interests in management. (2) Thus, the nimiber of partners being limited, the amount of capital which can be raised by a firm is also limited. Though superior to a single individual, it is inferior to more highly developed forms to be discussed below. Clearly, too, the com- mon-law partnership makes no satisfactory instrumentahty for collecting and handling the investments of a large number of people. With liability imlimited, investors who have not the capacity or the desire to participate in management could not afford to enter a partnership. Not only this, but a share in a partnership business is transferred with such difficulty that it presents disadvantages to many investors. Such a share can only be sold to a copartner, or to a stranger with the consent of the copartners, a condition which so limits the market that it may often have to be sold at a sacrifice. In this country, too, even after the sale of his share, a withdrawing partner is liable for debts to creditors whose claims were incurred prior to his withdrawal if those creditors are not actually informed of his withdrawal, and to other creditors unless constructive notice has been given. (3) In fact, the liability of the individual general partner may be regarded as excessive for most purposes. When the business unit embraced but a small amount of capital and business re- lations were very personal, the heavy personal liability for firm obligations was not so burdensome, and probably did good serv- ' Clephane, OrganizaUon and Management of Business Corporations, 58 BUSINESS ORGANIZATION AND COMBINATION ice in making possible wider business dealings. But now that trade and commerce on the largest scale are well established, and, moreover, require vast capital and extensive credit opera- ■ tions, the personal liability of partners may be increased beyond aU reason. The larger the number of partners and the scale of business, the greater the partner's liability. This means a cumulatively concentrated risk. It may be said that on the score of liability the individual and associational elements have not been happUy synthesized ; for the gains are on the basis of as- sociation, whUe the risks remain on an individual basis. Doubt- less the situation is to be explained on the principle that responsi- bility should be commensurate with power, and that as each partner may make contracts binding on the others, so he should be hable to creditors for all. But, whether considered as a deterrent against fraud or as an incentive to efficiency, one must conclude that something less than the partner's whole property would be adequate. Moreover, the property might not be adequate entirely to compensate the creditors; and, in any case, it is debatable whether the whole responsibility for the mis- judgment should be removed from creditors. Would it not be conducive to the general efficiency to allow some part of the risk to be taken by those who deal with the partnership ? (4) The liability of partnerships to be disrupted is a' disadvan- tage which must be set over against their flexibility. Any one of the following contingencies may dissolve a partnership: death, lunacy, or insolvency of any partner. Nor can a person retire from the firm or transfer his interest without thereby dissolving it. Of course this may not break up the business, for it may be carried on by the remaining members, or new ones be taken in ; but, on the other hand, it may do so, and this fact increases the risks of doing business as a partner. Limited Partnerships and Partnerships in Commendum. — Some of the objections to the ordinary common-law partnership are obviated by other forms of partnership organization, the chief of which is the " limited partnership," a form virtually identical with the Continental sociite en commandite. Probably no historical connection exists between the origins of the limited PARTNERSHIP ORGANIZATION 59 or commandite partnership and of the common-law form. Rather the two forms rest upon different principles, the Umited partnership being based upon the association idea, and the other upon the idea of the individual personality; for, as we shall see, in the one the members may merely participate in profits and losses, whereas in the other they are personally Hable for the debts of the firm. In so far, however, as the adoption of the two in the United States is concerned, the limited partnership came in as a means for modifying a common-law liability which was proving excessive under modern conditions. The limited partnership was introduced into the United States from the French law early in the nineteenth century. It is character- ized by having two classes of partners: "general partners" and " special partners." There may be one or more general partner, and the management of the firm's business is in his or their hands. Also the general partner is subject to the com- mon-law liability. On the other hand, the special partners merely contribute capital and share in profits ; not unnaturally, then, they are liable only to the amount of their investments. This arrangement enables men to invest in a business without assiuning the entrepreneur's risks, and is thus a virtual recogni- tion of the distinction between capitalist and business enter- priser. Though very old, and similar forms are perhaps older than the ordinary partnership, this form of organization as found to-day is a creation of statute law, deliberately introduced into Anglo-Saxon countries as a modification of the common-law form to meet business needs. Acts providing for it generally require that the nature and location of the business, the names of the partners, the amount of capital authorized and paid in, and the amount of liability and its duration must be made public. The contributions of the special partners must be actually paid, and in cash. The " partnership in commendum " which exists under the laws of Louisiana is virtually the same as the limited partner- ship, and it will be remembered that the law of that State is largely drawn from the Civil Law. 6o BUSINESS ORGANIZATION AND COMBINATION This suggests the societes en commandite found in those parts of Europe where the Civil Law prevails, and calls to mind the origin of the kind of partnership now under discussion. The dis- tinctive word of the title comes from the Latin commendare (cum-manui-dare), meaning to give something into the hands of another. According to Roman law, one or more persons coxild give property (peculium) into the hands of a slave and trade through him with limited liability. The practice appears to have been extended to include trading through the agency of others than slaves. Then, with the development of the Italian cities as commercial centers, the commenda became a common- place form of business organization. The commendator or capitalist partner supplied the funds or goods, while the com- mendatarius or active partner managed the venture. At first, such a relationship was entered into temporarily for a single voyage or similar enterprise, and the active partner invested no capital; but later, as business became more established and was prosecuted on a larger scale, it became more permanent and more highly organized. There might be several socii stantes, or sleeping partners, who merely contributed capital, while the active partner not only directed the business with unhmited liability, but also invested capital himself. The commandite partnerships of the present descend directly from these early forms. As compared with the ordinary partnership, the limited or commandite form has certain advantages. While retaining the direct motivation management found in the common-law form, it furnishes a single direction of management which may act with greater unity and promptness. Moreover, it comes nearer to satisfying the wants of the investing pubUc, and through its special partners a greater capital may be collected. Thus it affords a chance for an industrial leader who may have little capital to secure what he lacks and put his genius and energy at the service of society. On the other hand, (i) limited partner- ships are criticized because of the great power given to the general partner. In the absence of fraud special partners cannot in- terfere in the management, with the result that the investor's PARTNERSHIP ORGANIZATION 6 1 interests may be abused, while it is difficult to withdraw-without loss. (2) Moreover, while discontent on the part of the special partners is common, in other cases the special partners may in practice exert considerable influence over the general partners, a situation which gives them a chance by collusion to de- fraud creditors. Thus such sums might fraudulently be paid to the special partners as to more than offset the property liability of the general partners, making failure profitable. The commandite has been used considerably in banking, but its use is decreasing. Writing on The German Great Banks, Riesser says of this kind of partnership : " If the manager dies, the busi- ness will have to be liquidated, which in most cases is not to the interest of the bank, or, if the agreement contains special provisions for this event, as is generally the case, the bank may become involved in great difficulties and annoyance until a suitable successor is chosen. The fact is that the commandite is essentially bound up with the person of its manager, not only in its success, but to a large extent in its very existence." (Part IV, Chap. Ill, Sect. 3.) The Hmited partnership, then, will be found advantageous where a highly concentrated and responsible management is desired at the same time with considerable capital, especially if incorporation is not desirable either because of expense or regulatory provisions. Other forms of partnership, so-called, like " mining partner- ships " and " limited partnership associations," are virtually joint-stock companies, and such business organizations are dealt with in the following chapter. Social Point of View. — As contrasted with the single- entrepreneur form, the partnership follows the principle of adop- tion in order to perpetuate itself. The individual enterpriser transmits his business through inheritance, and not infrequently his personal ability passes on through heredity. The partner- ship, however, must adopt its children. Sometimes this causes a spUt in the family, but probably it affords a wider choice and one somewhat less likely to be affected by mere family ties. On the other hand, the danger of dissolution through incapacity of partners has been indicated. We must conclude, then, that while 62 BUSINESS ORGANIZATION AND COMBINATION the partnership provides a somewhat better means of perpet- uating itself, the existence of that self at any given time is more precarious. The workings of motivating forces and of responsibilities are not so simple as in the case of the single individual's business. The chance of gain, the spur of profits, is both limited and divided among the partners, whereas the responsibility or liability of general partners is " unlimited " ; and the result is that the moti- vation works under the friction of excessive caution and divided councils. Moreover, motivation working through the partner- ship finds a field limited in much the same way that the field for individual business activity is limited; for the difficulties of management and raising capital restrict the scale of the busi- ness. Yet the fact that a large element of direct stimulus, coming both positively from a proportionate share in gains and negatively from a personal liability, is found in the firm, must not be forgotten. Nor is the further fact of an adequate financial responsibility to society to be overlooked. Certainly the field for the common-law partnership has steadily decreased relatively to that for other forms of business organization. If, however, a word anticipating some conclu- sions to be drawn in a following chapter may be presented here, the author would say that there is good reason to believe that the reaction against the disadvantages of the partnership may have gone too far in the direction of removing personal re- sponsibility. There is something to be said for restricting the use of limited-liability forms of organization or for reducing the degree of limitation, and by the same token there are reasons for wishing that something like the limited partnership might be more widely used. To this end it would be well for the state to modify somewhat the restrictions which now limit the use of this form of organization. CHAPTER V JOINT-STOCK COMPANY ORGANIZATION Among the shortcomings of the partnership as a form of business organization were f oxmd to be its limitations for amass- ing capital, its easy disruption, and its lack of faciHty for central- ized management. To furnish the large capital, the complex but centralized administration, and the stable organization re- quired for the vast and risk-filled industries of to-day, some new business machinery was imperative. In the present chapter we are to deal with one of the most important industrial in- ventions ever devised, — one which went a long way toward supplying the needed machinery. This is the joint-stock idea. In the United States we are accustomed to draw very little distinction, between the corporation and the joint-stock company, for here most joint-stock businesses are incorporated ; but such is not the case in England, for example, and at any rate it is highly essential to keep the joint-stock feature of our business corporations in mind as a distinct element not necessary to the corporation as such. What, then, is the joint-stock com- pany as distinguished from other forms? Definition and General Nature. — A joint-stock company is a voluntary association of individuals for profit, having a capital divided into transferable shares the ownership of which is the con- dition of membership. The essential economic features of the modern joint-stock company are : (i) the capital is divided into equal shares; which (2) are readily transferable; and (3) indicate the holder's part in the income of a business, as well as (4) his risk. The legal essentials are : (i) formation by contract among the members, without a charter or certificate from the state; and (2) personal Uability of members. One's first 63 > 64 BUSINESS ORGANIZATION AND COMBINATION thought is, How does such a company differ from the corporation with which every one is familiar in a general way ? In answer, it must be noted that the joint-stock company is in a special sense a transitional form of organization and stands as an intermediary between the partnership and the business corporation of to-day. This intermediary position means that it must extend over a wide gap ; and such is the fact, one result of which is found in the variety of joint-stock forms. Thus there are common-law and statutory joint-stock companies, as well as a number of related forms like mining partnerships and hmited partnership associations ; and it is indicative of the situation that most of these organizations, while containing the word "partnership" in their names, are sometimes called " quasi-corporations " by lawyers. The common-law form is almost a partnership; the statute-law form is almost a cor- poration. As will appear shortly, the joint-stock company as a legal form grew out of the partnership; and, as a step toward comparing it with the corporation, it is necessary to understand its relation to the earlier form. The ordinary common-law joint-stock com- pany differs from the partnership only in that (i) its capital is divided into shares which may be transferred by the owner at will without the consent of the other members ; (2) its affairs may be conducted by a board of managers or directors, who may bind the company when acting within the scope of their au- thority ; and (3) it is not dissolved by the death or incapacity of any member. Other less essential differences are the facts that generally it has a specific name not that of its members and that generally it embraces many individuals. We must conclude that the heart of these differences is the less personal relation among its members ; they are not necessarily acquainted with one another nor is their consent required for changes in member- ship. Aside from these differences, it is not incorrect to think of the common-law company as a kind of partnership, and its members have the same rights and are liable to the same degree as are partners. On the other hand, the statutory joint-stock company is a quasi-corporation, having in the State of its domi- JOINT-STOCK COMPANY ORGANIZATION 65 cile virtually all the characteristics of the corporation except that liability is generally unlimited. The statutes, however, may provide for limited liability. Coming now to the question of the difierence between joint- stock companies and business corporations, we note first, that the former are not, as such, clothed with a legal personality entirely distinct from the natural persons who are their members, and so are less permanent than corporations ; secondly, they arise out of a contractual relation among their members, and " the relation they assume is wholly the product of their mutual agreement and depends in no respect upon any grant of author- ity from the State " ; thirdly, unless expressly authorized by statute, they have no right to limited liability. The gist of the matter is that the joint-stock company involves a more personal relation among its members than does the corporation, a condition expressed in the absence of a complete and separate legal entity. In an interesting case not long ago decided by the New York courts, some difference of opinion was expressed concerning the likeness of a joint-stock company to a corporation.^ In this case, Hiscock, J., maintained that — "... there can be no doubt that a joint-stock association differs from a corporation, or that in its original conception and ultimate analysis it is like a partnership in respect to the individual liability of its members. But, upon the other hand, so many of the attributes and characteristics of a corporation have been impressed upon the modern joint-stock association that in my opinion, for the purposes of the question now before us, we are amply justified in regarding simply the joint, quasi corporate entity. . . . They are, like cor- porations, organized under and regulated by statutes. They have, and transact business under, an artificial name. Their capital and ownership is represented by shares of stock transferable at will, and their existence is not dissolved or affected by the death of or transfer of interests of members. They have regular officers in whose names actions may be commenced in behalf of and against the association, and upon a judgment rendered in the latter case, execution may be 1 Hibbs V. Brown, 190 N. Y. 167 (1907). 66 BUSINESS ORGANIZATION AND COMBINATION issued only against property belonging to the association or to all of its members jointly. . . And, as Olustrating the complete and separate existence of the association as between it and the individual members, suit may be brought by it against such members." On the other hand, E. T. Bartlett, J., cohtended that: — "The association has not appealed to the sovereignty of the state for its right to exist, and is, therefore, free from the visitorial powers to which corporations are subjected ; nor is it amenable to those vari- ous commands of the statute which if disobeyed lead to the imposi- tion of certain liabilities and penalties. The association need not disclose the amount of its capital, or the number of its shares; the corporation is obhged to do so. It is the obvious poUcy of the state to maintain this distinction, to wit : If men desire to embark in great business adventures, practically exempt from governmental control, they must do so subject to the joint and several liability to pay the debts thereby incurred. . . . The distinguishing feature of the joint- stock association is the personal liability of its members.'' The difference of opinion appears to arise largely from the fact that the one learned judge dwells in his thought upon the manner in which the business is conducted in ordinary private relations, whereas the other is concerned with the public re- lations and takes the social point of view. Perhaps, too, the one is looking at things as they are ; the other as they ought to be under the law. Articles of Association. — In forming a joint-stock company, articles of association, . or " deeds of settlement," as they are sometimes called, are executed by all members.^ Such articles should set forth the object of the company, the amount of stock, number of shares and manner of assignment, the number and duties of directors, and, in general, the duties, rights, and obli- gations of members among themselves. Historically, it was by a common signing of an agreement to the effect that their deaths should not dissolve the association, that a mere private member should not have power to act as an agent, that property should be vested in a board of trustees, and that shares should be trans- 1 See Appendix, p. 403, for articles of Pierce-Fordyce Oil Association. JOINT-STOCK COMPANY ORGANIZATION 67 ferable, that the members of the joint-stock partnership secured the most important advantages of the modern business cor- poration ; and much the same procedure is followed to-day. Some of the provisions of the articles of a prominent statutory joint-stock company (the Adams Express Company) are as fol- lows: " The amount of capital, surplus, and reserve fund of the association shall be as the managers may from time to time de- termine and as they shall deem necessary or expedient in their discretion for the conduct of the business of the Association and to provide for losses and protect the shareholders against per- sonal liability or assessment." The certificates representing the shares shall contain a clause " stating in substance that the holder thereof is subject to all obligations and liabihties of, and entitled to all the privileges of, a member of the Association and resting on the shares represented by such certificate as fully as if he had signed the original Articles of Association.'' In order to illustrate how this company secures a virtually Umited Hability, the following clause from its bond issue is inter- esting : "no person or future shareholder, officer, manager, or trustee of the Express Company shall be personally liable as partner or otherwise in respect to this bond or the coupons per- taining thereto, but the same shall be payable solely out of the assets assigned and transferred to the said Trust Company or out of other assets of the Express Company." The business of the company is governed by a board of man- agers which forms a self -perpetuating body. The articles provide that upon the written request of the holders of one third of the shares, a meeting shall be called by a board of managers ; and at any meeting the officers may be removed by a two- thirds vote. The property of this company is in the custody of trustees elected by the board of managers from among its own members. In this way the right to sue for any breach of con- tract or injury to the company's property is vested in a small number of men, avoiding the necessity of making all the members parties to any suit. Origin and Development. — The joint-stock scheme of busi- ness organization, like the representative scheme of political 68 BUSINESS ORGANIZATION AND COMBINATION organization, may be traced to many and early rudiments. Now but a trace or suggestion of the idea is found, again a clear-cut but fleeting application of it; in some cases it is combined more or less loosely with the corporation, in others not. It would be unwise in the present state of our knowledge to attempt a complete and connected account, but a brief sketch which may touch accurately upon some salient points of origin and develop- ment should interest those who like to trace the roots from which things grow. We know that in the twelfth centiury associations were formed in the Italian city-states among the subscribers to the public debts. These subscribers contributed on shares, and their associations in several respects resemble companies of subscribers in modern joint-stock concerns, — though they were more like bondholders than stockholders.' Later, joint-stock banks were organized, notably one in Genoa (1419), and finally in 1694 came the great joint-stock Bank of England. These financial joint-stocks developed the idea of raising large capital by means of selling many small equal shares. But meanwhile the joint-stock idea was being applied and developed in other fields. Probably this appears earliest in maritime trade. In the early commandite partnerships already described, we at once observe that the special or inactive partners were investing capital without active participation in manage- ment, somewhat after the fashion of shareholders in a stock com- pany. And by the fifteenth century we actually find business xmdertakings in which a single individual or a group built and operated vessels for profit on a joint-stock basis. Indeed, as early as the thirteenth century, under Venetian laws, we are told that sea voyages were conducted somewhat as follows. The ship- owners were not traders, but acted as entrepreneurs of ocean transportation. The owners would build a ship as partners in the venture. Before building, the size and cost of the vessel would be determined. Then, if any member should fail to contribute his share, he would become actionable. If he should 1 See Lehmann, Geschichtlkhe Entwickelung des Aktienrechts (Berlin, 1891), pp. 14-17. JOINT-STOCK COMPANY ORGANIZATION 69 die before payment, however, his heirs were not to be bound. If it were desired to enlarge a ship, a majority vote of the mem- bers would decide. The venture would be governed by a board of four, composed of a paironus representing the shipowners, a mariner, and two representatives of the merchants who had chartered the vessel. The business side of the vessel's opera- tion was managed by the patronus, and he paid the wages of the sailors. While on the voyage the partners could not sell their shares ; and, in any case, the patronus had certain prior rights to purchase shares.' Most interesting of all, however, and of direct importance to an understanding of the development of the joint-stock idea in EngHsh-speaking countries, is the history of the rise of that idea in the craft gilds. This began during the fifteenth century, and became well established by the seventeenth. Doubtless the forces at work were the accumulation of funds in the gild treasuries or in individual hands, and the growing possibility of larger business operations. Thus cash from fines and entrance dues would accumulate, successful merchants would leave be- quests, and returns from investments would accrue. Such funds were employed in various ways, as in making loans to young men and in purchasing raw materials for the gild members. A case in point occurred in 1482, when the Pewterers' Company bought tin as a profitable investment of their surplus joint funds. Also groups of rich members of certain gilds appear to have been formed with the consent of their fellows for purposes of private speculation ; and here, of course, the joint-stock was separate from the corporation and without a definite legal status. Pro- fessor Unwin tells of an instance in the reign of James I in which the same Pewterers' Company mentioned above allowed several of its members to form a copartnership with the aim of raising a joint capital to purchase tin. In 16 15 the company itself ventured £800.2 ^ \{xxIq later, the feltmakers attempted to > Schmoller, "Die geschichtliche Entwickelung der Unternehmung," in Jahrbuch fur Gesetzgebung, Verwaltung, u. Volkswirtschaft, 1893, Vol. XVIII. Cf. Weber, Zur Geschkhte der Handdsgesellschajtm im MiUeUUer (Stuttgart, 1889), p. 18 ff. 2 Unwin, Industrial Organizalion in the idth and 17th Centuries. (Oxford, 1904.) 70 BUSINESS ORGANIZATION AND COMBINATION apply the joint-stock idea to an industrial corporation and to raise capital from outside the company.' The scheme failed, however, whereupon a nominally separate company of " stockers and shareholders " with a capital of £5000 was formed to buy wool. In this case an individual who had loaned them £500 sued and obtained judgment against the Feltmakers' Company (1625), it being held that the company in its capacity as a cor- poration had borrowed the said sum and " did employ the same in stocke." Somewhat inconsistently, the individual feltmakers were held liable under this verdict and some seem to have been imprisoned for debt. The earliest case of an industrial enterprise (not a gild) or- ganized on a single joint-stock basis that has come to the writer's attention is that of a mining company as chartered by Eliza- beth in 1568.^ Steps were taken to form this company as early as 1561; and from 1564 to 1568 it existed as a kind of partner- ship, or unincorporated joint-stock company. The ownership of the enterprise was divided into 24 shares, part of which were held in Germany. In England, the average price re- ceived was £1,200 per share. Large as this amount is, it was merely a payment for the privilege of entering the enterprise, and heavy calls were made to defray working expanses. One of the earliest balance sheets ever prepared by a joint-stock cor- poration was presented by this Society of the Mines Royal in 1571.' With the granting of monopoly charters by the Stuarts, it became not uncommon for the individual masters who com- posed the corporations to seek to raise a common fund for buying materials and supplies on advantageous terms. Some- times the subscribers furnished supplies of the various materials 1 Unwin, op. cit., p. 157. The prospectus is interesting. "The Company of Felt- makers London thereunto moved by sundry mischiefs and miseries they have endured by the Company of Haberdashers of London have resolved for remedy thereof and for Government of the poore of their trade and profyt of such as will come with them therein to buy a Stock or bank of money for the taking in and buying up of all the wares they make into their own hands which Stock is projected to be £15,000 to be raysed by themselves and such as will adventure with them." 'Price, English Patents of Monopoly (Boston, 1906), pp. 50, 131. ' Scott, W. R., The Constitution and Finance of English, Scottish and Irish Joint- Stock Companies to 1720. (Cambridge, 1910.) Vol. II, p. 388. JOINT-STOCK COMPANY ORGANIZATION 71 needed in the industry, in place of cash. Thus the joint-stock idea crept into industry. These early joint-stock experiments mostly failed for want of a suitable legal machinery and organization for administer- ing responsibly their collective capitals. For illustration, the Pewterers' joint-stock group ended with a suit by the majority holders against a leading member. Meanwhile, some of the great medieval trading companies were operating on a joint-stock basis. Probably the earliest of these was the Russia Company formed in 1553 with a capital of £6000 subscribed in 240 shares of £25 each.' This company soon became narrowly monopolistic, and in 1604 a Parliamen- tary committee complained that " the directors limited the proportion of stock held by individual members, made 'one piurse and common stock,' consigned their goods to one agent in Moscow, and on the return voyage to one agent in London, through whom they disposed of all imported commodities, and then rendered what account they pleased." ^ The most typical case, and ultimately the most highly de- veloped one, was the East India Company. In 1599 a number of merchants subscribed some £30,133 in shares carr}ang from £100 to £3000, and petitioned the crown for incorporation as a joint-stock company on the groimd that " the trade of the Indies being soe remote, could not be traded on but on a joint and united stock." A charter was granted in 1600. At first, voyages were undertaken by groups of members on joint-stock, and not by the company in its corporate capacity. In 161 2, however, the company decided to trade on a common joint-stock as a company, profits to be shared according to the amounts sub- scribed; and £429,000 was raised for voyages to be made during the four succeeding years. At the end of that time a second joint-stock was raised, and others followed it. These were ' See Scott, Joint-Stock Companies to 1720, Vol. II, p. 36 ff. The reasons given contemporaneously are interesting. " And lest any private man should bee too much oppressed or charged a course was taken, that every man wiUing to bee of the socitie, should disburse the portion of twentie and five pounds a piece ..." The risks of trade with a new and savage country made the establishment of a joint- stock desirable. ' Hewms, English Trade and Finance (London, 1892), p. 34. 72 BUSINESS ORGANIZATION AND COMBINATION all separate ventures, though having the same directors. The capital fluctuated from time to time, and the shares were not equal and readily transferable. In the second half of the cen- tury, stocks were subscribed for longer periods ; and the joint- stock became a definite sum, with equal shares, transferable only by purchase and sale in the market. Omitting that in- teresting bit of medieval high finance by which the old and new East India Companies were merged, we hasten on to note that after this time joint-stock corporations sprang up in great num- bers, forming so rank a speculative growth during the early years of the eighteenth century that in 1720 the " Bubble Act " for- bade joint-stock companies as public nuisances, and for over one hundred years thereafter this form of business organization was illegal in Great Britain. Like most such prohibitions, the statute was ineffective. As a result of this little excursion into history, we conclude that the joint-stock company is the result of a long evolution. Traces of the joint-stock idea are found wherever a group of men own shares in a common property, as in land, workshops, and ships. It is suggested, though not realized, in the early monies of the Italian cities (twelfth century), which were formed by compulsory loans from the citizens who received interest on their contributions. But joint-stock, in the present-day sense of transferable shares which indicate participation in the risk and the net earning of a business undertaking, awaited the de- velopment of commerce and industry on a larger scale. During the fifteenth and sixteenth centuries we find it springing up here and there, most notably in shipowning and craft-gild operations. Then came the full realization in the great trading companies and banks of the late sixteenth and the seventeenth cen- turies. The medieval corporations (gilds and regulated com- panies) had merely correlated the activities and capitals of individuals in a loose fashion; but a need for more closely associated enterprise arose. Then groups of merchants and of craftsmen who could raise a capital organized for single ventures in common; then for a series of ventures; till we find joint-stocks created as permanent funds divided into trans- JOINT-STOCK COMPANY ORGANIZATION 73 ferable shares. This development was partly due to greater experience with and improvements in business organization itself, and partly due to the requirements of larger business and more capital — especially fixed capitaL There appears to be no way of estimating the extent to which the unincorporated joint-stock form of business organization is now in use. In England, incorporation is more expensive than in America, and one result is that mere joint-stock companies are common there. In the United States, on the other hand, relatively few large businesses are not corporations. Most of the exceptions are organizations formed under the statutes of New York, and the most notable exceptions are the great ex- press companies. The Pierce-Fordyce Oil Association is another prominent example of pure joint-stock company. Establishments Persons 189s 1907 Increase 189s 1907 Associate-direction industrial units 1,350,88a 1,813,922 35% 8,554,718 12,984,038 J.. Partnerships (Mehrern Gesellschaftern) . . 55,239 82,370 49% i,47S,o8i 2,151,248 2. Commandite associa- tions {Kommandit- gesellschaften) . . 1,117 1,636 46% 90,155 129,907 3. Commandite associa- tions with shares {Kommanditgesell. auf Aktien) . . . 334 340 1-7% 42,945 47,825 4. Limited-liability as- sociations {Gesell. mit beschrankter Haftung .... 1,028 11,001 970% 66,055 534,328 5. Joint-stock companies (Aktiengesell- schaften) . . . 4,749 9,832 i°7% 801,143 I 759,406 6. Mining Companies {Bergrechtlichen Ge- werkschaften) . . 440 Sio 15% 132,104 229,993 74 BUSINESS ORGANIZATION AND COMBINATION The preceding table shows both the relative and the absolute importance of the joint-stock company and its related forms in Germany. Forms 3 to 6, inclusive, are all imincorporated associations having transferable shares. Related Forms. — ■ Closely resembling joint-stock companies are two distinct forms of business organization: "mining partnerships," and " limited partnership associations." Mines and oil wells are generally operated by " mining partnerships," and, as the supreme court has said : " Mining partnerships, as distinct associations with different rights and liabilities attach- ing to their members from those attaching to members of ordinary trading partnerships, exist in all mining communities." ^ Several reasons are advanced by lawyers for the existence of these " abnormal " partnerships, among them being (a) the large num- ber of members usually embraced, and (b) the necessity for con- tinuous operation in order to prevent great loss of property from flooding, etc. The economist would add that, in such extrac- tive industry as is involved, the life of the property is peculiarly limited and often uncertain, a condition which may help ex- plain the fact that in mining partnerships the profits of opera- tion alone are concerned, the mining property generally being outside the scope of the partnership proper. In view of the foregoing characteristics, it is easy to account for some of the most saUent legal attributes of this form : (i) under it, shares may be transferred and new members be brought in without disturbing the ownership of the property or dissolving the operat- ing partnership. Even the death of a partner does not work a dissolution of the firm. (2) Management is delegated to a board whose powers are narrowly limited to the necessary business of the firm. Limited partnership associations are created by statute in a few States.^ These associations are sometimes called quasi- corporations, but may be more accurately styled limited- liability joint-stock companies. In Pennsylvania, at least, stock is only transferred subject to the election of the purchaser > Kahn ji. Cent. Smelting Co., 102 U. S. 641 (1880). (Conyngton.) ' Michigan, Pennsylvania. JOINT-STOCK COMPANY ORGANIZATION 75 by the existing members. " Stock may be issued, by-laws passed, a seal may be adopted, and in the home state they may sue and be sued under the association name." ^ Advantages and Disadvantages. — Inasmuch as the joint- stock idea is generally associated with the corporate entity, and joint-stock organizations are generally also corporations, full discussion of the former will be withheld at this point and be presented in the next chapter. Here we will merely note some of the chief advantages of the joint-stock principle over the or- dinary partnership idea. To begin with, it is most obvious that this principle goes far toward removing the partnership limita- tions for raising large capital. By the sale of a large number of transferable shares a much greater aggregate fund can be amassed. Even when the holder is liable to the full amount of his property, the relatively ready salability of a joint-stock share gives him some chance of safeguarding his interests ; and the fact that only the authorized agents of the company can bind it and him further reduces the risk as compared with partnerships. More- over, the fact that the operations of the company are carried on under the direction of a board of managers under delegated authority makes active supervision by the investor unnecessary. In short, the joint-stock organization furnishes a more efficient machine for appealing to an investing class. Again, the joint-stock principle results in a greater stability of organization. By this is not necessarily meant perma- nence or endurance in time, but a decreased liability to dis- ruption at any given time. The relation between investors is less personal and requires less mutual acquaintance and trust. Membership is conveyed by transferable shares. Accordingly it may change without dissolving the organization, a fact which differentiates the company from the firm. Finally, the joint-stock idea provides a way for the efficient management of large business ventures. It appHes the prin- ciple of association not only to capital but also to management, for in joint-stock companies a large number of investors vote for directors who as their representatives administer the col- ' Conyngton on Partnership Relations, p. 28, 76 BUSINESS ORGANIZATION AND COMBINATION lective property of the company. Though, as we shall see, not free from weaknesses, the plan of delegated control furnishes the element of concentration which is essential to prompt and con- sistent action by a large body. It may be added that from the private point of view the joint- stock company, in common with partnerships, possesses certain advantages over corporations. It is not subject to franchise and other taxes levied on corporations. " Unless the statute expressly includes joint-stock associations they are not taxable upon their capital under a statute subjecting all moneyed or stock corporations deriving an income or profit from their capital or otherwise, to such taxation." ^ The members of a joint-stock company are taxable as partners rather than as corporation stockholders. It might prove an advantage, too, that, being a contractual relationship, a joint-stock association may by mutual consent go into volimtary insolvency at any time and wind up its affairs. In general it is a more simple and easy matter to dissolve such an organization than a corporation. As to disadvantages, the chief point against the stock com- pany, as compared with the partnership, is the greater likeli- hood of waste and inefficiency attendant upon an indirect, del- egated management. This is an old count. As long ago as 1776, Adam Smith wrote: " The directors of such companies, however, being managers rather of other people's money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which partners in private copartnery frequently watch over their own. . . . Negli- gence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company." ^ The spur to zeal and fidelity is not so sharp as in the partnership where the partners are the active managers. And there may be a lack of identity of interests between the company and its management, leading to manipxilation, speculation, and ruin. In a word, moti- vation is less direct and certain than in the simpler forms. • Cyclopedia of Law and Procedure, Vol. XXIII, p. 468. 2 Wealth of Nations, Bk. V, Chap. I, Part III, art. i. JOINT-STOCK COMPANY ORGANIZATION 77 Another notable disadvantage, not as against partnerships, but as compared with corporations, lies in the joint-stock company's lack of a separate legal personality. It is unlike the corporation in that the law gives it no entity separate from its members. This affects its permanence, its position in actions by and against itself, and its jurisdictional status, (a) Being at common law more closely identified with its members, its existence is not so well guarded against the vicissitudes of life as is the corporation's; it is more readily dissolved, (b) Barring statutory qualifica- tions, all the members of a joint-stock company are necessarily joined in actions either by it or against it. Similarly, a member cannot sue or be sued by his company on a contract between them, for the law holds that he and his company are one, and logic demands that he be prohibited from playing a double part.^ Finally, we remember that the members of joint-stock com- panies generally have unlimited liability. At common law they are in precisely the same position as are general partners. This condition is modified by statutes in some of the States, and lia- biUty may be limited by special agreement with creditors. As remarked in discussing partnerships, this is a disadvantage from the private point of view, and only a mixed advantage from the public standpoint. From the private standpoint, it is a disadvantage that joint- stock companies are less secret than simpler forms with their smaller memberships; their business plans and financial stand- ing are more likely to leak out. Social Point of View. — ■ The joint-stock principle goes a great way toward suppl)dng that continuity of business organization which is so necessary to the best development of industrial plans. Though not associated with a legal personality, the joint-stock company may draw upon the whole class of investors for its members and continue undisturbed by altered personnel. ' There has been some remedial legislation on this point. See People ex rel. Piatt V. Wemple, 117 N. Y. 136; Van Aerman v. Blustein, 7 N. E. 537 ; MacGeorge See below, p. 138. Il6 BUSINESS ORGANIZATION AND COMBINATION ness organization should be encouraged where the greatest capi- tal and the maximum stability are not essential.' A healthy struggle between different forms of organization may still have salutary results. ' See above, pp. 47, 62. CHAPTER VIII SIMPLE BUSINESS TRUSTS' When the word " trust " is mentioned, most men at once think of some illegal combination. The term is in bad odor. Yet if one were to inquire of a lawyer concerning trusts one would probably be told that they are very desirable social institutions, and that they are perfectly legal. Moreover, in the conserva- tive State of Massachusetts, one could find scores of harmless business organisations which are carried on under the trust form. Whence comes this seeming paradox? The trusts thought of by the lajnnan are the " Standard Oil Trust," the " Sugar Trust," and the Uke. These are all more or less monopoHstic combinations of corporations, and will be discussed in a later chapter on " Combination Trusts." The lawyer, however, has in mind the general idea of the trust in- stitution, which is a very different matter. While trusts may be readily perverted when used for combinations, they are necessary and beneficial in many other relations. The lawyer may be thinking of the trustees appointed by the courts to administer the estates of deceased persons, infants, etc. Also, in some States, trustees are chosen to carry on businesses for groups of individuals, and to supervise investments. Such uses of the trust institution need involve no monopoly; and they need combine no corporations. They may be entirely legal, and beneficial to all concerned. To the partnership, the joint- stock company, and the corporation, therefore, the trust must be added as a form of business organization under which a simple association of individuals may legally carry on a business. • See Report of Massachusetts Tax Commissioner upon Voluntary Associations, Boston, 1912; Chandler, Express Trusts under the Common Law, Boston, 191 2; Stimson, "Trusts," Harvard Law Renew, I, pp. 132-143 ; Perry on Trusts, passim. 117 Il8 BUSINESS ORGANIZATION AND COMBINATION Trusts Defined. — The simple business trust which forms the subject of this chapter is a form of business organization under which the legal title to property is vested in an individual trustee or individual trustees/ and the property is managed by them in the interest of the former title holders who become " bene- ficiaries " {cestuis que trustenf). The trustees thus become, not agents — as are partners — but principals ; and they can make contracts, and can sue and be sued in their own names. The beneficiaries, in turn, are neither partners nor agents. They cannot convey the property to others; nor can they usually maintain any action at law for its protection. They only have the right of action against the trustees. With such a relation existing between trustees and beneficiaries, it is apparent that without any special provision to the contrary the debts of the business lie against the trustees, not against the beneficiaries. Under the common law, trustees may and do issue certificates of beneficial interest, the capital embraced in the trust being divided into shares. These certificates are much like the stock certificates of a business corporation. Origin of Trusts. — The idea of the trust may be traced di- rectly back to medieval times and to the doctrine of " use." This doctrine arose from a desire on the part of churchmen to evade the statutes of mortmain, which then limited the rights of those who would fain have willed estates to them in per- petuity. Accordingly, the wily men of that day had such es- tates deeded to some friend for their " use," which meant that they retained the right to any income from the estate; and for a time this practice was effective. Clearly, this process is very similar to transferring property to trustees to be managed by them in the interest of certain beneficiaries. Thus, at the very outset, trusts were associated with evasion of the statutes. The trust proper appears to have developed from the necessity of devising some suitable agency for managing the property of incompetent persons ; and such agencies were early recognized ' Corporations may act as trustees, as is the case with trust companies. In such cases, the trust is the function ; the organization is a corporation. SIMPLE BUSINESS TRUSTS 119 at common law. Indeed, they were imposed by the law in the interest of society. As developed along this early Une, the trust was merely an equitable right in real or personal property. It involved the creation of a trustee or group of trustees who had possession of the property as the legal owner, and whose proper function was to carry out the terms of the trust instru- ment with regard to that property in the interest of the ultimate owner or owners in equity, — the " beneficiaries." As early as the middle of the nineteenth century, this idea was used commercially in England for the management of investments. Classes of Trusts. — Lawyers distinguish several classes of trusts : active and passive, simple and special, express and re- sultant, etc. The terms active and passive are self-explana- tory. A " simple " trust is one established without any special instructions to the trustees, thus allowing great discretion on their part. An " express " trust is created by an instrument which designates directly and expressly the property, persons, and purposes of the trust ; whereas a resultant trust is one which results from the construction put by the law upon some existing or past relation. Practically all business trusts may be classed as active express trusts ; but, as it is next to impossible to define the duties and policies of trustees, they are all virtually " simple " trusts. From the economic point of view, two classes of trusts are clearly distinguishable : (i) trusts of real estate, and (2) trusts of personal property. Personal property trusts, in turn, are of two kinds : (a) industrial trusts for carrying on some manu- facturing, mercantile, or other business; and (b) securities- holding trusts, organized for investment in or control of cor- porations or joint-stock associations. In Massachusetts, where the trust form is now most used, the State has for all practical purposes prohibited the use of cor- porations for developing, holding, and managing real estate. Therefore, the trust is largely used in this field, most of the real estate development of Boston being carried on in this way. The advantages of so doing have been stated in the following terms : — I20 BUSINESS ORGANIZATION AND COMBINATION "The rights of shareholders, the terms of office of trustees, their compensation, powers, duties and limitations are more satisfactorily- regulated by the terms of the trust agreement which ca!n be drawn to meet the special needs in each case than could be possible under the general corporation laws ; and as the property under any specific trust is usually hmited to one parcel and one set of shareholders, it seems wise to leave the management, as far eis practicable, in the hands of trustees selected by the owners with their powers and duties carefully defined rather than to give over its supervision to the chang- ing officials of the State." ' Industrial trusts are not nearly so common as real-estate trusts, and are generally small. Only one having over twenty shareholding beneficiaries existed in Massachusetts in 1912. The majority of such trusts appear to have been reorganized from corporations for the purpose of avoiding publicity, liability for the Federal income tax, and other corporation disadvantages- Here would come such cases as the McKay Sewing Machine Association ; ^ inventors who assign inventions and patents to trustees ; ' " car trusts " ; etc. Car trusts are organizations for supplying railway companies with cars. The trust, which is often formed by officers of the company, issues certificates to pay for the cars, which cars are leased to the company for a rental sufficient in amount to cover interest and to form a sink- ing fund for paying off the full price of the cars. These leases ' Report of Tax Commissioner, above cited, p. 19. The reader may be interested in a concrete example. The Terminal Hotel Trust is a Massachusetts realty trust organized in 1899, and owning lauds and buildings in Boston. Its condensed balance sheet is : — ASSETS LIABILITIES Land and Buildings .... $725,000 Preferred Stock . . . . $359,000 Cash ... 2,2sS Common Stock 350,000 Payments due on Essex Street Notes Payable 50,000 addition 162,827 Mortgage Loan 70,000 Reserve for Depreciation . . 28,042 Profit and Loss 24,043 Total $890,085 Total $890,085 Trustees : Francis Peabody, Henry M. Williams, Leslie C. Weed. ' Hoadley v. County Commissioners, 105 Mass. 519. ' Mayo V. Moritz, 151 Mass. 481. SIMPLE BUSINESS TRUSTS 121 are held to form a conditional sale, as they are in the shape of a contract of sale providing that the title to the cars shall remain in the vendor until the purchase price is fully paid. The bene- ficiaries, or vdtimate equity owners of the cars, are the manu- facturers or original owners, and they are virtually selling the cars to the railway company on the installment plan through trustees, who issue trust certificates to them to represent their interests in the payable installments. These certificates are transferable ; and the death or withdrawal of a member of the car trust does not dissolve the association. The members can- not be bound by the trustees on a contract entered into for a purpose which does not come within the objects of the trust, and they cannot make themselves liable on such a contract un- less they imanimously authorize it.^ Securities-holding trusts have been formed of late years in some States which do not authorize corporations to hold the stocks of other corporations, especially where the law prohibits the consolidation of public-service corporations, — e.g. Massa- chusetts electric railway companies and gas companies. Such organizations take us over into the field of " combination trusts," which are to be discussed later. The procedure is simply to put a majority of the stock of several companies into the hands of trustees, and these trustees then issue certificates in any amount desired.^ In such cases, question of creating a monopoly can hardly exist ; for such industries are naturally monopolistic. The chief trouble with such trusts has been that they have often been grossly overcapitalized. Also they have increased the extent of their monopoly by going into the business of furnishing the materials and supplies needed by the subsidiary com- panies.' They are virtually holding corporations, but are not subject to the laws regulating corporations. Their legality may be questioned. But there is a kind of holding trust in existence to-day, which, ' On car trasts, see Roberts' Appeal, 92 Pa. St. 407 ff. ; McGourky 11. Toledo, etc. Ry., 146 U. S. 536 ; Ricker v. American Loan and Trust Co., 140 Mass. 346 £f. ' See Bepl. Indust. Com., Vol. I, pp. 1131, 1134. ii74- ' See Report of Board of Gas and Electric Light Commissioners (Mass.), April 3, 1911. (On Bay State Gas Company.) 122 BUSINESS ORGANIZATION AND COMBINATION within certain limits, is entirely legal, however undesirable it may be. Such trusts are known as " voting trusts," and are sometimes called " stock pools." The votiag trust is a kind of special express trust, which may be defined as a form of organi- zation in which holdings of stock are combined by placing them in the hands of trustees to be voted in a stipulated manner. A voting-trust agreement is entered into; and the stocks are transferred to the trustees and taken out in their names, negoti- able trustee receipts being given by them in exchange. They are authorized to collect dividends, and are bound to pay such dividends over to the holders of the trust receipts. Unified vot- ing is the object in voting trusts, and the ownership of stocks is not vested in the trustees : they are trusts of management, not of property. This second class of holding trusts does not in- volve a combination of corporations, and is undoubtedly legiti- mate when used reasonably. It is often desirable to insure a uniform and undisturbed policy on the part of a whole corpora- tion, or of a group of stockholders within the corporation, and by transferring a controUing amount of stock of the company, or all the stock of the group, to a board of trustees, with definite and binding instructions as to how to vote, this end may be secured. The, trustee's receipts may be transferred Avithout affecting the voting of the stock. In this way a dominant majority within a corporation may rest easy without fear of its holding being decreased, a minority may insure a imited front upon all occasions, or a whole body of stockholders may prevent outside interests from buying in and manipulating their corpora- tion. The voting trust, however, may be abused by majorities, and may be used to further manipulative plans. Its use should be carefully safeguarded by law. The only limits to the legality of these voting trusts at present are that they must be for legal objects and not be discrimina- tory against other stockholders, they must be formed for a reasonable duration of time — probably not for a longer period than the life of a proxy — and they should be open to all stock- holders desiring to enter. New York statutes specifically provide for voting trusts. SIMPLE BUSINESS TRUSTS 123 Advantages and Disadvantages of Trusts. — If this form is at hand for organizing business imits, and has actually been used in not a few cases, one's next inquiry is: What are its po- tentialities ? Why is it used at all ? Why is it not more used ? The answer to these questions involves a discussion of the ad- vantages and disadvantages of the simple business trust. Applying the six tests of efficiency of business organization, we note first that the trust is readily and cheaply formed. It does not require the sanction of the State. In facility of forma- tion, then, it is on a par with the partnership. As to capital, the trust lies between the partnership, as ordi- narily organized, and the corporation. The trustees issue certifi- cates which accommodate a number of investors ; but the char- acter of the management makes it impossible to appeal to so wide a market as do the stocks of a corporation. Furthermore, the trust certificates can be sold or assigned only in States which authorize by statute the assignment of those rights to personal property which are contingent upon suit at law (chases in action). In other States the buyer may have to file a bill of equity to get the title. The liability of the members of trusts is in practice handled very satisfactorily, from the point of view of the investor. It is common to make an agreement that neither the trustees nor the beneficiaries shall be liable for the debts of the trust, which pro- vision is made a part of every contract entered into by the trus- tees. In a word, it is provided that the trust property alone shall be looked to for the satisfaction of debts. This leaves the beneficiaries in a more desirable state than even the stock- holders of a corporation, as there would be no excess of par value of shares over value of property to be drawn upon. Unless some such agreement is made, it appears that the trustees are person- ally liable : trustees can be held personally for material ordered for a trust estate, and for contracts made.' The foregoing tests, then, are met fairly well. Aside from questions of legality, the crucial test, therefore, comes in the efficiency of direction. Here we find that the continuity of • Perry on Trusts, and cases there cited. 124 BUSINESS ORGANIZATION AND COMBINATION management is excellefnt; for trustees are not likely to be changed. In this the trust has an advantage over the corpora- tion for businesses in which continuity is highly desirable. It also appears that in practice trustees can handle business with more ease and dispatch than the average board of directors.* But the case is not so favorable on the important points of motivation and flexibility. True, the trustee is in equity bound to take such care of the trust estate as he would of his own prop- erty. That fact, however, can have but an uncertain and in- termittent motive force, and can not adequately take the place of responsibility to shareholders. The beneficiaries have no power to remove trustee managers. They possess no remedy for unskiUfulness on the part of trustees ; and they can remove trustees who are guilty of fraudulent acts only by means of an uncertain bill in equity. As to flexibility, the trust is sadly de- ficient. The deed of trust once drawn up and put in force, its provisions are not subject to change except by the unanimous consent of all parties. The courts cannot change the powers of trustees, nor alter the terms of the trust agreement. And a trustee who has accepted a trust can neither renounce the duties and responsibilities of his office, nor delegate them to another. We must conclude that the trust will supply a safe and efficient instrimient for direction only in case of businesses which are little subject to change, and which require relatively little discretionary action on the part of the managers. Such a business is the holding and managing of real estate. Quite in accord with this conclusion is the fact that the trust is very stable and enduring. Trusts may be established for any reasonable time, and upon the death of a trustee his duty passes to his survivor or survivors. While a large percentage of the corporations formed each year soon pass out of existence, such business trusts as have been established have with few exceptions endured. A final disadvantage of trusts lies in their doubtful legal status. As a general proposition, at common law, trusts are quite legal : ' If there were many trustees this would surely require some modification of the common-law rule that all the trustees must concur in an act to make it binding. SIMPLE BUSINESS TRUSTS 125 any one who can enter into a contract, or make a will, or deal with legal title to property, may vest property in trustees. But, of course, this proposition is subject to the limitation set by public policy and by statute law. Trusts for combining corporations may be illegal as being the result of ultra vires acts by the corporations. New York and other States forbid trusts of real estate except in certain cases ; and some States have abol- ished all trusts and uses except those which are established by will or deed. But this is not all. It is not entirely clear whether trusts as forms of business organization will come under the law of trusts or not. It appears that in Massachusetts the trend of the deci- sions has been toward regarding voluntary associations with a trust agreement as a form of partnership. In some cases, how- ever, they have been brought under the law of trusts. It seems not imlikely that in other jurisdictions, business trusts having agreements which limit liability and vest all property rights in the trustees would be regarded as quasi-corporations. A re- cent Massachusetts case suggests that in the determination of this point the emphasis will be laid upon " the substantial purposes of the enterprise " rather than upon these forms and agreements." ' In addition to this element of uncertainty, there is the further fact that the pubUc is inclined to be suspicious of any organiza- tion bearing the name " trust " ; and even in Massachusetts, legislation restricting the use of simple business trusts has been proposed of late. Trustees as Entrepreneurs. — How is the entrepreneur's function filled in the trust ? What of the trustee's position as an entrepreneur? Under the common law, the situation is rather anomalous, being somewhat Uke that in a receivership.^ The trustee is neither a pure entrepreneur, nor a mere salaried em- ploye. His risk is more Uke that of the entrepreneur, though it is modified by his right to reimbursment for losses incurred •Williams v. Boston, 208 Mass. 50. See Edwards v. Warner Linoline, etc. Works, 168 Mass. 566, for a case which indicates that the business trust might be dealt with by the courts as a corporation. ' See below, p. 336. 126 BUSINESS ORGANIZATION AND COMBINATION through acts performed in good faith. But his reward as trustee is in the nature of a stipulated commission, and he may not make a profit in his trustee capacity. His mixed status appears in the ownership of the trust property : The legal title is in the trustees; but in equity the beneficiaries are the owners, and the trustees are limited by the terms of the deed and by the principles of equity. Like the receiver, although to a less extent, the trustee is subject to considerable supervision by the courts. As modified by special agreements, the business trust is made to partake largely of the nature of a corporation, except that the trustees may always be more independent of the shareholders than are directors. Agreements often specifically divest the beneficiaries of all title in or to the trust property, deprive them of the right to an accounting, and bestow upon the trustees all the powers of corporation directors. As already noted, too, such agreements generally provide that neither the beneficiaries nor the trustees shall be personally responsible for the debts of the trust. Social Point of View. — Considered from a social standpoint, the business trust is so liable to abuse, and requires such safe- guarding, that it may fairly be called a dangerous institution. It will be remembered that the idea of the trust developed from the need of a suitable agency to manage the estates of incompe- tent persons, not to conduct businesses for competent persons. We have seen that in its very origin the trust form savored of the evasion of law. It has appeared that the securities-holding form of trust has been used to evade corporation laws. In one case, the courts have held that " the originators of this scheme have endeavored to avail themselves of the advantages of a corporation, under an association as partners " ; ^ and again in Hussey v. Arnold, the Massachusetts court said : — "The agreement creating the trust has peculiar provisions. The object of it, apparently, was to obtain for the associates most of the advantages belonging to corporations, without the authority of any legislative act, and with freedom from the restrictions and regulations imposed by law upon corporations" (185 Mass. 203). ' Tyrrell v. Washburn, 6 Allen (Mass.), 474. SIMPLE BUSINESS TRUSTS 127 While these cases were decided in a State whose policy is to recognize no forms intermediate between the partnership and the corporation, they throw light on the general significance of the trust as a form of business organization. In order to give the utmost reasonable safety to the use of business trusts, in the interest both of investors and of the public, it would seem to be the part of wisdom (i) somewhat to limit the field available for them, and (2) to safeguard their form. Business trusts appear best adapted for the conduct of invest- ments in real estate ; and, to say the least, are not needed for ordinary manufacturing and mercantile business. Wherever used, the following restrictions should be adopted: Trusts should be limited to a reasonable term of years, — say ten. They should be formed only by means of a written deed of trust accessible to all beneficiaries. The beneficiaries should not sur- render all title to the trust property ; and the deed should em- power them to withdraw their property upon reasonable notice. The same policy which is applied to the control of the capitali- zation of corporations ought also to be applied to the trust. In conclusion, it may be said that the essence of the matter lies in the fact that the trust institution originated in the need of an organization for administering the property of those who were incapable of attending to it themselves, and consequently it is not naturally adapted to the needs of active and intelligent investors. While the trust supplies a stable and enduring or- ganization, as used in business it almost of necessity places in the directors (trustees) a discretion which is out of all proportion to their actual responsibility. It is not a safe form, viewed from the standpoint of society. CHAPTER IX COMBINATION ORGANIZATION IN GENERAL Thus far we have examined organizations which may be called simple associations. In each of the forms discussed in the fore- going pages, the individual has been the constituent unit, and, in each case, the individuals as units have been simply and di- rectly associated. Formally, at least, the natural persons who are the members have stood in an immediate relation to the direction of the management of the organization. The highest and most efl&cient form of organization by simple association is the corporation. Now, in just the same way that the powers of a single individual are limited in comparison •with, the powers of an association of individuals, so the powers of a simple asso- ciation are more limited than those of larger and more complex aggregates. In political government, and especially in an im- mature and changing civilization, it would be deemed impossible to administer the affairs of a great continent directly, without the interposition of subordinate officials and local xmits having some discretionary powers; and, likewise, in business govern- ment, the extent of territory and amount of production that could be attended to by a simple direct association of business men is limited. If we call business " the market," we may conclude that with the growth of markets there would be a tendency to form larger business organizations, and that these larger organizations would necessarily be less simple and oper- ate more indirectly. The natural thing to occur would be the combination of existing simple associations into large compound organizations. Looking around us to-day, what do we see? On all sides we behold complex organizations which indirectly, through sub- 128 COMBINATION ORGANIZATION IN GENERAL 129 ordinate and simpler forms, deal with markets which are some- times world-wide in extent. Of course, independent simple associations, such as partnerships and uncombined corporations, continue to exist, just as the single-individual organization does ; and, moreover, combinations were not unknown in earlier times ; but a substantially accurate idea of the evolution of business organization will be gained if one thinks of a new cycle of de- velopment as opening about the time of the Civil War, or say 1870, and reaching a climax about 1898 — a cycle in which the constituent xmits more and more frequently became associations of individuals, and the resultant organizations were compound affairs or comjanations. It may be said that artificial persons (corporations) more and more form the units of the later asso- ciations. For over a generation we have been growing more and more familiar with the rich terminology of combination. The coliunns of the press bristle with " combines," " trusts," " associations," " pools," " consolidations," " rings," " merg- ers," and what not. In the following chapter the object will be to straighten out this confusion of terms, to analyze the forces which gave rise to the new cycle in the evolution of business or- ganization, and to prepare the way for later discussions by pre- senting some general principles of law as affecting combinations. Classes of Combination Organization. — Few readers, or writ- ers either, for that matter, discriminate carefully among the terms which indicate the various forms of combination; but there are as many different kinds of combination as there are kinds of simple association, and in dealing with these different kinds it will be found conducive to clear thought to apply the various terms according to their logical denotation and best usage. To combine is simply to become one of the parts of a whole, and a combination is merely a union of persons to make a whole or group for the prosecution of some common purpose. The idea of purpose is not separable from the meaning of the word as used to indicate unions of men, for men hardly unite without a common object in view; and it is significant that even the dictionaries use the word " confederacy " in defining human I30 BUSINESS ORGANIZATION AND COMBINATION combinations. Aside from the idea of purpose, however, the word " combination " is properly used as the most general and colorless term to denote any sort of union of persons, and will generally be so used in the following pages. The law, with which we are constantly touching hands in this subject, recog- nizes two classes of persons, the natural and the artificial, or corporate; and generally, in present-day business, persons of the latter kind are the ones which are directly concerned in the formation of combinations. Indeed it would be well if the word " association " could be used to indicate direct unions of in- dividuals or natural persons, for that word implies a personal relation, a linking together in fellowship, which is not found in the combination of artificial persons."