;¥- ^rw■-«fe^^vV .~5- • '&'" .^ €mm\\ Wimvmxi^ Jiht^tg THE GIFT OF ..U,93..SwjuQJC. .oi .. .Si.crcM.Ma)t^vvtito-- h.Zl.53.Z.b. .■■... U]yi;l\3.. 6561 Cornell University Library The original of this book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924032432738 DEPARTMENT OF COMMERCE AND LABOR BUREAU OF CORPORATIONS LUTHER CONANT, Jr., Coramissionec THE International Harvester Co. MARCH 3, 1913 WASHINGTON GOVERNMENT PRINTING OFFICE 1913 COI^TEIfrTS. PaK«. Letters of transmittal xy Letter of submittal xvii SUMMARY. Conditions leading up to organization of International Harvester Co S Methods by which, the company was organized ; 4 Terms of consolidation 6 Position of the International Harvester Co. at its organization 9 Comparison of capitalization with investment 10 Value of physical properties and inventories 10 Deering ore properties 12 Deering timber properties 13 McCormick real estate 14 Ilhnois Northern Ry. (McCormick) 14 Inventories 14 Goodwill 16 Working capital 16 Subsequent acquisitions and extensions 17 Extensions into new lines 13 Construction of new plants 19 Organization of the International Harvester Co. of America 19 Rearrangement of capitalization 19 Present position of the International Harvester Co 20 Profits of the International Harvester Co 21 Rate of profits on investment, as computed by Bureau 23 Effect of Bureau's revision of assets and earnings on surplus 25 Profits in particular lines and in export trade 25 Productive efficiency and financial resources 23 Cost of production 26 Financial resources 28 Competitive methods of International Harvester Co 30 Pretended competition in early years 31 Coercion of dealers to handle International Harvester Co. goods 32 Exclusive contract 32 Exclusive handling 32 ' ' Full-line " forcing 33 Effort to secure undue proportion of dealers 33 Issue of "suggested-price" lists 34 Local discrimination in prices and terms 35 Misrepresentations regarding competitors 36 Sources of the combination's power 37 lU IV CONTENTS. CHAPTER I.— CONDITIONS BEFORE THE FORMATION OF THE INTERNATIONAL HARVESTER CO. Page. Sec. 1. Introductory 39 2. Importance of large-scale operations in the implement industry 39 3. Growth of the industry according to census statistics 40 4. Development of invention and use of agricultural implements 44 5. Development of the harvesting-machine industry 45 General character of harvesting-machine concerns 45 Companies merged in the combination in 1902 46 McCormick 47 Deering 47 Champion 47 Piano r 47 Milwaukee 48 Companies subsequently acquired by the combination 48 Osborne 48 Aultman-Miller Co 48 Minneapolis 48 Companies not acquired by the combination 49 Wood 49 Adriance, Piatt & Co '. 49 Johnston 49 ' Acme 49 Emerson 50 Thomas 50 Richardson 50 Other manufacturers of harvesting machines 50 6. Development of other branches of the implement industry 50 Plows 51 Drills 52 Wagons .*. . 53 Thrashers 53 Other machines 54 Extent of "full-line " development 54 7 . Methods of sale an d distribution in the harvesting-machine trade 55 8. Competition and combination in the harvesting-machine industry prior to the International Harvester Co 56 American Harvester Co 57 Competition during the nineties 59 Testimony of Cyrus H. McCormick 59 Testimony of John J. Glessner 60 Testimony of Wm. H. Jones 61 Testimony of C. S. Funk 62 Profits of harvesting-machine companies prior to the merger 62 Increase in volume of production 64 CHAPTER II.— FORMATION OF THE INTERNATIONAL HARVESTER CO. Sec. 1. General character of this consolidation 67 2. Motives for forming the consolidation 69 3. Manner in which negotiations were conducted 72 Excerpt from statement made by Mr. Stanley McCormick and Mr. Bentley to Mr. Perkins, June 27, 1902, in New York City 73 CONTENTS. v.. Page. Sec. 4. Legal and financial details of organization 76 Original agreements between vendor companies and Lane 78 Organization of the International Harvester Co 79 Entrance of original proprietors of the merged companies into control 81 Execution of voting-trust agreement 82 Supplementary contracts of Mar. 24, 1903, and Aug. 17, 1903 82 Summary and criticism of contracts with respect to capitalization - . 