^ This is, perhaps, a re- finement which cannot now be insisted upon, but it has been observed in these pages. When the term combination is used alone it will mean a compound combination, or combination of associations. Next, the idea of ** federation-" should be brought in. Fed- eration is alliance for mutual support, or a union by agreement of independent and autonomous powers for mutual benefit in relations external to any one member, and it implies that out- side of such external relations the members retain their inde- pendence and autonomy. Thus a federation, both in political and business life, is a relatively loose form of combination based upon mutual consent. Another general term is " consolidation." Consolidation, by the logic of words and by best usage, applies only to firm, compact alliances. It should, therefore, never be applied to federated organizations, but only to combinations in which the members are so compactly united as to lose a large measure of independent and autonomous existence. They are fused. For example, both the Southern Wholesale Grocers' Association and the United States Steel Corporation are combinations, but the former is a federation organization while the latter is a consolidation. The law recognizes the distinction between con- • Further substantiated by the fact that the Latin word socius (companion) is seen in the term ; and it is commonly used in connection with partnerships. COMBINATION ORGANIZATION IN GENERAL 131 solidation and mere combination, for the validity of consoli- dations, involving as they do a greater loss of individuality on the part of their members, depends upon statutory authority and not upon public policy; whereas combinations other than consolidations have their validity determined by public policy, and the laws rarely authorize but often forbid them. A " merger," as the term clearly indicates, is a form of or- ganization in which the identity of the parts is lost. The mem- bers are absorbed, as it were, into a common whole, and the merger is thus a complete and absolute consolidation. Though the term is loosely used, there is considerable legal authority for confining " merger " to consolid3.tions in which one business organization absorbs another or others and continues to exist, as when a railway system absorbs a branch line. In view of this fact, it is logical to use another term, " amalgamation," to in- dicate a consolidation in which all the combining organizations give up their identities, become fused, and coalesce in a new organization.^ An outline classification of combinations, then, would run somewhat as the following: — I. Simple Combinations : I. Association (direct combination of natural persons as in part- nerships). II. Compound Combinations : 1. Association (the loosest agreements directly between individual members of different associations: trade "asso- ciations," some simple "agreements," etc.). 2. Federation ^(combination of organizations which remain sep- arate and retain considerable autonomy : most simple "agreements" and pools). 3. Consolidation (combination of organizations in which, while members may remain nominally separate, direction of business is fused). a. Partial Consolidation : (i) Securities holding (direction of business organizations 1 Cf . Meyer v. Johnston and Stewart, 64 Ala. 603 ; Powell v. N. Mo. R. R. Co., 42 Mo. 63. 132 BUSINESS ORGANIZATION AND COMBINATION consolidated through stock ownership, with separate existence formally maintained). b. Complete consolidation : (i) Merger (complete consolidation, members of one busi- ness organization absorbed by another). (2) Amalgamation (complete consolidation, members of two or more organizations coalesce to form a new organization). In the preceding chapters, individual business organization and combinations of individuals into simple associations have been discussed ; in succeeding chapters the compound forms of combination will come up, forms in which the preceding simple associations are combined, making combinations of combina- tions. We enter the new cycle in which the combining units are generally corporations. From a more strictly economic point of view, all combinations may be classed as trade-combinations and industry-combina- tions. The trade-combination is a horizontal or parallel com- bination, as it were, for it reaches out and unites organizations which are competing on the same plane, or in the same trade, or which are in the same general line of business. This has been the most frequent type of combination and the one most in- veighed against by the public. On the other hand, an industry- combination is a vertical or sequence combination in that it unites organizations which are on different planes and which represent the successive stages or " trades " within an industry. The organizations combined are not competing side by side, but stand end to end, the one receiving the products of the other as its own raw material. The suggestive term " integration " has recently come into use to indicate this type. The expres- sion " industry-combination " is preferable, however, as setting it over against trade combinations. Moreover, it has none but economic implications, and it suggests more clearly the dis- tinguishing characteristic of the combination involved, namely, its inclusion of all or a large part of the subdivided " industry." A similar terminology is well established in the field of labor organization. COMBINATION ORGANIZATION IN GENERAL 133 Cases of trade combination occur to one in plenty, — parallel railways, local coal dealers, the sugar refiners, and so on. In- dustry-combination rarely occurs alone, but it is strikingly apparent in the steel and tobacco industries.' In the former, the whole scope of the industry, from ore to rail or wire, is com- bined under one management; and likewise in the tobacco industry, the growing, the curing, the manufacture of machinery used, the manufactiu-e of snuff, chewing tobacco, cigars, and cigarettes, the manufacture of licorice, — to say nothing of tin foil and cans and packages, — and finally the retailing of the finished product, — all have been more or less combined. Obviously, this saves capital in the storage, selling, buying, inspection, and transportation of materials between the stages. End-to-end consolidation of railways, to form a single long line, also resembles industry-combination. Such combination is hardly possible except in very large-scale industry; and it is greatly facilitated by simplicity and uniformity in the product. To integrate the piano industry, for example, would require the control of so many industrial fields, — metal, wood, ivory, — that it is hardly practicable. The question naturally occurs to one, does industry-combina- tion (sequence combination) not ultimately tend to trade-com- bination (parallel combination) ? Such appears to be the case. The most obvious reason for this conclusion is the fact that the existence of industry-combination results in a more highly con- centrated and dangerous competition; for huger aggregations of capital are involved and the struggle affects a wider range of productive processes. Consequently it becomes very desirable to limit competition. The truth of this point is evidenced by the fact that the progress made in industry-combination in the iron and steel industry, together with threats of further steps along the same line, was largely instrumental in causing the United States Steel Corporation. But more than this, the very purposes of industry-combina- tion tend to drive the combining units to monopoly. If the object be to secure control of a market, how can it be effectively ' See above, p. 33 i. 134 BUSINESS ORGANIZATION AND COMBINATION attained with strong competitors in the field? Or, if the end sought be control of sources of raw materials, ultimately we come to some limited natural resource, and monopoly becomes likely. So we conclude that the integration by any business organization of the various stages within an industry will gen- erally mean a tendency towards combination with other parallel business organizations, — that, or the elimination of the non- integrated organizations frorn the field. Occasions and Causes of the Recent Combination Movement. — The forces which called the combination movement — or " trust movement," as it is popularly called — into being must be of profound interest to economists and statesmen, and such at- tention has been devoted to them that the author could hope to add little knowledge concerning the subject. They will, how- ever, bear further analysis and restatement. In any movement like this the forces and conditions may be divided into those which drive, those which beckon, and those which facilitate. The last ones may be called the occasions for the movement as distinguished from the causes. First, then, the driving forces. Becoming clearly apparent about 1890, there was a marked decrease in the opportunity for speculative gains along the old Hues. Formerly there had been a wide, uncertain field of natural resources to be exploited, and great prizes were drawn from physical environment. Now, this field has been narrowed down and become pretty definitely known. The tillable public lands are gone; the gold, coal, iron, and copper mines are exploited, and so with the forests ; the railway map requires little revision. Consequently the old opportunities for great gains through exploiting such fields have rapidly diminished. This fact, when coupled with the desire for gain through the employment of a greatly increased fund of capital and a multiphed labor force, impelled industrial leaders to seek new fields, such as existed in control of manufac- turing industry through combination. At the same time, a development in the character of markets and busmess risks which had long been unfolding, came to a head. As markets became more truly continent-wide, or world- COMBINATION ORGANIZATION IN GENERAL 135 wide, that part of production which consists in moving goods from place to place and holding them from time to time became more important, and the conditions of exchange seemed to dominate the technical conditions of manufacture, etc. Busi- ness risks, arising from changes in expenses and prices, came to bulk larger in comparison with technical problems.' Now the way to control the business situation, and reduce the risks of ex- changes which involve widely separated places and times, is to combine the direction and management of the various producers. Installing new machinery and processes, or operating on a larger scale, might serve as a remedy for the technical troubles of growing and manufacturing things (" form utilities ") ; but unity in direction of management was needed in dealing with the risks involved in creating time and place utilities through buying and selling. But doubtless the most active impelling force was the increas- ing severity of competition. In the days before the Civil War, business was on a relatively small scale. There was generally a close personal relation between producer and consumer, and less specialization existed. Capital, too, was relatively less important ; and this was notably true of fixed and specialized capital, so that the danger of great loss was less. As a result of such conditions, competition was less intense. But with modern large-scale capitalistic production, competition often becomes cut-throat and intensely wasteful. The reasons for this fact may be briefly stated. Take any non-monopolistic business employing a large amoxmt of fixed capital, which is the case wherever machinery plays an important part quantitatively, and a large part of the expenses is fixed. This means that if the output can be increased with the same investment in plant, the net returns per unit will increase: the business is one of " increasing returns " or " decreasing costs." The moral would seem to be "increase your output." But what happens when this natural impulse is obeyed by competing producers? First, prices sooner or later fall as a result of increased supply, and a time comes when they fall faster than expenses. Then comes 1 Cf. above, pp. 4, 13 f. 136 BUSINESS ORGANIZATION AND COMBINATION overproduction, which means producing more than can be sold at prices which will cover costs. And, finally, the producer realizes that he has on his hands a mass of capital which is so specialized that he cannot turn it into other industries and is so fixed that charges must accrue on it for a life period of consider- able extent. He is without alternative and continues the strug- gle, selling for what he can get, until exhausted. Transportation developments increased the intensity of com- petition by building up larger business units and then adding to the force of the clash between them. Those plants which furnished the largest and steadiest tonnage were favored by railway discriminations which need not be recounted here, with the result that small plants were driven out, and then the large plants were enabled to enter costly wars with one another by means of the same space-eliminating transportation facilities which had aided their upbuilding. The severity of competition was increased by the fall in general prices which took place between 1875 and 1895. Largely be- cause of a relative decrease in the supply of money, the value of a dollar was steadily increased and prices correspondingly re- duced. The natural result was that between the beginning of an enterprise, when materials were bought, and the time when the finished product was sold, prices often fell considerably. Wages, too, fell more slowly than prices. Under such circum- stances business profits were less certain and losses more com- mon, a situation which greatly stimulated the desire of business men to get together for the pm^jose of reducing their risks. All these conditions, it will be remembered, were brought to a focus in the crisis of 1893, and the ensuing years of industrial depression. So much for the more important driving or impelling forces. On the other hand, certain conditions invited combination, the beckoning conditions. Thus, in the potential gains to be secured by regulating prices and trade conditions, the obverse of the driving force of intense competition was to be seen. Even at low prices, if the economies referred to in an earlier chapter could be effected, there was still an opportunity for gain. More COMBINATION ORGANIZATION IN GENERAL 137 particularly characteristic of the time, however, was an almost conscious realization of the possibilities of profits on a large- scale production of the common necessities of life, — coal, ice, lumber, naUs, meat, salt, tobacco, sugar, etc. Captains of in- dustry arose who saw, first, that great profits might be made by selling large quantities of such products even at a small gain per unit; and second, that in selling such things monopoly would have great power because the demand for them does not fall off rapidly when prices are raised or kept up.^ Both of these visions were based on the width of the market or the in- elastic character of the demand for such necessaries. A distinct feature of this phase of the matter was formed by the tariff protection afforded to these industries. Though ex- cepting his own industry, Mr. Havemeyer, of sugar-trust fame, testified before the Industrial Commission that the tariff had been the occasion for the formation of most of the large com- binations prior to 1900.^ It is too obvious to need discussion that wherever a tariff wall is buUt the control of prices is made easier and combination is invited. Another condition which invited the combination movement was the possibility of gain by overcapitalization. By watering stock and making two shares grow where one grew before, it was possible to reap large speculative profits, and such profits were reaped from bountifxil crops. There is no doubt that sev- eral large combinations have been promoted chiefly because the promoters believed that they could sell an increased capi- talization for more money than they had to pay for the proper- ties combined. The foregoing conditions are well stated by a witness in the recent hearings before the Senate Committee on Interstate Com- merce : " Then came years of financial panics — 1890, 1893 to 1897 — with complete dislocation of business. The old owners emerged from this period of stress worn out by superhuman exer- 1 A correlative fact is that the price would fall sharply with increased output. The desire to control the supply of inelastic-demand goods, then, was a closely related element in the situation. ' Rept. Indust. Com., Vol. I, p. loi. 138 BUSINESS ORGANIZATION AND COMBINATION tions and profoundly discoi;raged, and were, many of them, glad to give, free of cost, options on their works, to sanguine trust promoters ; and the people were ready for a bull market ; whence the crop of trusts." ^ But had these driving and beckoning conditions not operated in conjxmction with certain facilitating conditions, the combina- tion movement would not have come just when it did nor in just the same way. The tariff, for example, was such a condi- tion. Under Republican administrations the principle of pro- tection was more and more strongly applied, reaching a high point in the McKinley Tariff Act of 1890 and a climax in the Dingley Act of 1897. While it can hardly be maintained that tariffs cause trusts, they certainly facilitate their formation by raising a wall against foreign competition, and such cases as salt and sugar, rails and nails, paper and window glass, are evidence to the fact. Last, but by no means least, the development of corporate organization was itself a factor in facilitating combination. Prior to 1850 the use of the corporation in business had not been great, and it was not until the seventies that the general corporation laws were much utilized. The result was that cap- ital was limited in amount and combination difficult. Through the agency of joint-stock shares, control over a large number of business organizations may readily be concentrated in the hands of a few men. They have merely to purchase enough stock to control each corporation and vote that stock with a united policy, and to make the purchase they need only form a new corporation whose shares may be exchanged for the con- trolling holdings. By proceeding in this way they do not have to gain the consent of the organizations which they desire to combine, nor do they increase their financial liability. Such a means of combination sharpened one of the most effective weapons of the trust builder, — secret control of plants used locally to cut prices under those of particular competitors while keeping them up elsewhere. In so far as the corporate form could be used to minimize legal responsibility, it also facihtated combination. 'Hearings, 1911, p. 1689 (Mr. C. N. Dutton).' COMBINATION ORGANIZATION IN GENERAL 139 Prerequisites for Effective Trade Combination. — Competition can lead to effective and enduring trade or parallel combina- tion only under certain circiunstances. When the number of competitors is large, combination cannot be close and so can- not be either efladent or stable. First, then, the competitors must be reduced to a manageable nimiber. A corollary of this prerequisite is the fact that, where it is easy to establish a new business unit, competitors will spring up and effective combina- tion be di£Eicult. Again, where the competitors are of very unequal strength, combination is not generally effective. The weak members are dissatisfied and tend to imdercut prices; the strong tend to gobble the weak. As an extreme illustration of this principle, it seems safe to say that the history of the United States Shipbiiilding Company shows that where one member of a combination is stronger than all the others put together, no stability is possible. In this case, one concern, the Bethlehem Steel Company, had a majority of the votes and used them to its own advantage rather than for the good of the com- bination. From both these prerequisites it follows as a corol- lary that effective combinations are generally preceded by com- petitive struggles for survival. A third requirement is that where there are several trades or stages in an industry, like ore mining, smelting, and rolling, in the iron and steel industry, the members should hold similar positions as to the stage in which they operate; for if the business of some members includes more advanced stages of production than others their interests are double and may not lead them to maintain prices, etc., in the earlier stages. Where some producers combine several stages and others only one, that which is the raw material of those in the later stages is the finished product of the others, and consequently their interests as to prices may diverge. Some General Principles of the Legality of Combinations.^ — Combinations may exist between individuals or between cor- 1 See Noyes, A Treatise on the Law of Intercorporate Relations (Boston, 1909) ; Eddy on Combinations (igoi) ; Goodnow, "Trade Combinations at Common Law," in Pol. Sci. Quart., Vol. Xn, pp. 212-245, also in Ripley's Trusts, Pools, and Corpora- tions, Chap. XI. I40 BUSINESS ORGANIZATION AND COMBINATION porations or between other forms of business organization, but the same general rules of public policy and the same statutes apply to all. In so far as the character of the parties is concerned, the chief difference among combinations lies in the limitations which may be placed on the powers and objects of corporations as preventing them from entering a legally binding union. Thus corporations cannot enter any agreement which transcends the powers granted them in their certiiicates,' and in most States they cannot become members of a partnership. But, as just stated, in so far as the legality of objects and means is concerned, all combinations are on the same footing. It needs but a cursory examination of the cases in which the legality of business combinations has been tried to see that three leading tests are applied, namely, monopoly, restraint of trade, and conspiracy. Two of these, restraint of trade and monopoly, rest upon the more fundamental rules of public policy, but for more immediate purposes, the general legal principles may be discussed under the three heads. First, then, as to monopoly. Monopoly is control over price, based upon control over supply. The old legal concept of an exclusive grant from the sovereign no longer obtains. Monop- oly, as such, is not illegal; that is, the test of legality is not monopoly but the results of monopoly. In a word, there might be lawftil monopolies and unlawful monopolies. True, the courts to-day generally speak as though monopoly in itself and as such is illegal, but always there will be found that a major premise is impHed which would run : " All monopolies are against pubhc pohcy." The ultimate test, then, is public policy, not monopoly; and whenever it comes to be recognized that some monopolies may be necessary and according to sound public policy, then this tacitly assumed major premise will have to be modified. At the same time, the fact of monopoly will sink to its secondary and minor place. The sound logic would reason : (i) acts which are against public policy are imlawful ; (2) some monopolies involve acts against public policy; (3) therefore, some monopolies are unlawful. ' See below, p. 201 f . COMBINATION ORGANIZATION IN GENERAL 141 As yet, the prevailing doctrine is such that monopoly will generally be declared illegal without further analysis, both at common law and under anti-trust statutes ; but, if a prediction may be hazarded, the time is coming, when, as the existence of " natural monopoUes " ^ is realized more fully, more discrimina- tion will be used, and already we have many public-utility laws which authorize monopolies in the hands of public-service cor- porations on grounds of public policy. Other illustrations are furnished by patents and copyrights, which in themselves are legal and lawful monopolies and often furnish the basis for monopohstic business organizations. The time must come when the results of the monopoly as affecting public welfare in each case will be considered as the decisive element. The case is similar with " restraint of trade," only here the common law has long been on a more rational basis. Any con- tract which limits freedom of exchange or restricts markets is in restraint of trade, thus making this idea broader than the idea of monopoly. Frequently such contracts appear as inci- dents to industrial combination, as when a retiring competitor agrees not to set up in the same hne of business for a term of years ; but this is over and above the act of combination and does not affect the legality of the combination as such. The question of restraint of trade, however, may concern the com- bination itself. In this case, we find the preceding reasoning on monopoly an accompUshed fact, for the law recognizes reason- able as well as unreasonable restraints. At common law it has long been customary to inquire into the operation of the restraint upon public welfare, and, if it be foimd injurious, to declare it against public policy and consequently unlawful. And, vice versa, if foimd beneficial, restraints of trade may be held reasonable and lawful. It is only recently, however, that the provision of the Federal anti-trust law against restraint of trade has been subjected to this " rule of reason." " Conspiracy " remains to be discussed. A conspiracy, by legal definition, is any combination " to do an unlawful act, or a lawful act by unlawful means." The parties to the conspiracy ' See above, p. 97. 142 BUSINESS ORGANIZATION AND COMBINATION may be individuals or corporations, — the law is the same. Two conditions are essential to conspiracy: (i) concerted ac- tion, and (2) unlawful intent, either to do unlawful acts or to use unlawful means. But when the question is raised as to what actions are unlawful in the sense here used the answer is hot so clear. Often, coxxrts appear to make the combination or concerted action the gist of the conspiracy, for acts otherwise lawful are declared unlawful when done by a combination. Thus an individual may lawfully refuse to buy of any dealer, but concerted action among a number of individuals so to refuse may be an unlawful conspiracy. Or any proposed restraint of trade, though it be in itself innocent, if it is to be accompUshed by conspiracy is unlawful. The truth, however, appears to be that, of necessity, both the purpose and the results of the group's action will differ from those of the individual's, for in combining, a greater power is brought to bear, and this may be assumed to be known to the members. Therefore, the quality of intent that characterizes concerted action must be the basis. Again, if a monopoly or restraint of trade is unlawful, then concerted action to procure either would be conspiracy and so heighten the offense. Not that individual action by way of monopoly or restraint of trade would not be unlawful, too, but when there is concerted action a new offense in the eyes of the law is added, an offense which lies in the intent of the conspirators. Thus, the conspiracy proper lies in the intent to do an act forbidden by law or to do damage, expressed in some agreement. Design in common is the essence. Organizations in the nature of business combinations are not often illegal as conspiracies, for the simple reason that their primary purpose is usually the benefit of their members, and, unless it can be proved that their intent is primarily to injure their competitors or others, or to do some unlawful act, they are not conspiracies. Even when they -act with such an intent after the combination is formed, the original intent is considered in so far as the combination itself is concerned and the later act does not necessarily invaUdate the combination as such. Most of the cases of conspiracy brought \mder the Federal anti- COMBINATION ORGANIZATION IN GENERAL 143 trust act have involved labor organizations, but not all ; for in Gibbs V. MacNealey (102 Fed. Rep. 594) the court held the action of an association of manufacturers in adopting a resolu- tion denouncing a dealer in their line of goods who was engaged in interstate trade, and in printing this resolution and mailing it to other manufacturers and to customers of the dealer, whereby his business was injured, constituted a conspiracy in restraint of trade imder the anti-trust law. The three foregoing points hark back to the more fundamental principles of public policy. The general statement of this prin- ciple laid down by Story is also accepted by Judge Noyes.' It rims as follows: " Whenever any contract conflicts with the morals of the time, and contravenes an established interest of society, it is void, as being against public policy." A more special statement of the principle, however, based upon an ex- amination of the leading anti-combination decisions of the courts, may be hazarded. Any combination, the object or necessary result of which is directly or indirectly to control prices or restrict freedom of exchange to the detriment of the public is unlawful as being against public policy; and this rule will be most strictly applied when necessaries of life or public utilities are concerned. It must be admitted, however, that in one particular the courts follow a narrower and more superficial rule, for they still reason that contracts which create monopolies are null and void as contrary to pubUc poUcy, without going back of the idea of monopoly to the reason. That there are diflaculties in the way of deciding what things are necessaries of life, and even of deter- mining what is on the whole detrimental to the pubUc, goes without saying. For the most part, the principle of public poUcy will be found precipitated and expressed in the various anti-trust statutes State and Federal. The Federal " Sherman Anti-trust Law," for instance, reads : " Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or com- merce among the several States, or with foreign nations, is hereby declared illegal. . . . Every person who shall monopo- 1 Story on Contracts, 1649; Noyes on Intercorporate Relations (1909), p. 611. 144 BUSINESS ORGANIZATION AND COMBINATION lize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of such trade shall be guilty of a misdemeanor." However, some few States do not have such laws, and in any case the principle has some significance in interpreting the statutes. At common law, mere agreements which restricted competition were only extra-legal and non-enforceable. A person injured by them had no ground of action against them. But the Federal statute makes them criminal, and provides that any person in- jured by the prohibited combinations may recover threefold damages (Sec. 7). Following this lead, the various State statutes generally make such combinations criminal, and their members liable for punitive damages.^ Domestic corporations as members may have their certificates of incorporation for- feited, while foreign corporations may be ousted. Says a State court : "It makes no difference whether such acts if done by an individual not in the combination might have been lawful, and a person suffering therefrom would be without remedy. The same acts done by agreement or combination of several are made imlawful, and for that reason a right of action foUows." 2 By this time, the reader will have wondered what significance there is in the various forms of business organization from the standpoint of legality. In a general answer to such a query not much more is to be said than that the only significance of the form of combination, various types of which are to be studied next, is that it may throw some light on the intent of the com- biners, and also upon what the necessary results of the combina- tion will be. If the combination takes the form adopted by the Tobacco Trust the purpose is fairly obvious and the necessary result is clear. Outside of such indirect considerations, the matter of form is a mere question of corporation law. ' For convenient summary of State anti-trust laws see Noyes, Intercorporate Relations, p. 763 S., note. 2 Rourke o. Elk Drug Co., 75 App. Div. (N. Y.) 145 (1902) ; 77 N. Y. Sup. 373. See also: State :;. Schlitz Brwg. Co., 104 Tenn. 715; Cleland v. Anderson, 66 Neb. 252 ; C. H. Albers Commission Co. v. Spencer, 205 Mo. 105. • CHAPTER X FEDERATION ORGANIZATION: SIMPLE "AGREEMENTS" AND PRICE COMBINATIONS! Definition and General Nature. — In passing over to the field of combination organization, we enter a region where forms are so complex, interrelated, and shifting, that accurate classi- fication is difl&cult. Such was once the case with simple asso- ciations of individuals when in the sixteenth and seventeenth centxuies various forms of partnership and joint-stock company, temporary and permanent, xmincorporated and incorporated, were being tested by business men and lawyers. One result of this greater complexity is the loose terminology used by the press and popular writers on the subject of combinations. Naturally the looser forms of combination are treated most imsatisfactorily, and so a word about the meaning and classi- fication of " agreements " and " pools " will not be amiss. Both of these forms come under the idea of " federation," for both are alliances of separate and largely autonomous or- ganizations for mutual benefit in relations which are largely external to themselves. The pool is the more highly developed form and is more easily defined. As its name indicates, the pool as a form of business organization involves the establish- ment of a common fund which is to be divided among the mem- bers on some agreed basis. This is the essential element ; and income, output, or market may be thus " pooled " by any number of producers. The pool is thus a special kind of agree- ment and generally involves a considerable amount of organiza- tion for its maintenance. The " simple agreement," various forms of which are to be • See Appendix, p. 414, for the constitution of a typical agreement organization. L 14s 146 BUSINESS ORGANIZATION AND COMBINATION discussed in this chapter, is a less highly organized and com- pact form of federation among business organizations. In most general terms, an agreement is simply an express understanding concerning business affairs, and so would embrace pools. A pool is a sort of agreement. But the latter term has come to have a more limited and special meaning, and that class of agreements in the general sense which concerns pooling is ex- cluded from " simple agreements " in the special sense. The term " simple agreement " will be used to cover all express understandings between separate business units in so far as they do not concern any collective control of the quantity of output to be marketed. Such understandings concern prices or trade con- ditions directly and immediately, and do not seek to restrict supply or demand, — the price-making conditions. The " agree- ment," then, is to be taken to mean the looser forms of busi- ness organization, such as are variously called " working agreements," " price combinations," " gentlemen's agreements," " associations," etc. In 1776 Adam Smith wrote: "People of the same trade hardly meet together even for merriment or diversion but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." Over one hundred years later, Mr. C. M. Schwab, the steel magnate, when asked if there had. been pooling agreements in the steel industry before the trust, replied : " Yes ; in all lines of business, not only in steel, but in everything else. There were similar agreements, known as joint agreements, to maintain prices. They have existed in all lines of business as long as I can remember." ' And un- doubtedly as long as there have been groups of business men engaged in the same industry, among whom commxmication has existed, such agreements have been made. The period in which they came into special prominence as a means of federat- ing important business organizations, however, may be said to extend from the Civil War time till 1875 or thereabouts. Then, " big business " was only just developing in this country, and the agreement was naturally the first recourse under the new ' Report of the Industrial Commission (igoi). Vol. XIII, p. 474. FEDERATION ORGANIZATION: "AGREEMENTS" 147 circumstances. To-day, however, agreements may be found everywhere. In all trades there are wholesalers' or retailers' " associations," often organized into national and local branches, which loosely federate business organizations. Conventions are held at which trade conditions are discussed and steps taken to secure the advancement of the business. " Unfair " compe- tition is ventilated and decried. Moreover, the members of such organizations sometimes prepare catalogues or price lists of standard articles, the understanding being that the terms thus circulated will be observed. Not so extensive, but much more effective, are the numerous Uttle groups of " magnates " whose agreements occasionally come to Ught. Thus there were the notorious " Gary dinners " of steel manufacturers, at which " there were no understandings reached to maintain prices, but the general effect was that prices were maintained." ' There is the Bridge Builders' Society formed " to establish perfect frankness as to furnishing such information as to bids, terms, prices, and tonnage as may reasonably be required," but whose members maintain that they are in active competition with one another. For years, without any formal organization, the price of anthracite coal has been regulated effectively by obvious agreement among a •small ©roup of mine owners. The various railway traffic asso- ciations bring agreement concerning rate schedules, as every one knows, without any consolidation or pooling organization. And recently the limeHght has been turned upon the secret meetings of the " big six " among the packers, who each week came to an informal agreement on prices and margins. As they also regulated output after the manner of pools, this agree- ment shaded into pooling. In fact, few if any outsiders know the exact scope of these secret agreements, and several of those mentioned may embrace pooling features. 1 Evidence by J. A. Topping in recent suit to dissolve the U. S. Steel Corporation, as reported in the press May 15, 1912. Judge Gary himself said before a House Committee recently, "I do believe that if one individual is possessed of information concerning the conditions surrounding the other's business that it prevents many times, and perhaps in most cases, the extreme, the unreasonable, the bitter, and destructive competition which used to exist." This was the object of his dinners. 148 BUSINESS ORGANIZATION AND COMBINATION Illustrations of Various Kinds of " Agreements." * — From the formal point of view, two broad types of " simple agree- ment " organization exist : those which trust to the spoken word of the parties for the enforcement of their terms; and those which seek to secure more binding results through written contracts, penalties, or other devices for compulsion. The former type embraces the so-called " gentlemen's agreements." 1 To facilitate an understanding of agreements the following attempts at classi- dcation are presented : — A. As to scope and membership: I. Local. 1. Trade conditions. a. Setters (with or without sales agency), (i) Manufacturers, growers, etc. (2) Wholesalers or jobbers. (3) Retailers. (4) Wholesalers and retailers. (5) Manufacturers and jobbers. (6) Manufacturers, jobbers, and retailers. 6. Buyers (as imder a ; but not so full). 2. Prices. a. Setters (as under i, a, "Factors' Agreements" included). b. Buyers (as under i, J). 3. Output, and Prices and Output. II. State and National (as under I). III. International (as under I ; but perhaps not I, x, a, (3), (4), (6). B. As to methods: I. Monopolistic (generally secret). 1. Gentlemen's agreement (generally voluntary). 2. Contract agreement. a. Voluntary (with or without a sales association), i. Without forfeit. 2. With forfeit. a. Refusing to sell to or buy from violators. b. Boycotting. c. Pledge deposit. d. Fines. c. Use of patents. h. Involuntary or compelled (with or without sales association, as un- der a). II. Open. 1. Gentlemen's agreement (generally secret and voluntary). 2. Contract agreement (as under I, 2). a. Secret. b. Public. FEDERATION ORGANIZATION: "AGREEMENTS" 149 Such organizations are numerous and widespread. Their effectiveness depends entirely upon the honor and faithfulness of the members in holding fast to their informal word, but they are often more effective and more strictly observed than more formal contract agreements. They include no formal organi- zation for regulating output or maintaining prices. While the other tjrpe is not necessarily, per contra, a rascal's agreement, it depends less upon the honor of the parties, and forfeits are provided in case of infraction. Such agreements are described in the pages which foUow. Within each of these types several different classes of agree- ments might be distinguished. Some are loose and secret; others are more open and have written by-laws. Some concern the conditions under which business is transacted; others concern the prices charged for products ; still others go further and include an agreement concerning the output. It is the purpose of this chapter to examine in outline the more impor- tant forms of " agreement." As descriptions of them are not readily obtained, it has seemed best to include brief accoimts of numerous agreements, even at the risk of confusing the reader; but, as such a variety exists, after all the confused picture will be the truer likeness. I. Trade-conditions Agreements. — Most simple agreements of the present time concern prices ; but many do not have the fixation of prices as their direct and primary object, and some do not relate to prices at all. As such agreements concern vari- ous conditions of trade, such as terms of credit, methods of packing and shipping, deaUng with competitive products, ad- vertising, transportation, and labor supply, they may well be called " trade-conditions agreements." One great branch of trade-conditions agreements is formed by the commercial organizations of cities and towns which are variously known as " chambers of commerce," " boards of trade," " commercial clubs," etc.' These organizations are characterized by the fact that (i) they are based on locaUty; > See Brand, "Commerical Organizations," Department of Commerce and Labor, Bureau of Manufactures, Special Agents' Series, No. 60 (Washington, D.C., 1912). 150 BUSINESS ORGANIZATION AND COMBINATION (2) they may embrace any number of different industries ; and (3) they have little if any effect upon the independence of their members. They are organized for the general civic, commer- cial, and industrial development of the community concerned; and to this end they perform one or more of such services as the following : they furnish quotations of current prices, and in- spect shipments; they send out trade embassies and advertis- ing material, furnish information concerning business openings, and hold conventions ; they help secure economical transpor- tation arrangements ; they encourage industry through financing schemes, and by furnishing land and factory buildings; and in many other ways they bring the business men of a com- munity into cooperation. Usually a salaried secretary or a cen- tral board or committee conducts their operations, and expenses are paid from membership dues and voluntary contributions. The branch of trade-conditions agreements, however, with which a book on business organization is most immediately and directly concerned, embraces those organizations which have no necessary connection with any locality, which embrace but a single trade or industry, — or at most a group of closely related industries, — and which generally exert a somewhat greater effect upon the business conduct of their members than do the commercial organizations referred to in the preceding para- graph. They do not have the quasi-public aspect which is found in the local commercial organizations, and their objects are generally narrower. In England, for example, " the sale note adopted by the National Association of Millers prescribes the terms of delivery, the duration of the contract, the date of payment, and the adjudication of disputes. The charter party or contract for hire of a vessel adopted for various trades by Chambers of Shipping contains stipulations as to loading, conduct of the voyage, and method of payment. The primary object of these agreements is the avoidance of disputes by the transaction of business according to settled forms, but they also ensure that competition shall take place in the open without secret rebates." ^ > Macrosty, The Trust Movement in British Industry (London, 1907), p. 6. FEDERATION ORGANIZATION: "AGREEMENTS' 151 According to Judge Gary himself, the American Iron and Steel Institute, which succeeded the " Gary dinners," deals only with methods of operation, technical questions, welfare of em- ployees, and " various other questions." A clear but peculiar case of such an agreement organization is the American Baking Powder Association formed in 1899. It included most of the manufacturers of alum baking powders and was established to defend the industry against the compe- tition of the cream-of-tartar baking powder producers, headed by the Royal Company. The association has a constitution and by-laws, in which its objects are stated to be " by bringing together all business firms using exsiccated alum in the manu- facture of baking powder, to stimulate a spirit of fraternity and cooperation for mutual advantage and protection," and to dis- seminate information and improve trade conditions.* Dues, assessments, and regular annual meetings as well as special meetings, are provided for. The main idea seems to have been to raise a fund to offset the Royal's anti-alum war. Another instance of trade-conditions agreement, but one which illustrates the difficulty of classification, is the Cordage Manufacturers' Association of the United States which was formed after the dissolution of the National Cordage Company in 1893. The competing and disorganized manufacturers met first at a dinner in New York, and agreed to form an associa- tion for the purpose of a better understanding and the elimina- tion of trade abuses. The association, which embraced not all, but a majority of the manufacturers, had no constitution or by-laws, nor any officers save a secretary. Upon request by any member the secretary would send out word that " So-and-so would like to have a meeting," and ask, " What do you think? " Some three or four meetings per year were held, at which any questions of general interest to the trade were discussed: the hemp situation and prices ; and different trade abuses, such as allowing too much time, too large discounts for cash, and lack of uniformity in materials. There was no agreement to main- tain prices, but " card prices " were issued, which, though not • Report of the Industrial Commission (1901), Vol. XIII, p. 385. 152 BUSINESS ORGANIZATION AND COMBINATION uniform, had a natural result in uniformity as far as the trade was concerned. " At these meetings the question will be dis- cussed. One will say, ' I am going to put up my price.' Some one else will say that he will do the same thing ; and perhaps they will all do it — they will all put up their prices. But there is no agreement to follow those prices." ^ The Cordage Asso- ciation, then, is a pretty informal agreement organization which primarily concerns trade conditions, but also exerts some in- fluence on prices. Here, too, might be mentioned those fruit growers' " ex- changes " and other produce-selling organizations, which, while in the interest of higher or more regular prices, con- fine their operations to the inspection, packing, storing, and shipping of the produce, and seek to get rid of speculators and middlemen.^ The Southern Texas Truck Growers' Association, as at first conducted, and the Fruit Growers' Association of California are examples. From these mixed trade-conditions and price agreements, we may pass to an examination of some which center in price control. 2. Price Agreements.^ — " Price combinations " are numer- ous, and, in addition to prices, frequently cover trade condi- tions. Broadly speaking, two groups of price agreements may be distinguished, and if one be called industrial agreements the other may be named speculation agreements. We may dismiss the latter group with a word. By " speculation agreements " we mean such imderstandings among dealers as aim tem- porarily to affect the price of some commodity or security in order that the parties to the agreement may gain financially thereby. Generally the commodity must be one that is regu- larly subject to speculation ; and the dealers concerned generally seek to gain a monopoly of it for the sake of raising the price. Such agreements are illustrated by " corners." A corner is an ' Report of the Industrial Commission (igoi), Vol. XIII, pp. 121, 135, 149, 159. 2 Numerous fruit growers' associations are best classed as price agreements, and where crop output is pooled they are to that extent "pools." 3 See Appendix E. FEDERATION ORGANIZATION: "AGREEMENTS" 153 organization of speculators which seeks a temporary monopoly of the market by gaining control over the available supply of a commodity or a security. Agreements of this class do not seek to affect the technical processes of production such as manu- facturing and transportation; and rarely, if ever, are produc- tive of any net gain to society. They may well be thought of as abnormal forms of business organization. Hereafter, then, in speaking of agreements, we will not include " speculative agreements." Industrial price agreements, on the other hand, do concern the technical processes of production, and seek to maintain a level of prices which is not too far above expense to be prac- ticable. They may operate over long periods of time, and need not be abnormal. Such price agreements may be loose and informal, as in the case of the old Chicago Lumbermen's Exchange, which in the early eighties used to hold monthly banquets, when, on the basis of reports from dealers, " honest " prices were agreed upon and undercutting by discount was pre- vented. Or they may be closely and formally organized with by-laws and forfeits, as in the case of the tile dealers to be described shortly. They may operate through sales associa- tions or not. From another point of view, they may be divided into sellers' agreements and buyers' agreements. And either class may be local, national, or international in extent. Of course, the machinery for enforcing such agreements will vary with the scope of the agreement and the nature of the industry concerned. Industrial Price Agreements without Sales Association. — Local price agreements are notably common among coal, ice, and lumber dealers. But they are found in a great variety of other businesses, it even being true in some cases that local bar associations regulate the fees of lawyers. Probably there are few lines of business in which the dealers in staple articles do not have some understanding which limits competition in prices, though most of these " imderstandings " are not so developed as to merit the term " organization." The Gunpowder Trade Association of the United States fur- 154 BUSINESS ORGANIZATION AND COMBINATION nishes a fine illustration of an early national price agreement among sellers.^ This federation was organized in 1872 to en- sure " an equitable adjustment of prices and terms for sales of powder throughout the United States." Any powder manu- facturer, by indicating in writing to the president his desire to join, might be admitted to membership. The voting power of members varied according to the size of their businesses. Regu- lar quarterly meetings were provided for ; but a " council " of five was elected which met weekly, or oftener, at the call of its chairman, and to it were referred questions of price dis- crepancies, discriminations, and complaints of violations of the agreement. A schedule of prices was unanimously adopted and doubtless the chief function of the council was to maintain the observance of these prices. A few years later a competitor was forced to come in, and it was agreed that there should be a penalty of one dollar a keg on selling powder below the agreed minimiun price. Partly on account of the relatively small number of the members, and their closely related interests, this was an imusually stable and well-organized agreement. It had no common sales association. Another formal price-agreement organization on a large scale is found in the case of the Tile, Mantel, and Grate Association of California, formed in 1898 and declared illegal under the Sherman Anti-trust Act in 1904.^ The monopoly element was prominent here. The purpose of the association as set forth in its constitution and by-laws was " to unite all acceptable dealers in tiles, fireplace fixtures, and mantels in San Francisco and vicinity (within a radius of two hundred miles), and all American manufacturers of tiles, and by frequent interchange of ideas advance and promote the mutual welfare of its mem- bers." Thus its membership was of two classes, dealers in tiles, mantels, etc., and the manufacturers of the same products. The conditions of membership were rather strict: on the ' See Stevens "The Powder Trust," in Quarterly Journal of Economics, May, igi2. The full text of the agreement may be found in Industrial Combinations and Trusts (edited by the same writer, igis), p. 2. It is there wrongly classed as a pool. 'See IIS Fed. Rep. 27 (1902); 193 U. S. 38 (1904). FEDERATION ORGANIZATION: "AGREEMENTS" 155 dealer's side, any individual, corporation, or firm engaged in the business in San Francisco or vicinity and carrying a stock worth at least $3000 was eligible; but to become a member one had to be proposed by a member in good standing, be unanimously elected, sign the constitution and by-laws, and pay a fee of $10. Any manufacturer might become a member. Signing the constitution and by-laws committed one to an agreement not to buy from any manufacturer not a member nor to " sell or dispose of, directly or indirectly, any imset tile for less than list price to any person or persons not a member of this association, under penalty of expulsion from the association." The prices charged to members were 50 per cent less than the list prices. Local retailers' associations are sometimes federated into national associations, and combined with wholesalers for main- taining prices. Take the drug business for example. Besides the Proprietory Association (patent medicines) and the National Wholesale Druggists' Association, there is a National Associa- tion of Retail- Druggists. This is an unincorporated association having a membership composed of local associations which embrace about 90 per cent of the retail druggists in the localities organized. The headquarters have been at Chicago and the local associations are represented by delegates periodically chosen for that purpose. In the well-known case of Loder v. Jayne (142 Fed. Rep. loio) the court made the following state- ment of fact which describes the methods of the association : — "... that the National Association of Retail Druggists had its central office in Chicago, and received financial support from all the other associations and many of the members belonging to them ; that from this central point organizers were sent out for the purpose of bringing the local retail dealers into associations, and, as a result, Philadelphia retailers were organized into an incorporated association known as the Philadelphia Association of Retail Druggists. In ac- cordance with the plans suggested by the organizers sent from Chi- cago, the Philadelphia retail druggists working with the organizers secured a consensus of opinion of the retailers here from which they fixed the minimimi rate at which drugs should be sold. ... All 156 BUSINESS ORGANIZATION AND COMBINATION the retail dealers were then notified of this minimum rate, and in case the retailer cut below the price so fixed, his name, with this in- formation was sent to the National Association of Retail Druggists at Chicago, and the Secretary, Mr. Wooten, then placed the name of this retail druggist upon what was known as an 'aggressive cutter's' list. ..." This aggressive cutter's list was sent to all manufacturers of patent medicines and wholesale druggists who were members of their respective associations, with the request that they refuse to sell to the aggressive firm. In case they refused to act favor- ably upon the request, the " pink slip " was evoked, that is, the recalcitrant wholesaler's name was sent to all members of the retailers' association with the request that they have no further dealings with him. " Pink slip " was likely to spell " boycott." Industrial Price Agreements with Sales Association. — A good illustration of a strong local sellers' agreement organiza- tion with a sales association is furnished by the lumber com- panies of Portland, Oregon. In 1902 they agreed to operate in harmony for the sake of controlling the market and securing higher prices. To this end, they organized the City Retail Lumber Company and agreed to sell lumber in the Portland market only through that agency, and at prices to be fixed by it. Further, the agreement provided for inspectors of building operations who reported when local contractors purchased lum- ber outside the city, in which event the Portland lumber com- panies refused to deal with them.^ The Southern Truck Growers' Association is an example of a sectional price agreement operating through a sales association. The sales association in this case is an incorporated concern, formed for the purpose of " protecting " farmers " in the sale, inspection, and distribution " of their crops. Membership is obtained and indicated by holding stock in the association. A sales manager is at the head of the operations, and he must market all cars of truck offered by the members in the order • See Ellis v. Inman, Pouken & Co., 131 Fed. Rep. 182 (igo4). I FEDERATION ORGANIZATION: "AGREEMENTS" 157 received. Expenses are paid by levying a uniform handling charge on produce marketed ; and, as any shipment not marketed through the sales manager must also pay the handling charge, members are practically compelled to sell their produce through the association. The great majority of the business is carried on by means of a " daily local pool "; that is, every grower loading in a given locality receives on the same day the same price for the same grade of produce. The records of the association show that members who sell in this way have received a higher average price than those who sell outside the so-called daily " pool." 1 It will be observed that sales-association agreements neces- sarily involve no restriction of the aggregate output, and no apportionment of that output among the members. Merely, the output is tiurned over to a sales manager who disposes of the whole. The income is distributed through the common sales agency according to the unrestricted outputs of the indi- vidual members. While there is a semblance of pooling, — which might be called " marketing pooling," — there is none of the control over supply which characterizes the true indus- trial pool. Price Agreements Enforced by Patent Control ; and Factors' Agreements. — The recent prosecution of the so-called Bath- tub Trust has thrown light upon another means of organizing and enforcing a price agreement.' In 1909 a " Sanitary Enameled Ware Association " had been formed with a certain Mr. Wayman as " commissioner." This preUminary organi- 1 This association not only distributes produce, but also buys seed and handles claims for overcharges against transportation lines. It is interesting to note that formerly it operated under a "general daily pool" ; that is, the growers received the same price for the same grade of produce shipped on the same day, no matter from what shipping point. This system did not work very well, for it was found impossible to get a uniform grade. The produce at one point, two or three hundred miles removed from another point, might be affected by weather conditions so as to alter its carrying and keeping qualities, and conse- quently the stock grown under more favorable conditions would suffer in the gen- eral average. Furthermore, a delay in marketing shipments from one point held up settlements with all membersof the "pool." ' See U. S. V. Standard Sanitary Mfg. Co. et al., igi Fed. Rep. 172 (1911). 158 BUSINESS ORGANIZATION AND COMBINATION zation attempted to maintain prices, but large and irregular discounts were made and the trade was much demoralized. Accordingly a more effective agreement was devised, and entered into by sixteen of the largest manufacturers of enameled iron ware and nearly four hundred jobbers in the same trade. To Wayman, important patented devices and processes were assigned, and each of the sixteen manufacturers then entered into an agreement with him which was in the nature of a license to use the patents upon certain conditions. Each licensee was to sell only a specified quality of goods, to sell only to jobbers who made a certain resale agreement, and to observe the prices fixed ; and to insure observance, a royalty of $5 a day was paid for each furnace used, with an 80-per-cent refund in case of good conduct. The jobbers, on their part, contracted to buy exclusively of the sixteen manufacturers and to observe the prices set down in a jobbers' list that was issued by the manu- facturers' organization. A " blue book " of eligible jobbers was maintained. To hold the jobber to his agreement, he was required to pay 5 per cent more than the net price, and if he lived up to his contract this extra 5 per cent was refunded at the end of the year. This agreement might be classed as being to a small extent a pooling agreement; but, in any case, it well illustrates an unusually rigid and binding price agreement embracing manufacturers and jobbers, the backbone of which was control over patented devices. Such organizations shade down all the way to agreements which concern but one item in the jobber's stock, and contain but a faint shadow of the patent control — or none at all. Thus, the government has recently begun suit against the no- torious control exerted by the Kellogg Toasted Corn Flakes Company. That concern sells only to dealers who agree to maintain a minimum price per package set by it, and reenforces its control by means of a patent held on the carton in which its product is packed. Aside from the small infusion of patent control, this is a typical example of the " factor system " which has become so common. The factor's agreement always Ues between different stages in the marketing of a product, — e.g. FEDERATION ORGANIZATION: "AGREEMENTS" 159 manufacturing and jobbing, or wholesaling and retailing, — and consequently is a sort of " industry-combination," or se- quence agreement.' The classical case is the agreement between the American Sugar Refining Company and the Wholesale Grocers' Association, which has lasted from 1889 well down to the present time. So keen was the competition between the wholesale grocers that sugar was regularly being sold at cost or below ; and, in order to restore a more reasonable condition of afEairs, they sought and obtained from the refining company an agreement imder which sugar was bought and sold by whole- salers at a uniform price per pound, with a rebate to all who maintained that price. This rebate assured to each a small uniform profit. Such agreements may, if open, be quite reason- able and beneficial ; but they are likely to be abused. They may be made the means of discrimination, — as when a con- dition of the agreement is that only the goods of a certain manu- facturer may be handled, — and of maintaining extortionate prices. Buyers' Price Agreements. — Finally, there are agreements which have as their chief feature the control of the price of raw material purchased by producers. These are buyers' agree- ments. One illustration will suffice. It is a matter of general belief, if not an estabhshed fact, that various cotton-oil mills in Mississippi, Louisiana, and Tennessee are parties to an agree- ment according to which they keep up a uniform rate on cotton seed. To this end they commimicate to one another the prices they pay or intend to pay for seed, and have some understand- ing of a relation between the price they will pay and the New Orleans and Memphis markets. Moreover, they do not invade one another's territory in purchasing seed. General Characteristics. — ■ A Uttle reflection upon the fore- going illustrations leads one to conclude that, as contrasted with the closer corporate combinations or consolidations which ' A factor is one who sells goods for their owner on a commission. On factors' agreements in general see Arbuthuot, "Factors' Agreements," /owe. Fol.Econ., Vol. XV, pp. 577 seq. Stevens, Industrial Combinations and Trusts (N. Y., 1912), Chap. VII. l6o BUSINESS ORGANIZATION AND COMBINATION are to be discussed later, some of the more notable characteris- tics of simple-agreement combinations are : the members retain a larger measure of individual identity; the union is weaker and liable to be temporary ; the object is more generally merely to restrict competition rather than to secure economies in pro- duction; in fact the combination is not close enough to effect such economies. When coupled with a sales association, how- ever, the agreement may be enduring and effective. On the side of pubhc policy, it is to be observed that publicity is less likely, and consequently regulation is more difficult. The most effective remedy for abuse of power is dissolution, any other procedure being very difficult; and dissolution does not as a rule work such hardship as in the case of corporate combina- tions, as the separate ownership and management of the prop- erties is little affected by the agreement. Advantages and Disadvantages. — The advantages of the agreement as a form of business organization are fairly patent. It is formed with great facility. A dinner is arranged for, and with their feet under the same table the competitors reach a general understanding concerning the particular problem, together with a more or less informal arrangement for future cooperation. The more detailed and comprehensive the ar- rangement, the less true is this picture. But, in any case, there is no certificate of incorporation to secure, and no taxes to pay. As to financial liability, it, of course, is not increased by becom- ing a party to a price agreement. On the score of direction of management, much is to be said for the simple agreement in certain cases. It is very flexible and readily adjusted to changing or complex conditions. When, therefore, the industry is in rapid transition or trade conditions are very complex, such a loose temporary organization as the agreement appears very desirable. It will be observed that of all forms of combination organization it probably leaves the largest measure of autonomy with its members, for the manage- ment of plants is entirely in the hands of their owners. This not only leaves them free to tackle local problems in their own way, but it makes it possible to retain undisturbed the motivat- FEDERATION ORGANIZATION: "AGREEMENTS" i6l ing forces of the component establishments. That the agree- ment may readily be kept secret for a time is apparent, and this may be an advantage to the business from the individual standpoint. Another point which may prove of considerable importance lies in the fact that through simple agreements groups of inde- pendent producers may be able to secure such economies in buying and in marketing as will make it possible for them to exist alongside of large " trusts," thus keeping alive a personal direction of plants and some degree of competition. But agreements are notably unstable and temporary. They are not based upon a perfect association, for with the retention of autonomy by the members there goes a retention of separate interests which may be divergent; and little compulsion can be brought to bear upon them in a legal way. From this point of view we can discern five or six classes of agreements among the illustrations given above, (i) Oral agreement, without forfeit ; (2) written agreement, without forfeit; (3) agreements with provision for refusing to sell to violators, or for boycotting them ; (4) agreements with fines for violations ; (5) agreements with a pledge to be forfeited by violators ; (6) agreements en- forced by control of patents. These various devices, however, may not prove so effective as a gentlemen's agreement among a few closely alhed producers. The majority of " simple agreements " are of the price- combination sort, and these have the great weakness of not controlling supply. They do well enough at times when prices are going up, and they may themselves raise prices for a while ; but each producer tends to put all he can on the market in order to profit by the high prices, with the result that the market is overstocked for sale at profitable prices, and when the break comes the agreement is futile. This difficulty may be partly met by including a regulation of output in the price agreement, but the tendency to violate such a regulation is strong. Moreover, in the United States, most price agreements will be found to be illegal under the State or Federal anti-trust 1 62 BUSINESS ORGANIZATION AND COMBINATION laws, and there is no question that the monopolistic agreement mider the present conditions should be illegal as being a limita- tion upon freedom of exchange. It will frequently be fovmd impossible to enforce the terms of the agreement in the courts, which greatly limits the usefulness of this form of organization. Social Point of View. — From the social point of view, simple agreements and pools have so many points in common that no extended discussion is needed here, and the reader is referred to the concluding section of the second chapter below. One notes that the price agreement is the least highly organized and stable form of organization for affecting prices, and there- fore brings the least danger of a great or permanent injury to consumers. Also, it allows so much independence among its constituent organizations — they are so loosely federated — that overgrown and wasteful compound units are not likely to be built up. Of course, the creation of no new corporate organi- zation is involved, and the uncertain life of the agreement makes the capitalization of increased earnings by its members impos- sible ; therefore, this form does not facilitate or stimulate over- capitalization. Furthermore, agreement organizations are so loose in their nature that they are ill adapted to gain control of the great natural monopolies of the country, such as coal and water power, and consequently are [free from what is often a sinister feature of corporate combinations. Secret monopoly, however, is the danger of the price agree- ment. It will have been observed that some of the agreements described in the foregoing pages were bent upon gaining and maintaining exclusive control of the market, as in the cases of the tUe dealers and the " Bathtub Trust." Others were open to all comers, seeking merely to maintain a uniform price, as did the Druggists' Association. Again, some agreements work by the most secret and devious means ; others have unconcealed constitutions and by-laws, and, being open in membership, do not maintain much secrecy. Thus agreements run all the way from the very imdesirable to the very desirable. At the bottom of the list stand those price agreements which are monopolistic, close, secret, and with FEDERATION ORGANIZATION: "AGREEMENTS" 163 members some of whom are forced to join against their will; while at the top come the voluntary agreements concerning ' trade conditions which are never monopolistic, are open, and pubUc. These agreements, desirable and undesirable, may exert considerable influence, and the only way to insure their responsible use of power is to make their existence, purpose, and methods known. It goes without saying that methods of terror- ism and discrimination used to compel membership in an agree- ment are intolerable. In very general terms, may it not be concluded that it would be desirable to have all agreements subject to publicity? Yet this result can never be even approximated as long as the public displays hostility to such organizations in the present undis- criminating way. That there are reasonable and unreasonable agreements, just as there are reasonable and unreasonable re- straints of trade, must be remembered. The goal of public poUcy should be to bring to pass a condition in which business men would not fear to form any socially beneficial agreement organization, a situation in which business practices could be standardized, and cutthroat, unstable prices be eUminated. That necessary agreements concerning business methods and prices wiU be made is indicated by the futile attempt to stamp out railway rate agreements. The certain conclusion is that provision should be made for the registration of legitimate agreements, bringing them within the pale of the law. CHAPTER XI FEDERATION ORGANIZATION: POOLS Agreements as to conditions of doing business, lying as they do outside the realm of value, are quite inadequate to meet the desires of those business men whose ultimate object is profit ; while the mere price agreement was soon found to be too loose and superficial to accomphsh with any certainty the objects sought. The necessity for controlling the factors that deter- mine price was seen. Business men, feeling the need of com- bination, and still being loath to give up the sovereignty of their establishments, turned to closer and more thorough means of federation. This means they found in various kinds of pooling agreements. As just implied, a "pool," in the business sense, is a form of agreement organization ; that is, it is based upon the federation of members who by mutual consent combine for certain pur- poses, and retain a large measure of authority over their sepa- rate units. Mere agreements shade into pooling agreements, and pools frequently, if not usually, include agreements as to conditions and prices. Nevertheless, the pool is a separate and distinct form of organization with a characteristic element that allows exact classification. This element springs from the closer association sought in the pool. Briefly, it is this. Some material factor in the price-determining process is taken as the most readily ascertainable or easily controllable one common to a number of business units. This factor may immediately be on the supply side (the output or an element in it), on the demand side (the market), or it may be the income which arises from these factors (" profits "). Acting in concert, these business units combine to the extent of merging this material 164 FEDERATION ORGANIZATION: POOLS 165 factor in a common aggregate or " pool." Thus they are federated and bound together in so far as this factor is con- cerned. And if the factor is a controlUng one, the object in view is gained as long as the pool lasts and contains a determin- ing proportion of the pooled factor. On the contrary if the factor pooled is not a controlling one, or if the pool is too small, the organization is ineffectual. Ultimately, the activities of the pool find expression in a collective control of the quantity of output marketed by the members. It is a necessary corollary of such an organization that the pool is divided among the various members upon some agreed basis, to the end that while retaining their separate existences they may share in the benefits gained. An industrial pool, then, is a form of business organiza- tion established through federation of business units whose members seek a degree of control over price by combining some factor in the price-making process in a common aggregate and apportioning that aggregate among the units. Always some degree of control over supply is involved, and is exerted more or less directly accord- ing to the type of pool. The " pool " is a more definite and highly developed com- bination than the " agreement." The pool is generally accom- panied by an agreement as to price, but it undertakes to go back of price and control price making : the " price combina- tion " merely names the price and seeks to maintain it by an agreement not to sell for less, whereas the pool undertakes to provide machinery for controlling prices. This involves a more thorough and complex organization. One result is that it is possible to treat the latter kind of organization in a more clear- cut fashion than could be pursued in discussing the former. Just as the agreement was the typical form of combination from 1865 to 1875, so the pool was the typical form from 1875 to 1895, if, for the moment, we overlook the short period of " trust " organization to be described in a following chapter. Certainly this is true for the more highly developed industries. Pools became common in the seventies, while in the steel in- dustry and elsewhere " in the latter part of 1896, and the early part of 1897 in particular, there was a rather general abandon- 1 66 BUSINESS ORGANIZATION AND COMBINATION ment of such combinations." ' The beginning came as a result of the need for controlling larger business units operating under highly competitive conditions. Thus the crisis of 1873 and the cutthroat rate wars of the years following gave rise to the first great railway pools in 1877. As early as 1870, however, there was an important railway pool between Chicago and Omaha. The end came with hostile legal developments and the discovery of more effective devices. As a standard journal puts it : " The collapse of these pools showed very conclusively that pools, even where there were penalties involved, were not always successful, and another method of controlling certain lines of manufacture had to be tried." ^ Of course pools con- tinue to exist to this day and are perhaps more numerous than ever, but they can no longer be called the typical form of com- bined business organization. Main Types of Pooling Agreement. — The reader will have observed that the definition of pooling here used is to be appUed to " industrial pools." This is as much as to say that " specu- lative pools " are not included in the discussion. Those manipu- lative pooling agreements which throw stocks into a common fund for the purpose of speculative operations on the exchanges, and whose members share the pecimiary gains of these opera- tions according to an agreed per cent, are too temporary and too exclusively concerned with profits won by artificial modifi- cations of supply to deserve discussion here.' They have no necessary effect upon the functioning of concrete capital goods, such as machinery, locomotives, business buildings, and stores of goods. Three main types of industrial pool are clearly distinguish- able : (i) Output or traffic pools, (2) territory or market pools, and (3) income pools. In income pools either gross or net earnings may be pooled, and in the latter case the organization may be called a profits pool. This classification is based upon the essential feature of pooling organization and will be fol- lowed in the illustrations presented below. From other points 1 Repl. of the Com. of Corps, on the Steel Indust., Part I, p. 75. 2 Iron Age, December 30, 1897. » See below, p. 323. FEDERATION ORGANIZATION: POOLS 167 of view, however, we may distinguish voluntary and involun- tary pooling agreements. All pools might be classed according as they restrict the aggregate output or not, a point of great importance when the public interest is concerned. Again, there are local. State or national, and international pools. In more recent times it has become common to organize a separate selling agency to handle the output of a pool's members, and this kind of pool is called a " sales association " or " cartell." Accordingly, pools might be divided into two classes on this basis. Generally the sales association is connected with the pooling of profits. The reader will find most of these types illustrated in the following pages. I. Output or Traffic Pools. — As the name indicates, an out- put pool is one in which the members combine to the extent of making their outputs — or traflSc, in the case of railways — form an imaginary aggregate fund or pool, and then divide that pool among themselves according to some agreed basis. This kind of pool operates on the supply side of the market, seeking to control competition in producing quantities of goods, and sometimes goes so far as to restrict aggregate output. This is the rock upon which many a price agreement has spUt, — how can prices be maintained or raised if it remains to the advantage of the individual members to increase output and they are left free to do so ? The output pool is adopted primarily to avoid the rock of " overproduction." The first pool to be considered here is an agreement that was entered into in 1886 by the chief powder concerns in the United States, and was designed to last for three years.^ It was an output pool, combined with a price agreement, but without any restriction on maximiun aggregate output. It was formed " for the purpose of avoiding unnecessary loss in the sale and dis- position of powder by ill-regulated or unauthorized competition and underbidding by the agents of the parties hereto." The powder manufacturers were divided into two groups, one con- sisting of three companies (including the du Pont de Nemours <■ Stevens, "The Powder Trust," above cited ; U. S. v. E. D. du Pont de Nemours, 188 Fed. Rep. 127 (igii). l68 BUSINESS ORGANIZATION AND COMBINATION concern) and the other of nine. The nine companies were arbitrarily allotted an output of so many thousand kegs of powder per year. In case they should exceed this allotment, they agreed to purchase enough powder from the three com- panies to make up the difference, paying from three fourths to five sixths of the estabhshed sale price according to the kind of powder. On the other hand, the three companies, in case they increased their average yearly sales beyond the average for the years 1882, 1883, and 1884, agreed that the nine companies might increase their allotted output in proportion. Accord- ingly, the three companies were free to sell all the powder they could, for there was no restriction save that when they increased their sales the nine companies might do likewise. So also the nine companies were free to sell as long as they maintained prices ; for the only penalty was that when they exceeded their allotment, allowing for any increases due to increased sales by the three companies, they had to purchase enough powder at a fixed percentage of the agreed price to readjust the situation. This pooling agreement provided for a " Board of Arbitra- tion " of the members which was to pass upon all disputed points and whose decisions were to be final. As a result of its operation, prices were raised and maintained. Next it will be well to examine an output pool which included no formal price agreement but which restricted the total pro- duction of the members. Such an organization was the famous steel-rail pool which was first organized in 1887, and which, with some lapses, has continued in one form or another down to the present time. The various firms and corporations which combined to form the pool agreed to restrict their sales and production of steel rails according to the following allotment: For the year 1888 the market was estimated at a minimum of 1,050,000 tons of rails, and of this amount 800,000 tons were divided among the members in proportions running from 1.4 per cent for the Worcester Steel Works to 13.5 per cent for the Carnegie companies. The remaining 250,000 tons were placed at the disposal of a Board of Control to be apportioned by it " as and to whom it may deem it equitable, in the adjustment FEDERATION ORGANIZATION: POOLS 169 of any differences that may arise." More than this, the board was directed three times a year to take away parts of the allot- ment shares which it might deem any member could not make in due time and transfer the same to any other member. The board was further empowered to make such allotments in ad- dition to the 1,050,000 tons as might be necessary to keep the unsold allotments 200,000 tons in excess of the total current sales. Any changes outside of this required the written con- sent of 75 per cent of allotment percentages. Thus the output was limited and divided, but some elasticity was provided for both in the aggregate amount and its division among the mem- bers. And a safe working margin was maintained. The Board of Control referred to was composed of three men named in the pooling agreement who were empowered to em- ploy a paid secretary and treasurer. They could call special meetings when they judged it expedient, and could levy assess- ments to meet the expenses necessary to carr)dng out the agree- ment, such assessments to be levied pro rata to the tonnage allotments. To this board all members bound themselves to report each month their contracts and shipments of rails, together with a statement of the tonnage on hand at the beginning of the year. Though not expressed in the agreement of 1887, there was a penalty of from $1.50 to $2.50 per ton for each ton produced in excess of the allotted amoimt. Prices, too, were not fixed in the formal written agreement, but were left to an informal arrangement which on the whole was fairly effective as backed by the output pool. This famous pool was broken up by the panic of 1893 and attendant disagreements over the allotment of tonnage, but was reformed in 1894 and lasted till 1897. Somewhat later it was again revived. During the years of depression it main- tained its existence with great difficulty and large sums were expended in buying off or subsidizing outside producers. Output pools, or " traffic pools," as they are generally called in this case, have been common in the railway business and still exist, notably in the case of export and import traffic 170 BUSINESS ORGANIZATION AND COMBINATION moving via Atlantic ports. One simple illustration will suffice. At a meeting held in New Orleans in 1898, at which a chairman and secretary were elected, all the railways carrjdng cotton out of Memphis, Tenn., entered into a pooling agreement. Each road bound itself to observe rates as they might be adjusted by its agent from day to day, to furnish daily information as to the lowest ocean rates from the ports which it served, and to control the routing of cotton. An official acting for all the roads issued a daily rate bulletin for all ports, the rates being made up of the domestic rail rate plus the ocean rate. That combination which gave the lowest total through rate auto- matically became the rate over all the roads and via all the ports. If the through rail-water rate over the Southern Railway via Norfolk was 65 cents a hundred, while it was 70 cents over the other roads, 65 cents became the general rate. But this rate basis could hardly have been maintained without the pool. The roads concerned agreed to accept tonnage at the rate so fixed and to distribute the total in certain fixed percentages. Thus, at the New Orleans meeting referred to, the Southern Railway was to have not over 13.4 per cent, the Illinois Central and Yazoo and Mississippi Valley roads not over 42.8 per cent, the Louisville and Nashville not over 13.4 per cent, the Nash- ville, Chattanooga, and St. Louis not over 7.9 per cent, and the Memphis and Cincinnati Packet Company not over 6.5 per cent. Clearly the object of the pool was to maintain stable and profit- able rates. This Memphis cotton pool was attacked at law and in 1899 the Supreme Court of Tennessee gave it some sanction, though the case went off on the question of the right of a shipper to route his shipment.* ' Post V. Railroad, 19 Pickle (Tenn.), 197. The court said: "It is sufficient to say that we do not find from the record that the proceedings took the shape of an actual contract capable of legal enforcement by either party, but it was a simul- taneous declaration of the same policy, which had already been practiced by each company, and this declaration by each was made in view and in consideration of the fact that rates had already been fixed by the keenest competition ; that the declara- tion was made solely with reference to cotton in the Memphis market; and that concert of action upon this idea of maintaining the right to route cotton was first declared at the time and after this meeting and declaration (p. 201). FEDERATION ORGANIZATION: POOLS 171 2. Territorial Allotments or Market Pools. — Another way of maintaining prices is to pool the market and divide it among the members of the combination. From one point of view, this insures a certain demand to each member, and so this form of pool may be thought of as seeking to influence the demand side of price determination. But a part of the object may be to restrict the supply in certain sections by keeping the mem- bers from other sections in their own fields. It is not usual to find this kind of pooling agreement alone, for it is generally associated with some imderstanding as to a division of output or traflSc. As will appear below, the pooling of territory or market may be secured by direct specification or by indirect means. Also these pools may readily be international in scope. The desirability of territory agreements comes from an en- deavor to maintain prices above the competitive level. A busi- ness organization, usually a combination, in seeking to secure the highest net returns from the sale of its products, maintains prices at a relatively high level in the market in which it has the greatest advantage, which involves a limitation of supply. Its plant, then, is not running at full capacity. Thus it also seeks to make a larger output and to dispose of the surplus at what it will bring in some other market. But here it meets a competitor, who, if not already doing so, may retaliate by in- vading its sphere. Thus wars arise, as in the tobacco industry, and if both parties are of similar strength, an apportionment of the field is the result. Sometimes a " free " or neutral region is provided for, within which either concern may sell for what it can get. Of course, if one contestant is greatly superior in strength to the others, that one may swallow the others and virtually dominate the whole field, a possibility almost if not quite illustrated in the oil business within the United States. The agreements to be next described, then, are characteristic of a situation in which local combinations or mergers have gained control of certain territories and then are led to enter into what may be likened to protective tariff treaties made by the mutual agreement of the contiguous powers. Thus the home market at least is insured. 172 BUSINESS ORGANIZATION AND COMBINATION In 187s the powder pool described above began active com- petition with a Pacific Coast company. As a result the rival company was forced to sell some of its stock to a member of the original pool, and a " neutral belt " territory was agreed upon consisting of Utah, Wyoming, Montana, Colorado, and New Mexico. In this territory rates were fixed by the pool. When the agreement was renewed in 1880, the neutral belt was re- tained and the eastern members agreed not to ship powder into Cahfornia, Oregon, Nevada, Arizona, etc., with the under- standing that their territory would be free from invasion by the western concern. In a more highly developed and com- prehensive pooling agreement made in 1889, the whole country was divided into seven " districts." A very famous pool which had as an important essential fea- ture a marked allotment of territory was the Associated Pipe Works which embraced six southern manufacturers of cast-iron pipe. This is the pool that figured in the celebrated Addyston Pipe Company Case in 1897-1899.^ The avowed object of the pool was to regulate prices, and its chief means lay in a pooling of the incomes which will be described briefly below, but half the story hangs upon its division of territory. In the first place the United States was divided into two great territories, known as " pay territory " and " free territory." It must not be sup- posed that pipe was free in the latter region. It was merely the territory in which the members of the pool were free to sell on such terms as they chose without paying anything into the pool. " Pay territory," on the other hand, embraced the States in which, for every sale made, a " bonus " had to be paid into the pool. There were thirty-six such States, Virginia and her sister commonwealths to the north and east being " free." The fixed bonuses ran from $1 to $4 per ton according to State. Besides this territorial arrangement a system of " reserved cities " was evolved. Thus a resolution of 1894 provided that " The Addyston Pipe and Steel Company shall handle the business of the Gas and Water companies of Cincinnati, Ohio, Covington and Newport, and pay the bonus heretofore men- 1 U. S. V. Addyston Pipe and Steel Co., 78 Fed. Rep. 712; 175 U. S. 211. FEDERATION ORGANIZATION: POOLS 173 tioned, and the balance of the parties to this agreement shall bid on such work at such reasonable prices as they shall dic- tate." " Dennis Long and Company of Louisville, Ky., shall handle Louisville, Ky., Jeffersonville, Ind., and New Albany, Ind., furnishing all the pipe for Gas and Water works in above named cities," and so on for each member. Clearly a promi- nent feature of this agreement was a pooling of the market. The tobacco consumers of the world have been pooled. In 1902 the Imperial Tobacco Company (Great Britain) and the American Tobacco Company (United States) made an agree- ment under which the former was to have exclusive control in Great Britain and Ireland and the Isle of Man ; the latter was to have exclusive possession of the United States, Cuba, Porto Rico, Hawaii, and the Philippines.' A new corporation known as the British- American Tobacco Company (Limited), was established to handle the export business in the balance of the earth. Like Cesar's Gaul, the earth was divided in partes tres. The Imperial Company bound itself not to engage in the tobacco business in the United States unless through the Ameri- can Company or its aUies, except that it retained the right to buy and treat tobacco in that country for the purpose of its business in the United Kingdom; and the American made a similar agreement with regard to its former competitor's busi- ness. Each party was to sell to no one in the other's territory except that other, and goods sold to each other were to be paid for at a fixed rate of 10 per cent above cost. The Imperial Company was to act as sole agent for Havana and Porto Rican cigars and cigarettes in the United Kingdom and was to handle none but the goods of the American Company. This territorial pool was in operation at the time of the recent dissolution of the " Tobacco Trust." ^ Territory pooling could not be completely described without 1 See Report 0/ the Commissioner of Corporations on the Tobacco Industry (1909). Part I, pp. 170, 174. 44°- 2 For full details of an interesting international agreement of a similar kind, see case of the Powder Trust in the Appendix to this volume below, p. 434- Interna- tional agreements or pools have also existed in the sulphur, nickel, and armor-plate industries, among others. 174 BUSINESS ORGANIZATION AND COMBINATION some account of indirect means of dividing the market, such as the basing point system of prices affords. Take the old wire- nail pool for example. The territory was roughly divided by so fixing prices that the manufacturers nearest given points would have an advantage in selling there. Pittsburgh was made the " basing point." The price at any other point was fixed at a figure which equaled the Pittsburgh price plus the freight rate from Pittsburgh to that point. Thus the closer the mill to the point in question, the greater its profit ; while mills farther re- moved than Pittsburgh could not afford to sell to this point at all. If the cost price of a keg of nails at Pittsburgh is $1.20 and the freight rate to some point in Iowa is 60 cents, the price from any mill is fixed at $1.80, and Chicago will automatically hold the Iowa trade as against Pittsburgh, — as long as the basing point price is maintained. 3. Income and Profits Pools. — The Associated Pipe Works pool whose territory arrangements were described above makes a good illustration of an income or profits pool. Competition was confined to bids within the pool before contracts were let. It was managed as follows. A central board was created to represent the members and to it were referred all requests for bids coming from pay territory. The board then fixed the price that would be charged, and, having fixed it, the several pipe works were asked to bid for the contract. To the one which offered the most, the work was assigned. This was called " buying the job." Those of the members who had been asked to do so then " went through the motions " of submitting bids to the real purchaser, but these bids were always made higher than the price fixed, leaving the work to the one who had bought the job. So much for the price-fixing aspect. On each shipment of pipe a certain sum of money was paid into the pool. This payment was called a " bonus." The members regarded these bonus pa)mients as temporary deductions from the price received in the nature of a penalty upon efforts to get all the business possible even at low rates. For, if they Uved up to the terms of the agreement, the bonuses were distributed periodically among the several pipe works on the basis of their FEDERATION ORGANIZATION: POOLS 175 total yearly shipments into pay territory. At first the bonus was fixed at a certain rate per ton. This was not found to maintain prices at the desired level, and in 1895 it was agreed that prices and bonus|es should be fixed at regular or called meetings of the principals. The following excerpt from the minutes of such a meeting will illustrate the nature of the transaction. (Anniston and Bessemer were two of the pipe works.) "It was moved to sell the 519 pieces of 20" pipe from Omaha, Neb., for $23.40, delivered. Carried. It was moved that Anniston participate in the bonus and the job be sold over the table. Carried. Pursuant to the motion, the 519 pieces of 20" pipe for Omaha was sold to Bessemer at a premivim of $8." "Moved that 'bonus' on Anniston's Atlanta water works contract be fixed at $7.10, provided freight is $1.60 per ton. Carried." The long and short of it is that on every shipment each mem- ber paid a sum presumably bearing some relation to the profit that was expected, to the pool, and the total was divided according to the shipments. This arrangement was enjoined by the Supreme Court in 1899. Sometimes more direct and definite steps are taken to insure that each member retains at least his expenses and that only the surplus above average expense, or profits, is pooled. The wire-nail association (1895-1896) did so. This association agreed upon prices and output, fixing them in advance, month by month. Production was allotted among the members, and all income above a fixed " cost price " was turned into the pool. Then the expenses of maintaining the pooling organization, which, in this case, were heavy, were deducted, and the balance was divided according to allotted output. Each mill marketed its output independently, but an inspector was maintained in each to keep tab on books, correspondence, etc. The nail pool, then, differs from the pipe pool, among other things, in that the proportion of gross income to be pooled was stipulated directly, and not left to competitive bidding among the members. The foregoing comprises the ordinary features of a " profits 176 BUSINESS ORGANIZATION AND COMBINATION pool." Directly or indirectly, a " base price " sufficient to cover expenses of production is retained by the members and the difference between this and the selling price is paid into the pool. Indirectly this tends to prevent overproduction, for generally each member shares in the pool on a fixed basis, and if he increases his sales beyond the agreed amount he receives no proportionate increase in profits.' Thus output, or supply, is the ultimate basis of control, even in income pools. Obviously the effectiveness of such an arrangement may depend upon the percentage of the income that is put in the common fund, for if only a small percentage is pooled, it may still remain profitable for a member to take more than his share of the business. It was once found necessary in the old Southern Railway and Steamship Association (1875-1887), for instance, to require that as much as 80 per cent of the gross earnings from the through freight tonnage be pooled. In such cases as these, one can hardly speak of a " profits " pool, for far more than the profits are concerned. It is necessary, then, to distinguish two kinds of pools among those which involve the proceeds of the business, and this is the reason for the double heading of this section : " Income and Profits Pools." When, as was the case with the railway pooling organization just mentioned, a large part of gross earnings is thrown into the common fund for distribution on the agreed basis, we have what may best be called an " income pool." Where only the net earnings above expenses are so treated there is a " profits pool." Both classes may be called " money pools " to distin- guish them from output (or traffic) pools and territory pools. > How this works out is indicated in a letter from one of the pipe works to its repre- sentative in the pool which left the margin above expense to be determined by bid- ding. "... we have been able to determine to what point we could bid on work and take contracts, and if bonus is forced above this point, let it go and take the bonus. It is useless to argue that . . . shops who have been bidding bonuses of $6 and $8 per ton, can come out and make any money if they continue to bid such bonus. However, they of course calculate this bonus will be returned to them on work taken by other shops. . . . [But] If the others run bonus above this point let them take it, as it will be more money to us to take the bonus " {i.e. their share in the pool). Fed. Anti-trust Decisions, Vol, I, p. 1017, CHAPTER XII FEDERATION ORGANIZATION: POOLS {Continued) Sales Associations. — The great weakness of output and traflSc pools is the fact that the members are tempted to in- crease their sales beyond the allotted amount. This temptation the ordinary profits pool meets somewhat, but not perfectly. To obviate the difficulty, the various forms of sales associations, or pools which leave none of the marketing of their products to the individual members, have been devised. The sales associa- tion, then, may be defined as a joint output and profits pool which sells the combined outputs of the members through a common sales agency. Such an association is called a cartel on the continent of Europe. It is the most highly developed and stable form of pool, and may be said to date from the period of the later nineties. Indeed, to describe it here is to step somewhat out of historical order in the evolution of business organization, as in the United States the sales asso- ciation was fully developed after the trust and merger forms which are to be discussed later had been tried. Some writers have even thought that it may prove the most advantageous form for combination organization in the future. A short-Uved but instructive experiment with sales associa- tion pooling is furnished by the Chesapeake & Ohio Coal Association.' This association was formed in December, 1897, by fourteen coal and coke producers located on the line of the Chesapeake & Ohio Railway Company in West Virginia. For the purpose of pooling their sales they organized the Chesa- peake & Ohio Fuel Company under the laws of West Virginia and agreed with that company to sell their coal and coke for >_See U. S. V. Ches. & Ohio Fuel Co. et al., 105 Fed. Rep. 93 (1900). N 177 178 BUSINESS ORGANIZATION AND COMBINATION western shipment to it exclusively for a period of five years. The fuel company, in its turn, agreed to handle none but the products of the coal association, except in case of extreme emergency. Each party to these agreements had an " executive committee" of three, which committees were endowed with great powers. It was provided that one member of the fuel company's com- mittee should be a member of the coal association. The association's executive committee was empowered to fix a minimum price free on board the cars at the mines, though it was stipulated that they were to act in consultation with the fuel company's representatives; and the said fuel company agreed not to sell below this minimum price, and to try to get as much more as possible. Furthermore, the fuel company bound itself to take not less than 600,000 tons of coal and 75,000 tons of coke per year at the minimum price, providing that if it should prove impossible to market as much at this price, the quantities might be some- what reduced. The mode of operation was as follows. The executive com- mittee of the coal association made a monthly apportionment of the output and this apportionment was reported to the general manager of the fuel company who was to distribute all orders to be shipped by rail among the members of the association " according to such apportionments." It appears, however, that the coal and coke producers themselves employed an official known as an " equalizer " to make a distribution of orders and cars among the shippers. In case any member might not be able or desirous of contributing his entire allotted share, the siuTplus was redistributed among the others on the same basis as the original apportionment. The fuel company agreed to make periodic reports on tonnage, sales, and prices. To quote the language of the agreement : — " (6) The said Fuel company shaU make and render to the mem- bers of the Coal Association accurate and complete reports. . . . and upon the sale after the end of each month of any coal or coke FEDERATION ORGANIZATION: POOLS 179 shipped and weighed, or weighed but not sold during such month, the surplus, if any, arising after deducting from the actual price received the minimum price for such kind and grade of coal or coke for such month and! profit shall be paid forthwith to the shippers . . . according to their tonnage of such kind or grade of coal or coke for such month." The agreement then went on to provide for a compensation to the fuel company as follows : — " (9) . . . the Fuel Company shall get its profit [not to exceed ten cents per ton] over and above the net minimum price of said coal and coke f.o.b. mines as hereinbefore fixed, and, if the price at which said coal and coke is sold by said Fuel Co. shall be sufficient to yield a sum exceeding said minimum price and gross profit of ten (10) cents per ton as aforesaid, then the difference shall be paid over to the members of said association ... as they may be entitled under this agree- ment, as part of the purchase price to be paid for coal and coke by said Fuel Co." The gist of the matter is this : an agreed minimum or base price — presumably about sufficient to cover cost of mining or coking — was guaranteed to the coal operators ; and in addition they shared such profits as might be left, after an amount suffi- cient to pay ten cents a ton to their selling agency had been deducted, according to the tonnage allotted to them by the "equalizer." Of course, to the extent that they were interested in the fuel company, the amount paid to it for handling their output might also be regarded as pooled. Another point of interest in the agreement is its pro- vision of a committee of arbitration and of elaborate rules for the procedure of that committee. In case of any controversy arising imder any terms of the agreement, any party thereto nright submit his contention to arbitration by this committee. In 1900 this agreement and the organizations which were parties to it were declared illegal as being in restraint of trade and in violation of the Sherman Anti-trust Law, and the com- bination was dissolved. An excellent recent example of the sales association is found l8o BUSINESS ORGANIZATION AND COMBINATION in the paper industry. On May 26, 1900, some fourteen manu- facturers of manilla and fiber papers organized a corporation known as the General Paper Company. This corporation was organized under the laws of the State of Wisconsin for the purpose of acting as exclusive sales agent for the product of the fourteen manufacturers, and in July its members all entered into contracts with the agency to sell to it alone. The number of members was later increased to twenty-one and altogether produced about 90 per cent of the paper and paper products manufactured west of the Alleghany Mountains. But the cor- poration was more than a mere salesman; it was the visible symbol of a combination among the twenty-one manufacturers for pooling purposes. Under its certificate of incorporation the General Paper Company was authorized not only to become the agent for marketing all their output, but virtually to regu- late the output of their mills, fix the price of their products, and divide the market among them. The corporation was capitalized at $100,000 and its shares were distributed among the twenty-one mill owners in propor- tion to their average daily output. Of course its board of direc- tors consisted of representatives of the mill owners. The Imperial Window Glass Company formed in 1909 was purely a selling agency for about fifty manufacturers who sub- scribed for the stock and agreed to sell no glass except to this company. Among other instances, sales associations have occurred in the salt business,^ in the shade-roller business,' in the blue stone ware business,' and in the manufacture of wooden dishes.'* Characteristics of Successful Pools. — What now are the characteristics of the successful pool, and under what condi- tions will it succeed best ? A study of numerous cases must lead to the conclusion that the more successful pools have been organized on the basis of a definite allotment of tonnage or busi- 1 Michigan Salt Association, 1876 (see Pol. Sci. Quart., Vol. Ill, p. 78). 2 See 143 Mass. 353 (Central Shade Roller Co. v. Chas. H. Cushman, 1887). 2 See 164 N. Y. 401 (James V. Cummings v. Union Blue Stone Co., 1900). * See 92 Fed. Rep. 479 (Cravens ji. Carter-Crume Co., 1899). FEDERATION ORGANIZATION: POOLS ISI ness, maintained by penalties for violation. As in the case of the steel-rail pool, provision should be made for considerable elas- ticity in the aggregate output; and the exaction of penalties for excess production may well be accompanied by allowances to members falling below their allotted share. Of course, the penalty need not be in the nature of a fine, for the mere pooling of income makes the exceeding of one's allotment unprofitable, as is illustrated by the pipe-works pool. As to conditions other than the form of the organization, much depends on the number of plants and the amount of capital required to start in the business. Where the number of concerns is small a compact organization embracing a high percentage of the total output is easier, and these features are important. Where large capital is required there is apt to be a smaller number of plants, so that it is easier to make arrange- ments and hold the members to them. Also a less complicated and expensive organization is necessary. Above all, competi- tion is less likely to spring up : where one can start in business on a capital of but $10,000, no pool can long maintain prices when profits are good, for competitors will flock to the chance for gain. Another condition of greatest success is that there should be a certain degree of uniformity among the members, first as to size or strength, and second as to kind of business. Where weak and strong, big and little, are combined, dissatisfaction is more apt to arise. Where some members are engaged in pro- ducing a more advanced stage of the article whose output is concerned in the pool than are others, difficulties arise. Thus, if the manufacture of steel billets is pooled, and a few members of the pool not only produce billets, but also go on to manu- facture finished shapes, these members on the strength of their gain on billets may take it into their heads to sell the finished product at lower rates than their competitors and so spoil the market for the billets produced by their fellows in the pool, who, of course, are dependent upon these same competitors for sales. The organization of a sales agency adds the finishing touch l82 BUSINESS ORGANIZATION AND COMBINATION in making a pool stable, for it means a pooling of the marketing function as well as income. Advantages and Disadvantages. — It is of no mere academic interest to discuss the advantages and disadvantages of pooling agreements, for, though illegal, they exist, and it has long been a Uve question whether or not the fact should not be recognized by the law and pools be legalized. Probably pools are more numerous and varied than ever before, and they have even become international in scope. Naturally much that was written concerning the advantages of mere " agreements " applies equally well to pooling agreements, but not all, and the possibihties of the more stable forms of pools makes a rather more extended discussion desirable. One difficulty in the way is the fact of a variety of forms which renders it diffi- cult to make sweeping generalizations. Like agreements, pools may be formed with great facility. They may spring up over night. As with all organizations depending solely upon contract, the ease of formation is in some proportion to the readiness of the parties. But in the pool there is a closer combination of members and more powers are delegated to its " federal " authorities, with the result that the stronger business imits may be more loath to join in a pool which requires forfeits ; and the difficulty of arriving at mutually satisfactory apportionments of output is sometimes insuper- able. On the other hand, the very fact that the pool affords an opportunity for more binding federation may make it more attractive, and it affords an opportunity for effective monopoly which beckons seductively. Needless to say, the facts that no corporate charter is necessarily involved and that taxes and fees are not increased, are also to be considered in this connection. Not being a separate entity nor having any formal separate existence, the pool does not concern itself directly with any in- crease in capital and the test of ability to raise capital does not apply in the ordinary way. But the capitals of the members are combined for the limited purposes of the federation, so, in that sense, the question does present itself. It is to be noted, then, that pooling, as such, does not alter the financial lia- FEDERATION ORGANIZATION: POOLS 183 bility of members, there being no change in corporate organiza- tion or capitaUzation. Some doubt has existed as to whether a partnership relation is established and in some pooling agree- ments the precaution has been taken to specify that such a relation is not to be created. Where the members are cor- porations, however, the partnership question has little bearing,^ and this is now generally the case. We may conclude that the pool furnishes a ready means of bringing large capital to bear on a combined object, but that the aggregation is unstable. As remarked in the preceding paragraph, the pool is not con- cerned with raising capital, and by the same token it does not cause overcapitalization in any direct way. The formation of a pool involves the flotation of the stock issues of no new corporation. One result is the advantage that speculative mismanagement is not so apt to come from pooling as from corporate combination. Pooling, of course, only concerns output, its amount and sale, and the division of the proceeds. Therefore, the direction of the technical processes of production remains or may remain undisturbed. The motivation of industry, however, is un- doubtedly somewhat affected, and the spur of profits can hardly work in the same way as before when the very object of the pool is to modify competition among its members by regulating their sales. It is not to be concluded, however, that this means a destruction of motivation, for the producer still knows that by perfecting his methods and reducing his costs he may increase the margin between his expenses and the income assured him by the pool, and so get a larger net gain. Considerable benefit, too, may accrue to all concerned through a stability in prices and in trade conditions. Pooling agree- ments often provide for inspection of the product to insure a good, uniform quahty, which is an advantage to the strong and honest producer. They also furnish a form of combination which is very flexible, being readily adjustable to varying con- ditions of territory, membership, and business. Thus there is something to be said in favor of the pool on the score of ad- ' See above, p. 140. 184 BUSINESS ORGANIZATION AND COMBINATION ministration or direction, and, as was remarked with reference to agreements, the advantages thus indicated are especially prominent where the industry concerned is in rapid transition or trade conditions are very complex. To sum the whole matter up : the object in view is always to check competition, and so maintain or increase the margin between expenses and income; and the pool supplies an easy and secret means of combining temporarily for this purpose. But, on the whole, the foregoing advantages for direction are only offsetting or counterbalancing points, and apply only in comparison with other forms of combination. On the straight question of motivation, it can hardly be maintained that the intensity of stimulus to produce is as great in a pool as outside. This is due to the simple fact that during the life of the pool the struggle for survival is softened, the members do not have to seek more efficient means and broader markets, and the less energetic among them will not put forth so great an effort along these lines. Moreover, weak and inefficient producers are not infrequently taken into the pool and supported by it, in order to remove them as a disturbing element. The great disadvantage of pools from the private point of view is their lack of stability and endurance. In most general terms, this is due to their lack of perfect and complete combina- tion, as seen in the retention of a large amount of autonomy by the individual members, whose separate interests may lead them to disrupt the organization at any time. The obstacle which has wrecked many a pool is the shortsighted tendency to raise prices too high, with the result that the output cannot be disposed of, there is a slump in the market, and the last demoraUzed state is worse than the first. But regardless of artificial prices, the difficulty is inherent. Business has its ups and downs — no matter why — whereas the output capacity of the pool's plants is fixed and probably at least equals the maximiim demand. All goes well during the ups, but not so during the downs. To reduce output means waste capacity and a larger per cent of fixed charges, so each member is tempted to sell more than his share, and that means lower prices. Even FEDERATION ORGANIZATION: POOLS 185 if the pool is maintained there is constant difficulty in agreeing upon the division of the pooled factor, involving frequent re- adjustments with a new chance for dissatisfaction on each occa- sion. Or, if it is not the discontent of old members, there are new competitors springing up to be taken in and provided for. Pools, in common with all combinations, have ever to face the fact that any improvement they make in the price situation not only tempts their members to overstep the bounds of their allotment, but also encourages outsiders and the formation of new organizations. The further the division of the pool de- parts from the normal relative power of the members the more difficidt will it be to maintain the agreement, for not only will discontent exist, but there will be an increase in the tendency to exceed one's share to the end that the larger showing may be used as an argument for a larger apportionment in the pool at the next time of adjustment. For a striking example of the foregoing weakness of pooling agreements, and at the same time of their facility of formation and flexibiUty, one need go no further than the early days of the whisky combination. Beginning with a situation in which there was a glutted market and prices standing below cost, there were some earlier agreements, but it was in 1881 that the Western Export Association was formed. Its immediate object was to export the surplus product so as to keep up domestic prices, and to this end a monthly assessment was levied on mem- bers according to the amount of grain mashed. This organiza- tion split up in the following year, 1882. In this same year, another pool was entered for the purpose of restricting output, but it accomplished little. New pools were formed nearly every year till 1888,^ when a closer organization was established. Sometimes they sought a limited output, leaving marketing to the individual distillers; sometimes they merely exported the sur- plus over a certain amount; but always the pools were soon disrupted and generally because the members exceeded their allotted output. Another disadvantage, which has been notably prominent in > See Stevens (editor), Industrial Combinations and Trusts (N. Y., 1912), p. 4- 1 86 BUSINESS ORGANIZATION AND COMBINATION the case of railway traffic pools, lies in the objection sometimes raised by customers or shippers to any diversion of their orders or shipments. Here the profits pool has the advantage. In order to maintain the agreed output or traffic apportionment the output pools sometimes divert business from one plant or line to another, and customers may prefer the company from which the business is diverted. Several important suits have been brought by railway shippers against the diversion of freight, among which is the case of the Memphis cotton pool described above. On the whole these cases have favored the shipper. As a result, railways voluntarily abandoned traffic pooling to a large extent in favor of money or profits pools. The difficulty is generally met in the case of industrial output pools by levy- ing assessments on those plants which exceed their allotment for the benefit of those which fall short of it, thus making it unnecessary to divert business. It remains to apply the test of legality to the pool, and here we find a woeful deficiency. Always formed by combining previously competing plants with the object of restricting competition, pools are visited with the full wrath of the laws against combinations. At common law, all pooling agreements being regarded as in restraint of trade are unlawful in a nega- tive sense, that is, they are not enforceable in the courts. But in 1887 the Interstate Commerce Act positively forbade railway pooling, and, under the Sherman Anti-trust Act of 1890, indus- trial pools of all sorts became positively unlawful. Though not so intended by its framers, this latter act was apphed by the courts to labor combinations and to railways (1897), and so reenforced the previous law in the field of transportation. Thus, between 1887 and 1897 railways entered into rate agreements which were nominally, at least, different from pools, but in the latter year, when the Sherman Act was applied to the Trans- Missouri Freight Association, any form of concerted action became unlawful. Since 1890, the majority of the States have passed anti-trust acts which generally expressly prohibit pools The result is that these federations have been forced to take one of two coiu-ses: either they resort to secrecy and evasion, FEDERATION ORGANIZATION: POOLS 187 or they seek some other form of organization through which their ends may be gained. Social Point of View. — The advantages of the pool, when regarded from the social viewpoint, are similar to those of the, simple price agreement, but are reenforced on the positive side by the more efficient organization of the former. Pools and most cartels supply a facile means for minimizing industrial fluctuations and risks, and enable producers to cooperate with considerable imity without subordinating their individual methods to a central corporation. And these things may all be socially desirable. On the negative side, too, pooling, like' simple agreement, does not lead to overcapitalization or stock watering; nor does it establish an organization sufficiently consolidated to seize permanent hold upon the great limited natural resoiu^ces and thereby become entrenched as a natural monopoly. Surely the iaterests of society are more seriously threatened when a member of the United States Steel Corpora- tion (a consolidation) secures certain ore lands than would be the case if the owner were merely a member of a pool, say the steel-raU pool. From the standpoint of society, however, several objections might be raised against pooling. In"the first place, there are certain objections which lie not against pooling in general but against special kinds of pool. Thus income pools are liable to the social abuse of being used to subsidize the weak and improfitable plants. An inefficient railway or mill may be able to do great harm by cutting' in and selling below cost, or the interests owning efficient plants may also own inefficient ones, which they insist on having recognized in sharing income. In such cases society is forced to pay interest on idle and inefficient capital. Again, pools which are managed in a shortsighted way so that prices are sent sky-high, only to fall with a demor- alizing thud, are obviously imdesirable. More than this, if we must assume the existing state of the law of combinations, pooling in general is undesirable from the social point of view. Of necessity it works secretly by devious ways, and so begets evasion and crookedness. Moreover, under such l88 BUSINESS ORGANIZATION AND COMBINATION circumstances, an anomalous and ill-defined status is given to cooperation in business, and a situation is created in which power and responsibility are not correlated : business men seek the power of concerted action without a proportional respon- sibihty for their actions. Inasmuch as it has so far proved im- possible to prevent such combinations and concerted action, it would seem worth while to try the experiment of removing the taboo and encouraging open pooling arrangements under legal sanction and regulation. Any tendency to distinguish rationally between socially reasonable and socially unreasonable combina- tion in the shape of pooling agreements is to be welcomed as a step in this direction. But, some one asks, is pooling not monopoly, and is monopoly, then, not socially undesirable ? No and no, — that is, not neces- sarily nor always. In the first place, pooling does not neces- sarily mean monopoly and high prices. The author is not one of those who would minimize the effect of pools on prices, for it seems clear that they find their reason for existence in a desire to affect the margin between price and expense. Cer- tainly it is too naive to argue as some do that traffic and output pools seek merely to divide business on the basis of the rates determined by preexisting economic forces, when (i) they re- move that sort of competition which leads business organizations to attract trade by reducing prices, and (2) they generally in- volve some restriction of output. Nevertheless, pools do not always operate to advance prices. Take, for example, those pools which embrace businesses in which competition is nor- mally impossible, that is, businesses which are characterized by large fixed charges and increasing returns. In such cases it is a shortsighted person who concludes that because a pool- ing agreement will prevent price or rate cutting it will there- fore cause higher prices than would exist without the pool; for, though the cutting of prices means low rates part of the time, at other times rates must be raised to cover deficits created during the cutting process, and the average rate over a period of years will be high. The net long-time result of rate wars, cutthroat competition, and the attendant unstable con- FEDERATION ORGANIZATION: POOLS 189 ditions, may be a higher average price than would exist if com- petition were restrained and prices maintained at a level some- what above the lowest competitive basis. Furthermore, pooling agreements may be the means of en- abling small plants to compete with a great consolidation. By banding together to buy and sell in common, with pooling ar- rangements to give the agreement a degree of bmding force, a number of " independent " concerns may exist outside of a " trust." This may be desirable, if properly controlled, for the reason that (i) it retains personal supervision of plants, (2) it can be readily dissolved, and (3) it cannot gain permanent control of natural resources. As in the case of price agreements, the danger of monopoly based upon control of limited sources of raw materials appears to be small in so far as pools are concerned. Again, if we admit that pools may be monopohstic, we must not forget that monopolies may be partial and Umited, or com- plete and general. Pools when monopolistic are generally of the former class. We must remember that the members of the pool retain their separate individualities and have an interest in securing as favorable terms of membership as possible. These can only be secured, as a rule, by gaining larger shares of the business. To the same effect is the fact that pools, in permitting the existence of numerous separate business units, allow a condition in which seeds of competition remain ; whereas consoUdation, which, as will be indicated in a moment, is the alternative, reduces the nimiber of units and the UkeHhood of competition. It is a demonstrable fact that the effort to maintain a low level of prices through sharp price competition and to prohibit agreements which limit such competition defeats its own pur- pose by hastening the formation of more highly developed and powerful forms of combination. It is a matter of commonplace knowledge that the statutes against railway pooling have furthered consolidation into the great " systems " which now parcel out the regions of the continent among themselves. The recent history of the evolution of business organization shows igo BUSINESS ORGANIZATION AND COMBINATION no clearer lesson than that as the law has cut off one form of combination another has taken its place, and in following the line of least resistance each form has either been more secret or more compact than its predecessor. As agreements and pools have been made illegal, commimity-of-interest organiza- tions, mergers, and holding companies have sprung up. These forms may or may not be worse than the pool. That is not the point here. The point is that anti-pooling laws tend to freeze the pools, as it were, into solid masses which fill the same beds that the pools occupied. But, in the second place, it is not true that monopoly is always bad. This subject has already been touched upon in dis- cussing the legality of combination in general, and will be men- tioned again. Most thoughtful economists now are agreed that the wastes of unrestrained competition may outweigh the dan- gers of regulated monopoly in certain cases, and here monopoly, under governmental supervision, is good. The foregoing point leads naturally to a final observation on poohng from the public point of view. Among the wastes of competition is a fluctuating and unstable condition of prices accompanied by unjust discriminations. Unstable and fluc- tuating prices mean greater risk, higher interest and insurance rates, and retarded industrial plans, and in this way they con- stitute a social evil.^ Not only this, but the door is open to all sorts of unjust discrimination and favoritism and industrial terrorism. It is now a veritable commonplace to state that the ' The following excerpt from a recent decision indicates some of the advantages that may come from pooling. " . there was from the jobbers' standpoint much that was attractive in the scheme as a whole. Competition had been fierce. It had not always been either wise or honest. A badly made article may . . . deceive. . . . When the defects were speedily discovered, the jobber might have to take back the article. The cost of doing so ate up the profit. ... If every dealer signed the agreement, more of them could gain by . . . any ware . . not standard of its kind. The lowest price the makers could take would buy a good article . . fric- tion with customers would be lessened. The reputation of the ware would be raised. Every jobber would know that he was buying and selling on the same terms as his competitors. He could tell to the traction of a cent what his gross profit on every article sold by him would be. He could regulate accordingly his expenditures for handling and advertising it." U. S. v. Standard Sanitary Mfg. Co. et al., igi Fed. Rep. 177 (1911). FEDERATION ORGANIZATION: POOLS 191 railways are placed at the mercy of large shippers when they are not banded together so as to enable them to turn down requests for special favors, strong in the knowledge that the rival car- rier is bound to do likewise. Pooling, in addition to maintain- ing a level of prices which may be lower than the average of fluctuating prices, affords a distinct benefit by merely making prices stable. Mere price agreements tend to do the same thing, but are not sufficiently enduring. Pools also lack the perma- nence necessary to secure the best results on this score; but they have often met a temporary need successfully, and in their better organized forms have lasted for years. If legalized and regxilated they could do the work. And, in addition, they would enable the honest producer to maintain reasonable trade conditions and prices against the imdercutting of weak or dis- honest competitors. After all has been said, however, it must be agreed that pool- ing agreements are dangerous to the best interests of society unless prices or the price-determining conditions are under some sort of public supervision. Is it safe to allow pooling when monopolistic and extortionate prices may be charged? And is the mere right to sue for damages in the courts an adequate safeguard against extortion? Since the Interstate Commerce Commission secured power over railway rates, the benefits which might be expected from railway pools may be said to out- weigh the dangers, and sound public poUcy would lead to^a legal recognition of the railway pool as is the case in European coun- tries. In manufacturing industry, however, the case is not so clear. Here, as already indicated, reasonable pooling agree- ments may do great good, especially in large fixed-capital in- dustries; but the public hardly has an adequate protection against monopoly prices which might be set. In another con- nection, the author has concluded " that, though a pooling agree- ment does not primarily concern rates, imder private owner- ship the rate is the center of the problem ; if pooling is to be allowed, then rates should be regulated to safeguard pubUc interests " ; ^ and a similar conclusion has some bearing to-day ' A Congressional History of Railways (Madison, Wis., 1910), Vol. II, p. 303. 192 BUSINESS ORGANIZATION AND COMBINATION upon industrial pools. Is the inference not clear that, as with railways, so with manufactures we need administrative control — a commission under whose supervision legalized pooling agree- ments may be established? Probably no attempt should be made to regulate prices now, but any pool would have to be open to any plant which might desire to enter, its existence should be limited to some short period of time, and its agree- ments and proceedings should be filed with the commission just mentioned. And until we have these things the status of in- dustrial pooling must be doubtful. Meanwhile, the courts may make some progress through establishing the principles that should distinguish the reasonable from the xinreasonable pooUng agreement. CHAPTER XIII COMBINATION TRUSTS Trust combinations grew out of the weaknesses of pooling agreements. The latter form of business organization, while possessing several advantages over closer combinations, had the great disadvantages of instability and imperfect centraliza- tion of direction and management. This weakness of man- agement was apparent in the existence of numerous plants with a capacity far in excess of the market for products at paying prices. Some pools were more successful than others, but on the whole such agreements came and went without permanently improving the situation. When the Whisky Trust was formed in 1887 at the end of years of nearly futile pooling agreements, it immediately shut down sixty-eight out of eighty distilleries and was soon producing as much of the fiery fluid as ever with the twelve remaining plants. This spelled economy. A simi- lar situation existed in the sugar- and petroleum-refining indus- tries. Trust organization, then, was divised to meet the weak- nesses of the less centrahzed federation forms. The trust to be discussed in this chapter is a very different affair from some of the organizations to which the term is popu- larly applied — different in form, though not, perhaps, in pur- pose. Popularly, the " trust " is any big monopolistic com- bination ; but as a specific business form it has a more definite meaning. The somewhat cumbrous definition which is neces- sary adequately to distinguish it is as follows : A combination trust is a form of business organization established through tem- porary consolidation, in which the stockholders of the constituent organizations under a trust agreement transfer a controlling amount of their stock to a board of trustees in exchange for trust certificates. o 193 194 BUSINESS ORGANIZATION AND COMBINATION These certificates show their equitable interest in the income of the combination. Obviously the trust thus defined differs from the corporation in that it is necessarily a combination of business imits. But, more than that, its legal attributes are quite dif- ferent from those of a corporate combination. Trustees are not as directors, the paid servants for the stockholders ; nor are they mere agents. They act as principals, making contracts for themselves and being able to sue and be sued. Under the unmodified common-law organization, the debts of the trust are not those of the beneficiaries, but are the personal debts of the trustees. In some respects the combination trust is like a stable pool, even in method of organization and in form. For one thing, it is based upon the mutual consent of the members who sign a " trust agreement." Thus, a contractual relationship is involved, which differentiates it from the forms to be discussed later. Again, the net income of the constituent organizations available for dividends is virtually pooled, for the dividends declared by the combined corporations on the stock transferred to the trustees all flow into a common fund in their hands. This dividend fimd, or pool, is then paid out to the certificate holders in proportion to their interests therein as evidenced by the cer- tificates. But here the likeness ceases. The trust involves a great deal more than a mere pooling of dividends. There is a transfer of the legal title to stock in the constituent concerns, which is in the nature of a deed of trust. The rights of the members are defined in a " trust agreement," and a formal organization is provided for with an assured succession of trustees. Above all, however, the trust is no mere federation but is a consolida- tion of interests. The agreement provides that the trustees vote the stock transferred to them, thus giving them power to elect the directors of the constituent companies and so control their policies. Through common ownership of stock and di- rection of management the various units embraced are closely combined. They lose the large measure of independence which is retained in the pool, and may remain separate only in name. COMBINATION TRUSTS 195 Classes of Combination Trust. — As observed in an earlier chapter on the simple business trust, the law recognizes several classes of trust, and in terms of these classifications it may be said that practically all business trusts are active express trusts. At this point, however, a further step in classification becomes necessary. Some trusts are formed by groups of individuals or corporations for the purpose of vesting in trustees the ad- ministration of property for the common benefit ; and such trusts might be called association trusts, or trusts of property. Others, however, are formed by business units for the purpose of com- bination, and they delegate the control of the units to the trus- tees, thus incapacitating the constituent organizations from determining the course of their own operations. Such organi- zations might be called combination trusts, or trusts of business units. The former class is generally quite legal ; but combination trusts are likely to run counter to the law in at least two respects : (i) they may be monopolistic and contrary to public policy, and (2) they may involve a combination of corporations such that those corporations abandon the purposes for which they were created, and so act ultra vires. Of course monopoly may be effected under any form of business organization, and is not to be associated with the trust form as such. But it is characteristic of combinations of corporations under the trust form (" corporation trusts ") that the combining companies nec- essarily surrender control absolutely into the hands of trustees, and in so doing they not only make the monopoly more com- plete, but also they lay themselves open to attack on the ground of ultra vires. As to form and method of organization, two classes of com- bination trusts may be distinguished : (i) those in which the combining units transfer merely a controlling proportion of their stock to the trustees ; (2) those established by transferring all the stock of the combining companies, (a) either retaining mortgages to the amount of the appraised value of their plants (e.g. the Whisky Trust), or (b) making the transfer without any such condition (e.g. the Standard Oil Trust). Origin of the Combination Trust. — The juristic institution 196 BUSINESS ORGANIZATION AND COMBINATION of the trust, briefly described in a preceding chapter, was seized upon in the United States in the early eighties as supplying a form under which permanent centralized combinations of cor- porations might be formed without the trouble and publicity of forming a new corporation for the purpose. Instead of being imposed by the law for the purpose of conserving property, etc., it was adopted by the beneficiaries themselves who sought to combine for profit and chose trustees from among their own nmnber to administer their own property under a trust instru- ment devised by themselves. The form of organization now under discussion was first adopted for the purpose of a large industrial combination by that arch combiner and seeker after monopoly, the Standard Oil Company. Devised in 1879,^ apparently by Mr. Dodd, the company's general solicitor, the trust was perfected and firmly established in 1882. This lead was followed by the establish- ment in 1887 of the Distillers' and Cattle Feeders' Trust (" Whisky Trust ") and the Sugar Refineries Company (" Sugar Trust"). Trusts were also formed in the cotton seed oil, lin- seed oU, and white lead industries. The leaders in this direc- tion appear to have believed that their organization would not be regarded as a relation between corporations, as such, and they insisted, when attacked in the courts, that the trust agree- ment concerned the stockholders as individuals only. However that may be, by 1890, as we shall see, a leading com- bination trust had been declared illegal ; and so far as the com- bination of corporations is concerned the trust movement in the specific sense of the word " trust " came to an end at that time. This kind of business organization, then, is character- istic of big business combination in the eighties. At the present time, business trusts exist in England, where they have never been looked upon with the disfavor found in America, and in Massachusetts, where the law has encouraged them. The chief use made of trusts in that State is to organize real estate investments. This is very different from a combina- tion of corporations. The electric railways of eastern Massa- ' See Stevens, Induslrial Combinations and Trusts (N. Y., 1912), p. 13 ff. COMBINATION TRUSTS igy chusetts, however, have also been managed under a trust form of organization in very recent times, and have lately under- gone an investigation by State authorities . Organization of a Typical Combination Trust. — A combination trust agreement in full will be found appended to this volume, but it may be of interest to analyze the main points in the organization of the Standard Oil Trust. First, the agreement distinguished three classes of parties, which were : (i) all the stockholders of a preceding pooling agree- ment, the Standard Alliance of 1872, and a few other corpora- tions and limited partnerships ; (2) the leading oflScers and stock- holders of these organizations, such as W. C. Andrews, J. D. Archbold, J. A. Bostwick, H. M. Flagler, J. D. Rockefeller, Wm. Rockefeller, W. H. Rogers, etc., — forty-five names in all ; (3) a part of the members of certain other corporations and limited partnerships, mostly subsidiary and alUed industries. Secondly, the agreement" provided for the formation of several new corporations to be located in Ohio, New York, Pennsyl- vania, and New Jersey, to be known as the Standard Oil Com- pany of Ohio, the Standard Oil Company of New York, etc. The powers of these companies embraced everything in the oil business from A to Z. Their capital stock was unlimited. All the assets of the first two classes of members, as noted above, were to be vested in these several Standard companies, the consideration to be the stock of these companies. Thirdly, the stock of the Standard companies together with that of the members of class (3), were to be transferred to a board of trustees, in exchange for trust certificates equal at par to the stocks of the Standard companies, and to the appraised value of the securities of class (3). These trust certificates were in shares of $100 par value. They showed the interest of the beneficiaries in the business, and contained an express agree- ment that the holder was bound by the terms of the agreement and the by-laws provided for. In the fourth place, nine trustees were provided for, each to serve three years, and three to retire each year. They were to be elected by majority vote of the certificate holders. The 198 BUSINESS ORGANIZATION AND COMBINATION agreement provided that the legal title to stocks and property vested in the trustees should pass to succeeding trustees without formal transfer. The trustees were to issue certificates, dis- tribute dividends from stocks and interest from securities of other companies, " exercise general supervision," and represent the trust when a stockholder in other companies. They were required to render an annual statement. Each trustee received the modest sum of $25,000 a year for his service, and the presi- dent of the board got $5000 additional. The essential features of this trust are clearly the following : — (i) Control of a group of business units by an elected board of trustees through the vesting in this board of the stock and power to elect directors of the said business units. (2) The issuance of transferable trust certificates in exchange for the stock of the units. (3) The payment of dividends upon the certificates as though upon stock. (4) The certificate holders were interested m the financial standing of all the units : their interests were irrevocably pooled dur- ing the life of the trust. An imaginary outline balance sheet of the trust expresses the idea in a nutshell : — Assets Liabilities Stock of Stand. Oil Co. of Trust certificates O., 10,000 shares @ $100 $1,000,000 outstanding . Stock of Stand. Oil Co. of N. Y., 10,000 shares® $100 . 1,000,000 Stock of Stand. Oil Co. of Pa., 10,000 shares @ $100 1,000,000 Stock of Stand. Oil Co. of N. J., 10,000 shares @ $100 . 1,000,000 Stock of other companies . i ,000,000 Total assets .... $5,000,000 $S,ooo,ooo Total liabilities . . $5,000,000 Advantages and Disadvantages. — The two great advantages of the trust over a pool were its greater stability and endurance and its centralization of direction and management. Its COMBINATION TRUSTS 199 Stockholders having turned the voting power of the combined corporations over to trustees and vested it in them permanently there could be no question of instabihty, and so far as the or- ganization itself was concerned no reason existed why it should not endure forever. The stock of the constituent organiza- tions was held fast " in trust," while the certificates might be bought and sold a thousand times without working any other effect than to change the recipients of dividends. Subscribers to the trust assigned their stock holdings absolutely to the trus- tees who could not sell them during the life of the trust without the consent of a majority, and the life of the trust was made some considerable period of years, after which it was terminable only by vote of a majority, generally two thirds. In a word, here was a partial consolidation. From these conditions, the situation as to direction and management might be deduced. The trust formed a highly centralized compound business unit. While embracing many plants, these were so consolidated and brought under a central management that they could present an effectively united policy to the public and to their competitors. Said the Supreme Court of Tennessee in passing upon the Cotton Seed Oil Trust: "The beneficial use of all such property is surrendered to the common purpose. The provisions for the complete possession, control and use of the properties of the several corporations ... is per- fect. Nothing is left to the several corporations but the right to receive a share of the profits and participate in the manage- ment and control of the consolidated interests as members of the new association." ' The trusts could have a general man- ager, a general sales agent, and a general treasurer acting for the combination. More than this, they standardized methods both in accounting and technics, and by closing down plants and dis- tributing orders, they were able to localize production economi- cally and secure plant specialization. Yet all the time the individual existence of the plants which were retained in opera- tion was preserved. Further advantages are evident when the other tests of effi- 1 Mallory v. Oil Works, 86 Tenn. 602 (1888). 200 BUSINESS ORGANIZATION AND COMBINATION ciency are applied. Thus, under the head of liability, we ob- serve that trusts placed the direction of great combinations in the hands of unincorporated boards which were not fiancially liable except as holding stock in constituent companies. Nor were these boards subject to the laws controlling corporations, and one purpose was to shun publicity and attendant responsi- bility. As a prominent lawyer testified, if a new corporation had been organized its doings might have been heralded to the world, " and the world would have had the right to go into the county clerk's office, or the office of some other officer entitled and authorized to receive those papers, and to look at them. The object of the creation of the trust was to avoid that publicity." ^ Finally, this form of consolidation enabled the effective ap- plication of the largest aggregation of capital the world had yet known to the purposes of the combination. It must not be forgotten, however, that such a combination could not be effected with the facility of a price agreement or a pool. It still retained the mutual consent and contract basis, while involving a surrender of autonomy on the part of the mem- bers that resulted in consolidation, and this at times gave rise to considerable difficxilty in inducing important corporations to become members. It proved difficvdt in practice to satisfy members as to the valuation of their plants, a valuation which was dependent upon bargaining and yet was so vital as to de- termine voting power and percentage of earnings received. Nor was it readily changed. This was a limitation which, while not fatal, was later to be met by the holding-company device. The most important disadvantage, however, and one which did prove fatal was the doubtful standing of corporation trusts in the courts. Here it is necessary to expand the discussion a little in order to appreciate the force of the deathblow to the trust as a form of combination organization. In adopting the trust form, business men, or their lawyers, appear to have proceeded upon at least two assumptions : first, that it could successfully be maintained at law, that the trust is not a combination of cor- ' Dos Passes, Kept. Indusl. Commission, Vol. I, p. 1142. COMBINATION TRUSTS 20 1 porations as legal entities, but of the stockholders acting as individuals ; second, that the exchange of stock for certificates constitutes a sale which transfers title to the properties in the combination to the trustees. Acting upon the first assumption, they hoped, under the legal fiction of a separate corporate per- sonahty, to evade the provision of the law against delegation of corporate power and the formation of partnerships between corporations; while upon the second assumption they argued that the trustees became the only stockholders known to the law. As for the rest, they ran their chances of being declared illegal on groimds of restraint of trade and monopoly just like any other business organization. Unfortunately, however, the comrts refused to reason upon their assumptions, while the trust agreements were such definite, tangible matters of record that they were more easily reached than pooling agreements had been. The trouble came about in this way. Late in the eighties, action was brought by the attorney-general of New York against a corporation which was a member of the Sugar Trust, the North River Refining Company. In behalf of the people he demanded the forfeiture of this company's charter on the ground that it had exceeded its powers — acted ultra vires — by surrendering the control of its affairs to a third party. In this action he was sustained by the court, which held (i) that as between corpora- tion and State the only substantial question is what the collec- tive action of the members of the corporation has actually ac- comphshed, and (2) that the right to be a corporation is given by the State to individuals as natural persons to be used by them for certain definite purposes, and it cannot be placed in subordination to a different organization without disabling that purpose and exceeding the powers conferred upon it.^ Thus the court looked behind or through the separate entity fiction and decided that the corporate members of the trust were acting ultra vires. The trust idea in itself is legal enough, but the weak spot is that when applied in combining corporations the constitu- 1 People of the State of New York (respondent) 11. North River Sugar Refining Co. (appellant), 121 N. Y. 582 (i8go). 202 BUSINESS ORGANIZATION AND COMBINATION ent corporations can be attacked and dissolved, whereupon no trust is left. While the court, in this case, declined to pass upon the legality of the trust as being a monopoly, the decision made it clear that unless authorized by statute, such consoHdation as the trust involved is opposed to public policy : — "As corporate grants are always assumed to have been made for the public benefit, any conduct which destroys their normal functions, and maims and cripples their separate activity, and takes away their free and independent action, must so far disappoint the purpose of their creation as to affect imfavorably the public interest; .and that to a much greater extent when, beyond their own several aggregations of capital, they compact them all into one combination, which stands outside the ward of the State, which dominates the range of an entire industry, and puts upon the market a capital stock proudly defiant of actual values, and capable of an unlimited expansion. It is not a sufficient answer to say that similar results may be lawfully accom- plished ; . . . if corporations can combine, and mass their forces in a solid trust or partnership, with little added risk to the capital already embraced, without limit to the magnitude of the aggregation, a tempt- ing and easy road is opened to enormous combinations vastly exceeding in number and in strength, and in their power over industry, any possi- bilities of individual ownership. . . ."' About the time of this decision, suit was brought against the Standard Oil Company of Ohio, and a decision was handed down in 1892 which followed that of the court in the North River Sugar Refining Company case.'' .The Ohio court, however, laid more emphasis upon the monopoly element, stating that the object of the oil trust was to establish a virtual monopoly of the petroleum industry, and concluding that, " All such asso- ciations are contrary to the policy of our state and void." Meanwhile, it had been decided in a case involving still another trust, that whether or not trust certificates conferred upon their holders the powers of corporate stockholders they did represent an interest in the property, and the holders had property rights ; ' I121N. Y. 62s. (Author's italics.) ' State ex rel. v. Standard Oil Co., 49 Ohio St. 137 (1892). ' State V. American Cotton Oil Trust, 40 La. Ann. 8 (1888), and 3 S. Rep. 409. COMBINATION TRUSTS 203 and it may be said in general that the courts refused to regard the trustees as the only stockholders and as having sole powers to direct the property of the combination. So every legal support was knocked from under the trusts and one and all they fell. These cases decided : — (i) Acts of the members of a corporation which lead to the same results as though there had been a formal vote, are acts of the corporation. (2) It is illegal for corporations to delegate essential corporate powers, or, more specifically, to enter agreements which are virtually partnerships of corporations. (3) The law affords a remedy for unauthorized monopolistic com- binations such as trusts. At about the same time as these decisions, the popular an- tipathy to combinations of corporations which had been swelling ever since the seventies, burst forth in a flood of " anti-trust " statutes. Immediately following upon the disclosures of the Sugar Trust case came anti- trust laws in Louisiana (1890), Michi- gan (1889), Mississippi (1890), North Dakota (1890), Oklahoma (1890), South Dakota (1890), and Tennessee (1889). And above all, in 1890, the very year of the decision, the Federal anti-trust law, familiarly known as the Sherman Act, was passed. This act gave a further impetus to State legislation which con- tinued active down through 1898. Most of these statutes, like the Federal law, specifically mention the trust. Conclusion. — This chapter has dealt principally with a form of business organization which, as a form, no longer exists, — the corporation combination trust. In reaUty, however, other forms have been developed which are similar in several important respects, and which gain the same ends sought by the trusts. The study of the trust, then, is not of interest merely as a frag- ment of industrial history ; the trust contained the germ of the idea of the present-day " holding company," and, in the legal de- cisions on trusts, important principles of the law of business combinations were clearly formulated. We will have occasion to turn back to the discussions of this chapter more than once. 204 BUSINESS ORGANIZATION AND COMBINATION The trust was a clever attempt to utilize certain legal institu- tions through perversion, that is, to prostitute them. In the first place, the institution of the trust was taken out of its proper and original field and applied for purposes foreign to the spirit of that institution. In the second place, the fiction of the sepa- rate legal entity in the corporation was seized upon and an at- tempt made to clothe the shadow with substance, — to set it up as a material thing. This attempt was a turning point in the law of business organization, and the courts took the right turn. Finally, the trust episode — for, from the standpoint of the history of combinations, it may be so called — was one of many efforts to secure greater power with less responsibility, and, as such, was fraught with grave danger to the public. The trusts sought to fuse a great group of corporations into an organiza- tion which would act as a unit, yet which would be a mere unin- corporated association of individuals and therefore possessed of no adequate responsibility for the acts of the combination. No doubt such a condition would have been remedied in time, but meanwhile the public might have suffered irrevocable injury. But it would be wrong to carry away the idea that the trust organizers were merely clever knaves. They had legitimate objects partly in view and the slow-moving law was itself to some extent responsible for the trouble. The time had come for " big business " ; while the law was framed for little business. The time had come for restraining trade where unrestrained trade meant the cutting of business throats and the wasting of business blood ; whereas the law held that all restraint out- side of a few cases, like contracts not to set up a rival business under certain conditions, was bad. Although the trust builders were not actuated by benevolent motives, they were acting in accord with economic forces, in so far as they merely sought the imdoubted economies of combined production and the avoid- ance of the undoubted waste of industrial warfare. If the law had suppUed some authorized channel through which their legitimate ends could have been gained, they might have fol- lowed it. In any case, as we will see, the difficulty of dealing with them would have been lessened. CHAPTER XIV COMMUNITY-OF-INTEREST ORGANIZATION, WITH THE BE- GINNING OF COMPLETE CONSOLIDATION AND THE TRANSITION TO THE HOLDING COMPANY When the trusts were declared illegal and were forced to dis- solve, a new form of business organization had to be devised to replace them. Vast businesses had been built up under the trust form, and to have returned to simpler uncombined or- ganization would have resulted in disturbed industry and lost gains of combination. This was the last thing the trust builders had in mind. In the then existing development of business organization, two alternatives were open to them : they could resort to looser forms of (agreement) organization, or they could legitimately go the full length of consolidation and turn all their properties over to a single corporation. Both courses were taken, one trust resorting to federation, another entering into complete consolidation. One Trust resorts to Community of Interest. — The Stand- ard Oil Trust had been the pioneer in the trust movement, and it will be interesting to see what course the ringleader adopted. On March 21, 1892, at the trust's headquarters in New York, the Rockefellers, Flagler, Archbold, Rogers, and other certifi- cate holders met and passed a resolution of dissolution.' This resolution provided that the existing trustees should act as " liquidating trustees " to wind up the affairs of the trust. Prop- erty other than the stocks of corporations was sold and dis- tributed among the trust certificate holders in proportion to their holdings. At this time the stock of some eighty-four constituent companies was in the hands of the trustees, but within two > See Brief of Facts and Argument for Petitioner, in case of U. S.i). Standard Oil Co. of N. J. et al, Circuit Court for Eastern Distr. of Mo., Vol, I, pp. 63-78. 20s 2o6 BUSINESS ORGANIZATION AND COMBINATION weeks the number of such companies was reduced to twenty by transferring the stocks of the other sixty-four to the remainder. The stock of these twenty main corporations was then partially and in a halting fashion distributed among the certificate hold- ers, of whom there were several thousand. In fact, at the end of six years the distribution was still in- complete. What was done was this : the small certificate hold- ers were well content with their status and dividends, and they were not encouraged to liquidate; whereas the nine trustees and "a few other large holders were practically the only ones who liquidated their holdings and obtained stock in the twenty organizations which were retained. It takes no particular keenness to see that the result was that the few large holders dominated these corporations in practically the same way that they had done previously to the nominal dissolution. As in- dividuals, they held a majority of the stock of each constituent company, voting it at the annual meetings of the companies; and the balance owned by the small holders remained unliqui- dated and unsold in the hands of virtually the same men, in their capacity as hquidating trustees ! By the end of 1892 a trifle more, than a majority of the trust certificates had been liquidated, but from that time imtil 1898 only two certificates were turned in. The most significant and characteristic feature of the arrange- ment, however, remains to be noted. All of the important liquidating certificate holders were closely bound together by business and family ties. With but one exception, all were either trustees or former trustees or members of the family of one of the trustees. AU were closely connected with the man- agement of the trust. All voted their stocks in harmony. Truly here was a community of interest. When Mr. Archbold was called before the Industrial Commis- sion, the following colloquy is reported to have taken place : — "Q. Nevertheless, since that time the different Standard Oil com- panies have worked together in harmony, have they not? A. The ownership has naturally brought them into harmony of action; the like ownership, of course. " Q. The general way in which the control has been kept uniform COMMUNITY-OF-INTEREST ORGANIZATION 207 has been this, that the men who were the former trustees have held the majority of the stock in each one of these different companies ? A. Exactly so. " Q. So that the Standard Oil combination, as we may say, has worked together as harmoniously since the dissolution of the trust as before? A. It is hardly fair to call it a combination, but you might call it an aggregation." The form of business organization illustrated in the preceding pages has come to be known by the specific term, " community of interest." Community of interest may be defined as a form of business organization in which, without any formal central ad- ministration, the business policy of several companies is controlled by a group of common stockholders or directors. Generally it finds expression in the placing of directors or ofiicers of one company on the boards of directors of other companies; but, just as the tiltimate source of a director's power lies in the votes of stockholders, so commvmity of interest through community of directors generally is based upon community of stockholdings. In any case, of course, community of interest must find expres- sion in the direction and management of the interrelated com- panies, and it is not unenlightening to think of this form as a sort of pooling agreement in which the pooled factor is directly or indirectly the management of the members. Classes and Merits of Community of Interest. — The fore- going statement suggests what is a fact, namely, that two classes of commimity of interest exist, one of which is community in direction only, and the other community in ownership. Thus, sometimes an oflScer or director of one corporation is given a place on the directorate of another corporation without the exist- ence of an interholding of stock sufficient in itself to create a community of ownership, and as a director he may be able to seciu-e community in direction. The community will be more certain, however, if the mutual directors' seats rest upon a con- siderable mutual holding by the corporations of each other's stocks. Nor is this the only basis of classification. Some community- of-interest organizations consist in an interlocking body of 2o8 BUSINESS ORGANIZATION AND COMBINATION stockholders and directors binding together a group of mutually interrelated corporations no one of which is decidedly dominant ; others are virtually holding- company organizations securing harmony of interests through the ownership by a central com- pany of a majority of the stocks of a group of subordinated companies ; while still others are established by a group of cor- porations, which are generally, but not necessarily, interrelated, securing stockholdings directly in a third corporation for the purpose of controlling it in the common interest. The case of the Standard Oil commimity of interest as outlined above illus- trates the first of these types ; the unity of control established in the tobacco industry between 1890 and 1904 by the American Tobacco Company with the large holdings in the Consolidated and the Continental tobacco companies is an example of the second type ; and an equally celebrated illustration of the third type is found in the railway field as described in the next paragraph. Indeed, the community of interest was first formally recog- nized as a specific kind of business organization by the railways. This development occurred about the last of December, 1899, when President Cassatt of the Pennsylvania lines instituted a policy of mutual control in Trunk Line territory. Rates had been cut and the important item of coal traffic had been partic- ularly demoralized. To remedy the situation, both the Pennsyl- vania and the New York Central secured large stockholdings in the Baltimore & Ohio and the Chesapeake & Ohio roads, which were the disturbing factors. In this way, harmony of operation was secured and with it came the desired effect on rates. Later, a large part of the Pennsylvania holdings was given up to avoid prosecution under the Federal anti-trust law. But the first of the above types is also found among railways, for when the Northern Securities Company (which held the stock of the Great Northern and the Northern Pacific railways) was dissolved in 1904, its certificates were destroyed and the stock of the Great Northern and Northern Pacific lines was dis- tributed pro rata among the certificate holders. Thus a com- mon body of stockholders was created, resulting in a mutual COMMUNITY-OF-INTEREST ORGANIZATION 209 interrelation and a community of interests among independent corporations. In fact, a great network of interrailway commimity of in- terests, embracing all types, was described in the special report on intercorporate relations prepared by the division of statistics of the Interstate Commerce Commission in 1906. We need notice but one section of the country, namely, the Middle At- lantic States. Besides the joint holdings of the Pennsylvania and New York Central lines in the Baltimore & Ohio, the Chesapeake & Ohio, — and, indirectly, in the Philadelphia & Reading and Central of New Jersey companies, — the Lehigh Valley was brought into the " circle of interest " through holdings of its stock by the Erie, the Reading, the Lake Shore, the Central of New Jersey, and the Lackawanna. The Lacka- wanna, in its turn, was closely afl&Uated with the New York Central. Through various subsidiaries, the New York Central, the Pennsylvania, and the Erie lines held a majority of the stock of the Hocking Valley Railway Company ; each of the two first- named systems also had an interest in the New York, New Haven & Hartford, the leading New England road; and, through the Pittsburgh, Fort Wayne & Chicago Railway Company, the Pennsylvania held stock in the Great Northern, the Northern Pacific, and the Chicago, Milwaukee & St. Paxil. But this is not aU. The Pittsburgh, Chartiers & Youghiogheny Railway, the Monongahela, and the Central Indiana were jointly owned by the two leading Trunk Lines ; and the same was true of the Lehigh & Hudson River Railway Company, except that in this last case the Erie and the Lackawanna were also interested. It is no wonder that the report concluded : " The extraordinary concentration of railway interests shown in the situation in the Middle Atlantic seaboard would lead to the conclusion that, so far as this group of railways is concerned, competition has been practically eliminated." Though ever shifting, that situa- tion holds to-day. A sort of subvariety under the first t3Tje of community of interest is weU illustrated in the United States Steel Corpora- tion, where, within a holding-company combination, the stock 2IO BUSINESS ORGANIZATION AND COMBINATION of important subsidiary companies is parceled out among sev- eral members with the object of binding them more closely together. A case in point is that of the H. C. Frick Coke Com- pany, 74 per cent of whose stock is held by the Carnegie Steel Company, 1 1 per cent by the American Steel & Wire Company, lo per cent by the Illinois Steel Company (a subsidiary of the Federal Steel Company), and i per cent by the National Tube Company. There is stUl another variation in community-of -interest or- ganization which is a sort of mixture of the second and third types noted above. This variety is found in the packing in- dustry, and it is one that has been attracting interest for some years. In 1902 it leaked out that the great packing plants of the West were planning to form a combination. Whatever their plans were, however, the only materialization was the for- mation in 1903 of the National Packing Company, organized imder the laws of New Jersey, to which were turned over several smaller plants owned by the large packers.' Later, the packers acquired other properties through the National Packing Com- pany. The point of interest here is that the Armours, the Swifts, and the Morrises own practically all of the stock of the National Company, and all but one of its directors are either directors or officers of these three interests. Thus, while the three large packers are not directly interrelated by holding any considerable amounts of one another's stock, this separately organized hold- ing company has been used to seciure community of interest by acquiring competing plants, and, if reports be true, by harmoniz- ing the marketing of dressed beef in eastern centers. Of course, the meetings of the directors of the National Packing Company constitute a sort of family reunion at which community of in- terests in general can be effected. Every one knows something of the ramifications of community of interest in the banking business. Not long since, evidence was adduced before the Pujo committee of the House of Repre- • Report of the Commissioner of Corporations on the Beef Industry (1905), pp. 16, 35. This company is now {1912) in process of dissolution as a result of the recent trial of the packers, and its assets are to be distributed pro rata. COMMUNITY-OF-INTEREST ORGANIZATION 211 sentatives that eighteen large finandal houses in New York and Boston were associated with at least one hundred and thirty- four other corporations through interlocking directorates and interholdings of stock. Morgan, George F. Baker, and Stillman dominated such Eastern institutions as the First National Bank, the National City Bank, the National Bank of Commerce, the Chase National Bank, the Guarantee Trust Company, and "the Bankers Trust Company ; and through holding stock, or direc- torates, or other oflScial positions in lesser financial institutions — either personally or through associates — they established a widespread community of interest among banks, trust companies, and to some extent among the larger railway and industrial corporations. While such an organization can not properly be called a money trust, — for money can hardly be monopolized, — it gives the interests concerned great power over the promotion and underwriting of business organizations. As a rule, the community of interest plan will be used only when no more effective combination is possible. Obviously it depends for its effectiveness largely upon mutual confidence and good feeling among the parties, and so is not a stable form. It is too complicated and cumbrous to do the best work. Again, it affords no centralized direction. Moreover, it is open to ob- jection on the ground of illegality much as are pooUng agree- ments. Where, however, there is a bona fide and considerable interholding of stocks by the shareholders of two or more cor- porations, it holds a stronger position ; and the separate hold- ing-company scheme, illustrated by the National Packing Com- pany, has worked well for those interested, though it is now about to be dissolved for fear of being proceeded against by the government. From the public point of view, imder present conditions, the device of community of interest is doubtless to be condemned. It affords too great an opportunity for devious methods and power without responsibiUty, as is indicated by its abuse in the hands of the Standard Oil Trust. It there became a trust in disguise. The system of " interlocking directorates," of which this is one phase, has been one of the most difficult aspects of 212 BUSINESS ORGANIZATION AND COMBINATION the combination niovement to handle. Only with full pub- licity and adequate means of preventing monopoly abuses can it be tolerated. Another Trust resorts to Complete Consolidation. — At about the same time that the Standard Oil Trust was begin- ning to take steps towards its community of interest plan of noimnal dissolution, the Sugar Refineries Company, popularly known as the Sugar Trust, likewise entered upon a new stage of organization. The sugar interests, however, were not so closely united by friendly ties as were the oil interests, and they sought a more binding form. Accordingly, late in 1890, a plan of organization was circulated which called for a complete con- solidation of the twenty odd refineries embraced in the trust,^ and was favorably received by a majority of those concerned. On January 10, 1891, the receivers who had the property of the illegal trust in hand were discharged, and at once the Ameri- can Sugar Refining Company was organized as a New Jersey cor- poration to take over this property. The transfer was effected largely by mere exchange of stock, though some cash was paid. The shares of the American Sugar Refining Company were ex- changed for the trust's certificates, each holder of 100 certifi- cates being given 50 shares of common, 50 shares of preferred, and a 5 per cent cash " dividend." All the properties represented by the certificates of the Sugar Refineries Company were thus acquired, and a mortgage was filed upon the whole to secure a $10,000,000 bond issue. A considerable number of plants were closed and dismantled, practically all the refining thereafter being done in not over seven establishments. When Mr. Havemeyer was asked to explain the difference be- tween the trust and the new consolidation, he replied : " The trust was attacked and the courts decided it was illegal, and a company was organized in New Jersey which bought outright and paid for the different companies, which were the constituent companies of the trust. ... we bought and paid stock and cash." ^ 1 See Commercial and Financial Chronicle, November i, 1890, p. 609. ^ Repl. Indust. Com., Vol. I, pp. 109, 124. COMMUNITY-OF-INTEREST ORGANIZATION 213 To-day (1912) the American Sugar Refining Company owns in fee four large refineries, one in Jersey City, one in South Boston, Mass., one in Port Chalmette, La., and one in New Orleans. The last mentioned plant, however, is not operated. In addition, it owns all the stock of three great refineries : the American Sugar Refining Company of New York, the Spreckels Sugar Refining Company (Pa.), and the Franklin Sugar Re- fining Company (Pa.). It also holds the entire stock of the Brooklyn Cooperage Company. Stock interests are held in four other cane-sugar refineries, and thirty-three beet-sugar factories."^ Here, then, is an ex-trust which took the consoli- dation alternative and amalgamated its plants into a single new corporation. The American Steel & Wire Company of New Jersey (1899) was a notable early consolidation. It secured nmnerous wire plants by purchase of stock and property, only to cancel the stock, convey the property to itself in fee, and dissolve the cor- porations. Other plants were secured by direct purchase. Only a few were maintained as subsidiaries controlled through stock ownership. These illustrations indicate a tendency toward complete con- solidation by amalgamating a group of corporations into a great central organization. So strong was this tendency that in 1900 the Industrial Commission was led to report as follows : — "The form of organization that seems most common at the present time is that of the single large corporation, which owns outright the different plants. A combination of this kind is formed by the pur- chase of all of the plants of the different corporations or individuals who enter into it, the corporations then dissolving. . . . The affairs are then managed entirely by the stockholders of the one corporation through their board of directors, elected in the ordinary way. It is usual for these larger corporations to choose a very Uberal form of charter " (Vol. I, p. 10). It was but the beginning, however, of a movement which, as ' Moody's Manual of Railroads and Corporation Securities, 1912. See also Re~ port of Spedal Committee to investigate the American Sugar Refining Company, House of Reps., 62 Cong., 2 Sess. 214 BUSINESS ORGANIZATION AND COMBINATION suppl3dng a form of organization for the largest combinations, has recently received more attention ; and the discussion of its merits will therefore be deferred till a later chapter, when a fuller treatment of complete consolidation can be presented. Even in the late nineties of the preceding century the time was hardly ripe for such organization, and a more facile and elastic form was adopted. This was a sort of incorporated community-of- interest organization, the corporate form making it more stable and permanent and giving it a better standing in the courts. As just indicated, the Sugar Trust and the steel and wire company both held some subsidiary concerns through stock ownership, and to that extent were not complete consolidations. An even better illustration of the tendency to the stockholding type of consolidation appears in the organization adopted by another one of the trusts. The American Cotton Oil Trust in 1889, seeing the storm brewing, voluntarily reorganized and continued in business as a consolidated New Jersey corporation under the name of the American Cotton Oil Company.^ The difference between it and the sugar company is that it owns few of the combined plants in fee, but depends mostly upon stock owner- ship, holding all the stocks, except directors' quaUfying shares, in sixteen constituent companies. In addition, it itself operates a large refinery in New Jersey. Thus the Cotton Oil Company is in part a complete consolidation or merger, and in part an incorporated community of interest, or " holding company." What then is a holding company? 1 See below. Appendix H. CHAPTER XV HOLDING COMPANY ORGANIZATION When the Standard Oil Trust was dissolved (1892) it sought refuge in a community of interest. The Sugar Trust, however, took (1891) the more difficult step of entering into a complete consolidation of interests of the most important plants. The Cotton Oil Trust (1889) followed a halfway course in that it adopted a kind of incomplete consolidation which depended upon the holding of stock in various subsidiary companies. Now the position taken by the Standard Oil organization soon became untenable, for men were not slow to see that it involved an evasion of the law, and accordingly in 1897 the attorney- general of Ohio filed a bill of information in contempt, as a lawyer would say, against the Standard Oil Company in the Ohio Supreme Court. In the following year he also brought suit to have forfeited the charter of a subsidiary, the Buckeye Pipe Line. The situation was growing decidedly warm for the oil interests and something had to be done. Immediately they began to liquidate at a lively rate the old trust certificates which, it wiU be remembered, had been left outstanding in the hands of small holders, and early in 1899 under legal advice they took steps to reorganize the Standard Oil Company of New Jersey with the idea of turning the controlling stock holdings over to it. This meant the adoption of a form of organization similar to that of the Cotton Oil Company. In pursuance of this plan, the old charter of the Standard Oil Company of New Jersey was amended so as to authorize it to do anything that the various subsidiaries could do; the capitalization was increased by $100,000,000 of common stock, to be exchanged for the stocks of the subcompanies ; the liqui- dating trustees were made directors, constituting a majority 215 2l6 BUSINESS ORGANIZATION AND COMBINATION of the board; and by-laws which were virtually those of the trust were adopted. Its own previously outstanding stock was made preferred stock and exchanged for the new common stock, and the same course was followed with the stocks of the other nineteen main companies. Thus the reorganized Standard Oil Company of New Jersey in 1899 became the direct holder of the stocks of 20 main companies and of some 23 subsidiary com- panies whose stocks had been transferred to it by the trustees in 1892 ; and indirectly, through the 20 companies, it had controlling interests in 40 odd companies subsidiary to them. In all cases of any importance a controlling interest was held, frequently running as high as 99 per cent. This, then, was not a mere community of interest, for it rested on a stronger basis than friendship or a loose interholding of stocks ; npr was it complete consolidation or merger, for it maintained the sepa- rate formal existence of the constituent companies; it was a securities holding corporation — a " holding company." Definition and General Nature. — A holding company is a form of business organization (established through partial or tem- porary consolidation) which is created for the purpose of combin- ing other corporations by owning a controlling amount of their stock. It necessarily involves the creation or the prior existence of a corporation which has power to hold the stock of other cor- porations, which corporation proceeds to acquire such stocks by exchanging its own securities for them, or by other means of purchase. The controlled corporations are nominally inde- pendent and operate under their own names, but they are or can be effectively managed by the oflScers of the holding com- pany, whose directors vote their stocks, or a controlling part thereof, and so elect their directors. In this way, the combined plants are firmly bound together. The holding company is organized just as any other corporation, but its piu-pose — at least its chief purpose — is merely to hold the stocks of other and subsidiary companies. " The attitude of these combina- tions is that of a stockholder in many corporations which seeks to manipulate them so as to promote its own private interest." Although they are rather tedious and may be skipped by the HOLDING COMPANY ORGANIZATION 217 cursory reader, the following paragraphs from the charter of the greatest holding company in the world, the United States Steel Corporation, will serve to emphasize this aspect of the matter. In addition to other authorized purposes are the following : — "To acquire by purchase, subscription or otherwise, and to hold or to dispose of, stocks, bonds, or any other obligations of any cor- poration formed for, or then or theretofore engaged in or pursuing, any one or more of the kinds of business, purposes, objects or opera- tions above indicated, or owning or holding any property of any kind herein mentioned ; or of any corporation owning or holding the stocks or the obUgations of any such corporation. " To hold for investment, or otherwise to use, seU or dispose of, any stock, bonds or other obligations of any such corporation; to aid in any manner any corporation whose stock, bonds or other obli- gations are held or are in any manner guaranteed by the company, and to do any other acts or things for the preservation, protection, im- provement or enhancement of the value of any such stock, bonds or other obligations, or to do any acts or things designed for any such purpose ; and, whUe the owner of any such stock, bonds or other obH- gations, to exercise all the rights, powers and privileges of ownership thereof, and to exercise any and all voting power thereon. " The business or purpose of the company is from time to time to do any one or more of the acts and things herein set forth ; and it may conduct its business in other States and in the Territories and in, foreign coimtries, and it may have one office or more than one office, and keep the books of the company outside of the State of New Jersey, except as otherwise may be provided by law ; and may hold, purchase, mortgage and convey real and personal property either in or out of the State of New Jersey. " Without in any particular limiting any of the objects and powers of the corporation, it is hereby expressly declared and provided that the corporation shall have power to issue bonds and other obligations, in payment for property purchased or acquired by it, or for any other object in or about its business ; to mortgage or pledge any stock, bonds or other obligations, or any property which may be acquired by it, to secure any bonds or other obligations by it issued or incurred ; to guarantee any dividends or bonds or contracts or other obligations ; to make and perform contracts of any kind and description ; . . ." The balance sheet of a typical holding company, like that of 2l8 BUSINESS ORGANIZATION AND COMBINATION the trust, would show as assets merely the stocks of other com- panies and such office property and the like as might be neces- sary to conduct the central direction of those companies. For example, the balance sheet of the Rock Island Company on June 30, 1909, stood as follows : — Assets Liabilities Stocks owned . . $150,012,031 Capital stock, com. . $96,000,000 Cash 12,938 Capital stock, pref. . S4;°oo,ooo Bue from companies Due to companies and and individuals . 607,419 individuals . . 548,643 Surplus 83,746 Total . . . $150,632,390 Total $150,632,390 Its own income account contains nothing but a statement of the surplus of the preceding year and " expenses and taxes " of a little over $17,000; but in the combined income account of itself and a subholding company it appears that the entire income consists of dividend installments on the stock of a con- trolled operating company, while the expenses are made up of interest payments on securities issued, in payment for such stock. What is the difference, then, between the holding company and the trust, one wonders. Economically speaking, there is very little difference indeed. The chief difference exists in their standing in the courts. To change a trust to a holding company, a process already illustrated by the history of the Standard OU Company, it is only necessary (i) to substitute the stock of the holding company for the certificates of the trust, (2) to substitute the board of directors of a corporation for a board of trustees, and (3) to substitute a permanent transfer of stock or ownership for the trust relationship. At the present time, the law of holding companies is being made and it may be that the courts will more and more refuse to draw a distinction between the two forms, but as yet it may be said that the in- corporation of the combination and the absence of the trust relationship make an important difference in the eyes of the law. In the formation of a trust, the stockholders of the constituent HOLDING COMPANY ORGANIZATION 219 companies surrendered their stock to be held in trust for them by trustees. Thus they became the " beneficiaries" of a trust agreement. These stockholders, while they might retain an interest in their shares, at the same time surrendered control over them and abandoned the management of their plants. Holding companies are formed by the exchange of stock in one company for stock in another, which exchange is in the nature of an outright sale; and this sale is made by the stockholders of the combined companies to a legally authorized corporation. Moreover, in the trust agreement a confederated relationship was involved, in which the parties maintained a nominally separate existence, whereas the holding company is a nominally responsible corporation, buying stock in the open market and doing that which the State has authorized it to do. Formally, this makes considerable difference between the two kinds of combination organization. Formally, the combination trust is an agreement between an association of individual trustees and a group of corporations which by implication give up their autonomy and so act ultra vires: it involves dealings be- tween corporations which result in partnerships between them. Formally, the holding company is a duly certified corporation, authorized to deal in the stocks of other companies and to hold them; and its dealings are entirely with the individual stock- holders of the controlled corporations. Formally, the one is illegal; the other is legal. When it comes to the question of purpose or intent or result, the answer, as we shall see, is dif- ferent, — at least in part. Origin and Development. — But the thought occurs to one, if the holding company is legal and yet can be used to accom- plish the same results as the trust, why was it not resorted to sooner? Why was the trust form ever used? Why did not all the trusts become holding companies at once? The simple answer is that the holding-company idea was not and is not legal as a general principle in business organization. Of course, it depends upon the right of one corporation to hold the stocks of other corporations, and at common law no such right was established. Pennsylvania even went so far as positively to 220 BUSINESS ORGANIZATION AND COMBINATION forbid it by statute, though she has since relaxed the prohibition in several ways. The right to buy and sell the stocks of other corporations is derived from legislative enactment, and prior to 1889 no such enactment on a general scale was in existence. Before this date, therefore, no holding companies were organized under general law, and the form was httle known. It is true that the interholding of stock had been practiced before this time, and there were a few holding companies created by special law. Perhaps the first real holding company of large size in the United States was the Pennsylvania Company or- ganized in 1870. Its purpose was to centralize the control of the hnes a£&liated with the Pennsylvania Railroad west of Pittsburgh and Erie, " with a view to give greater simphcity and efficiency to the management of these large western in- terests," as the president of the road said in his 1871 report. By its charter the Pennsylvania Company was specially em- powered " to make purchases and sales for investments in the bonds and securities of other companies." Accordingly, by 1879 this company had a majority interest in the western lines, and over half its assets consisted of their securities. It was the little State of New Jersey which, probably without fully realizing the fxill portent of the action, first passed a statute providing a general authorization of intercorporate stockholding. That was in 1888. As amended in 1893, the provision reads : " Any corporation may purchase, hold, sell, assign, transfer, mortgage, pledge, or otherwise dispose of the capital stock of, or any bond, securities or evidences of indebtedness created by any other corporation or corporations of this or any other state, and while owner of such stock may exercise all the rights, powers and privileges of ownership, including the right to vote thereon." ^ Since that time, Delaware, Maine, West Virginia, New York, and at least fourteen other States have followed suit, giving considerable choice of domicile to any corporations which desire to form a combination by means of transferring their securities to a holding company. In 19 12 only two States specifically prohibited holding companies; but in 19 13, according to press • Sect. SI, General Corporation Law. HOLDING COMPANY ORGANIZATION 221 reports, New Jersey also passed a law prohibiting any future corporation from holding the securities of other corporations. Thus it came to pass, when the depression of 1 893-1 897 was over and the voice of the promoter was heard again in the land, that the holding-company device was much used and the New Jersey charter mill worked overtime. It will be remembered that the combination movement came to a climax about this time, and, since trusts had been tabooed, community of interest had not proved generally satisfactory, and complete consoli- dation had hardly become practicable, it is easy to imderstand why the combination movement became a veritable holding- company movement. Business men were not yet prepared for more centralized consolidation by amalgamation or merger; while at about this time the looser forms of combination were being vigorously assailed. The Standard Oil scheme was being attacked in Ohio, and the Sherman Anti-trust Act was about to be applied to railway traffic agreements in the Trans- Missouri Freight Association and the Joint Traffic Association cases. Various economic conditions were driving or beckoning to combine. Such was the situation. Between i8g8 and 1904 the great majority of securities-hold- ing corporations were organized ; but to-day nearly all the larger combinations are more or less in this form, and, whUe the courts have shown a readiness to look through the form to the pur- pose, it bids fair to hold its own in the field of legitimate com- bination; unless the numerous threats to pass hostile statutes are carried out. Some Typical Holding Companies. — One of the simplest, clearest illustrations of holding-company organization im- aginable is the Rock Island Company which' has already been mentioned in another connection. This corporation was char- tered in New Jersey in 1902 mainly for the purpose of highly centralizing the control of extensive railway systems. At the same time, in order to facilitate the accomplishment of the pur- pose, the Chicago, Rock Island & Pacific Railroad Company was incorporated with a capitalization of $145,000,000, all of which was exchanged for the $138,405,000 stock of the Rock Island 222 BUSINESS ORGANIZATION AND COMBINATION Company. Neither of these corporations owns or operates any railway, so both are pure holding companies. The next step, however, was to get control of some real earning capacity in the Rock IslcmdCo. Stock $ 158,405,682 ;Chic Rept. of Com. oj Corps, on the Tobacco Trust, Vol. I, p. 225. 234 BUSINESS ORGANIZATION AND COMBINATION ment, it may be well to note the advantage possessed by the holding company in that it can adapt itself to the various and varying legal requirements of the several States. Some States, like Pennsylvania, require a company owning land to incorporate within their bounds; others levy higher taxes upon foreign corporations than upon those which they themselves create; and still others require such publicity that, where secrecy is desired, it is necessary to have separate corporations for busi- ness within their jurisdictions, so that only this part of the cor- poration's business need be reported upon. The endurance in time of a holding company may be that of corporations in general. From the private point of view, this form of business organ- ization has few disadvantages other than those attendant upon any other kind of corporation, though some of these are con- centrated and intensified by consolidation. Such matters as expense of formation, hostility to foreign corporations, re- stricted credit, may be neglected as being relatively small or largely overcome ; but, in spite of what was said about effective management, the questions of personal interest, directness of motivation, and responsibility suggest important limitations. In such great and complex aggregations as the United States Steel Corporation it can hardly be expected that the managers wUl have the same personal interest in the success of the business as did the partners in the old Carnegie Company ! As complex and devious as is the organization, so complex and devious is the motivation. After a certain size is reached, the man or men directing the business cannot have so exact or detailed a knowledge of conditions, and there is less chance to weigh these conditions carefully. The business organization may be- come so large as to resemble a pohtical government and then some of the stock arguments against government ownership may apply. All the manipulation and " inside management " arising out of a clash of interests between the officers or directors and the stockholders, coupled with inadequate legal responsi- bility of the former, are given a greater opportunity in a secu- rities holding corporation than in a simple operating one. The HOLDING COMPANY ORGANIZATION 235 complicated structure of secondary and tertiary subsidiaries with their many different lines of business, all of which are con- trolled by the holders of stock in a single primary company acting through a single board of directors, affords increased chances for fraud. It is now a matter of common knowledge that excessive promoter's profits and great manipulative cam- paigns have attended the organization of the Steel Corporation and any one may read of such things in the government reports on the tobacco industry. The overcapitalization, too, which frequently accompanies the formation of holding companies facilitates, if it does not stimiilate, fraud. The legality of holding companies is in a stage of uncertainty. It is clear that the holding corporation as such — as a form — is entirely legal. Corporations have the implied power to buy and sell property, and no reason exists at common law why one corporation should not become a member of another if its intent is legal. The mere holding of stock, unless prohibited by statute, may be ultra vires, but is not illegal. Therefore, although the decisions are not unanimous, it seems probable that, even in the absence of a general authorizing statute like that of New Jersey, " a corporation may legally be organized with the acquisition and ownership of shares in other corporations as one of its objects as expressed in its incorporation paper." * In several cases, indeed, the power has even been implied, as where the certificate contains a statement that one object is to assist in forming other corporations ; and a corporation which has power to lend money has been allowed to take shares in another corporation as collateral. Obviously, however, it would be far safer for a prospective holding company to have some general or special authorization ; and it must be observed that without such authorization, while a stock-holding control may be legal, it would probably be ultra vires of a corporation. Where there is any ulterior illegal intent it is now well es- tablished that the courts will look to that intent, however it may be cloaked under the guise of authorized stock holding. In the case of People v. Chicago Gas Trust Company (130 111. » Machen, Mod. Law of Corps., Vol. I, p. 57, and cases cited. 236 BUSINESS ORGANIZATION ANB COMBINATION 268), it was held that though the certificate of incorporation stated that the company might deal in the stock of other com- panies, the control of competing gas companies by this means was unlawful as constituting a monopoly; and the fact that the Chicago Gas Company sought all the stocks of constituent companies was pointed to in this connection in confirmation of the conclusion. In the celebrated Northern Securities Com- pany case (193 U. S. 197 (1904)) the attorneys for the company sought to maintain that the company was authorized by the State of New Jersey to purchase and hold securities of any com- pany; and that to deny it that power would be a blow at a State's right to incorporate business organizations. This con- tention was overruled, however; for the court looked to the obvious intent, which was to prevent competition between paral- lel lines of railway in violation — so it held — of an act of Con- gress. Thus, the corporation was formed for an unlawful pur- pose ; and of course no State authorizes corporations for unlaw- ful purposes. In line with these decisions, the Supreme Court of the United States has recently dissolved two great holding companies, the Standard Oil and American Tobacco ^ trusts ; not because they were holding companies, but because they were in restraint of trade. The point is that their State charters empowering them to hold stocks of other corporations availed them nothing as a defense against charges of restraint of trade. The obvious conclusion follows that the tendency of the law is to scrutinize closely the objects and methods of holding com- panies, and when these are found to be monopoly, restraint of trade — either unreasonable or prohibited by statute — or violation of sound public policy, they will be dissolved." From the public point of view, power without responsibility is the great objection to holding-company organizations. In the first place, we have seen that the financial liability of the mem- ' The Tobacco Trust was bound together by stockholding ; some of its great branches were mergers. 2 See Pearson v. Concord R. R., 62 N. H. 537 ; Dunbar v. Amer. Tel., etc. Co., 224 111.9; Bigelow V. Calumet Min. Co., 155 Fed. Rep. 869; So. Elect. Securities Co. 1/. State, 44 So. 785 (Miss.); Burrows v. Interbor. Metropol. Co., 156 Fed. Rep. 389 ; Elkins v. Camden & Amboy R. R. Co., 36 N. J. Eq. $. HOLDING COMPANY ORGANIZATION 237 bers of a holding company may be only a fraction of their finan- cial power. In the second place, they are under no adequate responsibiUty for their economic and social power. To the extent that monopoly and restraint upon the freedom of trade are harmful, the holding company is a menace which, while it perhaps need not be destroyed, needs pubHc supervision. The ease with which it enables the concentration of control in the hands of a few, the secrecy and deviousness of its interests, the " amphibiousness " of its situs, all give it evil potentiahties. Its amphibiousness makes State control futile; for, while it operates imder a State certificate of incorporation, and its con- stituent units are State corporations, its business is mostly in- terstate and beyond State control ; and by procuring incorpora- tion from a lax State and forming subsidiaries in hostile States the regulations passed by strict States concerning foreign cor- porations may be evaded in part. The State of Texas has a rail- way anti-stockwatering law, and a railway which has issued its maximxmi legal amount of securities still wants to issue more — wisely or unwisely, that is not the question. Accordingly, a hold- ing company is formed in Virginia to hold all the common stock of the Texas railway, and on the basis of this maximum amount it issues collateral trust securities to any amount it pleases.^ As already remarked, overcapitalization has commonly at- tended the promotion of holding companies; and, in many cases, the hope of gain through selling watered stock has been a chief object in forming such combinations. Although over- capitalization is not the fatal catastrophe pictmred by uninformed persons, it is serious enough, for it encourages fraudulent pro- motion, speculative management, payment of unearned dividends out of capital, and the exploitation of the " investing public." As conducted at present, holding companies have been sinners in this respect and it would be in the interest of public welfare to have full publicity concerning their operations or even to limit their capitalizations. 1 Such a case occurred in 1911. In the particular case which the author has in mind, the object was to give an equity in the property to a number of third mortgage bondholders whose securities had been wiped out by reorganization. The International & Great Northern reorganization. CHAPTER XVI COMPLETE CONSOLIDATION: AMALGAMATION AND MERGER Just prior to the great holding-company epoch which began about 1899 and reached its climax between that date and 1904, a number of important consolidations of a different type arose, — complete consolidations. This form was not new, but its application to the huge combinations of that time was a new development, for it then played a brief part in the " trust move- ment." Just what is a complete consolidation, and how does it differ from the securities-holding type? Definition and General Nature. — Noyes in his standard work on Intercorporate Relations (§310) sets it over against the hold- ing company in the following terms : " As a part of a plan for combining competing corporate interests, a purchasing corporation is organized, with a share capital sufficiently large for the purpose, which purchases the properties — plants, stock in trade, good will — of the several corporations, and issues its own stock in payment therefore. . . . The pur- chasing corporation, as the result of this process, becomes the absolute owner of the properties of all the corporations, and may continue or suspend the business theretofore carried on by them, and otherwise manage the affairs without restriction or supervision except by the State and its own stockholders." This statement is in accord with and serves to amplify the def- inition of complete consolidation to be adopted here, which is that it is a form of business organization which is established by the outright purchase of the properties of constituent organizations and the merging or amalgamating of stick properties into a single business unit. In a word, complete consolidation is combina- 238 AMALGAMATION AND MERGER 239 tion through sale. It is a union in which the parts are fused and lose their identity, at least for operating purposes. The following steps will be found in the ordinary consolida- tion. First, the directors of the constituent companies get together and make an agreement as to the capitalization of the consolidated corporation and the method of exchanging its securities for the stock or properties of the constituents. Next, this agreement is submitted to the members of the constituent companies for the purpose of securing their assent. Then, if, at properly called and conducted meetings, the majorities re- quired in such cases favor the step, a certificate or articles of consohdation, together with copies of the agreements of the stockholders, are filed with the Secretary of State of the appro- priate commonwealth. Statutory authority is always necessary to make valid a com- plete consolidation by merging or amalgamating business imits, and mere provision for it in a certificate of incorf)oration is not enough. Such authority may come through the enabling acts imder which the constituent companies were organized or in- corporated, through legislation at the time of the consolidation, or through a sanction by law of an existing but Ulegal consolida- tion. As a matter of fact, nearly all general corporation laws to a greater or less extent permit consolidation for lawful pur- poses. The assent of the stockholders of all constituent com- panies is required, and where the statutes provide for consoli- dation a favorable majority of from two thirds to three fourths of the shareholders is generally prescribed, but otherwise the assent must be unanimous. Payment is generally made in the securities of the consolidated corporation, but the members of the constituent companies cannot be made to accept stock in- stead of cash unless, perhaps, the certificates of their corpora- tions so provide. The difference between the form of organization thus de- scribed and the holding company is fairly obvious. The hold- ing company retains the separate existence of the combined or- ganizations and controls them by voting their stocks. Nor can it formally act for them independent of their directors. It is 240 BUSINESS ORGANIZATION AND COMBINATION at most a partial or temporary consolidation. Of course its constituent units must be corporations or joint-stock concerns, and the relationship is between their stockholders and the hold- ing corporation. The complete consolidation, however, wipes the separate existence of constituent elements off the slate and they become one with it. It would be a contradiction of terms to say that it controls them, for they are not ! These elements need not be corporations, as the consolidated corporation does not depend upon stockholding. Moreover, the properties be- ing fused, there is no occasion for separate existences and the relation established necessarily involves the organizations con- cerned as well as their individual members. Where, as is gen- erally the case, the constituent elements are corporations, the relation lies between the corporations as such, and not, as in holding companies, between the stockholders as individuals and a corporation which combines their organizations indirectly through combining their stocks. While the pure holding company merely holds stocks and does not engage directly in' the management of the constituent plants, the complete con- solidation is, at least nominally, above all an operating unit. From a legal point of view, it is important to draw a distinc- tion between consoKdation and sale. Is any sale of its property by one business organization to another a consolidation ? Gen- erally speaking, yes ; but at law, as well as in economic signifi- cance, no ; for, as the best considered cases have held, a mere sale terminates the interest of one of the parties in the property which is transferred, whereas a consolidation results in a union of interests in the property and so is more than a sale. If the stockholders of the vendor corporation retain an interest in the united properties, it is evidence of combination, and laws against combination may apply. To illustrate consolidations which involve mere sales, mergers which arise in the course of the normal expansion of a business may be mentioned ; for they are not the result of a plan to com- bine competing concerns to the end that the margin between price and expense may be raised. Such consolidations will have no trouble with the law. On the other hand, stand those AMALGAMATION AND MERGER 241 consolidations which are the result of a desire to combine all the plants supplying a given market, and here the results upon public well-being will determine legaUty. Closely associated with this classification is the distinction between those consoUda- tions which occur gradually over a period of years of steady growth, and those which spring up all at once, showing evidence of intent to combine. But the classification to be emphasized here is that which dis- tinguishes between the " merger " and the " amalgamation." A merger is a consolidation in which one business organization is absorbed by another that retains its own existence. Amalga- mation, however, results from the creation of a new corporation by the coalescence and virtual disappearance of a group of busi- ness organizations. Perhaps the most common case of merger is found in the absorption of branches and extensions by the main line of a railway system; for in such cases the branches cease to exist as separate organizations, while the main railway company continues on with little or no change; but, now, if two systems, the A and the B Unes, were to combine under the name of the C line, and cease to exist as system A and system B, the consolidation would be amalgamation. Thus in 1910 the Gulf & Chicago Railway Company was consolidated with the Mobile, Jackson & Kansas City Railway Company to form the New Orleans, Mobile & Chicago Railroad Company by their amalgamation. The use of the term " merger " in the sense here employed is fairly well established ; and, while the term " amal- gamation " has been more loosely used, its clear significance makes it the logical means of designating the coalescence just Ulustrated. Such is the usage in England. In a very general sense complete consolidation is as old as business organization, but as a characteristic feature of the combination movement of the second half of the nineteenth century it has a more special significance. In this special sense it is a corporate consolidation, and it seeks the same object sought by the trust form. The tendency in the earlier days of the combination movement was strongly towards the federation - of nominally independent business units. Entrepreneurs were 242 BUSINESS ORGANIZATION AND COMBINATION loath to surrender the autonomy of their organizations, and the business world had not yet become trained in the game of com- bination. Perhaps, also, competition had not become severe enough to act as an effective driving force. However that may be, consolidation built on a large scale and directed toward the restriction of competition was relatively rare. Then, be- tween 1890 and 1900, after the trusts had been ruled out and before holding companies became the style, there was an epoch of complete or nearly complete consolidation, notably in the iron and steel industry, the railway business, and also in sugar, paper, and cotton oil. The application of the anti-trust act to the looser forms of agreement combination went so far as to drive business organization into corporate combination; but, as already stated, the holding corporation won favor over the complete consolidation as being more facile and more in har- mony with the desire to retain the names and separate organiza- tions of the subsidiary concerns. In 1904, however, the North- ern Securities Company was declared illegal, and it became evi- dent that even corporate combinations, if in restraint of trade, could not be carried on safely imder the holding-company form. This decision xmdoubtedly somewhat checked the holding-com- pany movement, and at the same time it seems to have given a new impetus to complete consolidation; for the belief arose that by dissolving the constituent companies and owning their properties combinations would become less readily assailable in the courts. Since the more recent decrees of 191 1 dissolving the Standard Oil and American Tobacco holding companies, the possibiHties of merger and amalgamation have been further canvassed.' Throughout the development thus briefly sketched one pur- pose runs, the purpose of business men to regulate competition whether in trade conditions or prices to the end that the mar- gin between price and expense might be raised or maintained. On the other hand, down to 191 1 the statute law, as construed • The fact that these later decisions by strong implication provide for reasonable restraints of trade, however, holds out some hope for the continued use of securities holding along the old lines. AMALGAMATION AND MERGER 243 by the courts, has steadfastly opposed all such regulation. The result has been that one form after another has been evolved m an effort to effect a combination that would permanently regulate competition without meeting the active opposition of the law. Whether the merger or the amalgamation afiords the desired form will be indicated below. Amalgamation Illustrated. — One can hardly pick up a financial paper without learning of some consolidation. Be- cause of their greater importance and interest, however, we will confime attention to two well-known cases, the American Tobacco Company and the " Powder Trust," the former illus- trating amalgamation and the latter merger. Prior to 1904 the ConsoHdated Tobacco Company as a holding company had gained almost complete control of the common stock of the American and Continental tobacco companies and so had es- tablished a close community of interest in the tobacco industry. Such control seemed adequate, and there appeared to be little reason for change. But at least two reasons induced the leaders to form a more complete consolidation : they desired to simplify the organization, which imder the community of interest through stockholding was very compUcated, and also they wished to make their legal position stronger. In 1904, as already noted, the United States Supreme Court declared the Northern Securi- ties Company to be in violation of the Sherman Act, and, as the organization of that company was not dissimilar to that of the tobacco interests, the decision caused doubt as to the legality of the existing arrangement. As the commissioner of corpora- tions puts it : " There is little doubt that the stockholders and officers of the Consolidated Tobacco Company felt that this de- cision rendered the legal position of the Consolidated very un- certain, and that they therefore considered it desirable to trans- fer the actual assets of the American and Continental companies to a single corporation." Accordingly, in the latter part of 1904 the directors of the three companies drew up a so-called " merger agreement " and submitted it to the stockholders concerned. This agreement provided that the stock held by the Consolidated together with 244 BUSINESS ORGANIZATION AND COMBINATION certain inter-company holdings should be canceled, that the small outside holdings should be retired by exchanging them for the stock of the amalgamated company, and that outstanding preferred stock should be exchanged for bonds. This agreement was favorably acted upon by the great majority of the stock- holders — indeed, why should it not have been, when the Consol- idated interests were that majority — and became the basis of the certificate of incorporation of the reorganized American Tobacco Company, into which the three concerns were amal- gamated. Under the " agreement " a board of twenty-eight di- rectors was established, all the members of which, but one, were directors of the amalgamating companies, and that one had been treasurer of the Consolidated. Promptly upon the merger, the entire stock issues of the old American company and the Con- solidated and Continental companies were retired and complete consolidation reigned. Was the legal position of the combination under this new form of corporate consolidation stronger than that of the old organi- zation? Apparently not, inasmuch as seven years later it was forced to submit to a decision dissolving it. Nevertheless, as will appear shortly, the situation in which it found itself upon dissolution was very different from what it would have been had the amalgamation not been effected. Merger Illustrated. — The case of the " Powder Trust " consolidation is even more interesting.^ Prior to 1899 the powder industry was not organized on consohdated lines, but price agreements and pools had been the form which combina- tion had assumed. The leading powder producer was the firm of E. I. du Pont de Nemours & Company, a partnership. In the year mentioned, however, holding-company consolidation began. The du Pont Company was incorporated, and in 1902 its stock was turned over to a new corporation, the E. I. du Pont de Ne- mours Company (of Delaware), which company, in order to make itself a pure holding company, likewise turned all its assets over to two subsidiary concerns in exchange for their stock. 1 See U. S. V. du Pont de Nemours & Co., 188 Fed. Rep. 127 (1911) ; and Stevens, "The Powder Trust," in Quart. Jour. Econ., May, 1912, pp. 469-481. AMALGAMATION AND MERGER 245 But, beginning about 1904, — at the very time the Ameri- can Tobacco Company amalgamation was formed, — the pol- icy of complete consoHdation by merger was substituted for securities holding. In 1903 The Consumers' Powder Company, the Enterprise Powder Company, the Moosic Powder Company, and the Oliver Powder Company, all Pennsylvania corporations, were merged into the E. I. du Pont de Nemours and Company of Pennsylvania (one of the subsidiary concerns .of the Delaware holding company of 1902), that company increasing its stock from $2000 to $2,000,000, but retaining its identity. As the next step toward complete consolidation, in 1903 the E. I. du Pont de Nemours Powder Company was organized in New Jersey. This New Jersey du Pont company had a capitaliza- tion of $50,000,000 which it used in acquiring the Delaware company of 1902 (including its Pennsylvania merger) and sev- eral other corporations which had been organized to consolidate plants in various sections of the country. The situation in 1903, then, was this : (i) several preliminary mergers had been effected and scattered interests had been brought together in several holding companies ; (2) the securities of these preliminary con- solidations, complete or partial, were controlled by the 1903 du Pont powder company of New Jersey. From 1903 to 1907 the merging went on merrily. It is known that during those years the New Jersey du Pont company and a subsidiary, the Eastern Dynamite Company, gained control over sixty-four different corporations which they caused to be dissolved, and merged the properties of the dissolved concerns into their own companies. In 1907, when suit was brought against the organization now under discussion, the defendants frankly acknowledged that their poUcy was " eventually to vest absolute ownership of all the plants, manufactories, and tangible properties acquired by the methods above mentioned in one corporation, and then to dissolve the subsidiary corpora- tions." 1 The suit was brought before this policy could be en- tirely carried out. > U. S. V. E. I. du Pont de Nemours & Co. (1911), 188 Fed. Rep. 146, opinion of court. 246 BUSINESS ORGANIZATION AND COMBINATION The object is plain enough, being similar to that of the tobacco amalgamations, namely, to simplify organization and gain a stronger legal position. Thus, coimsel for the defendants in the suit just mentioned contended that the title of the New Jersey du Pont company, into which the others had been merged, could not be impaired. " The most that government in any event can claim," they argued, " is that prior to the organiza- tion of the present defendant companies there did exist con- tracts and combinations in restraint of trade, and possibly a monopoly . . ., and that such combinations and monopoly were participated in by some of the corporations which were later purchased by the present defendants. . . . Even so, the cor- poration had title to such properties, and if such combination and monopoly no longer exist, the title to such property must be good in subsequent purchases thereof." As in the tobacco case, however, the defense based upon the consolidated form of the combination was given little weight by the court. Railway Consolidation. — Just a glimpse at the situation in the railway business. Every one knows that here great systems have been built up which are more or less compactly organized and which divide up the United States into transportation prin- cipalities. The question as to how these systems are organized and held together is an interesting one. Every year numerous changes take place. Some roads are being reorganized, some merged, some amalgamated; others are being leased, others abandoned, and some are merely having their names changed. The net result, however, has been that three fourths of the rail- way mileage consists of roads which are operated by the com- panies that own them and are independent operating lines, while only the remaining one fourth consists of roads which are operated by companies that do not own them in fee. The larg- est part of the latter class of roads is operated under lease, whil? others are controlled by stockholding, by trackage rights, and other contractual arrangements. One can infer, then, that complete consolidation has been carried to a great length in the railway world. Back in 1894 only 68 per cent of the railway mileage was operated by inde- AMALGAMATION AND MERGER 247 pendent companies which owned their lines ; in 1904 the per- centage was 74 ; in 19 10, as just stated, it was 75. Most think- ers agree that this tendency to complete consolidation is the result of laws prohibiting railways from cooperating by means of the looser forms of organization like pooling and trafl&c agreements, and doubtless the application of the Sherman Act has encouraged the merger and amalgamation of railway com- panies. Also there is some evidence that the tendency to shift from seciurities-holding organization to complete consolidation, which we have found in manufacturing, appeared in transporta- tion. The statistics show that the independent operating roads increased markedly in number in the 1 904-1 906 period, and that the increase was not due to a splitting-up process, for at the same time the mileage embraced in large systems of over 1000 miles each grew steadily. The maximimi number of complete consolidations occurred during the three years 1900-1902, the great majority being of the merger type ; but this fact is partly to be explained by the great mileage built in 1899-1900 and 1901-1902, which resulted in numerous mergers of newly constructed lines into parent companies. The following table taken from the data given by the Interstate Commerce Commission's Division of Statistics show the facts : — Period Amalgamation Mergers Total 1894-1898 1899-1903 1904-1908 93 158 113 I2S 314 188 218 472 301 The largest part of the mileage of the subsidiary roads is controlled by lease, and such control may be mentioned as a kind of temporary consolidation similar to stock ownership. Leasing has been so commonly resorted to in the railway busi- ness partly because the laws of several States prohibit complete consolidation. In a way, too, it is a simpler process than con- solidation, for no new capitalization need be issued and the 248 BUSINESS ORGANIZATION AND COMBINATION nominal identity of both lessor and lessee roads is undisturbed. A majority of leases provide for the pa)anent of a fixed money rent to the leased line, but some make the payment contingent upon the earnings received from its operation. When the lease is for long periods of time it virtually amoimts to complete con- solidation, and illustrations of this occur in the lease of the West Shore to the New York Central for a period of 475 years and of several parts of the Pennsylvania railway in perpetuity. The most common period is probably 99 years, though shorter terms are frequently found. Wise public policy should restrict the period to not over 100 years. On the whole, the lease method of consolidation is less used than formerly.^ Advantages and Disadvantages. — There are two problems in corporate combination : one is the corporation problem, the other is the " Trust Problem." This is true because such com- binations are, in the first place, to be regarded as corporations and as units of business organizations; while, in the second place, they may also be considered as checks upon competition and as agencies of monopoly. The first problem is one pri- marily of production ; the second is one primarily of distribution or consumption.^ Later, some attempt will be made to deal with these problems separately, but here they may be left inter- twined. The chief advantage of the complete consolidation lies in the simplicity and directness of organization which it brings. For the complex mass of subcompanies and of sub-subcompanies which are found in the large holding corporations, it substitutes one united operating company. This makes possible the aboli- tion of numerous figurehead oflScials, and of expenses involved in maintaining nominally independent establishments. The presidents or vice presidents of the constituent companies are ' The reader will find it both interesting and instructive to turn to Table I in the Statistics of Railways in the United Stales, compiled by the Interstate Commerce Commission, and in the "remarks" column read what changes are taking place in railway organization and see under what "terms" the various systems are held to- gether. The former information is presented in a supplement to the main table. 2 Of course, production, distribution, and consumption are contemporaneous and parts of the circle of life ; but even a circle can be approached from different " sides." AMALGAMATION AND MERGER 249 replaced by superintendents entirely responsible to the central office. Moreover, it binds the constituent corporations into a complete harmony of interest which is absolute and irrevocable and it removes a part of the incentive to manipulation of con- stituent companies which exists where control by stockholding is depended upon. One interest is less likely to be " milked " by the other. Again, the complete consolidation has a somewhat stronger position in the courts than even the holding company. It is true that it may fill the same function as the trust, and that in both the tobacco and powder cases the courts have dissolved this sort of organization as far as seemed possible and expedi- ent ; but the limitation contained in this statement suggests the point. Once effected, a complete consolidation with ownership in fee is more difficult to disintegrate. In the case against the E. C. Knight Sugar Refining Company, involving the purchase of Philadelphia plants by the American Sugar Refining Com- pany, the United States somewhat feebly tried to have a con- solidation set aside and failed. In the dissolution of the Ameri- can Tobacco Company, also, it is not to be forgotten that an American Tobacco Company still exists and produces about one third of the output of the cigarettes and smoking tobacco. The corporation which was built up in 1904 by the merger of the Consolidated, the Continental, and the old American Tobacco companies survives and the merged companies can no longer be recalled. Simply, the American Company's interests in thirteen allied and subsidiary concerns have been severed, so that the Liggett & Myers Company, the American Snuff Com- pany, the British-American Tobacco Company, and others are separate and presumably independent organizations. And in the du Pont de Nemours case the court said : " The dissolu- tion of more than 60 corporations since the advent of the new management in 1902, and the consequent impossibility of re- storing original conditions in the explosives trade, narrows the field of operation of any decree we may make." The whole point is that the merger and the amalgamation, while they may be attacked as being illegal combinations, are the forms of 250 BUSINESS ORGANIZATION AND COMBINATION combination least likely to violate any principle of corporation law : as a form of business organization, the merger has the strongest position at law. It is a single (though really com- poimd) corporation, arising out of sale and purchase between parties which are corporations and have the right to buy or sell property for legal purposes. But here we must pass to a recognition of the limitations of the complete consolidation; for, in spite of the difficulties, the courts will surely look to the purpose and methods of the consoUdation,and if these be found to be monopolistic and unlaw- ful the consolidation will surely be attacked. Said the court in the case last referred to : — "The du Pont Company of 1903 was created to aid the combina- tion in concentrating its power and fastening its hold on the monop- oly which it had sedulously built up. We do not propose by our decree to deal with titles to property. Our power is defined in the fourth section of the Anti- trust Act. ... If our decree, limited to that purpose, shall necessitate a discontinuance of present busi- ness methods, it is only because those methods are Ulegal. The in- cidental results of a sweeping injunction may be serious to the parties immediately concerned; but, in carrying out the command of the statute, which is as obligatory upon this court as it is upon the parties to this suit, such results should not stay our hand. They should only challenge our care that our decree may be no more drastic than the facts of the case and the law demand." ' Though a few cases have held that the purchase by one cor- poration of another which results in the suppression of competi- tion is not illegal,' the weight of opinion is that the corporate purchase cannot authorize power which has as its object com- bination that will be in unreasonable restraint of trade or com- petition.' > U. S. 11. E. I. du Pont de Nemours & Co., 188 Fed. Rep. 153. ' See Trenton Potteries Co. v. Oliphant, 58 N. J. Eq. 507 (1899) ; State v. Con- tinental Tobacco Co., 177 Mo. i (1903) ; Dittman v. Distilling Co., 64 N. J. Eq. 537 (1903) ; Metcalf v. Amer. School Fum. Co., 122 Fed. 115 (1903). » In addition to the tobacco and powder cases cited in the text, see Shawnee Com- press Co. V. Anderson, 28 Sup. Ct. Rep. S72 (1908) ; National Lead Co. v. Grote Paint Co., 80 Mo. App. 267 (1899) ; Distilling, etc. Co. v. People, 156 111. 448, 491 (1895). AMALGAMATION AND MERGER 251 The economic disadvantages of complete consolidation are: (i) It is not a facile means of combination because it involves consent to sale by a large majority of the stockholders of the constituent companies ; it is a more expensive process, which necessarily involves greater capitalization in proportion to con- trol ; and it is not one that can be kept secret. (2) Valuable franchises and firm names possessed by constituent companies may be lost by purchase and dissolution. (3) The flexibility and capacity for adjustment to local conditions which char- acterize control through stockholding are not present. (4) Al- though the danger is less likely to occur than in the case of holding companies, complete consolidations may be " over- grown " making the business unit so large that no entrepreneur can adequately grasp its details or judge them carefully. Social Point of View. — From the social point of view, it is diflS- cult to judge the merits of mergers and amalgamations. It seems to the author, however, that, granting the desirabihty of combination and " big business," the complete consolidation is the logical way to bring them to pass. Economy, responsi- bility, — using that term in the very broadest sense, — and harmony with sound social institutions, must be the tests. From the purely economic standpoint, the complete consolida- tion has the advantage of the most concentrated direction and management, and all the economies that lie in large-scale, com- bined organization may be more easily attained.^ Under the system of secvuities-holding combination, which is the only other form of combination that need be considered here, the same in- dividual may be a director in fifty or sixty different corporations, to say nothing of acting as an executive head of one of these organizations. In such a case, no adequate information or attention can be given to the affairs of any one or two concerns without sacrificing those of the others, and this breeds irrespon- sibility among the officers of the various corporations. Con- solidation, by reducing the number of separate corporations, would concentrate directors' responsibility. It would tend to remedy the abuses of interlocking directorates with their ^ See above, pp. 22 ff., 233. 252 BUSINESS ORGANIZATION AND COMBINATION irresponsibility and possible inefficiency. There is some danger that consolidation will result first in overcapitalization, due to excessive stock and bond payments, and then in the petri- fication of that capitalization as the result of losing the identity of the several properties against which it was issued. The holding-company form makes readjustments in capitalization easier. But, on the other hand, the holding company is more apt to retain such a mass of plants and business organizations as to resxilt in a combination which is overgrown, — one not able to secure the complete economies of large-scale production. Useless wheels within wheels often exist, especially where an attempt is made to conceal from the public the fact of control. Moreover, it is usual to precede or supplement the formation of holding companies by merging or amalgamating some of the properties in order somewhat to simplify the organization. One must conclude that while in its formation the consolidation may be more expensive, once established it gives a more economi- cal organization in that its direction is simpler and in that it is not so apt to keep up a wasteful duplication of organizations and plants. And as to the facility of formation, it is to be re- membered that ease of forming combinations of competing or- ganizations may encourage monopoly and overcapitalization, and certainly it is no unmixed blessing from the public point of view. As to responsibility to the public, or even to stockholders, the complete consolidation is decidedly superior to securities- holding organization. True, both are corporate combinations; but in one, combination has been carried so far as to make a single compoimd corporation which acts directly and which is controlled only by a majority of all the stock involved, whereas in the other there is but a combination of controlling holdings in the constituent organizations, which combination acts indi- rectly through these holdings upon the constituents, and is or may be controlled by a small fraction of the total capitaliza- tion. In the holding company the total power is lodged in a few; the total responsibility is spread among many. Finally, the sociological test of consonance with the institutions AMALGAMATION AND MERGER 253 of the environing society must be met. If, whether for good or evil, the society concerned is organized on a democratic basis, and its dominant ideal is the preservation of the greatest measure of individuality among its citizens that is consistent with the great- est well-being of the greatest number ; then the form of business organization which is the most democratic in its control and which affords the largest measure of individuahty consistent with economy of operation is the one to be favored. When used for combination of competing plants, the holding company al- lows more nominal individuality, but this is generally not realized in practice; and certainly that form of organization lends it- self to xmdemocratic control more readily. Furthermore, over against the nominal independence of the holding company's parts is to be placed the fact that in a field of any great extent the complete consoHdation is not so readily formed as is the holding company, and consequently is not so apt to become a monopoly by embracing an entire industry. Here the thought occurs to one, is the greater difiSculty of dissolving the complete consolidation not in favor of the hold- ing company ? The answer partly depends upon the desirabil- ity of dissolution, and, as a rule, dissolution will prove an elusive and delusive remedy. Secret evasion is commonly the result ; the danger of destroying economically desirable organiza- tion is run ; and those most injured are generally the innocent minority interests involved. It is the author's judgment, then, that sound pubUc policy will encourage complete consolidation by merger or amalga- mation rather than by securities holding, and that, in the long run, legitimate individual interests lie in the same direction. Some Conclusions concerning Combination Organization. — A few generalizations may be drawn from the foregoing discus- sion of the various combination forms of business organization. For example, on the score of direction and management, it ap- pears (i) that in consolidations, the more extensive or complex the organization, the more the entrepreneur's function is delegated by the stockholders to representatives ; (2) that the more extended or complex the organization, the more the busi- 254 BUSINESS ORGANIZATION AND COMBINATION ness function is separated from the technical, and the more the directors attend to the former, leaving technical matters to salaried managers. Also, (3) imder these same conditions, the wider becomes the gap between those who bear the owner's responsibility and those who exercise the directive power. (4) It follows from all this that the old arrangements for transmit- ting authority from the shareholders to the management have become less and less adequate as a democratic means of secur- ing control of business by investors. Again, it has appeared that there are two great types of combination : on the one hand there is the federation type, or imincorporated combination; on the other hand there is the consolidation or corporate combination. The federation (i) re- tains the separate existence of the combining organizations, (2) is less stable, (3) is more secret, and (4) is not so effective in se- curing economies in management and direction as in marketing. Its greatest economy generally lies in selling through a central agency. The consolidation takes away the independence of the units, and is more stable. If not overgrown, it affords a great chance for economical management. In each type the trend has been toward the most stable and centralized form, on the one hand the sales-agency pool with output allotment, and on the other the amalgamation or merger. It is interesting to reflect that with the complete consolidation we may be completing a cycle in the evolution of business or- ganization. Beginning with the individual, we found various forms of association which reached their culmination in the simple corporation. Beginning with the corporation, there developed various forms of combinations of corporations (and other simple associations) which seem likely to culminate again in — the corporation ! The new corporation, however, is a compound corporation built up through the consolidation of preceding organizations. Perhaps the pool, the trust, and the holding company will continue to exist alongside the compound corporation, just as the partnership and the joint-stock company have continued to exist beside the simple corporation. Prob- ably it will be well to encourage the various combination forms AMALGAMATION AND MERGER 255 in certain cases and subject to appropriate restrictions, just as it is best to encourage partnerships and individual organiza- tions where they are effective. The end has not come yet, and who can tell through what new cycles business organization must swing ! But surely it is worth while to have grasped the concept of such organization as ever evolving through continu- ous differentiation and integration caused by the struggle of business men to adjust its existence to the growth of society. BOOK III STRUCTURE AND LIFE HISTORY OF A TYPICAL BUSINESS CORPORATION CHAPTER XVII INTERNAL ORGANIZATION OF A GOING CORPORATION Organization in General; and the Accounting and Economic Points of View. — The corporation is easily the central figure in the world of business organization in the United States. Whether viewed as the culmination of association among indi- vidual business men, or as the initial unit of the material out of which combinations are built, it is without question the most important primary form of business organization ; and there is little need for a more detailed discussion of unincorporated organizations. It is most important, however, to know the structure and the life history of the business corporation. With this end in view, we will first examine the internal organization of a going corporation. Taking the corporation for granted, we will inquire into its organs and their functions. How are they arranged and coordinated and directed ? What, in short, are the anatomy and the physiology of a business corporation regarded as an operating organization? We may then pass more intelligently to a consideration of the formative stage of corporate existence, covering the periods of promotion and tmderwriting. In looking at the corporation as an operating business unit, business men take two points of view which we will call the accovmting and the economic points of view. The former gen- erally means an individual way of looking at the business ; for it concerns a relation between the business imit and its pro- prietors. In a word, it is the fimction of accounts to show the condition of a business organization regarded as a source of in- come to its owners. In a way analogous to that in which econ- omists are wont to distinguish the wealth of a nation from its annual income, accountants set forth the condition of a business 259 26o BUSINESS ORGANIZATION AND COMBINATION unit under two heads, the balance (as shown in a " balance sheet ") and the income (shown in an " income accoxmt ")■ The balance sheet is a sort of periodic inventory which shows the standing of the business at any given time. On the one hand are summed up the " assets " ; on the other the " lia- bilities." The assets show what the proprietors have put into the business as it exists at any given time and what others owe the business, and includes such items as plant and equipment, materials, cash, and accounts receivable. The liabilities show what the business owes to the proprietors and others, embracing such accounts as stock, bonds, accounts and bills payable, and profits. The income account is designed to show the net re- turn from the business to the owners on what they have put into it, the two main heads, of course, being revenue and ex- penditures. Thus it shows the results of operations over a period of time, a month or a year. The operating expenses and others are deducted from the receipts from all sources to ascer- tain the net revenue, out of which dividends may be paid or a surplus be accumulated. We, however, are not here concerned with accounts. We are to take the economic point of view, which regards the busi- ness as a productive unit, or means of organizing and directing the factors of production ; and it follows that attention will be devoted to the productive cooperation of land, labor, capital, and entrepreneurial ability, rather than to the relation among them as set forth in accounts. In the chapters describing the evolution of business organiza- tion, attention was centered chiefly on the ownership of the units, and the formal external aspects were emphasized. Now, it behooves us to take a glance within and see the organization from the internal operating point of view. We have seen that the operation of a business unit is affected by the character of ownership and the external form of organization, but chiefly, of course, it is dependent upon the kind of work that is done. The operating organization of a bank difi^ers from that of a fac- tory, and both are unlike that of a railway. Factories, in turn, are variously organized according as they produce steel or cloth INTERNAL ORGANIZATION 261 or ice. All, however, are engaged in production, and have the same general problem. All must combine land, labor, and capital, under the direction of an entrepreneur; all take in some " raw " materials, and, by applying labor power with capital, must operate to tvu"n out a finished good or service ; all must sell the product, collect the income, and account to the owners for expenditures and receipts. In each case these vari- ous processes must be more or less subdivided, and at the same time they must be so interrelated and coordinated that they will work together for the good of the business unit. There will be certain classes of interests which must be effectively subordinated and directed ; and the internal aspects of the or- ganization of ownership and administration are found on the one hand, while the organization of the technical processes of operation (manufacturing, transportation, mining, etc.) lie on the other. Just as there are general principles of anatomy and physiology which can be studied by dissecting cats or corpses, so certain general forms and principles of business organization exist, and in a brief sketch like the following these general features alone can be taken up. They will concern (i) the division of the work into departments (differentiation), and (2) the central direc- tion of these departments to secure cooperation (integration). Classes of Interests. — Several classes of interests are to be distinguished in any discussion of the internal organization of a business unit, and notably so in case of a large corporation. In single-entrepreneur and partnership organization the situation is relatively simple, for ordinarily those who are the owners are at the same time the ones who direct and manage the business, — although a salaried manager is not uncommonly employed. Then there are laborers, of course ; and, when capital is borrowed, the creditors who hold the owner's notes may in practice have some voice in his affairs. In such a case, however, they can hardly have the long-time, organized influence often exerted by corporation bondholders. The typical corporation is a much more highly differentiated organization. First come the stockholders, who are nominally 262 BUSINESS ORGANIZATION AND COMBINATION the owners and the ultimate source of authority. They, how- ever, exercise their authority through an elected board of di- rectors, composed of men who are supposed to represent them. Very commonly there is also a body of bondholders ; and, as bonds are in practice regarded merely as one means of raising capital and as being a part of the corporation's capitalization, Property Stockholders (& Bondholders) THE CORPORATION THE PLANT 4 \ >^ Directors I Y Y Excecutive I I Manager ADMINISTRATION Superint6n(^ents I I 1 Foremen i i \ Labor Force OPERATION 1 Pro< o z- ui wr u C c o c (D -i n o 4- c c I/) u o 2 a o z (A (D C 0) 1_ cs o u a) 4- (£|s: o x: If) O -+- c CI Q f u o »/) C I. 0) c ov. oo 4--''- u Utilization of waste for by- 14. Strength for export business. products. 15. Cheaper raw material 7. High-priced officials dispensed (bought in largest quan- with. titles and from nearest 8. Saving in cross freights. sources). 16. Strength in dealing with organized labor. But competition may also be legally or ethically illegitimate. To be associated with competition are points 2-7 in the list of eyils with which this chapter begins. Rebates, bribery, secret control of nominally competing plants, and the Uke, have existed under a system of " unrestrained " competition, and such prac- tices are not only wrong but unlawful. Refusing to sell to re- tailers who also buy of competitors, and cutting prices on cer- tain special articles or certain grades of product may or may not ' These, and, perhaps, some of the others, may be obtained by large-scale pro- duction without combination. While not holding in all cases, and while they may often be obtained without a giant combination, or "trust," — to say nothing of monopoly, — these economies of combination and restricted competition are very real. 352 BUSINESS ORGANIZATION AND COMBINATION be unlawful, but the common sense of the community or society regards such practices as wrong. Competition by terrorism is no beneficent thing. It is piracy. The conclusion is that in judging competition, whether as a cause of monopolistic combination or as a force which it is de- sirable to retain, we must distinguish the good and economical from the bad and wasteful. Clearly, some regulation of com- petition along the lines indicated by the abuses just described, is desirable. Neither unregulated competition nor unregulated monopoly can be safely tolerated. Another important cause of combination for monopoly is (b) the desire of individuals to secure control of limited natural re- sources, generally in the shape of raw materials. The chief reason why the steel corporation desired the Tennessee Coal & Iron Company appears to have been the latter's possession of such resources, and the exorbitant royalty paid on the Great Northern ore properties is evidence of a similar desire. Many similar illus- trations might be found in the petroleum industry and elsewhere. These causes and others actuate those who seek monopoly. From the point of view of the public, the conditions which, by facilitating their ends, aid the growth of monopolies are also causes. Such conditions are (c) corporation law, and {d) pro- tective tariffs. The former is, to the author's way of thinking, the more important ; but it will be dealt with in discussing the corporation problem. As to the tariff, it has already been in- dicated that protection functions chiefly in an indirect way as an occasion, facilitating and inviting combination and monopoly. Inasmuch as it narrows the market, making control easier, and reduces the sources of raw materials, facilitating dominance at that end, it encourages monopoly. Then, too, it may heighten the ill efifects of an established monopoly by allowing prices to be raised higher. In the case of the sugar industry, the tariff appears to have hastened monopolistic combination by beget- ting a condition of abnormal competition which led to the building of the Sugar Trust. (2.) Uneconomical Production. — Just as Socialists are wont to overlook the problem of production in their eagerness to solve PUBLIC POLICY: EVILS AND CAUSES 353 the problem of distribution, so writers on the " trust problem " sometimes forget that uneconomical production is often asso- ciated with trusts, and is one aspect of the problem. The chief immediate causes for the use of uneconomical methods by the trusts are (a) desire for monopoly, often leading (6) to over- grown business units; (c) overcapitaKzation ; (d) inadequate corporation laws ; and (e) legal uncertainty. Both overgrown business units and overcapitalization are often caused by the effort to profit by watered stock, that is, the effort to make money by selling something for more than it is worth ; for it is this effort which actuates fraudulent and uneconomical pro- motions (see pages 287, 298). Consequently we may say that desire for monopoly gains and desire for unearned gains on watered stock are the more deeply underlying causes of uneconomical trust methods. Surely, little discussion is needed to make plain the reasons for this analysis. It is the desire for monopoly gain which leads business men to buy up plants and patents only to suppress them; or induces them to pay extravagant prices for mines, railways, and factories ; and everybody knows that the security of monopoly can deaden the desire to adopt the most advanced methods. By overgrown plants are meant those which are so huge and unwieldy as to make them incapable of efficient direc- tion by any effectively concentrated directive agency. A large part of those trusts which have not rested on monopoly have proved to be overgrown and therefore unable to stand competi- tion with better directed plants. Either by their reorganiza- tion, or by earnings inadequate to keep up the value of their common stock, such corporations as the " Whisky Trust," the " Cordage Trust," the " Malting Trust," the International Pa- per Company, the American Writing Paper Company, the American Hide & Leather Company, the Union Bag Company, the Sole Leather Company, and the American Can Company, have shown that they are not the most economical producers.' 'See Meade, "The Fallacy of Big Business," Annals of Amer. Academy, Jxily, igi2; Meade, "Economies of Combination," Jour. Pol. Econ., April, 1912. Brandeis, Hearings of Sen. Com. on Interstate Commerce (1911). P- ii47 ff- 2A 354 BUSINESS ORGANIZATION AND COMBINATION Overcapitalization is now recognized as a cause of bad manage- ment in that it inevitably brings a tendency to pay dividends out of capital. More than that, it is a cause of speculative man- agement or manipulation; for overcapitalization generally means a situation in which the value of the more stable and sure assets is covered by bonds (or preferred stock), while consider- able quantities of common stock are issued as bonuses or sold to persons who are more or less in the dark as to the likelihood of receiving dividends. Thus, one group owns the great bulk of the property while anothem group controls the management, and, as control costs little and means little risk, the conduct of the business is dominated by the idea of raising or lowering the price of its mass of speculative stocks on the exchanges. Under the head of inadequate corporation law as causing xmeconomical production, would come the irresponsibility and imrepresentative character of directors and officers which en- courage extravagance and mismanagement. As to legal un- certainty, it is now the most common complaint among business men that they are prevented from cooperating and from laying business plans by the present unsettled state of the law and of public opinion. Undoubtedly this condition adds an element of risk that retards progress and tends to increase interest rates. II. Inefficient Service. — Inefficient service to the consvuner is in part synonymous with xmeconomical production, and to that extent its causes are the same. The possession of imregulated monopoly may make a business organization less progressive and less attentive to the wants of customers. On the other hand, too, unrestrained competition may result in unsafe or unwhole- some service. Without further discussion, it may be concluded that public regulation is necessary in a wide range of cases in order to protect the interests of consumers. III. The Corporation Problem and Abuse of Investors. — After what has been written concerning corporations in the fore- going pages, we need only pause to mention the causes of the abuse of investors' interests. In large part, the waste and un- economical production found in the operation of many of the PUBLIC POLICY: EVILS AND CAUSES 355 trusts are a fraud upon the investor ; but the chief consideration here is to ascertain why the corporate form, in which nearly all of our giant combinations are clothed, fails to work for the best interest of the stockholders or owners. This is one of the most fascinating and important problems of the day ; for is not the house in which over three fourths of our industry is carried on infested with disease? In a democratic country, hundreds of thousands of citizens in their economic relations are living in an oligarchy. Corporations, for the most part, have ceased to be " Uttle republics," in which the shareholder citizens govern through democratically elected representatives, and too often these shareholders are mere ignorant pawns in a game of high finance, — their shares the chips of a gigantic poker game. What is the trouble? The root of the evil is a lack of reasonable harmony of interests within the corporation. Instead of operating harmoniously to pro- duce wealth, and to render a due share of interest and profits to the owners of the capital and the risk takers, — corpora- tions too often become as gambling houses which are supported by church members with shut eyes, and are run by men who seek to extract as much money as possible from " the public " with- out scrupling to pocket what should go to the owners. More specifically, directors and officers too often work for their own gain and against the interests of their constituents, the share- holders. Barring monopoly, it is probable that the long-run in- terests of the shareholders and the public are largely identical ; but this is not the case with the " insiders." Holding but a single share of stock, and knowing next to nothing of the techni- cal processes of the industry or the wishes of the owners, directors who are interested in a dozen other businesses, not infrequently competitors, determine the policy of the corporation. They take the promoter's fiction without disclosing the facts; they manipulate the market for its stocks, profiting as individuals by the changes caused; they enter combinations and dispose of properties with all too little regard to the productive capacity of the plant ; and all this may happen with little or no knowledge on the part ^ the stockholders. The majority prey upon the 3S6 BUSINESS ORGANIZATION AND COMBINATION minority, " freezing " them out upon occasion. So common are such clashes of interest that it is little wonder that those who have made no deep study of the corporation sometimes regard it as an evU in itself. But merely to point to a clash of interests takes one but a little way toward the solution of the problem. Why the clash ? What particular occasions for it may be removed? In answer to these questions, then, we may attempt to state the immediate causes of the corporation problem, as follows : — (a) Perhaps not of such vital importance as some of the points to be mentioned, but worthy of distinct attention as an occasion of evil, is the element of risk which lies in the multiplicity of cor- porate securities. To mention but a few varieties, the investor is confronted with common stock, preferred stock, and bonds. This, however, is but the beginning of his difficulties : for the preferred stock may be " first preferred " or " second pre- ferred " ; it may be preferred either as to assets or as to divi- dends ; it may receive cumulative or non-cumulative dividends ;i and it may or may not convey voting power. Some stocks are assessable by the corporation, while others are not ; some are subject to " call " at a certain price, while others are subject to no such provision ; and some have a limited dividend, while others may receive an unlimited income. Also, a score of dif- ferent kinds of bonds may be found on the market, differing in priority, kind of security, method of payment, and redeem- ability. This situation fosters clashes of interest among the members of corporations ; for each class of security holders may profit by a course of action which immediately injures every other class. The common stockholders, for example, are apt to desire larger dividends at any cost, while the holders of pre- ferred stock and bonds generally look more carefully to the maintenance of the property. The existence of a variety of securities, too, facilitates manipu- ■ Cumulative preferred stock is stock which has some prior claim over common stock, and bears dividends which cumulate when not paid, i.e. if passed in any one year they remain due and must be paid before any dividends can be paid on common stock. PUBLIC POLICY: EVILS AND CAUSES 357 lation especially when forms are not standardized. This is strongly suggested by the reorganization of the American To- bacco Company in 1904. In that case, by the action of a ma- jority, a large issue of non- voting preferred stock was substituted for stock which had voting power, thus eliminating the minority vote. Nor is this the only kind of evil which arises from multiplicity of securities. OvercapitaUzation is encouraged by the same cause: for, after all the securities that the true value of the corporation's assets will warrant have been issued, millions of a speculative and specious kind remain to be " floated " ; and purchasers appear to be ever present among the ignorant and the adventurous. Perhaps the most obvious evil of all is suggested by the last statement. This is the uncertainty and risk which the would-be investor encounters. Many a man has purchased securities in the beUef that they were sound, only to find that some obscure clause in the security document or some unknown provision in the corporation's certificate or by-laws had either given him but a remote and secondary claim or had deprived him of all voice in the corporation's affairs. The losses borne by holders of com- mon stock and second-mortgage bonds in many a corporate reorganization speak eloquently on this point. (b) Easy Transferability of Stock. — Considerable freedom to buy and sell corporate securities is essential to the success of the joint-stock idea and to that fluidity of investment which pro- motes industrial progress. This should not be forgotten. But we have seen that the joint-stock idea has its dangers. Ac- cordingly, the ease with which men can buy into or sell out of business corporations is one of the occasions of corporation fraud and manipulation, especially in the case of the larger corpora- tions whose securities are dealt in on the exchanges. Control for sinister purposes is rendered easy ; and escape from the nearly wrecked business is assured. Would directors often injure a business imit if they could not sell its stock " short " and buy it cheap? If stockholders had to stay by the business, would not greater care be exercised in business management? Un- 358 BUSINESS ORGANIZATION AND COMBINATION limited transferability encourages overcapitalization and specu- lative management. (c) Small Holdings by Directors and Officers. — Closely allied to the foregoing point, in the way that it affects the corporation, is the smallness of the stake often held by those who direct the corporation's poUcy. In most cases, one share will qualify any person to be a director. This facilitates the creation of " dummy directors " ; and it means that the ups and downs of the cor- poration's business need not worry a director in so far as his personal financial affairs are concerned. The fact that few, if any, directors are required to be residents of the State which creates the corporation tends in the same direction. It is little wonder that boards of directors so frequently take no part in directing. " Interlocking directorates " arise out of the two conditions indicated in points (b) and (c), and the interlocking in turn be- comes an occasion of evil in many cases. A large corporation may place one or more of its directors on the boards of dozens of other corporations for the sake of financial influence or of busi- ness cooperation. (d) Remoteness of stockholders is to some extent a cause both of the lack of participation by the owners of corporate property, and of the common clash between their interests and those of the insiders. (e) This cause is reenf orced by the growing size and complexity of business units; for only a small part of the stockholders have either the time or the ability to understand even the larger de- tails of a business like that of the Steel Corporation. Johnson, in his American Railway Transportation, makes the following statement which bears out the preceding points : " The control of railway properties is coming more and more into the hands of a small number of groups of capitalists, but each group of capitalists comprises a multitude of individual owners, the concentration of control being the result of the delegation of authority to the limited number of financial leaders in whom investors have especial confidence. ... As the corporations become larger and the stockholders become more widely dis- PUBLIC POLICY: EVILS AND CAUSES 359 tributed, control by the individuals or groups of individuals holding a minority of the shares becomes easier " (p. 76). (J) Doubtless, too, the proxy has been abused, being secured by insiders from careless or ignorant stockholders for unduly long periods of time, and for unrestricted purposes. (g) Inadequate Reports. — Even if the owners or stockholders had the power to determine the general poUcy of the corporation, it is rarely the case that they receive information concerning their business which would be adequate to enable them to act intelUgently. Probably they do not have adequate access to the books in some States ; but that is a difficult question.^ Cer- tainly there is crjdng need of better information concerning (i) promotion, (2) operation and finance, and (3) stockholders' and directors' meetings. Now, the intelligent and interested stockholder generally has no means of knowing to what extent his shares represent promoters' services and property of doubt- ful or speculative value; he has slight information to enable him to form a judgment as to wasteful or corrupt management ; he is an outsider. Nor do the States help much by requiring pubUc information. It appears that in 1910 as many as eighteen States required absolutely nothing but a purely for- mal report containing such insignificant items as the name of the company, the amount of its stock, etc. Is it any won- der that corporations have come to be regarded as investment or speculation institutions in whose slots, as it were, so many dollars are dropped by the bUnd with the expectation that somehow or other dividends will be forthcoming? (A) Inadequate Representation of Minorities. — At the present time a large minority may secure absolutely no representation in the direction of a corporation. Under the prevalent system of voting, each stockholder has one vote for each share of stock, and in electing directors the minority holders can have but one vote per share for each candidate. The result is that a bare majority can elect all the board. Again, small majorities, under the laws of many States, can pass measures which fundamentally affect the business. Certainly there is danger of losing efficiency ' See above, p. 265. 360 BUSINESS ORGANIZATION AND COMBINATION by giving iindue power to minorities, but the existing situation gives occasion for serious evils. (i) Indefinite Responsibilities ; Inadequate Penalties. — One great trouble with corporate action has been the difl&culty of fix- ing responsibility. To some extent this is a necessary concomi- tant of indirect motivation and delegated management; but more largely is it due to the faciUty with which the responsibility for manipulation and wrongdoing has been deliberately evaded, even when the wrongful acts have not been concealed. Under the guise of agents, ofiicers have acted against the best interests of their companies. Directors and officers have sinned against the pubhc with personal impunity; and bare majorities, per- haps fraudulently gained, have run counter to the wishes of large minorities on important points. In short, the policy of a corporation may be decided by a few, while the responsibility for that policy rests upon many. To cap the climax comes the inadequacy of penalties which was noted in an earlier chapter (Chap. VII, p. in). It is easily possible, here, to overemphasize the shortcomings of the law, for there can be no doubt that the legal principles concerning the liability of directors, officers, and promoters are much more deserving than is commonly supposed by the layman. Not uncommonly the trouble does not lie in the law so much as in ignorance of the law ; and the malefactor escapes with little or no punishment, because the injured stockholders or creditors do not know their own rights. Thus, the author knows of a case in which a corporation officer was advised by his attorney that he had so acted as to make himself liable for the sum of $100,000. He promptly authorized the attorney to make the best settlement available, and the shrewd lawyer " settled " for $2500, a feat which was made possible by the ignorance of the claimants of theur strength under the law. Fundamental Causes. — In the case of the corporation prob- lem, — and also, in part, of the "trust problem," — the great, fundamental, active cause is moral; the points made above have been the more immediate occasions through which the un- derlying moral forces work. The one great moving cause is the PUBLIC POLICY: EVILS AND CAUSES 361 desire on the part of individuals to enrich themselves at the ex- pense of others, without regard to social obligations. This, of course, is simply a virulent form of selfishness. It is evidence of a low moral tone, and it works through secrecy. In part, it works through bad laws ; in part through a violation of existing good laws. The more fundamental situation may be summed up by saying that our problems of business organization largely arise out of a low moral tone among business men, fostered by secrecy, and aided by faulty corporation law and other legal maladjustments. Under the latter head would come tariffs, patent laws, laws on restraint of trade, and the like, — laws formed under different business conditions than now obtain. This is not mere preaching. The significance of the ethical aspect is well stated by an eminent economist who is by no means prone to favor radical reforms ; for some years ago A. T. Hadley said : — "I have gravely doubted the wisdom of some of the more recent measures passed by the National Government. But I cannot shut my eyes to the fact that these things are what business men must expect, unless business ethics is somewhat modified to meet existing conditions. Industrial corporations grew up into power because they met the needs of the past. To stay in power, they must meet the needs of the present and arrange their ethics accordingly. If they can do it by their own voluntary development of the sense of trus- teeship, that is the simplest and best solution. But if not, one of two things will happen ; vastly increased legal regulation, or State ownership of monopolies. Those who fear the effects of increased government activity must prove by their acceptance of ethical duties to the pubhc that they are not bhnd devotees of an industrial past which has ceased to exist, but are preparing to accept the heavier burdens and obligations which the industrial present carries with it." 1 Some progress certainly has been made towards the improve- ment of the ethical situation, and much more can be effected in this durection ; but, nevertheless, it would be over-optimistic 1 Norlh American Review, Vol. CLXXXIV, p. 120 ff. (1907). 362 BUSINESS ORGANIZATION AND COMBINATION to rely upon thds alone. We must close the doors through which evil motives work. We must remove the occasions for evil. This is the significance of the detailed statement of the more immediate causes which has preceded. An examination of the remedies is now in order. CHAPTER XXIII PUBLIC POLICY: REMEDIES No one can step forth and say, " Lo, here is the remedy for the trust problem." Possibly the universal adoption of the golden rule and a high degree of general intelligence would solve it; but this is like suggesting a thorough salting of the bird's tail. What we can hope for is the careful adoption of those various measiu-es which such experience as we have, together with a scientific analysis of the cause of the trouble, shows will be best adapted to remedy the chief evils. To a considerable extent, such measures must be tentative, experimental, and subject to change ; for we are standing on the edge of a new and higher plateau of business and social life. The reader's attention is called to one general limitation upon the following discussion: namely, the fact that it primarily concerns the problem of " big business," and that much of what is written wiU not apply to small corporations or to " close cor- porations." In the hope of avoiding too much detail, it is left to others to draw the line between large and small corporations, remembering that in some cases the importance of the business is such that mere size cannot be the only criterion. The more restrictive ones of the following suggestions concerning corpora- tion law, then, are made for those corporations which do a large or important interstate business, and whose shares are bought and sold. A. Postulates which may be Assumed To begin with, there are certain fimdamental truths now recognized by most unbiased thinkers. 363 364 BUSINESS ORGANIZATION AND COMBINATION All thoughtful men will admit that there are two sides to the immediate question. One is the general well-being of society regarded as a body of consumers; the other is the prosperity of producers, including business men. This is but another way of saying that the public interest and industrial progress are interrelated. We must take care lest we hamper industry. Another general premise, admitted, at least tacitly, on all hands, is that any business organization which produces an essential of decent human life in our existing society is affected with a public interest; and that this interest becomes active whenever there is danger that the supply of such an essential may be controlled. The organization need not lie in the rela- tively narrow class of industries known to lawyers as public- service industries. The day of the pubUc-be-damned business is passed. The sanction for all laws and industries rests ul- timately upon social well-being. There has developed a strong conviction that in all industries which are affected with a public interest a large amount of " publicity " is desirable. Especially is this true when the busi- ness is organized as a corporation. Most men, however, admit that the information pubhshed should not be such as to hamper a business unit in legitimate competition. The last statement suggests the fact that, of late, opinion has crystallized into the conviction that certain practices common in the competition of the past are unethical and cannot be toler- ated in the future. These have been enumerated. Again, a growing conviction exists that, in dealing with these practices and with other sources of evil, the States are powerless to meet the situation adequately. Political jealousy toward any hmitation of State powers may retard industrial Federal- ism ;' it may do good by preventing hasty and extreme action ; but it cannot stay the tide. Some three fourths of our business is interstate ; under the Constitution, and logically, the Federal government alone can deal with interstate commerce; there- fore Congress should take the steps necessary to deal with cor- porations and " trusts." So runs the reasoning in the minds of this generation. The States can do something, and their ad- PUBLIC POLICY: REMEDIES 36s ministrative autonomy is not to be curtailed lightly; but the common Congress of the Union must be chiefly relied upon to apply the remedies adopted. Finally, there is the growing, if not general recognition that " administrative control " is essential. In such matters as concern us now, judicial control, or " regulation by law suit," has failed and failed again. The injured are loath to sue, and they get no adequate compensation when they do sue. The mjurers are not deterred. It is impossible to lay down in ad- vance rules which will cover multitudinous and changing con- ditions. The courts, from the nature of the judicial function, cannot apply general principles with sufficient breadth and special knowledge to meet a great complex social problem like this. They are too much hampered by legal precedent. They are too much confined to remedying wrongs accomplished, and have no adequate powers to prevent abuses. Therefore, the commission, acting with administrative powers, has been the recourse in nearly all cases, both here and abroad. The necessity for it has all but passed beyond the realm of debate, though the scope of its activities remains to be settled. To this body would be intrusted a large part of the task of mak- ing publicity effective ; for they, rather than the mass of rela- tively inexpert stockholders, would necessarily be relied upon to see that logical and enlightening accounts were kept, to initiate action on the basis of reports, and to pass upon the value of property and services exchanged for stock. Affidavits as to the value or even as to the cost of property have proved futile as a safeguard, and the judgment of some unbiased body is neces- sary if the law is not to be nugatory. We may therefore begin a statement of particular and more debatable remedies with the postulates (i) that busi- ness interests are to be guarded, but that the public has an interest in business and can properly demand publicity and the aboUtion of unethical practices; and (2) that the Federal government, acting through an administrative body in the nature of a commission, must be largely rehed upon to apply the remedies. 366 BUSINESS ORGANIZATION AND COMBINATION B. Remedies for Particular Evils /. The Corporation Problem It is most logical to begin with the corporation problem. At the outset, in order to suggest a part of the machinery through which the proposed remedies can be applied, it seems de- sirable: — (i) To provide for a general and uniform regulation of the powers and duties of those corporations which do any interstate business of importance to society. This is absolutely necessary to any effective solution, and history and logic show that it cannot come by State action. Therefore, we must have a national law which will bring it to pass. Compulsory Federal incorporation is open to constitutional objections. The Fed- eral license system has also met with similar opposition. Many profess to fear that either plan would operate to give a govern- mental sanction to monopoly. The least objectionable way to proceed seems to be for Congress merely to provide by law that all those corporations which are to be subject to control shall con- form to certain rules as a condition prerequisite to engaging in interstate commerce. Such a measure would act as a positive partial remedy for the present chaos of our State corporation laws ; and it would serve as the force behind the " certain rules," which are to be enumerated next. It will be observed that it is only compulsory Federal incor- poration that seems inexpedient. It would undoubtedly do good, if constitutional, to enact a model Federal corporation law which would provide for the incorporation of those inter- state business units which might desire it. The discussion of such an act would be educative. As a model law it might exert a beneficial effect upon State laws and tend towards uniformity. It would simplify the control of such corporations as might choose to come under its provisions. It would certainly be wise to intrust the draughting of such a law to a special commis- sion of economic and legal experts. (2) Taking up the more specific remedies somewhat in the PUBLIC POLICY: REMEDIES 367 order that the evils were presented in the preceding chapter, we should touch first upon the simplification of securities. This may be effected by reducing the number of varieties of stocks and bonds, and by standardizing their forms. In part, the evils which arise from a multiplicity of securities will be met by other remedies: the clash of interests between different classes of security holders may be softened by making directors and offi- cers hold more stock; and overcapitalization may be reduced by direct regulation and pubUcity. But a simplification of securities would help greatly to solve these problems, and is the only way to remove a source of loss to certain classes of would-be 'investors. To be sure, the various classes of securities now in use have been devised to meet needs, — but not always to meet legitimate needs. Corporations should be allowed to appeal to various classes of investors through a variety of stocks and bonds. Some investors want security and no participation in the con- duct of the business ; and bonds meet their desire. Some want a chance for larger returns than can be paid on bonds, but are willing to forgo the privilege of voting for the sake of consider- able security ; and for such preferred stock is suitable. Others are wilhng to bear the full risk of the business in the hope of a large profit; and these persons may buy common stock. In this way, the different classes of corporate assets are logically covered by different securities ; the different classes of investors are appealed to; and the largest amounts of funds are raised. But much beyond these three general classes of security there is Uttle need to go, and a limit should be put upon variety within each class ; for the existing multiplicity has become a source of confusion and jugglery, rather than a legitimate grading of risks. The student of corporation finance will appreciate the impos- sibility of any adequate treatment of so complicated a subject in a single paragraph. However, if a brief suggestion may be hazarded, one might reasonably defend the following program, (i) Prohibit the future issue of any but three general classes of securities : mortgage bonds, preferred stock, and common stock. (2) Within the bond class, prohibit any issues but those secured 368 BUSINESS ORGANIZATION AND COMBINATION by a first mortgage, and also prohibit " blanket " and " con- solidated " mortgages.^ (3) Prohibit any but first preferred stock, and provide that all future issues of preferred stock shall have priority over common stock both as to assets and as to dividends. Also make all such stock uniformly non-voting except on a few points, such as increase of capitalization. As a result of this poHcy there would be no need for income and de- benture bonds, and a reasonable degree of standardization might exist. (4) Provide for a standard form of common-stock cer- tificate. If any variations are to be allowed, the non-uniform certificate should be stamped " irregular " or " not standard," and the variations be plainly indicated. The primary point which facilitates the abuse of large business corporations is the easy transferability of shares ; for, as we have seen, it opens the door in the beginning to manipulation, speculative management, etc., and facilitates overgrown units and monopoly. It works hand in hand with the small holdings required of directors and officers. (3) A remedy for the evils just mentioned may be secured by putting some limit (a) upon the power of officers and directors to transfer or acquire holdings of stock in the corporations which they serve, and (b) upon the transfer of stock prior to corporation elec- tions. Obviously we are in danger of hampering industrial flexibihty by such measures, and great caution should be used. The author would suggest very tentatively that directors and leading executive officers be prohibited from buying or selling the securities of their corporations for a reasonable period im- mediately preceding and following such official acts of theirs as afiect the standing of such securities in the markets. The object is to do away with inside management. Also, by pro- hibiting those stockholders from voting who have come in just prior to elections, the purity of corporation representative government may be guarded. 1 Collateral trust bonds are desirable when subjected to some restriction. Con- vertible bonds also appear unobjectionable. It might be well to adopt uniform rules for redeemable bonds. [It will be remembered that there is no great difference be- tween debentures and many income bonds and preferred stock (cumulative).] PUBLIC POLICY: REMEDIES 369 (4) To require directors and officers to hold such reasonable amounts of stock as will insure on their part a reasonable interest in the business of the corporation. A considerable part of this stock should be common stock. The amount required might vary with the importance of the officer in making administrative decision. Such a measure would tend to retain the interest of officers and to prevent mismanagement. Employers advo- cate stock ownership by their employees ; why not try the shoe on the other foot? Of course, evasion would be difficult to avoid and safeguards against it would have to be provided for carefully. The foregoing measures will strongly tend to remove danger from " interlocking directorates." It does not seem wise to make it impossible for a man to serve on the boards of several corporations. It may prove necessary, however, to take some further step to restrict such interlocking in the case of corpora- tions between which competition is desirable, perhaps requiring a specially large holding in such cases, or even going to the length of prohibiting it. As to remoteness of constituency, and complexity of business, they are in large part inevitable in present-day business, and should only be modified in part. Some particular measures would be of great service, however. (5) If we could assume that the enforcement of more uniform conditions among corporations doing an interstate business had largely removed the special attractiveness of certain States for incorporation, it might then be well to require that the main office be located in the State or the region in which the largest part of the business is done, and that stockholders' meetings be held as near as possible to the geographical center of the stock hold- ings. This latter suggestion, however, might not prove expedi- ent in practice. (6) To the same general purpose, it is of considerable impor- tance that the use of the right to vote by proxy be safeguarded. Reasonable limitations on the life and powers of a proxy should be adopted.^ The New Jersey law limits the life of a proxy to ' See Appendix, p. 476. 2B 370 BUSINESS ORGANIZATION AND COMBINATION three years ; but why not limit it to one year when regular meet' ings are annual? To be sure, this would put those who desin proxies to more trouble, but that should be the case. So it is with the powers given to a proxy : it would be more in keeping with carefully guarded corporate democracy not to give carti blanche to the proxy holder, but to require that he act upon in- structions and for limited purposes. (7) The requirement of reasonably full and intelligible annual reports should be supplemented by the requirement of timely and enlightening announcements of all stockholders^ meetings. To the end that stockholders may take an intelligent interest and that they may be able to attend meetings, notice should reach them from ten days to two weeks prior to meetings and should state the purposes of such meetings. At any regular meeting, directors should be required to furnish a copy of all or any parts of the records of directors' meetings to any stock- holder who might desire such information. No special regulation need be adopted to meet the trouble that comes from the complexity of the business. Better in- formation and honest management would help directly; and restrictions on holding-company organizations would simplify conditions. (8) It is highly essential to make the reports of corporations to stockholders adequate, to the end that they may be able (at least through representative attorneys or accountants) to protect their interests in so far as possible. It is not possible for stockholders to protect their property alone, but it is in accord with the ideals of the nation that they be stimulated to help themselves in so far as the safety of society warrants. This is not the place to make detailed suggestions as to the manner of securing and pre- senting the desirable information ; but in a general way it should be observed that full information concerning promotion must be given to prospective stockholders, covering amounts and kinds of all securities, the consideration received therefor, — cash, property, and services being plainly distinguished, — prelimi- nary contracts, and details of promoters' and underwriters' commissions. The importance of knowledge concerning depre- PUBLIC POLICY: REMEDIES 371 ciation, sinking funds, and reserves should also be remembered ; and information covering these points should be given.^ • The following paragraphs from a propoaed New York companies' act are ex- cellent : — Every company and the directors and managers thereof — 1. Shall cause to be kept proper books of account in which shall be kept full, true and complete accounts of the affairs and transactions of the company, and 2. Shall once at least in each year cause the accounts of the company to be bal- anced and a balance-sheet in this act referred to as the shareholders' balance-sheet to be prepared, which balance-sheet after being duly audited shall be laid before the members of the company in next general meeting ; and 3. Shall cause a copy of such shareholders' balance-sheet so audited to be sent to the registered address of every member of the company at least seven days before the meeting at which it is to be laid before the members of the company and a copy to be deposited at the registered ofBce of the company for the inspection of the mem- bers of the company during a period of at least seven days before that meeting, and every shareholder in the company or any person acting in his behalf shall be entitled to other copies thereof on payment of twenty-five cents each. The shareholders' balance-sheet shall be in such form as is directed by the cer- tificate of incorporation or the by-laws or by a resolution of the company and shall show in every case — 1. The amount of share capital authorized, the amount issued, and the amount paid up thereon, distinguishing the amount of share capital paid up in money and the amount paid otherwise than in money, with statement of nature of the considera- tion and the arrears of calls due, and the specific amounts issued during the two years next preceding ; 2. The amount of debts due by the company, specifying the security if any allocated for each debt and distinguishing the amount of mortgages, debentures and floating charges against the general assets of the company, the amount of the reserve fund, if any, and the amount of any contingent liabilities. 3. The amount of all current assets, after making a proper deduction for debts considered to be bad or doubtful ; any debts due from directors or other officers to be separately stated. 4. Whether the assets other than debts due to the company are taken at cost price or by valuation, or on what other basis they are reckoned, and whether any and if so what amount of percentage has been written off and what other provision, if any, has been made for depredation. 5. The gross amount of the year's earnings, the deductions made from the same for fixed charges of interest and taxes and the surplus, if any, available for dividends. 6. The amount by which the gross value of the assets of the company has been increased since the last balance-sheet in consequence of any increase in the valuation of real or personal property belonging to the company, 7. The amount of property, if any, for which shares were issued, which has been sold since the last report with a full disclosure of the consideration therefor in detail, the parties to the contract and the real parties in interest. The shareholders' balance-sheet shall be accompanied by a certificate signed by two or more of the directors on behalf of the board stating that in their opinion the balance-sheet is drawn up so as to exhibit a correct view of the state of the company's affairs and that in their opinion the statement is correct. 372 BUSINESS ORGANIZATION AND COMBINATION (9) With regard to giving stockholders access to the books, a provision similar to the German law would be expedient, — namely, to authorize stockholders owning at least one tenth of the shares to petition the courts (say the district courts in such States as have them) to appoint a committee to examine the hooks and accounts of their corporation for the purpose of securing informa- tion on its promotion, operations, or financial relations. A regis- tered office should be maintained by all corporations, at which stock and transfer books written up to date should be kept open to inspection by all stockholders. To remedy the shortcomings in the representative govern- ment of corporations, and especially the abuse of minority hold- ings, some or all of the following measures are worthy of con- sideration. (10) In order to make majorities more certainly representative, in addition to giving to stockholders fuller information and safeguarding the proxy, larger majorities should he required for the adoption of any policy which has an important effect upon organization or upon assets or earnings; e.g. changing by-laws, creating a new class of stock, forming a merger, or selling or leasing an important property. Such corporate acts might be roughly classified and a three-fourths majority be required for some, while a two-thirds majority would answer for others. It has been well suggested that merger might be allowed only upon a vote of two thirds of the stock of each corporation, dis- senting shareholders having the right to sell their stock for cash at an appraised value. The danger in all limitations on majorities, one should recall, lies in impeding action. (11) In order to make considerable minorities more effective, " cumulative voting " is a tried and excellent device. The author would strongly recommend that the Federal law now contemplated be made to provide for optional cumulative voting in all cases and to require it in all monopolistic industries and those in which the least puhlicity is provided. Cumulative voting gives to each share of stock as many votes as there are men to be elected. Therefore, when more than one position is to be filled, — as is generally the case in electing directors, — a bare majority PUBLIC POLICY: REMEDIES 373 cannot elect the entire slate, for by concentrating all their votes upon one or two men the minority can always obtain some repre- sentation. (12) Another feasible measure, one which is in force under the corporation laws of Germany, is to give a reasonably small per- centage of the stockholders power to call meetings and initiate propositions for action. It seems fair to allow a small minority — say one twentieth of the outstanding voting securities of any class — to call a meeting of the members of that class under reasonable conditions. The piu-pose should be stated in writing. The general idea is similar to that of the initiative and referen- dum. Would it not be well to try with reasonable adaptations some of those steps towards a democratized control which have been effective in political life ? The danger here, as in politics, is that the brains of the business will be diluted, and that indus- trial democracy will be unwieldy and unstable like the democra- cies of politics. The representative idea, however, seems abso- lutely essential to good business management of corporations. It has also been proposed to facilitate the removal of obnox- ious directors by authorizing any stockholder to circulate at his own expense both information concerning the management and petitions asking for change, such documents to be vouched for by a certified public accountant. This would be a step remind- ing one of " the recall " ! (13) Finally, it is very desirable to remove such clashes of interest as tempt oflScers and directors to misrepresentative acts, to which end there is to be recommended that when direc- tors or officers seek to sell to their corporation any property in which they are interested, or otherwise to cause acts to he done by which they profit, and which are voidable and must be ratified by the stock- holders, the stock held or controlled by such directors or officers should either not be counted in the vote, or should he allowed to count only upon the approval of some public authority. In all cases, full information should be given to the stockholders concerning any relations which may exist between directors or ofl&cers, and any company with which their corporation has had or will have dealings. Also, it would be well to entitle any stockholder at 374 BUSINESS ORGANIZATION AND COMBINATION any time to demand a statement of all salaries paid any officer. In such cases, the reasonable cost of copying the information should be borne by the parties desiring it. . (14) The evils arising out of the lack of a definite responsibility on the part of directors and officers, and inadequate penalties for their misdeeds, would be much diminished by the various remedies proposed in the preceding pages: those designed to give corporation leaders a greater personal stake in the business, to make their actions subject to publicity, and to secure a better representation for minority interests. Nevertheless, it would strengthen the cause to take steps formally to localize responsibility with those who make decisions and to deter them from misdeeds by making them liable to well-chosen penalties. In corporations whose stock is largely held by women, by estates, and by others who either cannot or do not often make any real decisions concerning business policy, it seems foolish not to make the directors and officers who exercise the real power also bear the major part of the responsibility.-^ In this respect the limited partnership form is more logical, and it would be well if it could be encouraged in some modified form in cases where investors can- not actively participate. In the corporation, individual stock- holders may bring action in equity, but only in case the majority of the directors improperly refuse or neglect to sue. . It seems that the fraudulent acts of directors which it is in the power of the majority to authorize can be made the object of a suit for damages by an individual only after a stockholders' vote.^ When the damage is suffered by all the stockholders in common, it has been held that the corporation is the injured party, not any individual shareholder. Even when judgment is secured, the attempt is made merely to recompense the individual for his loss. It is tentatively suggested, in view of these facts, (a) that the individual stockholder should be definitely author- ized to bring suit at law against directors or officers for fraud ' But see above in chapter on corporations, p. no f. 2 See Cook on Corporations, Sect. 740. The conditions here indicated are better in some States where statutes have been passed to meet the evils referred to; but the point is that the proposed Federal law should follow the best practice. PUBLIC POLICY: REMEDIES 375 and negligence in pursuing any accepted general policy, by which he may suffer injury in fact, and that a simple procedure be provided ; (b) that either punitive damages or imprisonment be provided for as the penalty in all cases in which directors are found guilty of gross mismangement, fraud, or negligence ; and (c) that directors and high administrative officers be subjected to a double liability on their stockholdings to creditors, to the end that they may feel the responsibility for their policies more keenly. In accord with this general idea, it was proposed in a bill drawn for a New York companies' act some years ago, that if any certificate of incorporation or any public notice by the officers or directors of a corporation were false in any material respect, all the officers or directors who signed the same should be jointly and severally Uable for all the debts of the corpora- tion contracted while they were directors or officers thereof, as a penalty. As remarked when analyzing the evils of business organization, ignorance of the law is in part to blame for the inadequate re- sponsibility of officers, directors, and promoters ; and, though a measure of difficulty is perhaps inherent in representative gov- ernment or delegated management, it follows that some improve- ment might be effected merely by enabling stockholders to act with fuller information concerning their rights. Perhaps the most effective plan would be to provide for accountants and lawyers to represent the interests of minorities, the object being to put expert advice and skilled service on the side of those who need protection. All these suggestions are made with consider- able trepidation, in the hope that corporation lawyers will see some better way to gain the desired end. As in the case of some of the other proposed remedies, the author would here remind the passive reader, and concede to the argumentative one, that there is grave danger to efficiency in unduly encouraging suits by stockholders. Deadening litiga- tion would be fatal. It would be desirable, if possible, to dis- tinguish between general policies and particular measures, leaving large freedom of initiative to the officers in the latter field. 376 BUSINESS ORGANIZATION AND COMBINATION One objection which may occur to the reader of these pages is that the various regulations here proposed would so restrict the operations of corporations that investment would be im- peded and business be retarded by a lack of capital. But is it not more likely that the increased security which would be afforded to investment would swell the funds available for cor- porate enterprise? Every one knows of men of small savings who are loath to intrust their funds to the tender mercies of an unknown and uncontrollable' corporation management. It is certain that one result of an improvement in corporation law would be to increase the number of small stockholders; and, as this would not only encourage saving on the part of men of moderate means by giving them a chance to share in the profits of industry with moderate risk, but also increase investment in corporate securities, it suggests hope rather than fear for the results of the plan. The author has failed to express himself clearly if it does not appear from the foregoing suggestions that he desires to retain the corporation as a form of business organization in interstate commerce, and to make it more useful, by the general means of making its affairs more subject to reasonable publicity and by preventing clashes of interest both within the corporation and between it and the public, the means being applied with discrimination by an administrative commission of unbiased experts. CHAPTER XXIV PUBLIC POLICY: REMEDIES (Continued) II. Overcapitalization and Holding Companies: Transition to the Trust Problem In the problems concerning capitalization and concerning holding companies, we find a mixture of the problems of corpora- tion law and of " trusts," or combinations. (i) Overcapitalization. — Overcapitalization by " watering " stock is an admitted evil. It makes corporation managements try to pay dividends as though the real capital were equal to the watered capitalization; it increases speculation and risk; it furnishes an incentive to unsound promotions and combina- tions. Three policies have been pursued in the attempt to remedy the evil : (i) the laisser-faire policy, according to which the State merely undertakes to insure UabiUty on the part of those who are guilty of misrepresentation and fraud; (2) the policy of regulating the conditions back of security issues by accounting provisions and publicity, leaving the issue itself free ; (3) the control of issues, with or without regulating the conditions surrounding them. The last policy has been effected in two ways: {a) either by forbidding corporations to issue securities for less than their par value, or (&) by forbidding them to issue securities in excess of the appraised value of their properties. Which policy is best ? The first poUcy is so discredited that it need not be discussed. In applying the two remaining poKcies it seems necessary to distinguish two classes of corporations ; (i) those doing a com- petitive business, and (2) those which are monopohstic, includ- ing aU pubhc-service companies. The present tendency is strongly in the direction of a strong control of the amount of 377 378 BUSINESS ORGANIZATION AND COMBINATION stocks and bonds of public-service corporations, and this is probably wise. It removes the danger of speculative manage- ment and facihtates rate regulation. AVhere rates or prices are likely to be so regulated as to yield but a reasonable return upon investment, this strict limitation of capitalization is the safest policy for a corporation to pursue. Businesses of the second class, then, should have their capitalizations controlled by valua- tions based upon actual investment and appraisals of tangible property. Moreover, in such industries, less risk obtains, and there is less need of encouraging promotion by means of large speculative rewards. Instead, small investors should be encouraged by making securities safe. But with competitive industrial corporations the case is dif- ferent; and it is more in accord with the idea of encouraging an active participation by stockholders in corporate affairs to adopt the second policy. That policy is more in keeping with the ideal of retaining the largest measure of individual initia- tive that is consistent with the common good. Moreover, in this class of corporations risk is often greater, and the need of encouraging private promoters is real. Accordingly, the author would recommend for the present that, instead of attempting to fix the amount of stock to be issued by competing corporations, the conditions surrounding stock issues be made sound (a) by regu- lating accounts so as to insure the proper maintenance of the plant, and (b) by facilitating true judgment through requiring full pub- licity as to the amount of prior-lien securities, and the exact char- acter of the assets. Accounts should give such information that such abuses as the declaration of dividends out of capital, and the payment of exorbitant prices and salaries could be detected ; intelligent prospective purchasers should be able easily to learn just what outstanding securities have a prior claim either to assets or to dividends; and, while serious difficulties are in- volved in its execution, all will admit that a physical appraisal would be of value in enabling a truer judgment concerning the character of a large part of the assets of most corporations. In part, these regulations have been provided for in the pre- PUBLIC POLICY: REMEDIES 379 ceding points. Attention should be especially called to the fact that the simplification of securities which has been advo- cated would operate strongly to discourage overcapitalization. If it should be found that stronger control is necessary, and that a valuation must be made for all corporate property, very complex and difficult questions would arise, which questions should be answered by a board of economic experts. In any event, it is important for sound financial and business organization that some further control be exerted over the pay- ment for stock. In the capitalization of all important interstate corporations, in cases in which stock is issued for property or serv- ices, the commission should be given power to pass upon the value of such property or services and to see that payment is actually made. In cases in which stock issues are to be re- stricted to a property valuation, the law should require that a reasonable payment (say one fifth) be made at once, and that installments be paid thereafter at regular intervals till the total price is turned in. Interest should be collected on over- due installments and the shareholder be liable to the corporation for damages caused by his delinquency. But all this time the reader may have been questioning the power of the Federal government to exert any control over the capitahzation of State corporations. That it has the power, however, seems quite certain, — at least in the case of public- service companies.^ Even if corporations doing an interstate business do not secure a Federal certificate of incorporation, it appears that under all rules and analogies of constitutional interpretation, " Congress assxrredly may regulate and restrain the State corporation in the exercise of these as well as of other corporate powers, and may prohibit it from issuing obligations or stock for any purpose relating to interstate or foreign com- merce except in accordance with rules and restrictions prescribed by it for the purpose of preventing evils." (2) Holding Companies. — Up to the present time, the hold- • See Wickersham, George W., Federal Control of Stock and Bond Issues by Inter- state Carriers ; an address before the Illinois Bar Association, June 24, 1910 (Wash- ington, D. C, 1910). 380 BUSINESS ORGANIZATION AND COMBINATION ing company has been the leading form of business organization in the field of combination and " big business." There can be little doubt, however, that this very form has facilitated, if not caused, the existence of some of the gravest evils in the busi- ness world.^ It is well-nigh axiomatic that some limitations must be put upon interholdings of stock if competition between corporations is to be maintained. Yet, inasmuch as the hold- ing company has been very useful in the organization of great business units, especially " industry combinations," or sequence organizations, and has certain admitted advantages, one must feel somewhat loath to banish it without a hearing, as is the desire of many reformers just now. In the first place, the holding company is now both less desired by business men and less dangerous to the public interest: it must be remembered that the supposed advantages of the holding company as a device for legalizing combinations of competing concerns have been largely dissipated by recent de- cisions ; and, at the same time, the possibilities of securing mo- nopoly through secret stock ownership have been diminished by the hmelight of publicity. The limitations upon economical direction and management under holding-company organiza- tion are also apparent. We must conclude that such develop- ments wUl not only lessen the likelihood of abuses in securities holding, but wUl also make business men less desirous of adopt- ing the holding-company form of organization in the future. Furthermore, the danger to investors and to society from hold- ing companies would be greatly reduced by the various remedial measures already suggested, for holding companies, of course, are corporations. The addition of the measures to be suggested for dealing with monopolistic combinations would all but eliminate the evil. Nevertheless, following the policy of getting at specific causes and occasions, we may note some special steps which might be taken to remedy the situation without going so far as absolutely to prohibit holding companies. Perhaps the simplest and most effective plan would be to require all corporations and trusts » See above, pp. 234, 236, 252. PUBLIC POLICY: REMEDIES 381 which own or control as much as one fourth of the shares of another corporation to purchase all the remaining shares within a reasonable time, or else to sell their present holdings. The commission might be called upon to appraise the value of the shares to be acquired, in case of difficulty. The cause of holding- company trouble generally lies in the power of control over sub- sidiaries gained by the ownership of only part of their securities. In a word, it is the minority problem in an acute form. The natural remedy, therefore, is to get rid of the " outside " minori- ties. This would bring about either a virtual merger or separa- tion. In applying this remedy, certain distinctions might be con- sidered. Pure holding companies which do not engage directly in operation are obviously on a different footing from those operating companies which incidentally hold stocks in other concerns. Again, securities holding for the purpose of binding together the successive stages in an industry differs from the combination of parallel competing units in the same stage or trade. The pure holding company, owning but a bare majority of the stock of subsidiary corporations which are engaged in the same line of business, is the most dangerous form ; and one seek- ing to minimize regulation might confine the application of the suggested remedy to such concerns. The fullest publicity consistent with efficient management should be demanded of aU holding-company organizations, covering the payments received for the stock in the beginning, the interrelations of the main and subsidiary companies as to stockholders and directors, net earnings of subsidiary companies, dividends paid, etc. In case the present policy of control by a bare majority is allowed to exist, special care should be taken to protect minority holders and to inform them of the proceedings at directors' meetings. All stockholders in subsidiary companies should have the same right to inspect the books of the holding company that they have respecting those of the companies in which they hold stock ; and, similarly, any stockholder in the holding company should have access to the accounts and records of its subsidiaries. This is of prime importance. 382 BUSINESS ORGANIZATION AND COMBINATION Finally, it may be suggested that any corporation or trust which owns considerable holdings in the corporations of States other than the one which created that corporation thereby be- comes interstate in character; and such a corporation might properly be required to secure a Federal license, even if non- holding companies were subjected to no such requirement. ///. The Trust Problem, or the Problem of Combination General Postulates. — Assuming that the adoption of a pro- gram similar to the one suggested above would remedy the chief defects of corporation law, we may now pass to that phase of the problem of business organization which concerns such com- binations of corporations as are formed with the object of gaining control of the supply of goods and so controlling prices. This is part of the problem of monopoly. We may begin by laying down certain generally accepted conclusions as postulates. Competition is desirable, not for its own sake, but for the good results which it may bring by stimulating men to put forth energy in production, and by directing industry into the lines in which men are willing and able to pay the highest prices. In a large part of the world of industry, competition, when carried on as a healthful rivalry in which freedom of initiative is maintained and encouraged, and freedom to enter any private business is assured, stimulates and directs in this way, and consequently is desirable. But there exists a large group of industries in which competi- tion cannot normally exist, the so-called " natural monopolies." A large amount of business rivalry called competition also occurs, which, from a broad social point of view, is not healthful, and which does not encourage freedom of initiative nor the right to enter business. Such competition being unethical or obstructive or both, is harmful, and not desirable. Com- petition in which outsiders are interfered with in an xmfair manner is not to be tolerated. Finally, a debatable field exists in which a tendency to exces- sive and therefore unhealthful competition is frequently found. This field includes those industries in which large amounts of fixed and specialized capital are used and in which by-products PUBLIC POLICY: REMEDIES 383 or joint expenses are prominent. Here competition becomes destructive. Here the dangers of monopoly have to be balanced against the wastes of competition/ and either may outweigh the other. Some regulation is desirable in either case. Restraints upon competition, therefore, are of two sorts, — the reasonable and the unreasonable. A restraint upon exces- sive or unethical competition may be wholly reasonable ; and, in the same sense, there may be reasonable and unreasonable restraints of trade, the test being found in the question : does the restraint promote production and freedom of exchange ? These preliminary distinctions may be concluded with a sug- gestion for an analysis of combinations according to their pur- poses, methods, and importance. Any broad and discriminating study of the combination problem must recognize that com- binations differ in purpose, some seeking economies in produc- tion, others monopoly ; that they differ in methods, there being legitimate ones which are open and fair, while others are close and unfair ; that federative combinations differ from corporate combinations in important respects; and, finally, that they differ in the degree of public interest involved, some concerning pubUc service, others common necessaries of life, others luxuries. Particular Remedies for the Trust Problem. — In the light of the foregoing analysis, and with the assumption of a purified and efl&cient corporation organization, the logical plan for remedying the evils of combination appears to be as follows: — I. Recognize the existence of natural monopolies, and regu- late their accounts, service, and rates, in a manner similar to that now being worked out in various States for pubUc-service corporations. A minimiun of regulation would apply this policy only to those natural monopolies which supply some article of common consumption that is generally regarded as a necessity. This would include, besides interstate electric, water, and simi- lar companies, the companies engaged in the anthracite coal industry. The iron, lumber, and petroleum industries might possibly be considered in this connection. To the conclusion that, within this limited field, price regula- • See above, pp. igo, 350 f. 384 BUSINESS ORGANIZATION AND COMBINATION tion may be necessary, the author is forced by a consideration of the experience of the United States with railways and other public service industries. When the industry is both monop- olistic and essential to the general well-being, what objections against the fixation of reasonable rates can be urged which have not been urged against the exercise of a similar power by the Interstate Commerce Commission? To be sure, the ill effects of monopoly may not be quite so great as in the railway business ; but that is a question of degree which does not remove the need of the regulation. It may be granted that conditions of pro- duction or supply may be subject to greater fluctuations in the case of certain ones of the industries which would be included in regulation than those which are found in the transportation service ; but that only makes the remedy more difficult, not less necessary. The reasonable maximum price would have to be high enough to allow for such contingencies. Above all, the critic of the proposed price regulation must remember that that proposal applies only to those industries in which competition has already proved a failure. 2. In order to retain the largest possible amount of normal, healthful competition, it is highly important that the great natural monopolies of (i) natural resources and (2) transporta- tion should be segregated, and that their rates of charge should be subjected to regulation. Monopolies of natural resources, embracing such products as coal, iron ore, and lumber, con- cern power and the raw materials of manufacturing industries. Monopolies of transportation, and notably the steam railways, furnish indispensable means of marketing products. The supply of raw materials is necessary to all, and discriminations in fur- nishing such materials are just as serious to producers as are rail- way discriminations. Steps have already been taken to divorce mines and manufacturing establishments from the railway business, and those steps should be supported. For the same reason, the ownership of coal, ore, water power, and similar resources by industrial corporations should be greatly restricted or prohibited. The United States Steel Corporation, in so far as it has monopoly power, secures it through control of mineral PUBLIC POLICY: REMEDIES 385 resources and transportation agencies; and both the realm of monopoly would be decreased and the control of monopoly be made easier if these branches were segregated and adequately regulated. The principle of the common-carrier function should be appHed to limited natural resovurces. If they are left in pri- vate hands, the owners should be compelled to furnish products and services on equal terms to all and be made subject to a large degree of publicity. All this could easily be combined with a policy of conservation. 3. It might be well specifically to forbid, and to penalize as criminal offenses, the practices indicated in points 2-7 on page 346, and any similar devices which abridge the rights to free ini- tiative and legitimate competition, — terrorism, discrimination, theft.^ The object is to insxire to all, freedom of initiative in business and the right to enter any competitive industry. The chief problem under this general head is how to deal prac- tically with local price discriminations. Just as sound public opinion has condemned the railways for hauling competitive freight for rates which are below cost, while recouping the losses so incurred by charging high rates on local traffic, so now the pubHc is condemning the " trusts " for similar practices. By cutting prices in some few localities the big combinations can drive out Uttle competitors without fair competition. One conclusion is obvious : if prices were everywhere on a reasonable cost basis the likelihood of such discriminations would be greatly reduced. This is true because (i) ill-considered competition would be less likely to spring up, and (2) the combination would be less Ukely to make reductions. Clearly, therefore, the re- duction of protective tariffs and monopoly privileges which allow combinations to charge prices that are above expenses would minimize the evil. ' Some good authorities believe that it would be wiser not to attempt to enumer- ate these abuses; but to leave it to the courts to apply the more general test of rea- sonableness of restraint after the manner of the Standard Oil and Tobacco Trust decisions. This is certainly true if to enumerate must by implication sanction all non-enumerated acts. To the author, however, it seems that we need more definite- ness just now ; though the points enumerated should be considered as types, and should not preclude action against other abuses. 2C 386 BUSINESS ORGANIZATION AND COMBINATION In the railway field the problem has been partly solved by requiring public warning of rate changes, and by compelling the retention of the reduced rate for a considerable period of time. But railways are naturally monopolistic, while many other industries are normally subject to competition and must be permitted to make reasonable adjustments to meet it in many places and at many times. The essential point to keep in mind is that for offensive purposes prices should nowhere be reduced below expense ; for so to reduce prices would mean (i) that no test of the normal economic eflSciency of the compet- ing business organizations would exist, and (2) that consumers in other localities would have to pay higher prices. Of course the practical application of this general conclusion would be difficult ; it would be difficult even to ascertain what expenses are in some cases. But it might be possible to enact a provision similar to the following: In case it reduces prices below those of a local competitor, upon complaint any " trust " shall be required to prove to the satisfaction of the proposed industrial commission that it is not selling below expense.^ The provision might be limited in its application to business units which con- trol 40 per cent or more of the industry in which they are engaged. This proposal has the merit of leaving no question of intent or of the reasonableness of discrimination to be passed upon; and it would allow flexibility.^ It might simplify the administration of such a provision to compel the quotation of prices F. 0. B. at the plant, but it does not seem wise to go further along the line of price regulation in any industry in which com- petition can work normally, or which is not clearly a " natural " monopoly. 4. Subject to certain limitations, the proposed industrial commission should be given power to authorize agreements for cooperation and complete consolidation in case of all in- 1 Suitable penalities would be provided. It might be salutary to provide that the injured competitor should receive compensation. The industrial commission woiJd have to pass upon questions similar to those which come before the Interstate Commerce Commission in certain rate cases. 2 At least four States now forbid selUng below cost for the purpose of destroying a competitor, — Mississippi, Nebraska, North Carolina, and Tennessee. PUBLIC POLICY: REMEDIES 387 dustries in which, while monopoly is not clearly "natural," legitimate competition tends to become excessive or " cut- throat." Obviously this is a point that demands the most careful scrutiny. In the first place, what industries would be included in this class ? Here the testimony of economic experts would be valuable. Probably it would be learned that it would include those industries in which fixed capital forms a relatively large part of the investment. Here would come the iron and steel industry, for instance. Where the capital is also highly specialized, as will generally be the case, the evidence is even stronger. Industries in which net returns per unit of product increase with the amount of output would also be included. Commonly they will coincide with the fixed capital industries. Again, industries which have a large ele- ment of " joint expenses," that is, expenses which cannot be definitely allocated to a unit of product are likely to tend to cut throats when forced to compete. Here come the industries which yield large amounts of by-products. Also, where there are wide fluctuations in demand, the necessity of combination is apt to be great. a. As to authorizing agreements, serious question is to be raised, and no unanimity of opinion is now to be hoped for. Briefly, the proposal and the reasons for it are as follows: Bear- ing in mind the case of the German cartels with their legalized and regulated pooling agreements and selling agencies, it is proposed to authorize producers in this country to enter into arrangements for cooperation, especially in selling. For ex- ample, in West Virginia it appears that there are many small mining companies which are at a disadvantage, as compared with the large companies,, of from six to eight cents a ton in their expenses of production. This disadvantage is not due to un- economical methods nor to inefficient management. It is partly due to the fact that the large companies can better economize labor and power by running several mines with one superin- tendent, one clerical force, and one power plant ; but the chief disadvantage of the small companies lies in their inability to maintain a single selling agency which could fill the largest orders 388 BUSINESS ORGANIZATION AND COMBINATION as promptly as do the big concerns. It is in selling, or market- ing, and in buying, that the combination has its greatest econ- omies, as is indicated by items 8 to 15 on page 351. Accord- ingly, a witness before the Senate Committee on Interstate Commerce says: " Now what must the small men do? They must either go out of business, or there must be some means . . . by which they can get together, and in a reasonable way have a joint selling agent so that they can save themselves this expense and have a joint power plant, if you please, so that they may live." ' It has already been pointed out that such agreements, by allowing buying and selling economies, may enable groups of small producers to survive and compete, while retaining in- dividual initiative. To be sure, agreements of this kind would involve serious dangers. The danger of secret monopoly would be ever present. And the danger of subsidizing and keeping afloat incompetent producers and uneconomic plants would have to be guarded against. Said one witness, " the profits would be assured to the stockholders, and the wages to the workingmen would probably be better " ; but the statesman will realize that the agreement would be prostituted if used to insure returns to in- competents. Accordingly, in order to secure the advantages of cooperation without the dangers of combination, — if that be possible, — the following outline program is suggested: — (a) Subject to the anti-trust law (amended) and the preceding provisions against discrimination, authorize partnerships and corporations up to a certain power (say not over 40 per cent of the business concerned) to enter legally enforceable agreements, to be filed with the industrial commission. (6) Subject such agreements to the following limitations: — (i) To terminate in from 3 to 5 years. (2) To be open to any plants, both to join, and upon reasonable conditions to leave. (3) Boycotts and discriminations to be prohibited. (4) All agreements entered into, and minutes of all pro- ceedings of directors, to be filed with the commission. ' Hearings (1911), p. 32. Cf. Chesapeake & Ohio Coal Co. above, p. 177. PUBLIC POLICY: REMEDIES 389 (s) Information concerning output and markets to be given to the commission. The experience of other countries, and the judgment of busi- ness men, seem to indicate the desirability of some such scheme. b. In authorizing consolidations, the merger or amalagation should be favored over the holding company. Remembering that -sre have provided for a sound corporation law, the com- mission might be empowered to authorize consolidations in industries liable to excessive competition up to the point where not more than say 60 per cent of the business would be em- braced in any one business organization, with the object of al- lowing the undoubted economies of large-scale production while at the same time prohibiting monopoly and guarding against unwieldy and overgrown units. The commission would be given the power to allow or to con- demn at its discretion aU combinations up to a certain maximum degree of control, and beyond that all combination in competitive industries would be prohibited by law. It would be well in addition to put the burden of proof upon all business organiza- tions which control over 50 per cent of their industry, requir- ing then to show why they should not be dissolved. 5. In the balance of the industrial field, honest competition may safely be intrusted with the work of stimulating and regulating production, especially if corporation law is purified and made uniform. 6. The tariff on the products of all well-established industries should be reduced to a minimum deemed essential for revenue. In judging whether an industry is well-established, the power to export and sell in competition with foreign producers under normal conditions might be considered. But here an unbiased special committee of economic experts should be retained. Such a reduction should be made gradually and in such a way as least to distiu-b industry. Exceptions might be made for miUtary reasons. Of course this point takes us upon somewhat delicate poUtical ground, but in view of the strong general trend toward freer trade, the author ventures to point out that this trend if carried out will help solve the monopoly problem. It would be 39° BUSINESS ORGANIZATION AND COMBINATION a mistake, however, to think this a chief remedy ; for the tariff is not a chief cause, and in any case the day of international combinations is well advanced.-' The careful reader of these pages will have observed that several of these suggestions may be based upon the study of the advantages or disadvantages of the various forms of business organization. It was virtually concluded in the earlier chapters that it would be well (i) to authorize registered agreements, (2) to Hmit holding-company control, (3) to facilitate complete consolidation in its stead, (4) to encourage improved partnership forms. The Sherman Anti-trust Act. — Meanwhile, what of the Sherman Anti-trust Law? A majority of the best-considered opinions seem to be that as now interpreted it — or its equity features, at least — may well be retained. If the law is so in- terpreted as not to prohibit all agreements and combinations, but only those which restrain trade unreasonably, then it may serve a useful purpose. Recent decisions indicate such a use. Moreover, it is undesirable to abandon an old and adjudicated law imder which some good has been accomplished. But the law is not suflScient as it now stands, and is bad in its criminal provisions, (i) It must be supplemented by improvements in corporation law. (2) It should be amended or supplemented so as to make it more specific, (a) as to what agreements and com- binations may be "reasonable " ; (b) as to what agreements and combinations are " imreasonable " ; and (c) as to what general acts constitute proof of intent to monopolize. (3) It should be amended so as to distinguish between necessary and unnecessary monopoly, and to allow monopoly where economic conditions make it necessary and " natural." In short, if the sugges- tions found in the preceding pages are sound, the Sherman Act must be amended or supplemented by further legislation to in- corporate the spirit of the provisions on pages 140 f. and 350 f. It will be observed that the words " reasonable " and " un- reasonable " are retained to indicate the criterion or test of legaHty ; for this seems expedient in view of the existing legal I See above, p. 173 and note. PUBLIC POLICY: REMEDIES 391 terminology. But it would be most unwise to do as many seem inclined to do and base reasonableness upon mere intent or upon size. No rational or enduring application of the law can ever be found which does not consider economic necessity and social efficiency as the basis of reasonableness. That institution or policy is reasonable which insures a net gain in the well-being of society ; it is questionable if it brings no net gain ; it is unreason- able if it causes a net loss or injury, or a decrease in social well- being. The apphcation of this test is not simple ; but that is the way of social truth. General Basis of the Foregoing Plan. — In deaUng both with corporations and with " trusts," the aim has been to set forth a truly progressive plan. True progressiveness is neither rad- ical nor " standpatical." Instead of seeking to destroy on the one hand or preserve on the other, it aims to conserve, — that is, to utilize existing materials in building better structures. Not revolution, not petrification, but evolution, is the way of lasting progress. Therefore, the wise thing to do is to conserve the corporate institution and the combination, but to adjust them to the new social conditions. Cleanse the former, and fit it to become a good citizen in our democracy. Compel the latter to fight fairly, and harness its economies in the interest of social production. As part of this plan, it will be wise to consider all forms of business organization in their mutual relations and realize that there are several alternatives and many possible modifications. Many have thought that the corporate form is too loosely taken on. Why not encourage improved partnership forms for small undertakings? Already business men, under pressure of exist- ing corporation laws, are canvassing the possibilities of unin- corporated organizations, and this suggests that at no remote date we may be compelled to take the point of view here advocated. It is in keeping with this spirit that, while recognizing the desirability of healthy and normal competition, we do not over- look the necessity for regulated monopoly in some fields, and for great Umitations upon competition in others. In this we but 392 BUSINESS ORGANIZATION AND COMBINATION follow the trend of development in the regulation of railways by the Interstate Commerce Commission, and of public utilities by State commissions. We must recognize the economic necessity of monopoly and seek to regulate it for the purpose of securing just and reasonable rates of charge. But, if large-scale production is necessary to secure economy, and if, up to a certain extent, our great combinations have their economic justification, still that fact cannot blind us to the further fact that beyond a certain point business organiza- tions become unwieldy and overgrown, and combinations have no advantage except for extorting high prices or watering stocks. Therefore, the wise course is to remove the incentives and opportunities which lead to these uneconomic acts, leaving intact the motives and possibilities of large-scale production and economical combination. If we take away the motive to form combinations larger than will give the maximum efficiency, and the motive to overcapitalize, and if we regulate monopoUes, where they must normally exist ; then we can allow combi- nation to take its course. When we remove the possibiUty of profits gained by high prices, stock jobbery, and manipulation, who will want to build the huge, wasteful edifices in which those practices have been carried on ? The aim, then, has been to discover the cause, and there apply the remedy. Prohibitions do not prohibit and laws become dead letters, when fundamental forces are left to move. The remedies suggested in the foregoing pages form no haphazard list, but are based upon a study of the fundamental moving forces and of the occasions through which they work. Consequently, though at points they overlap, and all may not be needed; and though many details are omitted, and some may prove impracticable ; all the proposed reforms are aimed at a definite mark, and the ground is covered. The Alternatives. — The foregoing plan may be called one of positive constructive regulation. What are the alternatives to it ? The only other poUcies worthy of serious mention at the present time are (i) laisser faire, (2) negative regulation, (3) State paternalism, and (4) State Sociahsm. A return to the unregu- PUBLIC POLICY: REMEDIES 393 lated " free " competition of laisser-faire days is unthinkable ; but the second and third alternatives are now being considered by many, and are quite within the range of possibility. Negative regulation is a sort of do-don't poUcy, enforceable by law suit. This is the course which was favored by those who in earUer days opposed the establishment of the Interstate Commerce Commission or the grant of adequate powers to that body. One great weakness of this course is that it is not sufficiently flexible. According to it, numerous acts would be prohibited in a more or less sweeping fashion, with all too Httle classification and distinction of differences in cause. Wherever a head might be seen it would be hit. It is not a constructive poUcy. Cooperation would be forbidden ; combination would be prohibited ; monopoly would be tabooed. A ban would be put upon watered stock. The great error in all this is that no adequate distinction is drawn between good and evil, and causes and effects are not discriminated. For example, the negative regulationists generally oppose monopoly in all cases, possibly excepting certain pubhc-service industries; for they do not sufficiently distinguish between necessary and- unnecessary monopoly, nor between beneficent and destructive competition. By government paternalism is meant a policy of supervision in which the burden of responsibility is largely removed from investors and stockholders. The recent proposals of several prominent industrial leaders look in this direction. The State would be drawn into virtually guaranteeing profits, and would undertake to prescribe rules for the conduct of the business in such a way as to direct its course to a considerable extent. The tendency is to authorize monopoly and to endeavor to guard against its abuse by rate regulation. Such a policy, though it does not necessarily mean Socialism, is in conffict with the retention of the largest possible amount of individual activity. To bring out clearly the difference between this policy and the plan outlined in these pages, it may be said that paternalism would favor the transformation of all investors into bondholders, whose funds would be safeguarded and whose income would be assured by government participation in the conduct of 394 BUSINESS ORGANIZATION AND COMBINATION industry; whereas we have considered it highly desirable to encourage stockholders to participate to a reasonable extent, and to assist them to do so intelligently. Paternalism is the concomitant of an uninformed and supine class of investors, and " boss rule " of corporations ; but the plan here proposed is one which would encourage a truly representative form of cor- porate government. Again, as just indicated, the paternalists would give great scope to monopoly, putting their trust in government control of service and price; whereas we, while recognizing the necessity of monopoly in parts of the industrial field, would forbid it and stamp it out in the remainder. As to State Socialism, — it may come. Who knows ! But we are not ready for it yet. We can know that much remains to be done before entering upon so perilous an experiment. Mere government ownership of railways and a few other natural monopolies does not constitute Socialism, nor would such owner- ship solve the corporation-trust problem. Before we think of abandoning self-help and individual initiative in that part of the industrial field in which monopoly is not necessary, let us first see if they will not still work under legal conditions estab- lished in accord with industrial progress. The one great diflSculty in the scheme here advocated lies in securing Efficient Management. It is the same problem that confronts any democratic government : the problem of securing united, prompt, and economical action by a group. If it should be found that corporations in which the government is truly representative do not work efficiently, the next step would probably be government control, or paternaUsm. We need attempt to look no further into the future. CHAPTER XXV THE LIMITED-LIABILITY ASSOCIATION: A REMEDY At several points in the course of the discussion in these pages, it has been suggested that the use of the corporation should be restricted. Business men themselves are not satisfied with it in all cases ; but as it appears to be the only acceptable limited- liabiUty form available in the United States, they cling to it. Apropos of this fact, there remains one suggestion which might properly have been made among the remedies for the corpora- tion problem ; but which, on account of its breadth and impor- tance, as well as its general significance for all business or- ganization whether corporate or not, has been reserved for this the final chapter of the book. This suggestion concerns the creation of a new Umited-liability association as a golden mean between the partnership and the corporation. A crisis in American business organization is at hand. When every one is admitting that the partnership will not do because of its instabiUty and the excessive liability of its members, and at the same time unbiased observers are keenly realizing the Umitations of the corporation, — to say nothing of the dissatis- faction among business men on account of taxation and publicity, — the need of some new form to fill the wide gap between the two is clearly suggested. The partnership is too personal; the corporation too impersonal. In the one, the individual must run the risk of losing his all by the act of his partner ; in the other, he takes a chance on the faithfulness and energy of delegated direction and hired management. The partnership is generally safe only for very small businesses; the corporation is really expedient only for very large businesses. The long and short of the matter is that as the magnitude and com- plexity of business enterprise have rapidly expanded, a very 39S 396 BUSINESS ORGANIZATION AND COMBINATION large field has been left between the older simpler forms and the largest and most complicated ones. In this field we need a golden mean, — a form which will accommodate a relatively small number of investors by providing a stable form of organization for directing capital without an excessive liability. This form the limited partnership does not seem to supply. It has been in use in this country for nearly a century; but it has found no great favor, largely because the special partners are put so much at the mercy of the general partners, — the disparity between the two classes is too great. The statutory joint-stock company is a possibility; but it is provided for by but few States, and would in any case be subject to many of the same restrictions as are corporations. It has been suggested that a modification of the limited part- nership would be desirable. In making this suggestion what the author has in mind is no mere dream, but something that has been in practical operation in Germany and Austria for years. In Prussia, since 1891, the laws have provided for Gesellschaften mit heschrdnkter Haftung (associations with limited liability), and their number has rapidly grown. There the need was felt for a form of business organization which would allow small associations to operate safely and continuously without erecting them into joint-stock corporations, which are not suitable for small enterprises; and forthwith that form was provided by law. In 1893 there were 183 of the new associations in Prussia ; in 1907 the number had increased to 9002. Briefly, the main outUnes of the proposed limited-hability association are as follows : (i) a hmited number of members ; (2) a minimum firm capital — say $5000 ; (3) a minimum in- dividual interest in this capital — say $200; (4) such interests to be transferable, subject to certain restrictions; (5) members to be liable only for the maintenance of the firm's capital, with no personal Uability beyond that; (6) the management to be conducted through a responsible representative (not a member) who would be subject to fine and imprisonment for fraud, etc. The number of members should be limited in order that the organization might not possess such power as to make necessary THE LIMITED-LIABILITY ASSOCIATION 397 the restrictions which surround the corporation. Members should not be liable for more than the amount invested except when they permit their original investments to be wasted and the firm's capital to be impaired. The words " limited liability " might be required after the firm's name. The interests held by the members need not be uniform in amoxmt and no document in the nature of a stock certificate would exist, so that stock- exchange securities would not be swelled by the new form of organization. Transferability without the possibility of specu- lative manipulation would be the object. Aside from the manag- ing representative, the internal organization of the association would be freely determined by the members. Duration would be like that of the corporation, as the individual interests would be heritable. By means of some such form as the one thus roughly outlined, it would be possible (i) to fill a serious gap in our business organi- zation, and (2) to conserve and utilize best our existing forms. Through the proposed limited-liability association, medium- sized business uaits could be formed without the expense and pubUcity attendant upon corporations, and with an excellent basis for credit. On the other hand, they could operate with a moderate liability and with an assured continuity of existence. At the same time, the common-law partnership might retain its place in very small enterprises, and in businesses which in- volve great personal confidence or in which the credit conditions are such that the maximum liabihty is needed. And, above all, the overworked corporation could be confined to its proper sphere in providing an organization for those undertakings which require very large amounts of capital, numerous members, and complicated administration. Thus the whole problem of busi- ness organization might be simplified. APPENDIX APPENDIX SIMPLE ARTICLES OF COPARTNERSHIP > This agreement made and entered into this thirty-first day of October, One thousand nine hundred and three, by and between Charles Snow of Rochester, N. Y., of the first part and Edward M. Chapin of Batavia, N. Y., of the second part, witnesseth as follows : — 1. The said parties, above named, hereby agree to become partners in the business of buying and selling dry goods under the firm name of Snow & Co., said business to be carried on in the city of Rochester, or such other place or places as the parties may hereafter determine, and to continue for the term of five years from the date hereof. 2. The capital of the said partnership shall consist of the sum of ten thousand dollars, to be contributed as follows : The party of the first part shall contribute his stock of dry goods and the good will of the business herteofore conducted by him, which are together valued by the parties hereto at the sum of five thousand dollars ; and the party of the second part shall con- tribute the sum of five thousand dollars in cash. The capital stock so formed is to be used and employed in common between the parties hereto for the support and management of said business. 3. At all times during the continuance of their copartnership they and each of them shall give their time and attention to said business, and to the utmost of their skill and power exert themselves for their joint interest, profit, benefit, and advantage, and truly employ, buy and sell, and trade with their joint stock and the increase thereof in the business aforesaid ; and they shall also at all times during the said copartnership bear, pay, and ' Taken from Gano, Commerical Law. 2D 401 402 APPENDIX discharge equally between them all rents and expenses that may be required for the management and support of said busi- ness; and all gains, profits, and increase that shall grow or arise from or by means of their said business shall be equally divided, and all losses by bad debts or otherwise shall be borne and paid between them equally. 4. Each of said partners shall be at liberty to draw out of the funds of the firm each month for his private expenses the sum of one hundred dollars, and neither of them shall take any fur- ther sum for his own separate use without the consent in writing of the other partner. The sums so drawn shall be charged against the partners respectively, and if at the annual settlement, hereinafter provided for, the profits of any partner do not amount to the sum so drawn out in that year, he shall at once repay such deficiency to the firm. 5. All the transactions of the said copartnership shall be entered in regular books of account, and on the first day of January in each year during the continuance of this copartner- ship account of stock shall be taken, and an account of the expenses and profits adjusted and exhibited on said books ; said profits shall then be divided, and one half carried to the separate account of each partner. Either partner shall be at liberty to withdraw at any time the whole or any part of his share of the accrued profits thus ascertained and carried to his separate account. Each partner shall have open and free access to the books and accounts of the copartnership at all times, and no material or important changes shall at any time be made in the general business of the firm, either in the bu3dng of stock or in any other respect, by either partner without the knowledge of the other. 6. And the said parties hereby mutually covenant and agree, to and with each other, that during the continuance of the said copartnership neither of them shall indorse any note, or other- wise become surety for any person or persons whomsoever, without the consent of the other of said copartners. And at the determination of their copartnership, the said copartners, each to the other, shall make a just and final account of all things APPENDIX 40, relating to their said business, and in all things truly adjust the same; and all and every, the stock and stocks as well as the gains and increase thereof, which shall appear to be remaining, either in money, goods, wares, fixtures, debts, or otherwise^ shall be divided equally between them. In Witness Whereof, the said parties have hereunto set their hands and seals this thirty-first day of October, 1903. Charles Snow. (1. s.) Edward M. Chapin. (1. s.) B ARTICLES OF THE PIERCE FORDYCE OIL ASSOCIATION,— A JOINT-STOCK COMPANY ARTICLES OF COPARTNERSHIP Name We, whose names are hereto subscribed, do hereby form a Copartnership Association to be known and styled Pierce Fordyce Oil Association which shall continue in existence imtil the 2nd day of April, i960, imless sooner dissolved as herein provided. Purposes The general purpose of this Copartnership Association is: To engage in the general merchandise of petroleum and the products thereof and other such articles as may be advanta- geously sold or handled in connection therewith ; to purchase, own and mine lands supposed to contain or containing oils or other minerals and to construct and operate refineries or other manufacturing plants for refining or reducing such oils or min- erals and to engage in any other industrial manufacturing, min- ing or merchandising enterprise or exploitation that may be ' The capitalization has been increased and a few minor changes made in the arti- cles since this copy was made. Certain important provisions have been italicized by the author. 404 APPENDIX determined by the Board of Managers appointed or chosen as hereinafter provided. Capital The Capital is Three Million Dollars divided into Thirty Thousand Shares of One Hundred Dollars each, all of which has been paid in, by the subscribers hereto. The Capital may be increased from time to time by increasing the number of shares and the admission of new members, as may be determined by a vote of the majority of the then shares at any meeting of the shareholders called pursuant to these articles of Associa- tion or such By Laws as may be adopted hereafter by a majority of the shares. Shares The Certificates of Membership shall be issued by the President of the Board of Managers and countersigned by the Secretary of said Board and shall be in substantially the following form ; viz: PIERCE FORDYCE OIL ASSOCIATION (Copartnership) Capital, $3,000,000, or Thirty Thousand Shares Member's Certificate of Interest This is to certify that is the owner of full paid shares of beneficial interest in the Pierce Fordyce Oil Association, transferable on the books of the Association by the owner thereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate of interest is subject to the provisions and covenants contained in the Articles of Copartnership of the Pierce Fordyce Oil Association dated the Second day of April, 1910, and any amendment thereto and the By Laws of said Association and the provisions hereof. No member of said Association or owner or holder of this certificate shall haw any APPENDIX 405 authority, power or right whatsoever to do or transact any business whatever for, on behalf of or binding on the Association or any member thereof, and no member of this Association shall be liable for any debts, covenants, demands or torts of this Association beyond the amount of his shares. This certificate shall be the sole and only evidence of membership in said Association and shall be surrendered upon the call of the Board of Governors at any time to the Association upon the payment or tender of pajonent to the amount of its face or par value and a premium of fifteen per cent thereof. In Witness Whereof the said Association has caused this certificate to be signed by its duly authorized officers and to be sealed with the seal of the Association this — day of 19 . President. Secretary. Death of Member The decease or insolvency of a member of the Association shall not work a dissolution of it or have any effect upon the same, its operation or mode of business; nor shall it entitle his legal representatives or heirs or assigns voluntary or involuntary to any account or to take any action in law or equity or otherwise against the Association, its members, officers, Board of Governors, Trustees or its property or assets ; but they shall simply and only succeed to the right of the deceased, to the certificate of membership and the shares it represents, subject to this agree- ment, the amendments thereto and the By Laws of the Associa- tion, now or hereafter adopted. Board or Governors The entire affairs of this Association shall be managed by a Board of Governors, consisting of seven members, each of whom shall own at least, certificate or certificates for not less than ten shares, who shall be elected by a majority of shares held by mem- bers at a regular annual meeting of the certificate holders every 4o6 APPENDIX two years after the expiration of the term of the first Board of Governors. The first Board of Governors shall be composed of the follow- ing named persons, viz : H. C. Pierce, Samuel W. Foedyce, Samuel W. Fordyce, Jr., George T. Priest, Robert E. Moloney, Heistry W. Allen, and John H. Holliday, who shall continue for the period of five years, next ensuing the date of this agreement. Each Board shall elect its own President, Vice President, Secretary and Treasurer and may create such other offices, filHng them by appointments and prescribing the duties apper- taining thereto as they may deem wise, necessary or convenient to carry on the business of the Association and may likewise fill any vacancy in its membership occasioned by death or resigna- tion imtil the next election of a Board of Governors. The Board may also fix the salaries of all officers, including its own members, and may remove any officer and fill all vacancies which may occur in any office. The first Board of Governors shall appoint such a number of its members as it may deem proper, not exceeding three, as Trustees, in whose name or names all investments and title to all -property are to he made and held tmder a declaration of trust for and on behalf of this association. The Board of Governors shall be held to be Trustees for and on behalf of this Association and may in that capacity be sued and sue in any court of law or equity. The Board of Governors shall have full power and authority in the conduct of the business of the Association to borrow money and issue mortgage debentures therefor if deemed ad- visable and any debt for money so borrowed or hability created shall be and remain until paid a lien upon all f imds, moneys and properties there or thereafter belonging to or held in trust for APPENDIX 407 this Association in preference to the claims or claim of any share- holders as such. (i) The Board of Governors shall have no power to bind the shareholders or members personally; and in every written con- tract or undertaking they shall enter into relating to the business of this Association, its property or any part thereof, reference shall be made to this agreement ; and the person, firm or cor- poration so contracting with the Board of Governors shall look only to the funds and property legal and equitable of this Association for the payment of any debt, damage, judgment or decree or of any money that may become due and payable in any way by reason of the contract or undertaking ; and neither the Board of Gov- ernors nor the shareholders or members present or future shall be personally liable therefor or for any debt incurred or engage- ment or contract made by said Board of Governors. (2) The Board of Governors may fix and regulate their own time and place of meeting and a majority thereof shall constitute a quorum and possess and exercise all the powers of a full Board. (3) The Board of Governors shall whenever they may be so minded convene all of the registered share or certificate holders in general meeting without specifying the purpose thereof upon notice to that effect deposited in the Post Office at the place of the general offices of the Association addressed to each share- holder at his registered Post Office address, ten days before the date of the proposed meeting; and the majority of the shares present or represented at any such meeting so called, shall have and exercise the right, power and authority of the entire body of share or certificate holders. (4) The share or certificate holders shall meet annually on the second Tuesday of each year without further notice to consider the affairs of the Association and transact such business as may then be inaugurated by them or that may be submitted for their consideration by the Board of Governors. At each meeting of the share or certificate holders, each member present or repre- sented by duly accredited agent or attorney shall be entitled to cast as many votes upon any proposition as he may have shares of membership interest. 4o8 APPENDIX (s) At any meeting of members, By Laws may be passed or amended by a majority of those present or represented; and any amendment may be made to this agreement by a vote of three-fourths of those present or represented. (6) The Board of Governors may from time to time declare and pay such dividends from the earnings of the Association as they deem expedient. OrriCERS AND Their Duties President and Vice President The President or in his absence the Vice President shall sign all certificates of membership, preside at all meetings of the mem- bers of the Board of Governors and shall do and perform and render such acts and services as the Board of Governors shall prescribe and require and shall receive such compensation for services as may from time to time be fixed upon by the Board of Governors. Secretary The Secretary shall countersign all certificates of member- ship and shall keep such minutes, records and books as the Board of Governors may require, attend all meetings of the Board of Governors and render such services as may be imposed upon him. Treasurer The Treasurer shall perform such duties as the Board of Governors may impose upon him. Title Trustees The members of the Board of Governors appointed to hold the title to all property of the Association shall at all times be subject to the orders of the Board of Governors who may any time and for any cause remove any or all of them from oflace and appoint and devolve upon other members of the Board of APPENDIX 409 Governors the duties and functions of the office. In the case of the death, resignation or other disability of any such Trustee, the Board of Governors may fill the vacancy caused thereby. Dissolution This Association shall continue for a period of Fifty years from the date of the execution hereof unless sooner dissolved by the vote of the majority of membership certificates or shares. In Witness Whereof we have hereunto set our respec- tive signatures and attached our several seals, this the 2nd day of April, 1910. Henry C. Pierce, (Seal) S. W. FoRDYCE, (Seal) Samxtel W. Fordyce, Jr., (Seal) George T. Priest, (Seal) RoBT. E. Moloney, (Seal) Henry W. Allen, (Seal) John H. Holliday, (Seal) BY-LAWS OF A NEW YORK CORPORATION Article I. — Stock 1. Certificates of Stock shall be issued in numerical order from the stock certificate book, be signed by the President and Treasurer and sealed by the Secretary with the corporate seal. A record of each certificate issued shall be kept on the stub thereof. 2. Transfers of Stock shall be made only upon the books of the Company and before a new certificate is issued the old cer- tificate must be surrendered for cancellation. The stock books of the Company shall be closed for transfers twenty days before general elections and ten days before dividend days. 3. The Treasury Stock of the Company shall consist of such issued and outstanding stock of the Company as may be do- nated to the Company or otherwise acquired, and shall be held 4IO APPENDIX subject to disposal by the Board of Directors. Such stock shall neither vote nor participate in dividends while held by the Company. Akticle II. — Stockholders 1. The Annual Meeting of the stockholders of this Company shall be held in the principal office of the Company in New York City at 12 m. on the second Monday in January of each year, if not a legal holiday, but if a legal holiday then on the day following. 2. Special Meetings of the stockholders may be called at the principal office of the Company at any time by resolution of the Board of Directors, or upon written request of stockholders holding one third of the outstanding stock. 3. Notice of Meetings, written or printed, for every regular or special meeting of the stockholders, shall be prepared and mailed to the last known post-office address of each stockholder not less than ten days before any such meeting, and if for a special meeting, such notice shall state the object or objects thereof. No failure or irregularity of notice of any regular meeting shall invalidate such meeting or any proceeding thereat. 4. A Quorum at any meeting of the stockholders shall con- sist of a majority of the voting stock of the Company, repre- sented in person or by proxy. A majority of such quorum shall decide any question that may come before the meeting. 5. The election of Directors shall be held at the annual meet- ing of stockholders and shall, after the first election, be con- ducted by two inspectors of election appointed by the President for that purpose. The election shall be by ballot, and each stockholder of record shall be entitled to cast one vote for each share of stock held by him. 6. The Order of Business at the annual meeting, and, as far as possible, at all other meetings of the stockholders, shall be : 1. Calling of Roll. 2. Proof of due notice of Meeting. 3. Reading and disposal of any unapproved Minutes. 4. Annual Reports of Officers and Committees. APPENDIX 4H 5. Election of Directors. 6. Unfinished Business. 7. New Business. 8. Adjournment. Article III. — Directors 1. The Business and Property of the Company shall be man- aged by a Board of seven Directors, who shall be stockholders and who shall be elected annually by ballot by the stockholders for the' term of one year, and shall serve until the election and acceptance of their duly qualified successors. Any vacancies may be filled by the Board for the unexpired term. Directors shall receive no compensation for their services. 2. The Regular Meetings of the Board of Directors shall be held in the principal office of the Company in New York City at 3 P.M. on the third Tuesday of each month, if not a legal holiday, but if a legal hoUday, then on the day following. 3. Special Meetings of the Board of Directors to be held in the principal office of the Company in New York City may be called at any time by the President, or by any three members of the Board, or may be held at any time and place, without notice, by unanimous written consent of all the members, or with the presence of aU members at such meetings. 4. Notices of both regular and special meetings shall be mailed by the Secretary to each member of the Board not less than five days before any such meeting, and notices of special meetings shall state the purposes thereof. No failure or irregu- larity of notice of any regular meeting shall invaUdate such meeting or any proceeding thereat. 5. A Quorum at any meeting shall consist of a majority of the entire membership of the Board. A majority of such quorum shall decide any question that may come before the meeting. 6. Officers of the Company shall be elected by ballot by the Board of Directors at their first meeting after the election of directors each year. If any office becomes vacant during the year, the Board of Directors shall fill the same for the unexpired 412 APPENDIX term. The Board of Directors shall fix the compensation of the officers and agents of the Company. 7. The order of business at any regular or special meeting of the Board of Directors shall be : 1. Reading and disposal of any unapproved Minutes. 2. Reports of Officers and Committees. 3. Unfinished Business. 4. New Business. 5. Adjournment. Article IV. — Officers 1. The Officers of the Company shall be a President, a Vice- President, a Secretary and a Treasurer, who shall be elected for one year and shall hold office until their successors are elected and qualify. The positions of Secretary and Treasurer may be united in one person. 2. The President shall preside at all meetings, shall have gen- eral supervision of the affairs of the Company, shall sign or countersign all certificates, contracts and other instruments of the Company as authorized by the Board of Directors ; shall make reports to the directors and stockholders and perform all such other duties as are incident to his office or are properly re- quired of him by the Board of Directors. In the absence or disability of the President, the Vice-President shall exercise all his functions. 3. The Secretary shall issue notices for all meetings, shall keep their minutes, shall have charge of the seal and the cor- porate books, shall sign with the President such instruments as require such signature, and shall make such reports and per- form such other duties as are incident to his office, or are prop- erly required of him by the Board of Directors. 4. The Treasurer shall have the custody of all moneys and securities of the Company and shall keep regular books of ac- count and balance the same each month. He shall sign or coun- tersign such instruments as require his signature, shall perform all duties incident to his office or that are properly required of him by the Board, and shall give bond for the faithful perform- APPENDIX 413 ance of his duties in such sum and with such sureties as may be required by the Board of Directors. Article V. — Dividends and Finance 1. Dividends shall be declared only from the surplus profits at such times as the Board of Directors shall direct, and no dividend shall be declared that will impair the capital of the Company. 2. The moneys of the Company shall be deposited in the name of the Company in such bank or trust company as the Board of Directors shall designate, and shall be drawn out only by check signed by the Treasurer and countersigned by the President. Article VI. — Seal I. The Corporate Seal of the Company shall consist of two concentric circles, between which is the name of the Company, and in the center shall be inscribed " Incorporated 1905, New York," and such seal, as impressed on the margin hereof, is hereby adopted as the Corporate Seal of the Company. Article VII. — Amendments 1. These By-Laws may be amended, repealed or altered, in whole or in part, by a majority vote of the entire outstanding stock of the Company, at any regular meeting of the stock- holders, or at any special meeting where such action has been announced in the call and notice of such meeting. 2. The Board of Directors may adopt additional by-laws in harmony therewith, but shall not alter nor repeal any by-laws adopted by the stockholders of the Company. 414 APPENDIX D AGREEMENT REGULATING TRADE CONDITIONS, COMMIS- SIONS AND RELATIONS BETWEEN JOBBERS AND DEAL- ERS: FEED DEALERS' ASSOCIATION CONSTITUTION AND BY-LAWS Article I Name Section i. The name of this Association shall be Feed Dealers' Association. Object Sec. 2. This Association is formed for the mutual benefit of its members ; to reform abuses and inculcate principles of justice and equity in the feed business ; to facilitate speedy adjustment of business disputes; to protect its members from irresponsible customers and to encourage frequent intercourse and consultation among its members for the promotion of their common interests. Qualifications of Members Sec. 3. Any individual, firm or corporation of good repute and responsibility, maintaining a place of business and regularly engaged in the Hay, Grain and Feed Commission business, or regularly engaged in the buying and seUing of hay, grain and feed in the City of , County of , shall be eligible to membership in this Association. Application for Membership Sec. 4. Every appUcation for membership in this Associa- tion shall be made in the name of the individual, firm or cor- poration by whom the business is to be conducted, giving a trtie and complete statement of resources and liabilities, and such other information as may be required by the Board of Directors, on APPENDIX 41^ a blank form furnished by the Association for this purpose. This statement shall be sworn to and acknowledged before a notary pubUc and shall be for the use of the members as a basis for the allowance of credit. Initiation Fee Sec. 5. Every appUcant shall deposit in the hands of the Secretary, with the apphcation, the sum oi fifty ($50.00) dollars, as an initiation fee, or an unimpaired certificate of membership. Every application for membership shall be investigated by the Membership Committee and their finding referred to the Board of Directors within ten days from the date same was referred to them by the Secretary. The Secretary shall at the same time notify all of the members of the Association by mail of the name of the applicant, his place of business and also the name of the membership which is sought to be transferred, and any member having any objection to the transfer or the issuance of the certificate of membership to the applicant, must file his objection in writing with the Secretary within five days of the receipt of said notice. Upon the approval of the Board of Directors (the necessary time for the filing of objections having elapsed), the applicant shall become a member in good standing by signing the Constitution and By-Laws of the Association. Sec. 6. Memberships in this Association are transferable. Apphcation for transfer of membership must be made to the Secretary in writing and all transfers recorded on the books of the Association, a fee of five ($5.00) dollars being charged therefor. No application for membership shall be approved by the Board of Directors wherein the applicant is not engaged in the hay, grain or feed business in his own name and is financially interested in the profits and losses of the business. Appropriation of Money Sec. 7. All moneys received by the Association not otherwise provided for in these Articles of Association shall constitute a 41 6 APPENDIX fund to be appropriated and disposed of as the Association shall direct, provided, however, that there shall be no appro- priation for other than business of the Association, unless the same shall be approved by a two-thirds vote of all members present at any regular meeting and at least ten days' notice has been given of such proposed appropriation. Quorum Sec. 8. A quorum for the transaction of business shall con- sist of nine (9) members in good standing, but a less number may adjourn from time to time. Termination of Membership Sec. 9. In case any individual, company or corporation shall cease to be actively engaged in the hay, grain and feed business, the membership of such member shall thereupon cease and such member shall not be entitled to be present at any of the meetings of the Association or any of its committees. Provided, how- ever, that the membership may be transferred within six months from the termination of said membership by reason aforesaid, and it shall be the duty of the Board of Directors, on learning that a member has ceased to conduct his business, to notify him that he must dispose of his membership within six months or that same shall lapse. Sec. 10. The annual dues shall he five ($5.00) dollars, payable during the month of May for the ensuing year. Any member who refuses or neglects to pay the same within sixty (60) days after they become due, shall stand suspended until paid, and the Secretary shall immediately notify the members of such suspension. Upon any member paying his back dues, the Sec- retary shall issue to such member a reinstatement card, a fee of one ($1.00) dollar being charged therefor. Article II OflScers Section i. The officers of the Feed Dealers' As- sociation shall be President, Vice-President, Secretary, Treasurer, APPENDIX 417 a Board of Directors consisting of five (5) members, two of which shall be the President and Secretary and the other three members to be (i) hay receiver and two (2) feed dealers; a com- mittee of five (5) called the Appeals Committee, which committee shall be composed of one (i) hay receiver and four (4) feed dealers; a committee of five (5) called the Arbitration Com- mittee, which shaU be composed of one (i) hay receiver and four (4) feed dealers; a committee of three (3) called the Membership Committee; an Auditing Committee of three (3); a Sergeant- at-Arms, and a Marshall, all to be elected annually at the regular meeting in April or as soon thereafter as possible. Nominations Sec. 2. Nomination for Officers must be made at the regular meeting in January of each year. In case of the withdrawal of candidates for any office previous to the election, additional nominations may be made on the evening of election. Annual Meeting — Proxies — Vacancies Sec. 3. The hour and place of the annual meeting shall be designated by the President. The Secretary shall mail to each member a written or printed notice of the time and place of meeting three days in advance. All elections shall be by Au- stralian ballot, and the one receiving the highest number of votes for any office shall be declared elected. Only members personally present shall be allowed to vote. And all newly- elected officers shall officially assume the duties of their respective offices on May ist of each year, provided they are fully qualified, or as soon thereafter as they shall be. The officers of this Association shall continue in office until their successors are elected and qualified. Vacancies may be filled by the Associa- tion at any regular meeting, a majority being necessary to elect. 4l8 APPENDIX Article III Regular and Special Meetings Section i. The regular meetings of the Association shall be held on the second Tuesday of January, April, July and October. The time and place of said meetings to be determined by the Association from time to time. Special meetings of the Association may be called at any time by the President, and the President shall also call a special meeting whenever requested to do so by nine members in writing. Who can Vote — Classification of Members Sec. 2. a. In all matters to be determined by the Associa- tion (except such as are otherwise provided for in these Articles of Association) a majority vote of all members present shall be necessary for a decision, but these rules may be suspended upon the affirmative vote of two-thirds of the members present. b. Any member in arrears for dues, fines, fees, penalties or assessments shall be deprived of the right to vote until such arrears are paid. c. All partners in any membership may, if they desire, attend any meetings and participate in the dis- cussion and serve on committees, but each membership shall have but one representative upon any one committee. Sec. 3. The members of this Association shall be divided into two branches, designated as hay receivers and feed dealers. (Article IV Omitted) Article V Rules governing the Sale of Merchandise on Team Track " Members of this Association shall not sell hay or straw in any quantity to be delivered on any team track or ship dock to any dealer who is not a member of this Association who is doing business withia the limits as described in Section i of Article VI. APPENDIX 419 " Members of this Association shall not sell grain or feed to be delivered on any team track in less than carload lots to any dealer who is not a member of this Association." Sec. 2. Members of this Association shall not sell hay, straw, grain or any kind of feed to be delivered on any team track within the limits described in Section i of Article VI to any consumer in less than full carload lots. Sec. 3. Hay receivers shall not employ feed dealers or any of their employees to sell either hay or straw, in any quantity, upon team track for them. Rules governing the Purchase of Goods on Team Track Sec. 4. All members of this Association classified as feed dealers, shall purchase all hay, straw, grain and feed purchased by them on team track or ship dock, from members of the Association or on the Chicago Board of Trade. Feed dealers shall not solicit consignments of hay or straw, but should they receive shipments of hay or straw they shall turn the same over to a hay receiver who is a member of this Association, to be sold in the same maimer as if it were a car consigned to him. Article VI Consignments of Hay and Straw — To whom Sold Section i. All receipts of hay and straw received by hay receivers who are members of this Association shall be sold in carload lots, and no hay receiver who is a member of this Asso- ciation shall either directly or indirectly sell any such carload lots of hay or straw to any consumer in County, unless such consumer is a member of the Board of Trade and purchases the same on the Board of Trade during the trading hours of the Board ; nor to any dealer who is not a member of this Association whose place of business is located within the limits — 69th Street on the south, the city limits on the west, the city limits on the north and on the east — unless such dealer is a member and purchases such hay or straw on the Board of Trade during the regular trading hours. 420 APPENDIX Charges for Selling Sec. 2. The hay receiver selling hay and straw shall charge as brokerage $7.50 per car for any car containing ten tons or less, and 75 cents per ton for all cars containing over ten tons. Any member convicted of a violation of this section shall be fined the sum of $100 for the first offense, and for the second conviction within a year shall be expelled from membership in this Assocaition. Sec. 3. No member of this Association who is not a hay receiver shall purchase any hay or straw in carload lots at coun- try points to be consumed in County. Time for Rejection of Cars Sec. 4. a. The buyer must examine the hay or straw in the doorway of car, and either accept or reject the same within twenty-four hours from time of purchase, if the car is on team track when purchased. If not, then within twenty-four hours from time of its arrival on team track (or if bought on the Board of Trade by 12.30 o'clock of the next business day), on all roads that give more than two days' time for unloading before charg- ing car service, twenty-four hours additional time shall be allowed. Failure to reject or refuse in accordance with these conditions will constitute an acceptance of the car of hay or straw, b. The purchasers shall pay all car service charges by the railroad that may accrue after forty-eight hours from 7 A.M. following hour of purchase, should the car be on team track when purchased, provided hay or straw is according to sample. Sec. 5. The purchaser of hay or straw hauling out last load must take all loose hay or straw contained in car at half price, and if such hay or straw is not weighed separately the weight must be estimated by the agent of the R. R. Co. hauling the shipment, and such weight must be indicated on scale ticket and load ticket. APPENDIX 421 Article VII How to prefer Charges Section i. Charges against members of this Association for violation of the Rules or By-Laws shall be made by fihng the same in writing with the President for approval. Sec. 2. The President shall at once notify the Secretary of the Association to call a meeting of the proper committee before whom the complaint should be heard. Sec. 3. The Secretary shall notify all witnesses to be present and summon the member complained of, giving him a copy of ^the charges, and at least three days' notice of the time and place of the meeting of the committee before whom the com- plaint is to be heard. Sec. 4. A copy of the charges drawn by the Secretary shall state exphcitly the article and section of the articles of Associa- tion under which the complaint is filed. Sec. 5. Differences between members of this Association shall, Upon the request of either, be submitted to the Committee of Arbitration for adjustment. The complaining member shall file his claim with the Secretary in writing, accompanied by five ($5.00) dollars to cover cost of Arbitration Com- mittee, whereupon the Secretary shall fill out a regular blank to be signed by both parties to the arbitration, agreeing to sub- mit to and abide by such arbitration. Sec. 6. The cost of such trial by the Arbitration Committee to be paid by the party against whom the verdict runs. In the event of the verdict being found for the complainant, the cost shall be taxed upon the defendant, and the fee deposited by the complainant returned to him. Sec. 7. Any member refusing to sign agreement to arbitrate may be cited before the Board of Directors to show cause in justification of such refusal. Sec. 8. Any member of this Association who fails to meet his obligations to a member of this Association may be summoned before the Board of Directors, and if found guilty of the offense 422 APPENDIX charged against him, shall be, in the discretion of the said Board of Directors, fined not to exceed twenty-five dollars ($25.00) for such offense or suspended from the privileges of the Asso- ciation until he makes satisfactory settlement of the claim against him Penalties Sec. II. When any member of this Association has been con- victed of a violation of any of the Rules and By-Laws after due trial before the Arbitration Committee, the committee must impose the following penalties, except as otherwise provided in Section 2, Article VI : a. For the first offense a fine of twenty-five ($25.00) dollars, for the second offense a fine of fifty ($50.00) dollars, for the third offense a fine of seventy-five ($75.00) dollars, for the fourth offense the penalty shall be expulsion, provided, how- ever, that the cumulative fines shall not be imposed unless the offense be committed within the period of one year from the date of previous conviction. b. A member so expelled shall not be eligible to reinstate- ment in this Association for the period of six months from the date of expulsion except as hereinafter provided, c. The several penalties are mandatory and must be imposed where the party complained of is found guilty. This Association shall not modify, abate or remit any sentence justly imposed. All fines imposed must be paid within five days from imposition of same. The money to be paid into the treasury of the Association. Defendant may Appeal Sec. 12. In all cases where judgment has been rendered against the defendant or complainant in any case tried before the Arbitration Committee, the defendant or complainant may appeal from the finding of said committee. . . . The finding of the Appeal Committee shall be final in all cases. APPENDIX 423 Directors may appoint Committee to examine Books Sec. 13. Whenever the Board of Directors may deem it necessary or expedient they shall have the power to designate two of their number to examine the hooks oj account of any member of this Association with relation to any specific charge made against such member for a violation of the Rules, and members shall permit such inspection of their books, upon the presenta- tion by the Committee appointed to examine them an order signed by the President and Secretary. Article VIII Payment of Service of Arbitration and Appeals Committees — Who shall pay cost of Trials Section i. Each member of the Arbitration Committee and Appeal Committee shall receive as compensation for his services in the hearing of cases before said committees one ($1.00) dollar in each case. When the complainant does not appear to prose- cute the charges made by him, said complainant shall pay the costs of such trial, and when the charges are sustained the de- fendant shall be required to pay the costs; when charges are not sustained the Association shall pay the costs of trial. Sec. 2. Any member who shall furnish sufficient evidence of violation of Article ^ or 6 for the conviction of another member, and the member shall be found guilty, fined and the fine paid, shall be entitled to recover from the Association one-half of the amount of the fine so paid, and two ($2.00) dollars for each necessary witness, not to exceed three. Article IX Duties of the President The President, when present, shall preside at all meetings of the Association. He shall maintain order and preserve the dignity thereof. All committees shall be appointed by the President, unless otherwise ordered by the Association. At 424 APPENDIX the annual meeting and at such other times as he may deem proper, the President may communicate to the Association such suggestions as wUl, in his opinion, tend to promote the welfare and increase the usefulness of the Association. The President shall give the Vice-President twenty-four (24) hours' notice of his inability to preside at a meeting. Article X Duties of the Vice-President Article XI Duties of the Treasurer Article XII Duties of Secretary The Secretary shall keep a correct record of the proceedings of all meetings in a book provided for that purpose, which he shall produce at every meeting and transfer to his successor at the expiration of his term of oflSce. He shall send by mail to each member the notice of every regular, adjourned or special meeting of the Association, and shall also notify members promptly, by mail or otherwise, of all dues, fines, fees, penalties and assessments, and shall pay all receipts over to the Treasurer monthly, except as otherwise provided. He shall keep an alpha- betical list of all members and their addresses. He shall per- form all the clerical work necessary, at the request of the Presi- dent, and make a report of doings of the Association at the annual meeting. He shall notify all the members of the Asso- ciation by mail of any proposed change in the Articles of Asso- ciation. He shall be required to give bonds for the faithful discharge of his duties, with such security as the Association may, from time to time, require. For his services he shall re- ceive three hundred ($300) dollars annually, or such compensa- tion as the majority of the Association shall hereafter determine. In absence of the Secretary at any meeting, a Secretary pro tern may be appointed. APPENDIX 425 Article XIII Duties of Board of Directors The Board of Directors shall hold all property of this Asso- ciation other than its cash funds, and have direction of all affairs of this Association not otherwise provided for. All cases of uncommercial conduct shall be heard by the Board of Directors; they shall have the power to summon any member of the Association before them as witness. Their finding shall be final in all cases ; and by a majority vote they shall have the power to impose a fine upon or suspend a member, or both, and may expel a member by a unanimous vote. Article XIV Duties of Arbitration Committee The Arbitration Committee shall try all disputed accounts brought before it for adjustment, and all violations of the Rules of this Association not otherwise provided for, and its findings shall in all cases be final unless appealed from as herein provided. All evidence given before the Committee shall be stenographically reported, the expense to be paid by the Association. Article XV Duties of Appeal Committee The Appeal Committee shall try all cases sent to it by appeals from the Arbitration Committee and its findings in all cases shall be final. Article XVI Duties of the Membership Committee The Membership Committee shall see that every application is properly filled out and sworn to. They shall investigate the statements in every application and verify the same before approving. 426 APPENDIX Article XVII Duties of Auditing Committee Article XVIII Duties of the Sergeant-at-Arms Article XIX Duties of the Marshal Article XX Rules and Regulations This Association shall have power to adopt and enforce such additional rules and regulations for the government of its mem- bers, provided such rules and regtilations are not inconsistent with these Articles of Association, and all such rules and regula- tions so adopted shall be binding upon all the members and remain in force imtil altered, amended or repealed by three- fourths vote. Article XXI Alterations of Articles Section i. This Association shall have power to alter or amend these Articles of Association, but it shall require at least four weeks' notice mailed to each member, either written or printed, before any proposed alteration or amendment can be acted upon, except such as are otherwise provided for in these Articles. A two-thirds vote of all members present shall be necessary to legalize any and all amendments and altera- tions, except such as are otherwise provided for in these Articles. Sec. 2. This Association may be dissolved only by a two- thirds vote or by the written consent of three-fourths of all members in good standing ; and when these Articles terminate and this Association ceases to exist, then each member in good APPENDIX 427 standing shall be entitled to his pro rata share of the funds in the treasury of the Association after all just claims against the Association have been paid. But should any member be in- debted to this Association for any dues, fines, fees or assess- ments at the time of the dissolution of this Association, the amount of his indebtedness shall be deducted from his pro rata share before payment is made. E EXTRACTS FROM CONSTITUTION AND BY-LAWS OF CALI- FORNU COAL DEALERS' ASSOCIATION Constitution " Article i. Title and Object, (a) The title of this organi- zation shall be the ' Coal Dealers' Association of California,' with principal place of business in San Francisco, (b) It shall have for its object the furnishing of information to its members as to sales of coal made by wholesale dealers to the retail dealers, and by retail dealers to consumers, and also the names of any dealers who have been guilty of violating any of the rates or rales made from time to time by this organization, and the fur- nishing of as complete a Ust as possible of delinquent consumers, and such other matters as may be decided upon. " Art. 2. What constitutes a Dealer, (a) Any person who engages in the sale of coal as regular business, buying to sell again, who shall own and operate a yard, keeping an oflace, and displaying a sign, shall be regarded as a retail dealer. (6) All miners and shippers shall be eligible to membership in this association, provided such miner and shipper shall not make a practice of selUng coal, at retail, at less price than the retail dealers. " Art. 4. Fees — Dues — Assessments, (a) The admittance fee for membership shall be two hundred (200) dollars, and must invariably accompany the appHcation. (6) The amount of dues shall be fifty cents per month, payable quarterly in ad- vance, and to date from the first day of the month following the month in which the member was admitted, (c) Assess- 428 APPENDIX ments may be levied by a two-thirds vote of the members present at a regular meeting, but only in such cases when the interests of the association as a business society require it. (d) No assessment shall be levied unless it is expressed in the notice of meeting that ' a resolution to levy an assessment will be introduced.' " Art. 6. Failure to pay Dues, Assessments, or Fines — Charges — Right of Appeal, (a) If any member shall neglect or refuse to pay the monthly dues and assessments as provided in the constitution and by-laws of this association within three days after the same have become due, he or they shall no longer be considered members of this association, or participant in its benefits, and shall surrender certificate of membership ; but a written or printed notice must be sent, at the expiration of said time, to all those members who are delinquent, and may be reinstated within ten days thereafter by paying in full all dues. By-Laws " Sec. 3. Officers and Their Duties. ... (c) The secretary, prior to taking his office, shall be required to give a bond, for the faithful performance of his duties, in the sum of one thou- sand (1000) dollars, with two sureties qualifying for the sum of five hundred (500) dollars each, and satisfactory to the board of directors. He shall collect all dues, issue all communications, notices, and other correspondence not provided for. He shall keep a register of all members of the association, together with a regular set of books for the proper conduct of business ; receive all moneys due the association, and pay the same over to the treasurer ; sign all orders on the treasurer for the payment of such bills as may be approved by a majority of the finance and certificate purchasing committees. He shall keep a record, in a book provided for the purpose, of all transfers of certificates of membership ; be the custodian of all properties of the asso- ciation ; receive all charges made of violation of the card rates and rules, and refer the same to the grievance committee for action, after using due diligence in securing such facts in the APPENDIX 429 case as possible. He shall devote his entire time to the associa- tion, and under no circumstances is he allowed to be associated in any manner with any other business. He shall, on receipt of findings of the grievance committee, notify the wholesale dealers of such report, and request, in writing, that they impose the penalty for such violation. His compensation shall be fixed by the board of directors. . . . " Sec. 4. Standing Committees, (a) A grievance committee consisting of three persons shall be appointed by the president, from the board of directors, on the first Monday of every month, to serve without compensation until the first Monday of the following month, or until their successors are appointed. They shall assemble whenever requested to do so by the secre- tary, and receive and investigate all charges of violation of card rules or rates preferred against any coal dealer or agent in the city and county of San Francisco, and report their findings to the secretary. They shall have the power to fix the time limit for the payment of any fines imposed by them. . . . " Sec. 9. Advertising, Circulars, etc. (a) Dealers in adver- tising coal are not permitted to state prices without adding the names of coal to be had for the prices named ; both names and prices to correspond exactly with those on rate card. (6) Any circulars, posters, dodgers, cards, or signs conflicting with the card rates or rules displayed, found on the streets or circulated in any manner whatsoever, shall subject the dealer or agent, who caused their distribution, to the penalties, as are provided in section 13 of these by-laws for selling coal in violation of card rates or rules. " Sec. 10. Two or More Yards. A member having two or more yards cannot dispose of his certificate of membership in the sale of one yard, and retain his membership in the association. " Sec. II. New Yards. Any member opening a new yard or yards after June 14th, 1895, in addition to the one that secured his admission in the association, shall be hable for an additional two hundred (200) dollars admittance fee and monthly dues for each yard so opened, in order for such yard or yards to par- ticipate in the benefits of the association. 43° APPENDIX " Sec. 12. Standard Rules and Weights, (a) No dealer shall give more or less than loo pounds to i sack ; 500 pounds to 5 sacks, or J ton (short) ; 1000 pounds to 10 sacks, or ^ ton (short) ; 2000 pounds to 20 sacks, or i ton (short) ; 2240 pounds to I ton (long), (b) All long tons must be delivered in bulk. Names of coal must appear on bill exactly as they read on rate card. A load of coal delivered in bulk shall be per ton of 2240 poimds. If handled after arrival at customer's place, an addi- tional charge of fifty cents per ton must be made. A ton of coal delivered in twenty sack^, and put in bin, shall be 2000 pounds. No premiums or presents are permitted to be offered as inducements for purchasers to buy coal, (c) Dealers shall be permitted to sell and deliver fifty pounds of coal at one-half card rates for one hundred pounds, but in no case shall they be allowed to sell coal in quantities ranging between fifty pounds and one himdred pounds. " Sec. 13. Violations — Penalties, (a) If a dealer or agent, member or non-member, be found guilty of selling coal in viola- tion of the card rates or rules, he shall be subject to a fine of not less than ten (10) dollars nor more than one hundred (100) dollars for first offense, not less than twenty-five (25) dollars nor more than two hundred (200) dollars for second offense; if a member of the association, be suspended and compelled to pay retail prices for third offense until restored to membership in good standing by the board of directors. . . . " Sec. 14. Agreement. The following agreement between the wholesale coal dealers of the city and county of San Francisco, Cal., and this association, is hereby embodied in this section, and made a part and parcel of the by-laws of this association : " ' This agreement, made this first day of June, a.d. 1896, by and between the Coal Dealers' Association of California, an association, and the undersigned wholesale coal dealers, witnesseth: (i) That the purposes of this agreement are: First, protection to consumers in receiving full amount and kind of coal purchased; second, protection to dealers in obtaining sufficient margin to carry on a safe business with justice to con- sumers. (2) That said wholesale dealers will not, nor will any APPENDIX 431 or either of them, during the continuance of this agreement, sell coal at trade rates to any one not having an established yard ; nor will any or either of them sell coal at less than card rates to consumers, except in such cases as may be provided for by agreement among said wholesale dealers themselves. (3) That said wholesale coal dealers hereby acknowledge the request of the Coal Dealers' Association of California, made to them on the sixth day of May, 1896, to charge one dollar ($1.00) per ton additional over present trade rates for all coal sold by said wholesale dealers, or any or either of them, to the retail dealers in the city and county of San Francisco, who are not members of said association, and hereby agree to comply with said re- quest, and will during the continuance of this agreement charge one dollar ($1.00) per ton additional over trade rates for all coal sold to dealers carrying on business in said city and county who are not members of said association. (4) That upon re- ceiving proof from the Coal Dealers' Association of the violation by any retail coal dealer of any of the rules of business printed on the rate card issued by said association, and being satisfied that the charge is established, said wholesale coal dealers agree, and each of them agrees, to, and will, charge the dealer so violat- ing said rules or rule consumers' rates thereafter for coal, until said retail dealer, if a member of said association, shall have been reinstated to membership in the Coal Dealers' Association of CaUfornia by the vote of the board of directors of said asso- ciation, or, if not a member, until he shall have paid such reasonable penalty as may be imposed upon him by said asso- ciation. (5) That the following rules and rates shall be en- forced during the continuance of this agreement : That rates at which coal shall be sold to consumers shall be as shown on the rate card issued from time to time by the Coal Dealers' Asso- ciation of California. A ton of coal delivered in twenty (20) sacks, and deposited in bin, will be 2000 pounds ; and no more nor less than twenty sacks shall constitute a ton so delivered. A ton of coal delivered in bulk shall be 2240 pounds. For coal in bulk handled after arrival at place of delivery, an additional charge of fifty cents per ton shall be made, provided, however, 432 APPENDIX if the handling after arrival at place of delivery consists only of shoveling or dumping coal in place of deposit, no additional charge shall be made. All long tons must be delivered in bulk. (6) That any member of the Coal Dealers'^ Association furnish- ing coal to another dealer who has been duly adjudged by the Coal Dealers' Association of California guilty of violation of the rules or any rule of said association printed on said rate card will himself suffer the penalty imposed by said association for violation of said rules. (7) That no member of the Coal Dealers' Association shall have the right to transfer his certifi- cate of membership in said association untU all indebtedness due to said wholesale coal dealers, or any of them, by the mem- ber of the said Coal Dealers' Association holding said certificate, shall have been paid, or until an adjustment between the debtor and creditors shall have been satisfactorily made by such debtor and creditors. (8) That in the event of the discontinuance of business by any member of said Coal Dealers' Association, and his failure to promptly settle his indebtedness due to said whole- sale coal dealers, or any of them, then said Coal Dealers' Asso- ciation shall have the right to declare such delinquent member's certificate forfeited to said wholesale coal dealers parties hereto, who are his creditors. That the said wholesale coal dealers for whose benefit said forfeiture takes place shall have the right to sell said membership certificate, and, upon the sale thereof, shall apply the proceeds of sale to the payment of the claims of the wholesale coal dealers parties hereto, holding claims against such delinquent member. That, after the application of the proceeds of such sale to the payment of the claims of said wholesalers, any surplus remaining shall be paid to the delin- quent member. (9) And, in the event of a sale of his business, wholesale dealers shall decline to furnish coal to his successor, at the discretion of the association's directors, until the seller has paid all bills due by him to the wholesale dealers, who are parties hereto. (10) That this agreement does not apply to steam, hotel, restaurant, or church trade, nor to such trade as must be, necessarily, reserved by wholesale dealers as a means of protection to steam trade, and referred to in section 2 of this APPENDIX 43^ agreement, (ii) That this agreement shall continue in full force and effect for the period of two years from date hereof, and shall apply only to said wholesale coal dealers and retail coal dealers carrying on business within the city and county of San Francisco. " ' In Witness Whereof, the parties hereunto set their hands, the day and year first above written, said Coal Dealers' Association signing by its president and secretary, thereunto authorized by resolution of said association duly passed, and said wholesale coal dealers signing their respective names. " ' (Signed) Coal Dealers' Assn' or California, " ' By P. Lynch, President. " ' By E. K. Carson, Secretary. " ' Charles R. Allen. " ' Central Coal Co., " ' By J. J. McNamara. " ' R. D. Chandler. " ' Geo. Fritch, " ' Per J. Homer Fritch. " ' C. Wilson & Co., " ' Oregon Improvement Co., " ' John L. Howard, Manager. " ' Oregon Coal & Navigation Co., " ' By C. M. GooDALL, Vice-Pres. " ' W. G. Stafford & Co. " ' R. DuNSMUiR & Sons, " ' By C. H. Jouett.' " Sec. 15. Agencies or Offices, (a) Any member having agencies or offices other than those located at his yard, for the sale of coal, shall be compelled to have a certificate of member- ship for each of said agencies or offices, (b) In the event of the failure of any member to secure a certificate of membership for each agency or office, as referred to in paragraph (a) of this section, within five days after a written notice shall have been sent him by the secretary, he shall immediately cause the same to be closed, or subject himself to a fine of not less that ten (10) 434 APPENDIX dollars n6r more than one hundred (loo) dollars for each agency or office that is known to be operated by him or for his benefit. " Sec. i6. Sales to Nonmember Dealers or Agents, (a) No member of this association shall be permitted to sell dealers or agents, who are nonmembers, coal for less than consumers' prices. . . ." "INTERNATIONAL AGREEMENT" BETWEEN AMERICAN GUNPOWDER ASSOCIATION AND EUROPEAN COMPETI- TORS, 1897 Cited by Stevens, The Powder Trust, from a government exhibit in tlie suit of the U. S. V. E. I. du Pont de Nemours Powder Co. et al. 1. In regard to detonators the " European Factories " ' agreed to abstain from erecting works in the United States, and to abandon the project begun at Jamesburg. The expenses so far incurred in the construction of this plant were to be shouldered by the " American Factories " ^ which also agreed to take of the " European Factories " five million detonators per year.' 2. As to black powder both parties bound themselves to erect no factories, the Americans in Europe, the Europeans in the United States. Each, however, was free to ship into the terri- tory of the other.* 3. The arrangements in regard to smokeless sporting powder were the same as in regard to black powder.* 4. Smokeless military powder factories were not to be erected by the Americans in Europe or the Europeans in America. It was agreed that European factories upon receipt of an inquiry * These companies were Vereinigte Koln Rottweiler Pulver Fabriken of Cologne, and the Nobel-Dynamite Trust Company (Ltd. ) of London. * Du Pont de Nemours and Company, Laflin and Rand, Eastern Dynamite Miami Powder Co., American Powder Mills, jEtna and Austin Powder Cos., Cal. Powder Works, Giant Powder Co., Consolidated, Judson Dynamite & Powder Co. 2 European Agreement, Gov't Exhibit No. iig. Pet. Rec. Exhibits, Vol. II, pp. 1124-1125. * Ibid., p. 1125. ' Ibid., p. 1125. APPENDIX 435 from the Government of the United States in regard to explo- sives, should first ascertain the price quoted or fixed by the American factories and were then bound to neither quote nor sell below that figure. Reciprocally the American factories on receivmg an inquiry from governments other than their own, should, in like manner, obtain the price the European factories were quoting or had fixed and were bound not to quote or sell below it.^ 5. For the sale of high explosives the world was divided into four districts. All of the United States, its territories and posses- sions, present and future, Mexico, Guatemala, Honduras, Nica- ragua, and Costa Rica, Colombia, and Venezuela were to be exclusively American territory. All other countries in South America and the islands of the Caribbean Sea, not Spanish possessions, were to be common territory and designated as " syndicated territory." The Dominion of Canada and the Spanish possessions in the Caribbean were to be a free market unaffected by the terms of the agreement. The rest of the world was to be exclusively the territory of the European factories. 6. A chairman and vice-chairman were to be appointed by each party to the agreement. The chairmen or in their absence the vice-chairmen were to establish the rules for the accom- pUshment of the terms of the syndicate arrangement, (a) They were to agree, from time to time, upon a basis price for each market in sjmdicated territory, said basis to include the cost of manufacturing, freight, insurance, etc. (6) They were also to establish a selling price for each market to be regarded as a convention price below which no sales were to be effected. The difference between the selling and the basis prices was to be syndicate profit to be divided equally. 7. A common syndicate fund of $50,000 was to be established by a payment of $1.00 per case upon certain grades of explosives shipped into syndicated territory. When the sum of these assessments reached that figure the payments were to be reduced to 50 cents per case and from the fund thus established fines ' Ibid., pp. 1125-1126. 436 APPENDIX not recoverable from the parties were to be deducted. It was permitted that the chairman should utilize two-thirds of this common fund for the purpose of protecting the common interest against outside competition. 8. Chairmen were to adjudicate all breaches of the agree- ment. On failure to agree they were to appoint an umpire, who was to be a European or an American according as the complaint was brought by the American or European factories. 9. Fines: (a) for trading in the territory of the other, the penalty was the invoice value of the goods; (b) for cutting prices in syndicated territory, no limit was placed upon the amount of the fine; (c) for erecting a factory in the exclusive territory of the other, the penalty should not be less than $10,000. 10. The agreement was to go into effect on July 15, 1897, for a period of ten years. In the absence of six months' notice it was to continue thereafter from year to year. DISTILLERS' AND CATTLE FEEDERS' TRUST AGREEMENT, DATED MAY 10, 1887 1. The trust herein created is to be vested in nine trustees. 2. W. M. Hobart, Geo. K. Duckworth, L. H. Green, P. J. Hennesy, Alfred Bevis, Joseph B. Greenhut, W. H. Corning, Adolph Woolner, and J. H. Francis were appointed trustees, to hold their oflEice until May i, 1888, or until their successors are elected. 3. The trustees shall prepare certificates showing the interests of each beneficiary in said trust, said certificates to be divided into shares of the par value of $100 each. 4. No certificates shall be issued except for stock as herein- after provided, and the par value of the certificates issued shall represent, as nearly as possible, the actual cash value of the stock held by the trustees in trust. 5. Each subscriber to the trust agrees to assign absolutely to the trustees the number of shares of capital stock of the par- APPENDIX 437 ticular corporation or corporations indicated in article 6 of this agreement; in consideration of which said trustees do hereby agree to execute and deliver to each subscriber trust certificates as above specified for the number of shares, which certificates, at the par value thereof, shall represent the cash value of the stock so delivered. The value of the capital of any corpora- tion, whose stock shall be assigned to said trustees, shall be first agreed upon between said trustees and the stockholders willing to transfer the samp, and after it is agreed upon there shall be no discrimination in the purchase price as between other stockholders of same corporation transferring at same time. 6. This agreement shall take effect as soon as those holding a majority of stock in the following corporations, formed or to be formed, to wit, The Storrs Distilling Company, by the Mill Creek Distilling Company; the Maddux-Hobart Company, by Maddux, Hobart & Co. ; the White Mills DistilUng Com- pany, by Geo. K. Duckworth; the Great Western Distilling Company, Monarch Distilling Company, Woolner Bros. Dis- tilling Company, Peoria Distilling Company, Birmingham Dis- tilling Company, by the Chicago Distilling Company ; Missouri Distilling Company, by Mound City Distilling Company, have transferred the same to said trustees. Thereafter said trustees and their successors shall have power to purchase other stocks of said companies, or of companies organized for conducting same business, or any of the business hereinbefore specified, and may issue therefor certificates of trust equal at par value to the cash value of the stocks so pur- chased, or shall have power to lease the premises of such com- panies, paying therefor such rental as they may deem proper, and whenever in their Judgment it is for the best interests of the trust to lease rather than purchase. 7. All stocks sold and transferred to said trustees shall be held by them and their successors for the benefit of all the owners of said trust certificates. No stocks so held by said trustees shall be sold or surrendered by said trustees during the continu- ance of this trust without the consent of a majority, in number and value, of the trust certificates : Provided, however, That said 438 APPENDIX trustees may from time to time assign such shares of stock as may be necessary to quahfy any person or persons as directors of any companies, the stocks of which are held by said trustees. 8. Said trustees shall have power to cause corporations to be formed for the purposes and with the necessary powers for carrying on distilling and kindred business : Provided, That the stock of such corporations shall be issued for cash or for property at its cash value, and shall be issued or be purchased by said trustees in the manner provided in section 6 of this agreement. g. Said trustees shall safely keep all moneys received from dividends or interest upon stocks or money held in trust, and shall distribute the same, as well as all moneys received from sales of trust property, by declaring and paying monthly divi- dends upon said trust certificates, as funds accumulate, which are not needed for the uses and expense of the trust. The trus- tees shall keep separate accounts of receipts from dividends and interest and of receipts from trust property. ID. Trustees shall render to the holders of trust certificates at each annual meeting a statement of the receipts and dis- bursements of the trust for the year. They shall also, whenever demanded by a majority in value of the holders of trust certifi- cates, furnish a true and perfect inventory and appraisement of all property held in trust, and a statement, as full as possible, of the financial affairs of the various companies whose stocks are held in trust. 11. Said trustees shall exercise supervision, so far as their ownership of stock enables them to do, over the several corpora- tions or associations whose stock is held by said trustees. They shall elect, or endeavor to elect, the directors and oflScers thereof, who shall be paid reasonable compensations for services ; they may elect themselves as such directors and officers. 12. None of the powers of trustees can be exercised except by unanimous vote of their full number, either in person or by proxy, except in the election of officers as provided in the by- laws : Provided, That no proxy of a trustee can be given to any person other than a trustee ; and in case of disagreement among trustees on any matter, a majority of the trustees may call a APPENDIX 439 special meeting of the holders of certificates, as herein provided for, and to whom shall be submitted the matter of disagreement, and a decision of a majority in value of the holders of trust cer- tificates present, in person or proxy, shall be final. The trustees may appoint from their own number an executive committee and other committees composed wholly or partly of persons not trustees. 13. Trustees may employ and pay such agents and attorneys as they may find it necessary to employ in management of such trust. 14. Each trustee shall be entitled to a salary of $10 per day. Such may be increased by a majority of certificate holders. 15. Trust shall have principal office in Chicago, subject to change by vote of trustees. There should be a safe or vault for the safe deposit of the stocks held in trust. 16. All powers and duties vested in the trustees appointed shall be exercised by their successors. 17. Elections for trustees to succeed those herein appointed shall be held annually. At first annual election 3 trustees shall be elected for i year, 3 trustees for 2 years, and 3 trustees for 3 years. Thereafter 3 trustees shall be elected annually for a term of 3 years, to take the place of those retiring. Trustees elected to fill vacancy shall hold office only for the unexpired time of said vacancy. 18. No person eligible as trustee, unless actual owner of not less than 500 shares trust certificates at time of election, which must stand in his name on the trust books, and continue so, as well as actual ownership, during his term of service. 19. Trustees are elected by owners of trust certificates, and no stock shall be voted which has not stood in owner's name 30 days prior to election. 20. Annual meeting of owners of trust certificates for elec- tion of trustees and other business, shall be held at the office of trustees on the Wednesday nearest April 15, of each year. Trustees must call meeting whenever requested by one-third in value of the trust certificates. 21. By-laws must be in conformity with this agreement. 440 APPENDIX 22. Trustees may fill vacancy in their number or call meeting of owners of trust certificates for the purpose. 23. Trustee or trustees appointed by any court to fill vacancy or vacancies shall hold his or their offices only until his or their successors shall be appointed or elected in manner above pro- vided for. 24. Trustees must attend every meeting of the board of trus- tees, either in person or by proxy. If any trustee is absent from 3 successive meetings, or fails to be represented by proxy at such meetings, his office shall be considered vacant, and filled as heretofore provided. 2$. Whenever any change shall occur in the board of trustees the legal title to the stock or other property held in trust shall pass to and vest in successors of said trustees without any formal transfer thereof. But the board of trustees must obtain formal transfer from any retiring trustee, or from his executor, if re- tirement be caused by death. 26. The trust shall continue for 25 years and shall thereafter continue until terminated by a vote of two-thirds in value of the holders of certificates at meeting called for the purpose. At same meeting the holders of certificates may decide, by a vote of 51 per cent of their number, the mode in which the trust affairs shall be wound up: the trustees continuing to hold office for that purpose. 27. This agreement was signed on May 10, 1887, by the Great Western Distilling Company, per J. B. Greenhut, secretary, capital stock of owner company, $100,000; Peoria Distilling Company, per Wm. McLean, secretary, capital stock of owner company, $100,000 ; Missouri Distilling Company, per Mound City Distilling Company, by A. Bevis, vice-president; Storrs Distilling Company, per Mill Creek Distilling Company, by Thomas T. Gaff, president; White Mills DistilHng Company, per George K. Duckworth; Birmingham Distilling Company, per Chicago Distilling Company, P. J. Hennesy, treasurer, capital stock of owner company, $50,000; Maddux-Hobart Distilling Company, per Maddux-Hobart & Co. ; Woolner Bros. Distilling Co., per A. Woolner, treasurer, original capital APPENDIX 441 stock, $200,000, increased in 1885 to $350,000; Monarch Dis- tilling Company, per George J. Gibson, treasurer, capital stock of owner company, $250,000. H AGREEMENT FOR THE REORGANIZATION OF THE AMERI- CAN COTTON OIL TRUST This Agreement, made this sixth day of November, 1889, by and between Frederic P. Olcott, Samuel Thomas, Edward D. Adams, Nicholas Sheldon, James H. Benedict and William L. Bull, a Committee of the Certificate holders of The American Cotton Oil Trust, hereinafter called The Committee, parties of the first part ; and such of the Certificate holders of the said The American Cotton Oil Trust as shall become parties to this Agreement, parties of the second part ; and The Central Trust Company of New York as Depositary, party of the third part ; Witnesseth : Whereas, The American Cotton Oil Trust was heretofore created under and by virtue of an Agreement or Deed of Trust, and there have been issued thereunder Trust Certificates now outstanding to the amoxmt of $42,185,238; And whereas. It is the desire and purpose of the parties hereto to effect a reorganization of The American Cotton Oil Trust by the merger and incorporation of the Trust and the property and assets thereof, in whole or in part, into The Ameri- can Cotton Oil Company, a corporation organized and existing under the laws of the State of New Jersey, or that such Trust Certificates be sold, exchanged or transferred directly for shares of said Company, or that such other method or plan be adopted as may be considered by said Committee calculated to accom- plish the following general result and basis, viz. : General Basis of Reorganization of the American Cotton Oil Trust The American Cotton Oil Company to issue Six per cent., Non-cumulative Preferred Stock, redeemable at 105 per cent., 442 APPENDIX secured by the shares of all companies received on such merger or acquisition, or by property or Trust Certificates, as may be determined by the Committee, and limited to $15,000,000 in amoimt — $4,454,000 thereof (or any balance in excess of the amount required on the exchange) to be held, used and disposed of by the Directors for the purposes of the Company ; and Com- mon Stock to the amount of $21,092,000. All such stock to be entitled to like voting power. The American Cotton Oil Trust Certificates to be exchanged for such shares in the following proportion, viz. : For each share of Trust Certificates, 50 per cent, thereof in such Common Stock . . . $21,092,000 And 25 per cent, thereof in such Preferred Stock . $10,546,000 Now, THEREFORE, in Consideration of the sum of one dollar each to the other in hand paid, and of their mutual agreement, and of other valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto, and such other certifi- cate holders as shall come in and participate under the terms of this Agreement, either by executing the same, or by depositing their Certificates hereunder, hereby mutually covenant and agree (each for himself and not for the other), to and with each other, and with the said Committee, parties of the first part, and with said Central Trust Company, party of the third part, as follows : I. That they are the owners, or legal or personal representa- tives of the owners, of Certificates of The American Cotton Oil Trust, to the amounts set opposite their respective names, or deposited hereunder respectively; and that they will in all cases deposit said Certificates owned, or represented by them, or either of them, in good faith, on or before the twentieth day of November, 1889 (or within such further period as may be granted by said Committee), with the Central Trust Company of the City of New York, which is hereby designated as the De- positary of said Committee for said purpose, and that they will respectively accept in lieu thereof negotiable Certificate or Certificates of Deposit of said Central Trust Company, issued in such form as may be approved by the Committee ; and that APPENDIX 443 they and each of them will in all cases execute legal and suffi- cient transfers of their Trust Certificates to the Committee, par- ties of the first part, and deposit the same with their said Trust Certificates, so that the legal title to said Trust Certificates shall be and become vested in said Committee, for the use and sub- ject to the control of said parties of the first part, or a majority of them, or their successors, as such Committee ; provided, how- ever, that if any holders of American Cotton Oil Trust Certifi- cates shall fail to surrender and transfer their said Trust Certifi- cates in accordance herewith, or in any other respect fail to comply with the terms of this Agreement, they and each of them shall, from and after such omission or failure, have no right to participate in the benefits of this Agreement, without the express consent of said Committee. By the acceptance of such Certificates of Deposit above re- ferred to, the several parties of the second part respectively depositing their American Cotton Oil Trust Certificates with said Central Trust Company, become parties to this Agree- ment with the same force and efiect as if they had severally affixed their signatures and seals at the foot of this instrument. II. The assenting stockholders hereby constitute the Com- mittee, said parties of the first part, and their successors and substitutes, as their Committee, Trustees and Agents to carry out the general plan of reorganization above generally set forth, in such manner, and by such methods, means and proceedings, as in their judgment may seem advisable ; to possess and exer- cise all the title, interests, rights, powers and privileges of such certificate holders appertaining to such Certificates under the Deed of Trust, or otherwise, including the power and right to vote and act (either in person or by proxy) at any and all meet- ings of certificate holders of said Trust upon any measure or sub- ject, whether previous notice thereof be given or not, and to assent to, act upon and co-operate in the dissolution and wind- ing up of said Trust, and the transfer and sale of any or all the assets thereof — all in such manner and upon such considera- tions as they deem best; and to prescribe the form and pro- visions of such Preferred and Common Stock Certificates, and 444 APPENDIX determine with what shares, property or Trust Certificates such Preferred Stock shall be secured and the manner thereof. Also to prosecute or defend any and all legal proceedings which said certificate holders personally, or any of them, could have instituted, conducted or be parties to, and for any of the purposes or ends for which such certificate holders might have instituted or conducted the same; to employ and determine compensation of such assistants, agents, attorneys and coun- sel and incur such other expenses for advertising, printing and otherwise, as they may deem necessary for the accom- plishment of the purposes herein generally expressed ; and in general to devise and execute means for the reorganization of said Trust, and to do and perform each and every act which they may deem necessary or desirable to consummate such re- organization, and the general purposes hereinbefore recited, and full discretion is conferred upon them in the premises. It is expressly provided and agreed, that such Committee shall not be confined to any single method of accomplishing the conversion of such Trust Certificates into shares of said cor- poration, but shall have and is hereby given plenary power and discretion to bring about such result by such method and in such manner as they may consider practicable and advanta- geous to the certificate holders ; and that the enumeration of specific powers anywhere in this Agreement shall not be con- strued to hmit or restrict the general powers herein mentioned. III. Said Committee shall have power to add to their num- ber from time to time, to such limit as they deem judicious, and to fill any vacancy which may arise in the Committee by death, resignation or otherwise. They shall select of their number a Chairman and Secretary, who shall perform the duties usually appertaining to such offices. They shall be and are hereby em- powered to act in all respects and upon all questions and matters by the affirmative vote of a majority of their number ; and all the interests, rights, duties, powers and discretion herein con- ferred upon the parties of the first part, shall extend to and be possessed and exercised by any successor, substitute or addi- tional member of said Committee as fully as if such person or APPENDIX 445 persons had been originally named herein. They shall have power to nominate and appoint an agent, agents or sub-com- mittee, through whom they may act, and they may delegate any necessary authority as well as discretion to such agent, agents or sub-committees. IV. This Agreement, and all the provisions thereof, shall be binding upon all parties hereto, and depositors of Certificates hereunder, and shall be carried out without regard to any fixed proportion or amount of Trust Certificates that may be deposited hereunder. The Committee shall be the sole judge as to whether the assent of the holders of such American Cotton Oil Trust Certifi- cates has been obtained to this Agreement sufficient in amount to warrant them in carrying out the same ; and they shall have power, and it shall be their duty, to execute and consummate any such plan, and the provisions of this Agreement, for and in behalf of such holders as may become parties hereto, and with- out any regard to any fixed proportion or amount of such Cer- tificates ; and this Agreement shall continue in full force and effect until all of its purposes and provisions are accomplished; pro- vided, however, that said Committee, in their absolute dis- cretion and judgment, may at any time and at any stage of their duties, bring this trust in whole or in part to a close, wind up the same in whole or in part, and distribute, pro rata, among the holders of such Central Trust Certificates, the shares, cer- tificates or other property that may be in their hands at the time. V. And it is expressly agreed that, if said Committee should consider it preferable, for any reason or cause, so to do, they are specifically authorized and empowered to sell and dispose of, from stage to stage, and at any time or times, all or any part of the American Cotton Oil Trust Certificates deposited here- under to said American Cotton Oil Company, for its Common and Preferred Stock of the general description aforesaid, and upon such considerations as they may deem best ; and they are fully empowered to enter into any agreement and make such arrangements with said Company as they may consider desir- 446 APPENDIX able to such end, and to determine with what shares, property or Trust Certificates such Preferred Stock shall be secured and the form and manner thereof. And they are fully and specifically authorized and empowered to hold, manage, represent and be vested with the legal title to such shares required on any such sale or on such merger and dis- solution of the Trust ; and to continue therewith to pursue the purposes aforesaid, until such merger and dissolution and the purposes of this Agreement are completely accomplished, and said Trust is wound up and liquidated, or at their discretion, to make distribution thereof as hereinbefore authorized. And the said Committee shall possess and exercise all the title, interest and rights, powers and privileges of such stock- holders of said Company, including the power and right to vote and act (either in person or by proxy) upon any measure, matter or subject, in such manner as they may deem best, either in writing or at any meeting of stockholders of said Company, with or without previous notice thereof, and to represent said stock in every respect. And all the powers anywrhere in this Agreement contained are made applicable to the provisions of this Article as fully as if set forth therein. VI. It is expressly understood and agreed that any of the provisions of this Agreement other than Article IV., and that any detail of said general basis of reorganization, may be altered, amended, or added to in any respect by the assent of the holders for the time being of at least three-fourths in amount of the said Central Trust Certificates of Deposit issued hereunder, expressed either in writing or by a vote had at a special meeting of such holders called for that purpose by such Committee in the manner hereinafter provided ; and any and every such al- teration, amendment or addition shall become, and be deemed to be, a part of this Agreement, as fully and effectually in every respect as if the same had been originally so provided herein. VII. The holders of Trust Certificates of said The American Cotton Oil Trust may avail themselves of the benefits of this Agreement, by depositing their Trust Certificates hereunder APPENDIX 447 on or before the twentieth day of November, 1889 ; and after that date the holders of Trust Certificates, who have not de- posited their Certificates as aforesaid, shall be precluded from enjoying the benefits of this Agreement, unless said Committee shaU extend the time within which the same may be so deposited ; and said Committee is hereby granted full power and authority to extend the time within which such Certificates shall be de- posited, upon such terms and penalties, and in such cases as they, in their absolute judgment, may consider best, and may waive penalties in any case. VIII. Said Committee shall have power to call meetings of the holders of such Central Trust Certificates of Deposit, for any pmrpose and upon at least three days' notice to be given by publication of such call in two or more newspapers of general circulation published in the City of New York ; and such publi- cation shall be the only notice of such meetings requisite here- under, and shall be deemed and taken to be actual and sufficient notice thereof to the holders of such Central Trust Certificates and the respective depositors hereunder. IX. No member of said Committee, party of the first part, nor said Depositary, party of the third part, shall be responsible or liable for any act or default of the other of them, or of any agent employed by them or either of them; and they shall respectively be entitled to proper and reasonable compensation for all services by them respectively rendered in the execution of the powers and duties herein provided for, and to reimburse- ment for any expenses they may deem it proper to incur in the execution of said trusts, powers and duties ; and they or either of them may become pecuniarily interested in any of the prop- erties or matters which are the subject of this Agreement. X. And the said Committee, party of the first part, and said Depositary, party of the third part, do hereby respectively accept and agree to the trusts, powers and duties upon them respectively conferred or imposed hereunder, and will carry out the same to the best of their respective abilities ; but it is expressly understood that they assume no legal responsibility for the execution of any such plan of reorganization. 448 APPENDIX XI. This Agreement may be printed and copies thereof may be signed ; and all of said copies so signed shall be deemed and taken as constituting one original contract. XII. This Agreement shall bind and extend to the parties hereto, the depositors hereunder, and their and each of their successors, executors, administrators and assigns. In witness whereof, the said parties have hereunto set their names or affixed their corporate seals, and have written opposite to their respective names or seals the amount of Cer- tificates of The American Cotton Oil Trust held by them. F. P. Olcott, Samuel Thomas, Edward D. Adams, Reorganization James A. Benedict, [ Committee. Wm. L. Bull, Nicholas Sheldon, Signed, sealed and deliv- ered in the presence of — Wm. Nelson Cromwell. Central Trust Company of New York, I corporate 1 seal. By E. F. Hyde, 2d Vice-Pres., Depositary. Name op Certificate Holder Address Amount of Certifi- cates Deposited APPENDIX 449 I TYPICAL AMALGAMATION Agreement Preliminary to the Formation of the American Snuff Company Memorandum of agreement made this 15th day of February, 1900, between George B. Wilson, Henry D. Moore and John W. Woodside, of the first part : James B. Duke of the second part, and John B. Cobb of the third part : The parties of the first, second and third parts agree to and with each other, to forthwith organize a corporation under the laws of the State of New Jersey, by the name of The American Snuff Company, or other name to be agreed on by the parties hereto, with an authorized capital stock of twenty-five million dollars ($25,000,000), of which twelve million five hundred thousand dollars ($12,500,000), shall be six per cent, non cumu- lative preferred stock, and twelve million five hundred thousand dollars ($12,500,000) shall be common stock. There shall be a provision in the charter that no mortgages, or incumbrances of any kind, shall be placed upon any of the property of such proposed corporation as a prior lien to such preferred stock, and any profits realized by such corporation to the extent of six per cent, upon such preferred stock, or any part thereof, as may be earned in any year, shall be first appli- cable to such preferred stock. If any profits are realized by the corporation in any one year beyond the sum necessary to pay six per cent, dividends, such profits shall be applicable to the common stock only. The said parties of the first part agree to undertake to deliver to said proposed corporation, in such manner as counsel may advise, all of the issued stock of the Atlantic Snuff Company, a corporation organized under the laws of the State of New Jersey, with an authorized capital stock of ten million dollars, of which one million eight hundred and thirty-six thousand five hundred dollars is preferred, and seven million five hundred thousand two hundred dollars, common stock, or all the property 2G 45° APPENDIX real and personal (and the property of all corporations owned or controlled by it), together with its or their good- will, business and trade-marks. The party of the second part agrees to under- take to deliver and have conveyed to said proposed corpora- tion, in such manner as counsel may advise, the snxifE business and good-will of The American Tobacco Company and Con- tinental Tobacco Company, together with all of the real and personal property of said The American Tobacco Company and Continental Tobacco Company, used by them or either of them, and pertaining to the snuff business of them or either of them, and the good-will and trade-marks of the snuff business of said companies. The party of the third part agrees to imdertake and have con- veyed to said proposed corporation, in such manner as counsel may advise, the snuflE business and good-will of P. Lorillard Company, together with all of the real and personal property of said P. Lorillard Company, used by it, and pertaining to the snuff business of it, and the good-will and trade-marks of the snuff business of said corporation. The consideration of such conveyance to such proposed cor- poration as above set forth by said parties of the first part shall be seven million five hundred thousand dollars ($7,500,000), of the preferred stock of said proposed corporation, and two mil- lion five hundred thousand dollars ($2,500,000), of the common stock of said proposed corporation applied pro rata to the total present issue of preferred and common stock of the Atlantic Snuff Company. The consideration of such conveyance to such proposed cor- poration as above set forth by the said parties of the second and third parts shall be two million five hundred thousand dollars ($2,500,000) of said preferred stock of said proposed corporation and seven million five hundred thousand dollars of the common stock of said proposed corporation to be issued to The American Tobacco Company, Continental Tobacco Company and P. Lorillard Company, in such proportions as the parties of the second and third parts hereto shall hereafter notify said pro- posed corporation. APPENDIX 451 It IS agreed that the parties of the first part shall deliver and convey to said proposed corporation all of the assets of the Atlantic Snuff Company, which (exclusive of good-will and trade-jnarks) shall be of the fair value of at least one million eight himdred and thirty-six thousand five hundred dollars ($1,836,500), all of which shall be good, useful and available, and free of debts, liens and liabilities. All real estate and machmery, tobacco, raw, wrought and in process, supplies and materials are to be taken at book value, not exceeding cost. The book accounts included in such assets are to be satisfactorily guaranteed. It is agreed that the parties of the second and third parts shall deliver and convey to such proposed corporation all of the assets of The American Tobacco Company, Continental To- bacco Company and P. Lorillard Company, pertaining to the snuff business of said companies respectively, which said assets, exclusive of good-will and trade-marks, shall in the aggregate be of the fair value of at least one million five hundred thousand dollars ($1,500,000), all of which shall be good, useful and avail- able, and free of debts, Uens and liabilities. All real estate and machinery, tobacco, raw, wrought and in process, supplies and material, are to be taken at book value not exceeding cost. The book accounts included in such assets are to be satisfactorily guaranteed. The deKveries and conveyances herein contemplated shall be as of March ist, 1900. Said proposed corporation shall accept and assume such contracts of the Atlantic Snuff Company, The American Tobacco Company, Continental Tobacco Com- pany and P. Lorillard Company, as Messrs. Henry D. Moore, George B. Wilson, James B. Duke and John B. Cobb shall agree that it is advisable for said proposed corporation to accept and assume. If said proposed corporation shall pay any money, or deliver any article or thing on account of any obligation, by way of rebate or otherwise issued or undertaken by the Atlantic Snuff Company, or The American Tobacco Company, or Continental Tobacco Company or P. Lorillard Company, prior to March 452 APPENDIX ist, 1900, the amount so paid by said proposed corporation, or the value of the article or thing so delivered by said proposed corporation, in performance of such obligation, shall be refunded to said proposed corporation by the corporation, or party,.whose obligation was thus performed by said proposed corporation; though this shall not be construed as binding on said proposed corporation to pay any such obligation unless it elects to do so ; if any manufactured goods sold by the Atlantic Snuff Company, The American Tobacco Company, Continental Tobacco Com- pany or P. Lorillard Company have to be taken or transferred by said proposed corporation, the amount of loss or injury sus- tained by said proposed corporation by such taking or transfer shall be paid to it by the corporation or party who sold such goods. There shall be a committee of four to determine the avail- able assets, exclusive of real estate and machinery, of the Atlantic Snuff Company, The American Tobacco Company, P. Lorillard Company and Continental Tobacco Company. Two members of this committee shall be appointed by Henry D. Moore and two by James B. Duke. If the decision of such committee as to the availability of any such assets shall not be satisfactory to its owner, and cannot be made satisfactory within three days after the report of the committee thereon, the dif- ference of opinion shall be settled by an arbitrator selected by said committee, whose decision shall be final and conclusive and shall be made within five days after the time of his selection. One-half of the expenses of organization of said proposed cor- poration, which have to be paid in advance of said organization, shall be advanced by the parties of the first part and the other half by the parties of the second and third parts, and all such advances shall, immediately after its organization, be refunded by said proposed corporation. Said proposed corporation shall be organized by and under the advice of the firm of Jones, Carson & Beeber and W. W. Fuller, none of whom shall make any charge to said proposed corporation for any services rendered by them; the said firm of Jones, Carson & Beeber to look for their compensation solely APPENDIX 453 to the parties of the first part, and the said W. W. Fuller to look for his compensation solely to the parties of the second and third parts. It is understood, however, that the new corpora- tion shall pay a fee to Jones, Carson & Beeber, in the event of its securing, through theh advice, the acquisition, upon satis- factory terms, of Geo. W. Helme Company, it being under- stood that such compensation shall be twenty-five thousand dollars ($25,000) if said Geo. W. Helme Company agrees to sell to such proposed corporation, upon satisfactory terms to it, within 60 days hereafter ; or, only twelve thousand five hundred dollars ($12,500) if after 60 days, and within four months of this date, and if not agreeing so to sell within at least four months, then no fee to be paid to the said Jones, Carson & Beeber. The parties of the first, second and third parts hereto, respec- tively, undertake to have made known and imparted to the designated agents of said proposed corporation, the processes, formulae and recipes for the preparation and manufacture of snuff, employed by the Atlantic Snuff Company, The American Tobacco Company, Continental Tobacco Company and P. Lorillard Company. The parties of the first part agree that each of the directors of the Atlantic Snuff Company shall enter into contracts with the proposed corporation not to go into the business of manu- facturing snuff, in the United States, for a period of ten years, either directly or indirectly, or to take any interest in manu- facturing snuff in said country, during the said time, without the written consent of the said proposed corporation; and that similar contracts shall be entered into by The American Tobacco Company, Continental Tobacco Company and P. Lorillard Company. It is agreed that the property and business of the corporation shall be managed by a board of fifteen directors divided into classes as the committee above named shall agree. Shares of preferred and common stock shall have equal powers of voting. The by-laws shall provide that the President, as such, shall receive a salary not exceeding fifteen thousand dollars a year ; that the Vice-President shall receive a salary not exceeding five 454 APPENDIX thousand dollars a year; that the Treasurer shall receive a salary not to exceed five thousand dollars a year, and that the Secretary shall receive a salary not exceeding five thousand dollars a year. The by-laws shall not be amended except by at least two-thirds of the whole Board of Directors. A quorum of said board shall consist of five directors. The by-laws shall provide that the stock shall forthwith be listed on the New York Stock Exchange. The charter shall provide, if counsel conclude that such pro- vision can be legally introduced into the same, that the pre- ferred stock shall not be increased beyond the amount of twelve million five hundred thousand dollars ($12,500,000) without the assent of, at least, seventy per cent, of the preferred stock. The details of organizing said proposed corporation, and the carrying out of this agreement, shall be determined by a com- mittee composed of Henry D. Moore, George B. Wilson, Chas. E. Halliwell and John B. Cobb. They shall proceed forthwith to carry into effect the same, and to prepare by-laws to be sub- mitted for adoption, and any question that may arise be- tween the contracting parties hereto, in the formation of the proposed corporation, and the convejdng of any property the settlement for which is not provided for herein, shall be deter- mined by the decision of three-fourths of such committee after the consideration of such disputed question. To the performance of the agreements hereinbefore made, the parties hereto each pledges his earnest, bona fide efforts, but it is to be imderstood that no signer hereto incurs any personal liability for non-performance of any part of this agreement. Witness our hands and seals, at the City of New York, this 15th day of February, 1900. Geo. B. Wilson. (Seal.) Heney D. Mooke. (Seal.) John W. Woodside. (Seal.) J. B. Duke. (Seal.) J. B. Cobb. (Seal.) Witness all signatures Geo. M. Gales. APPENDIX 455 J TYPICAL MERGER The Merger Agreement of the American Tobacco Company, Continental Tobacco Company, and Con- solidated Tobacco Company ^ An agreement made and entered into this ninth day of Sep- tember, in the year nineteen himdred and four, between The American Tobacco Company, a corporation of the State of New Jersey, by its directors ; Consohdated Tobacco Company, a corporation of said State of New Jersey, by its directors ; and Continental Tobacco Company, a corporation of said State of New Jersey, by its directors. . . . Whereas the respective boards of directors of the said corpora- tions deem it advisable, for the purpose of greater efficiency and economy of management, as well as for the general welfare of the said corporations, to merge and consolidate them, under and pursuant to the provisions of said act entitled " An Act Con- cerning Corporations (revision of 1896)," and the several sup- plements thereto and acts amendatory thereof; Now, therefore, in consideration of the premises and of the mutual agreements, covenants, provisions, and grants herein contained, it is hereby agreed by and between the said parties hereto as follows : Article I. The said The American Tobacco Company, the said Consolidated Tobacco Company, and the said Continental Tobacco Company are hereby consolidated into a single cor- poration, under the name of " The American Tobacco Com- pany " (hereinafter called the " merged corporation "). Article II. The said merged corporation, in addition to the powers conferred by section i of the act concerning corporations (revision of 1896), shall have the powers herein set out, and said merged corporation shall be subject to the limitations on said powers herein set out, to wit : To dry and cure leaf tobacco and to buy, manufacture, sell, 1 Details not directly connected with the merging process are omitted. 456 APPENDIX and othersrise deai in tobacco and the products of tobacco in any and all forms ; to construct or otherwise acquire and hold, own, maintain, and operate warehouses, factories, offices, and other buildings, structures, and appliances for the drying, curing, stor- ing, manufacture, sale, and distribution of tobacco and its products; to guarantee dividends on any shares of the capital stock of any corporation in which said merged corporation has an interest as stockholder, and to indorse or otherwise guarantee the principal and interest, or either, of any bonds, securities, or other evidence of indebtedness created by any corporation in which said merged corporation has such an interest, provided that authority for any such indorsement or guaranty be first given by resolution adopted by vote of at least two-thirds of the whole board of directors of said merged corporation ; to carry on any business operations deemed by said merged corporation to be necessary or advisable in connection with any of the objects of its incorporation or in furtherance of any thereof, or tending to increase the value of its property or stock; but nothing herein set forth is to be construed to authorize the formation hereby of an insurance, safe deposit, or trust company, banking corporation, or savings bank or corporation deemed to possess any of the powers prohibited to corporations formed under the statutory provisions aforesaid; to conduct business in all other States, Territories, possessions, and dependencies of the United States of America, and in all foreign countries, and to have one or more offices out of the State of New Jersey and to hold, purchase, mortgage, and convey real and personal property out of said State as well as therein. The said merged corporation shall have power to purchase or otherwise acquire and hold, sell, assign, transfer, mortgage, pledge, or otherwise dispose of the shares of the capital stock or of any bonds, securities, or other evi- dences of indebtedness created by any other corporation or corpora- tions of this or any other State or government, and to issue its own obligations in payment or in exchange therefor, or for any purpose of its incorporation, and to secure such obligations by pledge or mortgage under deed of trust or otherwise of the shares of capital stock or bonds, securities, or other evidences APPENDIX 4^7 of indebtedness so acquired, or of any property of the corpora- tion. The power to make and alter by-laws of said merged cor- poration is conferred upon the directors. The directors of said merged corporation may hold their meetings and have an office and keep the books of the corporation (except the stock and transfer books) in the city of New York or elsewhere outside of the State of New Jersey Article IV. The capital stock of the said merged corporation is one hundred and eighty million ($180,000,000) dollars, divided into one million eight hundred thousand (1,800,000) shares of the par value of one hundred ($100) dollars each. One million (1,000,000) shares shall be common stock and eight hundred thousand (800,000) shares shall be preferred stock Article V. The said corporations are merged and consoli- dated upon the undertstanding and agreement that the present indebtedness of each of said corporations shall be assumed in fuU by the said merged corporation. Article VI. All property, real, personal, and mixed, of the said corporations, parties hereto, shall vest in the said merged corporation immediately upon the adoption of this agreement by the stockholders of the said corporations, as provided by the provisions of the said act entitled " An Act Concerning Cor- porations (Revision of 1896) " and the several supplements thereto and acts amendatory thereof; but if the said merged corporation shall deem or be advised that any further assign- ments, assmrances in the law, or things are necessary or desir- able to vest the title to such property in the said merged cor- poration, the said corporations parties hereto shall execute and do all such assignments, assurances in the law, and things necessary to vest title to such property in said merged corpora- tion, and otherwise to carry out the purposes of this agreement. Article VTI. The capital stock of each of the said corpora- tions parties hereto shall be converted into the common stock, the preferred stock, or the obligations of said merged corpora- tion, and the common stock, preferred stock, and obligations of said merged corporations shall be apportioned among the stock- holders of the said corporations parties hereto according to the 458 APPENDIX shares held by the respective stockholders of said corporations, and shall be delivered to them upon the surrender of their cer- tificates of stock, as follows : There shall be apportioned to each of the holders of the eight per cent preferred noncumulative stock of the said The American Tobacco Company, party hereto, for each share of said preferred stock of the par value of $ioo held by him the obligation or bond of the said merged corporation of one hun- dred and thirty-three dollars thirty-three and one-third cents ($133. 33§), in gold coin of the United States of the present standard of weight and fineness, due and payable on the first day of October, 1944, at the office or agency of the said merged corporation in the city of New York, with interest thereon from October i, 1904, at the rate of six (6 per cent) per centum per annum, said interest to be payable to the holder of such bond or obUgation, or to the holder of a coupon representing such interest, at said office or agency in like gold coin, semi- annually, on the first days of April and October in each year. Said bonds shall be issued in such denominations as the merged corporation shall see fit, and they shall, along with the bonds provided for in the next paragraph hereof, constitute a first charge upon the income and property of the merged corpora- tion. There shall also be paid to the holders of said preferred stock of said The American Tobacco Company, party hereto, in Ueu of dividend, an amount in cash equal to two dollars for each share of said preferred stock held by him. There shall be apportioned to each of the holders of the seven per cent noncumulative preferred stock of said Continental Tobacco Company, party hereto, for each share of said preferred stock of the par value of $100 held by him the obligation or bond of said merged corporation for one hundred and sixteen dollars sixty-six and two- thirds cents ($116. 66f) in gold coin of the United States of the present standard of weight and fineness, due and payable on the first day of October, 1944, at the office or agency of the said merged corporation in the City of New York, with interest thereon from October i, 1904, at the rate of six (6 per cent) per centum per annum, said interest to be APPENDIX 45g payable to the holder of such bond or obligation, or to the holder of a coupon representing such mterest, at said office or agency in like gold coin, semiannually, on the first days of April and October in each year. Said bonds shall be issued in such denominations as the merged corporation shall see fit, and they shall, along with the bonds provided for in the next pre- j ceding paragraph, constitute a first charge upon the income and property of the merged corporation. The holders of the said preferred stock of said Continental Tobacco Company, party hereto, shall also be entitled to receive and enjoy the dividend of one and three-quarters (if per cent) per centum already de- clared on said preferred stock payable October 3, 1904. There shall be apportioned to each of the holders of the com- mon stock of said The American Tobacco Company, party hereto, for each two shares of said common stock of the par value of $50 each held by him one share of the common stock of said merged corporation. There shall be apportioned to each of the holders of the com- mon stock of said Continental Tobacco Company, party hereto, for each share of said common stock of the par value of $100 held by him, one share of the common stock of the said merged corporation. There shall be apportioned to each holder of the stock of said Consolidated Tobacco Company, party hereto, for each share of said stock of the par value of $100 held by him, one share of the common stock of said merged corporation. By the act of merger the stocks of all the companies parties hereto held by any of the companies parties hereto shall stand and be canceled. The preferred stock of the merged corporation herein provided for may be issued for the redemption and retirement at par of debts that by the act of merger become the debts of said merged corporation, and such preferred stock shall be issued only for such redemption or at par for cash to be used in such redemption. Article VIII. The Morton Trust Company, of the city of New York is hereby appointed the transfer agent of the stock and obligations of the said merged corporation in the city of 460 APPENDIX New York, and the Farmers' Loan and Trust Company, of the city of New York, is hereby appointed registrar of the stock of said merged corporation; and any stockholder of any of the said corporations, parties hereto, upon presenting to the said transfer agent his certificate of stock and surrendering the same to be canceled, shall be entitled to receive a certificate for the proper number of shares of the capital stock of said merged cor- poration, or to the bond or obligation of said merged corpora- tion, pursuant to Article VII of this agreement. Article IX. The said merged corporation shall pay all ex- penses of consolidation and all preliminary expenses, including legal expenses K PROMOTER'S CONTRACT^ Whereas, the undersigned subscribers contemplate the organi- zation of a corporation under the laws of the State (or territory) of , to be known by the name of , or by such other name as the subscribing stockholders therein may adopt, having an authorized capital stock of $ , divided into shares of $ each, for the purpose of (state object of corpora- tion briefly). It is hereby agreed by and between said subscribers and (promoter's name) : (i) That each of said subscribers wUl take the amount of stock in said corporation set opposite his name and pay for the same according to the terms of a subscription contract this day executed by them. (2) That said (promoter's name) has heretofore done work and performed services of great value in preparing for the organization of said corporation and securing subscriptions to its capital stock, and is to hereafter perform additional services in perfecting its organization and securing bona fide subscrip- 1 From Modem Business Corporations, by Wm. Allen Wood and L. B. Ewbank. The Bobbs-Merrill Co. APPENDIX 461 tions to the capital stock of said corporation aggregating (aside from the stock taken by the subscribers hereto) the sum of $ , or such part thereof as the subscribing stock- holders may deem necessary to dispose of. (3) Said (promoter's name) shall have days in which to secure subscriptions for the aforesaid $ of capital stock of said company, and if he has failed to do so at the end of that time the subscribers, at their option, may extend his authority, or may recall it, and may, if they so elect, sub- scribe for the remaining portion of said $ of capital stock which then remains xmsubscribed for, or induce others to take it, or abandon the formation of said corporation. (4) Upon the incorporation of said proposed company there shall be issued to said (promoter's name), or to any person desig- nated by him, by indorsement on this agreement, in payment for his services in effecting such incorporation and securing the aforesaid subscriptions to the capital stock as above provided, shares of the capital stock of said corporation. Provided, That if said (promoter's name) shall have failed to secure bona fide subscriptions to said capital stock in the full amoimt of $ there shall be issued to him only such proportion of shares of stock as the capital stock for which he has obtained subscriptions is of $ , the whole amoimt for which he hereby undertakes to solicit sub- scriptions. Provided, further, That if said company be incorporated before the time allowed said (promoter's name) for obtaining subscrip- tions has expired and said (promoter's name) shall thereafter, under the terms of this contract secure additional bona fide sub- scriptions to the capital stock of said company, as above pro- vided, shares of stock shall be issued within thirty days after the said time allowed for obtaining subscriptions has expired to (promoter's name), or to his assignee, as above provided, in the proportion of one share of stock for each $ of capital stock for which subscriptions are so secured by him. In Witness Whereof the said subscribers have hereunto attached their names and designated the number of shares 462 APPENDIX taken by each of them, and said (promoter's name) has agreed to the above terms. Shares I agree to the above terms. (Signed by promoter) L UNDERWRITING AGREEMENT The United States Shipbuilding Company A corporation to be organized under the laws of the State of New Jersey, either by that or some similar name, proposes to acquire the plants and equipment of the following concerns, or their capital stock, free from any liens: The Union Iron Works, San Francisco, California. The Bath Iron Works, Limited, and The Hyde Windlass Company, Bath, Maine. The Crescent Shipyard and The Samuel L. Moore & Sons Co., Elizabethport, New Jersey. The Eastern Shipbuilding Company, New -London, Conn. The Harlan & HoUingsworth Co., Wilmington, Delaware. The Caneda Manufacturing Company, Carteret, New Jersey. Underwriting Agreement For $9,000,000 Series A First Mortgage, Five Per Cent Sinking Fund, Gold Bonds, due 1932, part of an authorized issue of $16,000,000 Bonds of $1000 each, $5,500,000 being with- drawn from public issue for disposal under the Vendor's and Subscribers' Contracts, and $1,500,000 being Reserved in the Treasury of the Company. Additional Bonds may be issued only for the purpose of acquiring Additional Plants and Equip- ment and for Improvements and Betterments, upon such Terms and Conditions as shall be Approved by the Holders of a Ma- jority of the Bonds under the Present Issue Outstanding at the Time of such Approval. APPENDIX 463 We, the undersigned, each for himself, with The Mercantile Trust Company, for itself and for the United States Shipbuild- ing Company, and to and with each other, agree to subscribe to, receive and pay for the amount of five per cent first mort- gage, sulking fund, gold bonds of the United States Shipbuilding Company of one thousand dollars each, set opposite our respec- tive signatures hereto, at the price of $900 for each bond, 25 per cent to be paid upon allotment and the balance upon the demand of The Mercantile Trust Company. We further agree to receive and pay for any smaller amount than that subscribed for which may be allotted to us respectively. The conditions of this underwriting agreement are as follows : (i) That this agreement shall not be binding upon the under- signed unless the entire amoimt of $9,000,000 of bonds shall have been underwritten. (2) That within such reasonable time as shall be fixed by The Mercantile Trust Company the said $9,000,000 of bonds, less any amount withdrawn by the underwriters, as hereinafter set forth, will be offered to the public, through such banker or bankers or brokers as shall be designated by The Mercantile Trust Company, for subscription at not less than 95 per cent. (3) With the consent of The Mercantile Trust Company, any other concern may be included in this combination, or others substituted therefor, provided the working eflSciency or values are not lessened or impaired. (4) That, if the amount of bonds subscribed and paid for upon such pubUc issues be at least equal to the amount of bonds so offered to the pubUc, then all liabiUty imder this agreement shall cease. (5) That, in case the amount of bonds subscribed for upon such pubhc offering shall be less than the total amount of bonds so offered to the pubhc, or in case the bonds subscribed for upon such public issue shall not be paid for to an amount equal, at the rate of 95 per cent, to the total of such pubhc offering, then such deficiency in subscriptions and payments will, upon the demand of The Mercantile Trust Company, be made good by the subscribers hereto in the manner aforesaid, 464 APPENDIX pro rata in the proportion their subscriptions for bonds not with- drawn by them from pubUc issue bear to the total amoimt of bonds so offered to the public. (6) That each underwriter shall receive in preferred and com- mon stock of the United States Shipbuilding Company 25 per cent of the par value of the bonds hereby underwritten in each kind of stock, and also that all the proceeds, not to exceed 5 per cent, realized from the sale of the bonds at public issue in excess of 90 per cent, after deducting issue expenses, shall belong to the underwriters. (7) That any underwriter shall have the option of with- drawing from the public issue any of the bonds hereby under- written by him, provided that he notify The Mercantile Trust Company, five days prior to the date fixed for the public issue, that he elects to purchase said bonds, provided that, in the pro- portion of the bonds so purchased, he waives his said right to participate in the cash proceeds realized from the public issue. (8) That no underwriter shall sell or offer for sale the bonds so purchased, nor any of the bonus shares he receives, until twelve months after the date of payment, without the consent of The Mercantile Trust Company. New York, April 19, 1902. Name Address Bonds Underwritten M UNDERWRITING AGREEMENT OF MARCH i, xgoi, BETWEEN J. P. MORGAN & CO. AND THE UNITED STATES STEEL CORPORATION An agreement, made this first day of March, nineteen hun- dred and one, by and between United States Steel Corporation, a corporation existing under the laws of the State of New Jersey (hereinafter called the " Steel Company "), party of the first APPENDIX 465 part, and J. P. Morgan & Co., of the city of New York, acting in behalf of a Syndicate, party of the second part : Whereas, the Steel Company has been organized with a capital of $3000, of which one-half is 7% cumulative preferred stock and one-half is common stock, as shown by the certificate of incor- poration of the Steel Company, recorded in Hudson County, New Jersey, on the 2Sth day of February, 1901, which capital stock is to be increased as hereinafter provided ; and Whereas, as hereinafter stated, the board of directors of the Steel Company deem it necessary for its business now to acquire the stocks and bonds of certain other corporations and also to obtain for its corporate purposes a certain sum in cash ; and Whereas, after careful investigation and appraisement, the board of directors of the Steel Company has ascertained, ad- judged and determined that the value of such bonds and stocks now so to be acquired and hereinafter specified, exclusive of such cash sum (which cash sum is to be received and treated by the Steel Company as surplus), is equal at least to the par value of the stock of the Steel Company and of the bonds of the Steel Company to be issued therefor ; and Whereas, the board of directors of the Steel Company con- siders that such bonds, stocks and cash may best be obtained by purchase, on the terms hereinafter stated, from the Syndicate represented by Messrs. J. P. Morgan & Co., party of the second part hereto, and managers of the said Syndicate ; and Whereas, each of the corporations, the capital stock of which it is proposed now to acquire hereunder, has been organized and now is existing under the laws of the State of New Jersey Whereas, in reliance upon this contract the Syndicate is endeavoring to effect the acquisition, and the delivery of all of the bonds of the Carnegie Company, and all of the outstanding shares of the capital stock of all of said corporations, upon the terms herein provided. Now, therefore, in consideration of the premises and of other good and valuable considerations, and of the efforts and expenses which both parties recognize will have to be made and incurred by the Syndicate in their endeavor to consummate such sale : 466 APPENDIX First. The Steel Company agrees with J. P. Morgan & Co., acting in behalf of the Syndicate, as follows : (i) If, on or before May 31, 1901, J. P. Morgan & Co. in behalf of the Syndicate shall (o) Sell and deliver, or cause to be sold and delivered, to the Steel Company, at least fifty-one per cent of such outstanding shares of the capital stock of each of the corporations above named, or of such of said corporations as finally shall be em- braced within the operation of this agreement with the approval of the Steel Company, which fifty-one per cent of the total out- standing capital stock of each of such corporations shall include not less than fifty-one per cent of the total outstanding preferred stock, if any, of such company ; and also all of the $160,000,000 of bonds of the Carnegie Company now outstanding, or such lesser amoimt thereof as shall be tendered by J. P. Morgan & Co.; and (b) Shall pay, or shall cause to be paid, to the Steel Company twenty-five million dollars in cash : (2) The Steel Company will purchase such shares and bonds, and, in payment and consideration for such stock and bonds and for such cash, will issue to such persons as J. P. Morgan & Co., in behalf of the Syndicate, shall indicate, shares of its preferred stock and shares of its common stock (all of which shall be fully paid and non-assessable), and also its five per cent gold bonds (which bonds shall be of such form and tenor, and shall be se- cured, as J. P. Morgan & Co. may determine), as follows : (fl) In the event that the Steel Company shall acquire all the shares of the capital stock of all of such other corporations and all such bonds of the Carnegie Company, the Steel Company will issue for all such stock, and such bonds, and such sum in cash, four million two himdred and forty-nine thousand nine hundred and eighty-five shares, of its preferred stock, and four million two hundred and forty-nine thousand nine hundred and eighty- five shares of its common stock, and also three hundred and four milUon dollars of its said five per cent gold bonds. (b) In the event that the Steel Company shall not acquire all the shares of the capital stock of all such other corporations and APPENDIX 467 all such bonds of the Carnegie Company, the Steel Company will issue for the shares of stock and the bonds which shall be acquhed, and said sum in cash, four million two hundred and forty-nine thousand nine hundred and eighty-five (4,249,985) shares of its preferred stock, and four million two hundred and forty-nine thousand nine hundred and eighty-five (4,249,985) shares of its common stock, and three hundred and four million dollars ($304,000,000) of its five per cent gold bonds, less abate- ment and deduction therefrom to be made as follows : For each $100 par value of stock of such other companies mentioned in the foUowmg table, which shall not be acquired by the Steel Company, the amount of the preferred stock and common stock, or either, set opposite to such class of stock in said table shall be deducted and abated. {Table Omitted) For each $1000 par value of such bonds of the Carnegie Com- pany that shall not be acquired by the Steel Company $1000 par value of such bonds of the Steel Company shall be abated and deducted. Second. The Steel Company further agrees that in the event of the acquisition by it pursuant to this agreement of less than the total issue of said bonds of the Carnegie Company or less than the total outstanding capital stock of each of said cor- porations, the Steel Company from time to time will purchase from such persons as shall be indicated by J. P. Morgan & Co., any and all additional outstanding bonds of the Carnegie Com- pany or shares of the capital stock of any of said corporations that shall be tendered to the Steel Company prior to May i, igo2 ; and in payment therefor will issue and deliver its bonds and fully paid-up shares of its preferred stock and fully paid-up shares of its common stock, at the rates at which deduction and abatement shall have been made under Article First hereof in respect of the additional bonds and shares of stock so purchased. Third. The Steel Company shall credit and allow to J. P. Morgan & Co. on account of the cash sum payable under Article First hereof, or shall pay to J. P. Morgan & Co. a sum equal to the aggregate amount which, prior to April i, 1901, shall 468 APPENDIX have accrued upon any installments of dividends accruing, but not matured, on any such preferred stock at the date of delivery thereof to the Steel Company. The Steel Company further agrees that the dividends on all the preferred stock of the Steel Company to be issued by it hereunder, shall begin to accrue from April i, 1901. Fourth. The Steel Company, without prejudice to the fur- ther exercise of its chartered rights to increase or to decrease its capital stock, agrees that it will lawfully increase its au- thorized capital stock to an amount sufficient to enable it to issue and to deliver its preferred stock and its common stock to the aggregate amount hereinbefore provided. Fifth. J. P. Morgan & Co., in behalf of the Syndicate, will bear and will pay the statutory fees and taxes for the proposed increase of the capital stock of the Steel Company. Sixth. This agreement, and any agreement in pursuance thereof, is and shall be strictly inter partes; and no stockholder of any of the corporations above referred to shall be deemed to have any right hereunder. In witness whereof, these presents have been duly executed by the parties hereto the day and year first above written. United States Steel Corporation, By W. J. Curtis, President. [L. s.] Attest : Charles MacVeagh, Secretary, J. P. Morgan & Co. SYNDICATE AGREEMENT OF FEBRUARY 26, 1901, BE- TWEEN J. P. MORGAN & CO. AND THE SYNDICATE SUBSCRIBERS RELATIVE TO ORGANIZATION OF THE UNITED STATES STEEL CORPORATION N An agreement, made as of the 26th day of February, nineteen hundred and one, by and between J. P. Morgan & Co., of the city of New York, parties of the first part, and the subscribers hereto APPENDIX 469 (hereinafter called severally the " Subscribers " and collectively the " Syndicate "), severally, parties of the second part: Whereas, the United States Steel Corporation has been or- ganized under the laws of the State of New Jersey, with a capital stock of $3000, of which one-half is seven per cent cumulative preferred stock and one-half is common stock, which capital stock presently is to be increased to such amount as shall be approved by J. P. Morgan & Co., and such corporation (herein- after called the " Steel Company ") desires now to acquire, as hereinafter provided, stocks and bonds of all or of some of the several corporations next hereinafter referred to, and certain sums in cash ; and Whereas, J. P. Morgan & Co., acting in behalf of the Syndi- cate, are hereby authorized to enter, and now are about to enter, into a contract or contracts with the Steel Company, by which the Steel Company is to agree to issue to such persons as J. P. Morgan & Co. in behalf of the Syndicate shall indicate, shares of its preferred stock and shares of its common stock (all of which shall be fully paid and non-assessable) and also its five per cent gold bonds, in payment and in consideration for outstanding bonds of the Carnegie Company, and shares of the outstanding preferred stock and common stock of the following named companies, or some of them, as shall be agreed upon or be provided for in such contract or contracts : American Sheet Steel Company, American Steel Hoop Company, American Steel and Wire Company of New Jersey, American Tin Plate Company, Carnegie Company, Federal Steel Company, National Steel Company, National Tube Company. Now, therefore, in consideration of the premises and of the mutual promises herein contained, J. P. Morgan & Co. and the Syndicate have mutually agreed as follows : First. J. P. Morgan & Co. shall have power and authority from time to time, in such manner and on such terms as from 470 APPENDIX time to time, either generally or in special cases, they may deem expedient : (i) Publicly or otherwise to offer, or to agree to deliver, or to cause to be delivered, in such amounts and at such general or special rates as, from time to time, either generally or in special cases, they may deem expedient, shares of the preferred stock, and shares of the common stock, and bonds, of the Steel Com- pany, in exchange for or in purchase of any of the stocks of any of the other companies named in said proposed contracts, that shall be delivered to J. P. Morgan & Co., or as they may direct ; and (2) By the use of any of the stocks, or of any of the bonds, of the Steel Company, deliverable under said proposed contracts, or of moneys provided or derived under the terms of this agree- ment, to acquire all or any of the stocks, or of the bonds, or both, of all or of any of the other companies above referred to. Second. From time to time, upon calls made by J. P. Morgan & Co., and within such periods as shall be specified in such calls^ the Subscribers, severally and respectively, will pay to J. P. Morgan & Co. such sums in cash, as shall be called by J. P. Morgan & Co., but in the aggregate, not exceeding their re- spective subscriptions hereunder. Third. J. P. Morgan & Co., in the exercise of their absolute discretion, may use the sums in cash so received from the Sub- scribers, for all or any of the following purposes, viz : (i) In payment to the Steel Company of any sum in cash by it to be received under said proposed contracts, and any fiirther sums that may become payable to the Steel Company imder any agreement modifying the same or supplemental thereto. (2) For any expenditures which J. P. Morgan & Co. in their discretion may have incurred or hereafter may incur in or about the preparation or the performance of this agreement or of said proposed contracts, or for any purpose which, in their judgment, may tend to promote the objects of this agreement or the benefit of the Syndicate hereunder. (3) In acquiring, by purchase or otherwise, as hereinbefore APPENDIX 471 authorized by clause (2) of Article First of this agreement, any of the preferred stock and common stock and bonds of the com- panies hereinabove referred to. All or any of such stocks and bonds of such other companies, so acquired by J. P. Morgan & Co., may be delivered by them under the terms of said proposed contracts to the Steel Company in exchange for its stocks and bonds as therein provided ; or, in their discretion, J. P. Morgan & Co. may resell to others all or any of such stocks and bonds. Fourth. J. P. Morgan & Co. may retain all of said stocks of the Steel Company, to be received pursuant to said proposed contracts (except such of said stocks as by them shall be used or be set apart for use under Article First of this agreement) for such period as in their discretion they may deem expedient, not exceeding fifteen months from the date hereof; and, from time to time, during said period and at any time before final dis- tribution hereunder, they may sell all or any of such stocks, at public or private sale and at such prices, and on such terms as to credit or otherwise, as they may deem expedient. Fifth. All such stocks of the Steel Company mentioned in Article Fourth hereof, and all net proceeds resulting from sales of any of such stocks or from any other transactions of J. P. Morgan & Co., for account of the Syndicate under any of the provi- sions hereof, shall be applied by J. P. Morgan & Co. as follows: (i) First, to the payment of any and all expenses and obliga- tions incurred by J. P. Morgan & Co. under any provision of this agreement. (2) Secondly, in repayment to the Subscribers (so far as the same may be suflScient for that purpose) of all sums by them respectively paid to J. P. Morgan & Co. pursuant to Article Second; such repayment to be made to the Subscribers ratably. (3) One-fifth of any residue of such stocks and net proceeds remaining after payment in full of all such sums payable under clauses (i) and (2) of this article shall be retained by, and shall belong to, J. P. Morgan & Co. for their own use, as compensation for their services in forming and managing the Syndicate: 472 APPENDIX and the remaining four-fifths of such residue shall be distributed by J. P. Morgan & Co. among the Subscribers ratably accord- ing to their respective interests. Such one-fifth of any such residue shall be the only compensa- tion to be received by J. P. Morgan & Co. for their services in forming and managing the Syndicate; and, in case there shall be no such residue, J. P. Morgan & Co. shall not receive any compensation for their services in forming or in managing the Syndicate. ... All cash sums received by J. P. Morgan & Co. under any pro- vision of this agreement shall be held by them as bankers. Sixth. Until the expiration of such fifteen months, or until the final distribution hereunder, J. P. Morgan & Co. in such man- ner, at such prices, on such terms, and in such amounts, as they may deem expedient, shall have power, for account of the Syn- dicate, to make purchases of the bonds and of the preferred stock and of the common stock of the Steel Company, and they may resell any such bonds and stocks which they may have pur- chased. . . . Seventh. J. P. Morgan & Co. shall issue to the Subscribers suitable receipts in respect of payments made hereunder and they may issue to the respective Subscribers certificates of in- terest, of such tenor and form as they may deem suitable. Such certificates of interest and all rights and obligations hereunder of the respective Subscribers may be made transferable in such manner and on such terms and conditions as J. P. Morgan & Co. may prescribe. Eighth. J. P. Morgan & Co. shall have authority, from time to time and at any time, to incur such expenses as they may deem proper in carrying out, or in endeavoring to carry out, this agreement or said proposed contracts. . . . Ninth. For account of the Syndicate, J. P. Morgan & Co., from time to time, may make undertakings of any kind with any persons concerning, or for the acquisition of, bonds or shares of either or of both of the classes of stock of any of the companies hereinabove referred to, and they may make purchases thereof from the holders thereof, or in any market or otherwise, and may APPENDIX 473 sell the same at such prices, on such terms and in such amounts as from time to time they may deem expedient. Tenth. On signing this agreement each Subscriber shall in- dicate opposite his name the total sum of his subscription on account of the whole Snydicate obligation hereunder ; and the several Subscribers shall be called upon to make payments in respect of their several subscriptions only ratably according to the respective amounts thereof, but each Subscriber shall be so responsible to the full extent of his undertaking, regardless of performance or non-performance by any other Subscriber. When and as requested by J. P. Morgan & Co., and without reference to the receipt or the possession hereunder by J. P. Morgan & Co., or by the Subscribers of any bonds or stock, each Subscriber will make any and all payments, and will perform aU of his undertakings under this agreement, and will do all things which by J. P. Morgan & Co. shall be deemed desir- able to aid in the accomplishment of the purposes of this agreement. Nothing herein contained or otherwise shall constitute the parties hereto partners, or shall render any one of the Subscribers liable to contribute more than his several proportionate amount as herein provided, or shall prevent any of the parties from contracting with each other with reference to any of their re- spective interests. Eleventh. In case of any failure of any Subscriber to make any payment called for, or to perform any of his undertakings hereunder, J. P. Morgan & Co. in their sole and exclusive dis- cretion may exclude such Subscriber from all interest in the S}mdicate ; and in their discretion and in such manner as they may deem proper, without any proceeding, either at law or in equity, they may dispose of such Subscriber's participation hereunder or of any interest or right of such Subscriber here- under or under said proposed contracts; but nevertheless such Subscriber in default shall be responsible to J. P. Morgan & Co., for the benefit of the other Subscribers hereto, for all damages caused by any failure on his part. . . . Twelfth. J. P. Morgan & Co. shall have full power, in their 474 APPENDIX discretion, to agree with the Steel Company upon the terms and provisions of such proposed contracts, and as to the amount of the preferred stock and the common stock and bonds of the Steel Company to be issued and delivered under said proposed contracts ; and, also, they shall have full power and authority, from time to time to enter into any agreements with the Steel Company modifying the said proposed contracts as they may deem expedient. Any and all contracts with the Steel Company made by J. P. Morgan & Co. in behalf of the Syndicate shall be open to inspection by any Subscriber at the office of J. P. Morgan & Co. Thirteenth. J. P. Morgan & Co. shall be the sole and final judges as to whether at any time it is to the interest of the Syn- dicate to proceed further under this agreement or under said proposed contracts ; and whenever they may deem expedient, they may abandon the objects contemplated in this agreement and said proposed contracts and all further proceedings there- under. . . . From time to time J. P. Morgan & Co. may sell or otherwise dispose of such stocks and other assets at such prices and on such terms as to credit or otherwise as they may deem expedient; or they may distribute the same to Subscribers ratably. Fourteenth. The enumeration of specific powers in this agreement shall not be construed as in any way limiting any general power intended to be conferred upon or to be reserved to J. P. Morgan & Co. ; it being intended to reserve to them, and hereby there are expressly conferred on them, in addition to the general and specific powers recited herein, all other general and specific powers which from time to time they may deem necessary in order fully and effectively to carry out what they may deem to be the purposes of this agreement, and of this S3Tidicate, whether or not such purposes be herein expressed. J. P. Morgan & Co. in their discretion may submit to the Sub- scribers any proposed change or modification of this agreement, and, when assented to in writing by a majority in interest of the Subscribers, any change or modification so submitted by J. P. Morgan & Co. shall become a part of this agreement and shall be APPENDIX 475 binding upon all the Subscribers and those claiming under them. Fifteenth. J. P. Morgan & Co. shall not be Hable for any error of judgment or for any mistake of law or of fact ; nor shall they be Uable for any act or omission while endeavoring in good faith to carry out the purposes hereof according to their judgment. No obligation or liability, in addition to those herein expressed, shall be implied against J. P. Morgan & Co. In no event shall J. P. Morgan & Co. be responsible for the repayment to the Subscribers of the sums by them paid under Article Second hereof ; but such sums shall be repayable only as herein provided, out of any stocks or other assets applicable to such payment imder the provisions of this agreement. Sixteenth. J. P. Morgan & Co. may become Subscribers hereto. As such Subscribers they shall be Uable for any sub- scriptions made by them, and shall be entitled in all respects to the same rights and benefits as other Subscribers. . . . From time to time J. P. Morgan & Co. may offer, on such terms as they may deem expedient, to sell any such stocks or other assets to the Subscribers severally and ratably in amounts proportionate to their respective syndicate subscriptions ; and in any such offering they may provide for the disposition of any untaken stocks or other assets in such way as they may deem expedient. Seventeenth. J. P. Morgan & Co. may receive and may hold, or may cause to be received and to be held by any depositaries or custodians, the certificates for any stocks or any bonds of the Steel Compa^ny, and any bonds of the Carnegie Company and the certificates for any stocks of all or of any of the other com- panies hereinabove referred to, and they shall not be responsible for any act or any omission of any such depositary or custodian. They shall have absolute control over the disposition of all such stocks and bonds held by them. . . . Eighteenth. This agreement shall bind, and is for the benefit of, the parties hereto, and their respective executors and ad- ministrators ; but no assignment hereunder shall be valid imless assented to in writing by J. P. Morgan & Co. 476 APPENDIX All rights and powers of J. P. Morgan & Co. hereunder shall vest in said firm as from time to time constituted, without further act or assignment. Nineteenth. Nothing herein contained shall be construed as creating any trust or obligation whatsoever in favor of the Steel Company, or in favor of any stockholder of any of such other companies, or in favor of any person or corporation other than the Subscribers, nor any obligation in favor of the Sub- scribers, excepting only as herein is expressly provided. Twentieth. Each Subscriber shall set opposite his subscrip- tion hereunder an address to which notices, calls or other com- munications may be sent, and any notice, call or other com- munication addressed to any Subscriber at the address so given, and either left at such address or mailed, shall be deemed actually given to such Subscriber, and shall be sufficient for all the pur- poses hereof. If any Subscriber shall fail so to furnish his ad- dress to J. P. Morgan & Co., he shall not be entitled to any notice of calls, or offers, or any other notice hereunder, and he shall be deemed to assent to any action of J. P. Morgan & Co. In witness whereof, the parties of the first part have hereunto affixed their signatures, and the parties of the second part at various dates have affixed their subscriptions hereto, it being understood that for convenience this agreement may be sub- scribed in several parts and copies, with like force and efiEect as if aU the subscriptions were upon one part or copy thereof. o PROXY — STOCKHOLDERS' MEETING Know All Men by These Presents, That I, the undersigned, being the owner of shares of the capital stock of the Company do hereby constitute and appoint my true and lawful attorney, in my name, place and stead, to vote upon the stock owned by me or standing in my name, as my proxy, at the annual (or special) meeting of the stockholders of the said company, to be held at the company's principal office, APPENDIX 477 street, N. J. on the day of 19. . , and on such other day as the meeting may be thereafter held by adjournment or otherwise, according to the number of votes I am now or may then be entitled to cast, hereby granting the said attorney full power and authority to act for me and in my name at the said meeting or meetings, in voting for directors of the said company or otherwise, and in the transaction of such other business as may properly come before the meeting, as fully as I could do if personally present, with full power of sub- stitution and revocation, hereby ratifying and confirming all that my said attorney or substitute may do in my place, name and stead. In Witness Whereof, I have hereunto set my hand and seal, this day of 19.. Witness: (L. S.) SELECT LIST OF REFERENCES' I. GOVERNMENT REPORTS (JJ. S.) Report of the Industrial Commission, Vols. I, II, XIII (1900-1901). Reports of the Commissioner of Corporations on — The Beef Industry (1905). The Petroleum Industry (two vols., 1907). The Tobacco Industry (two parts, 1909, 1911). The Steel Industry (two parts, 1911, 1912). The International Harvester Company (1913). Hearings before the (Senate) Committee on Interstate Commerce (XXXV parts and indexed Digest, 1911-1912). Hearings before the (House) Committee on Investigation of the United States Steel Corporation (191 2). Hearings before the Special Committee (House) on the Investigation of the American Sugar Refining Company and others (4 vols., 1911-1912). Hearings before the Committee (House) to investigate the concentration and control of money and credit (1912-1913); Report of the com- mittee, 62 Cong., 3 sess., no. 1593. ("Pujo committee.") 2. BOOKS ON INTERNAL ORGANIZATION AND FORMS OF BUSINESS UNITS Robinson, Business Organization and Management (Chicago, 1911). Sparling, Business Organization. CoNYNGTON, A Manual of Corporation Management (1911). Clephane, Organization and Management of Business Corporations (St. Paul, 1905). Purdy's Beach on Private Corporations, Joint Slock Companies, and other unincorporated associations. Vol. III. Conyngton on Partnership Relations. 3. BOOKS ON COMBINATIONS AND TRUSTS a. United States Ely, Monopolies and Trusts. Jenks, Trust Problem. Wyman, Control of the Market. 1 See also the footnote references in this volume. 478 SELECT LIST OF REFERENCES 479 Clark, The Control of Trusts (1912). Nolan, Combinations, Trusts, and Monopolies (New York, 1904). Von Halle, Trusts and Industrial Combinations. Van Hise, Concentration and Control. Stevens (Ed.), Industrial Combinations and Trusts. Ripley (Ed.), Trusts, Pools, and Corporations. Berghjnd, The United States Steel Corporation. WiLGUS, The United States Steel Corporation. b. England Macrosty, The Trust Movement in British Industry. Levy, Monopoly and Competition. HOBSON, Evolution of Modern Capitalism (191 2) ; chaps, v, vii, viii, ix, deal with combinations in England, United States, and Germany. c. Germany and Austria LlEFMANN, Die Unternehmerverbdnde. LlEFMANN, Kartell und Trust. Baumgarten tr. Meszleny, Kartelle und Trusts. Walker, Monopolistic Combinations in the German Coal Industry (Amer. Econ. Assoc. Publications, 1904). The standard works of Geunzel, Menzel, and Passow. d. France Rousiers, p. de, Les Syndicats Industriels de Producteurs en Prance et d I'Etranger (1912). Raffalovich, Trusts, Cartells et Syndicats. Dtxrchaines, Les Associations de Prodttcteurs. INDEX Accounting, 2Sg f., 276, 378. Administration, 263 ff. Administrative control, 365. Advertising, 25. Agreement combinations, 144, 145 ff. ; legal authorization, 386 f . Amalgamation, 131, 241, 243, 449. American Baking Powder Association, iSi- American Cotton Oil Co., 214, 441. American Sugar Refining Co., 213. American Telephone and Telegraph Co., 227, 307. American Tobacco Co., 173, 243, 4SS- Anti-trust legislation, 203. Articles of Association, 66, 403. Articles of Copartnership, 51, 401. Asphalt Company of America, 287. Associated pipe works pool, 172, 174. Bondholders, rights and habilities of, 266. Books, right to inspect, 26s, 372. Boycott, 156. Business, 3, 12 f., 13s, 274. Business ethics, 361. By-laws, 94, 409. By-products, 24, 387. Capital, advantages of different forms of organization for raising, 46, 57, 75, no, 183, 230. Capitalization, 93, 290 ff. Cartel, 177. Car trusts, 120. Charter, 87 ff ., 107 ; forfeiture of, 83 f . Chesapeake and Ohio Coal Association, 177. Clearing house, stock exchange, 318. Collegia, 100. Combination, 20, 26 f., 128 ff., 253 f., 29s; economies of, 26, 233, 351, 387; regulation of, 383 ff., 392. Commandite partnership, 58, 60. Commission, 365. Community of interest, 205 ff., 226. 2L 48 Competition, 135, 139, 190, 330, 382, 389. Concentration, 19 f. Consolidation, 130, 189, 199, 212, 223, 238 ff. ; legality of, 239, 249 f . ; legal authorization, 389. Conspiracy, 141. Cooperation, 31. Cordage Manufacturers Association, 151. Comers, 152. Corporation, 10, 14 f., 64 f., 81 f., 102 ff., 138, 201, 261 f ., 39S ; corporation prob- lem, 354 ff. Credit, 56, 310. Cumulative voting, 372. Departmental organization, 277 f. Departments, 273 ff. Direction, 78, 109 f., 124, i6o, 232, 252. Directors, 94, in, 268 f., 369, 373, 411. Divisional organization, 277 f. Division of labor, 9 f., 23, 32; in man- agement, 272. Domestic system, 28, 40. Dummy directors, 287, 299, 358. DuPont de Nemours Powder Co., 244 f. East India Co., 71, 102. Efficiency, tests of, 35 f. Entity, legal, 77, 82, 85, 108, 201. Entrepreneur, 6 ff., 12, 21, 27 f., 39, 125, 296, 336. Executive, 270 f. Factors' agreements, 157. Factory system, 29. Family, as origin of business unit, 40, S3. Farms, as business units, 41. Federal incorporation, 366. Felt Makers' Co., 70. Franchise, 113. Fraud, in, 23s, 288, 297, 325. Gary dinners, 147. General incorporation laws, 103 f. 482 INDEX General Paper Co., 180. Gilds, 28, 43, 69, loi. Good will, SI, 232- Gunpowder Trade Association, 153. Handicraft production, 28, 42. Holding companies, 215 £f., 239 f., 252, 379 f . ; legality of, 235. Household industry, 17, 28. Imperial Window Glass Co., 180. Industry-combination, 24, 33, 132, 224. Inside management, 3SS. Insolvency, 329. Integration (see Industry-combination). Interlocking directorates, no, 207 f., 251, 358, 369- International agreements, 173, 434. International Paper Co., 296, 353. Joint-stock company, 63 fE., 102, 106 f., 396, 403. Judicial control, 365. Large scale business, 16 f., 20 £f., 234. Law and business, 36, 139 ff., 204, 234, 249, 299. Lease, control by, 247, 339. Liability, 46, S3, S7, 6S, 67, 86, 96, los, 109, 237. Limited liability association, 396. Limited partnership, s8 f., 396. Limited partnership association, 74. Line vs. Staff, 277. Management, 8, 280. Manipulation, stock, 323. Margins, 320, 326. Markets, and size of business, 23. Memphis cotton pool, 170. Merger, 131, 241, 244, 433. Mining partnership, 74. Minorities, 56, 327, 3S9, 372 f. Mismanagement, 330. Money market, 317, 322. Monopoly {see also Natural monopoly), 133, 140. 189, 349. National Association of Retail Druggists, iSS- National Cordage Co., 337. National Packing Co., 210. Natural monopoly, 97, 140 f., 382, 383, 384. Northern Securities Co., 208, 236, 242. OfiScers (see Directors, Executive, etc.). Organization, internal, 260 ff. Overcapitalization, 137, 237, 252, 328, 353, 357, 377- Parent companies, 226. Partnership, 49 ff., 395, 401. PaternaUsm, 393. Pennsylvania Company, 220. Personality, artificial (see Entity). Pewterers' Company, 69. Pools, 145, 164 ff.; legaUty, 186. Powder producers' pool, 167, 172. Powder trust, 244. Price agreements, 132, 427. Price regulation, 383 f., 38s f. Production, 4. Profits, II. Promoter, 10, 282 £., 295 ; promotion, 282 ff., 460. Property rights, 14. Proxies, 359, 369, 476. PubUcity, 316, 364, 370, 381. PubHc poUcy, 143, 34s ff. PubUc-service corporations, 98, 292, 378. Quasi-corporations, 64, 74, 125. Railway consolidation, 19, 246 f. Receivership, 332 f. Regulated companies, loi. Regulation, negative, 393. Regulation of Corporations, 90 ff., lis, 366 ff. ; of Trusts, 139 ff-, 203, 383 ff., 392. Reorganization, 327 ff. Responsibility of directors, in. Restraint of trade, 141, 390. Restriction of output, 168, 17s, 185. Risk, 9, 3S, 58, 109, 134, 309 f. Rock Island Company, 221. Rubber Goods Manufacturing Company, 284. Russia Company, 71. Sales Associations, 136, 177 £. Sanitary Enameled Ware Association, 157. Secrecy in business, 4s, 79, 230, 361. Shares, 70 f., 102, 138. Sherman Anti-trust Law, 143, 186, 390. Socialism, 32, 394. Social point of view, 4, 46, 61, 77, 87, 112, 126, 162, 187, 251, 364. Societas, 53, 100 n. INDEX 483 Society of the Mines Royal, 70. Southern Truck Growers' Association, 156. Speculation, 323. Standard Oil Company, 196, 205, 213. States, desirability of, for incorporation, 293 f. States' rights, 236, 364. Steel rail pool, 168. Stock exchange, 312 f.; evils and rem- edies, 324 f. Stockholders' rights and liabilities, 263 ff., 267; 370, 410. Stocks and bonds : issue of, 291 f . ; price determination, 321 ; multiplic- ity of, 356, 367; easy transferability an evil, 357, 368. Sugar trust {see American Sugar Re- fining Co.), ig6, 212. Syndicate, underwriting, 302, 304, 306, 308. Tariff, the, and combination, 137, 138, 389. Tile, Mantel, and Grate Association of California, 154. Trade-combinations, 132. Trade-conditions agreements, 149, 414. Trust problem, 349 ff., 382 ff. Trusts, simple business, 1176.; com- bination, 193 ff., 218, 436; legality, 200 f. Ultra Vires, 87, 19s, 201, 235. Underwriting, 301 ff., 464. United States Steel Corporation, 133, 209, 217, 223 f., 308, 464 ff. Unlimited liability, 46, 50, 54, 55, 104. Voting trusts, 122. Watered stock (.see Overcapitalization). Whisky pools, 185. Whisky trust, 196, 436. Wire Nail Association, 174, 175. 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THE MACMILLAN COMPANY FuMishers 64-66 Fifth Avenue Ifew York Principles of Economics By F. W. TAUSSIG Henry Lee Professor of Economics in Hai-vard University Two volumes. Cloth, 8vo, $4.00 net The book deals chiefly with the industrial conditions of modern countries, and most of all with those of the United States. Eco- nomic history and economic development are not considered in any set chapters, being touched only as they happen to illustrate one or another of the problems of contemporary society. Among the important chapters are those on Wealth and Labor ; The Division of Labor and the Development of Modern Industry ; Quantity of Money and Prices ; Differences of Wages ; Wages and Value ; General Wages ; Trade-Unions and Labor Legislation. Of these perhaps the most important is that dealing with General Wages. Here the fiindamental questions as to general wages as raised by the case of hired laborers is discussed ; also the notion that lavish expenditure creates demand for labor and makes wages high. The author explains why hired laborers universally desire that employment should be created and dislike labor-saving appliances. The author states the principles of economics in such form that they are comprehensible to an educated and intelligent person who has not before made any systematic study of the subject. "The book is a notable addition to the literature of political economy. The ease born of thorough familiarity with every part of the subject, and of long practice in successful teaching of mature students, is apparent in style throughout." — JVew York Evening Post. THE MACMILLAN COMPANY Publishers 64-66 Tifth Avenue New York The Purchasing Power of Money A STUDY OF THE CAUSES DETERMINING THE GENERAL LEVEL OF PRICES AN EXPLANATION OF THE RISE IN THE COST OF LIVING BETWEEN 1896 AND I9I0 By IRVING FISHER Yale University Author of " The Rate of Interest," " The Nature of Capital and Income," "A Brief Introduction to the Infinitesimal Calculus," etc. Cloth, 8vo, 505 pages, $3.00 net; by mail, $3.18 "The work is well and authoritatively written and forms a splendid addi- tion to economic literature." — Bulletin of the Chamber of Commerce. " A searching and thorough restatement and amplification of the old ' quan- tity theory ' of money and a plea for the recognition as an exact science of the branch of economics which treats of the factors in its purchasing power." — Chicago Evening Post. " By far the most important work yet published on that special phase of economics with which it is concerned." — Saturday Chronicle. "No more important work on. money has recently appeared." — Newark Evening News. " A volume which has practical as well as academic value." — Boston Globe. PUBLISHED BY THE MACMILLAN COMPANY 64-66 Fifth Avenue, New Tork n '^b