83 5. Allotment of $120,000,000 of stock issued 84 6. Description of the organization of the International Harvester Co. and the property acquired in 1902 87 Organization of the manufacturing branch of the business and de- scription of the property 87 Organization of a selling company 88 7. Production of chief kinds of harvesting machines by the International Harvester Co. in 1902 91 CHAPTER III.— COMPARISON OF CAPITALIZATION AND INVESTMENT IN 1902. Sec. 1. Methods employed by company in making valuations 94 Comparison of appraisal and of true value of tangible property acquired 95 2. Appraisal of McCormick properties 98 Factory real estate 99 Factory buildings and machinery 100 Illinois Northern Ry 101 Agency property 104 Timber 104 Miscellaneous plants and property 104 Inventory 106 Summary of the McCormick company valuation 107 3. Appraisal of Deering properties 108 Factory real estate 109 Factory buildings and machinery 109 Agency property 110 Iron ore and coal property and iron and steel plants 110 Timber property 117 Miscellaneous property 119 Inventory 120 Summary of Deering company valuation 121 4. Appraisals of the Piano, Champion, and Milwaukee companies 122 Piano and Champion appraisals 122 Milwaukee appraisal 123 5. Total appraisal 124 6. Distribution of "plant stock" issued for property 126 7. Value of good will and other intangible property acquired 128 8. Cash stock subscription 133 CHAPTER IV.— SUBSEQUENT DEVELOPMENT OF THE IN- TERNATIONAL HARVESTER CO. Sec. 1. Introductory 1^6 2. Acquisition of competing concerns 137 D. M. Osborne & Co 13? Minnie Harvester Co 139 VI CONTENTS. Sec. 2. Acquisition of competing concerns— Continued. page. The Aultman-Miller Co 139 Keystone Co 140 General character of these acquisitions 141 3. Acquisition of noncompeting lines 141 4. Befusal of the International Harvester Co. to acquire other competing concerns 143 5. Development of new lines of manufacture at old and new plants in the United States 145 6. Acquisition and construction of manufacturing plants in foreign coun- tries 146 7. Development of raw-material properties and plants 148 8. Capacity and output of the International Harvester Co. plants in 1911. . 150 Implement plants 150 Ore mines 153 Coal and coke property 153 Iron and steel works 153 Timberlands and sawmills 154 9. Industrial railways of the International Harvester Co 154 10. Internal organization and administration of the International Harvester Co. (of New Jersey) and the International Harvester Co. of America. . 156 General administration of the International Harvester Co 156 Relations of the International Harvester Co. with the America Company 159 11. Profit-sharing system of the International Harvester Co. and welfare work 161 12. Important financial changes 162 13. Financial support of the International Harvester Co. by John D. Rocke- feller 163 14. Company organization of the International Harvester Co 164 Company organization in 1912 164 Defunct subsidiary companies 167 South Chicago Furnace Co 167 Illinois Iron Mining Co 167 Weber Wagon Co 167 D . M . Osborne & Co . and Columbian Cordage Co., 167 Minnie Harvester Co 167 The Keystone Co 168 The Aultman & Miller Buckeye Co 168 Lagonda Western R. R. Co 168 Calumet & Southeastern R. R 168 Chicago, West Pullman & Southern Ry. Co 168 Chatham Wagon Co 168 Macleod & Co 168 McCormick Harvesting Machine Co. m. b. H. (Berlin) 168 Osborne & Co. m. b. H 168 Deering Harvester Co. (Ltd.), McCormick Harvesting Ma- chine Co. (Ltd.), and Osborne-Plano Co. (Ltd.) 168 Sec. 15. Separation of the International Harvester Co. into two companies on Jan. 27, 1913 169 CONTENTS. Vn Page. Sec. 16. Proportion of busineas obtained by the International Harvester Co. from 1903 to 1911 178 Harvesting machines .• 179 Binders 180 Mowers 181 Rakes 183 Binder twine 184 New lines 184 17. Recent development of full-line concerns 188 CHAPTER v.— PROFITS AND PRICES OP THE INTERNA- TIONAL HARVESTER CO. Sec. 1. Character of the accounts of the International Harvester Co 190 2. Financial results of 1903 196 3. Earnings as reported by the International Harvester Co 211 Earnings 211 Assets and liabilities, 1903 to 1911 213 4. Method of revision by the Bureau 218 5. Additions to property 219 6. Depreciation, extinguishment, and special maintenance 221 Plant depreciation 222 Extinguishment 223 Special maintenance 225 7. Fire insurance, accident insurance, and pension reserves 226 Fire insurance reserve 226 Accident insurance reserve 228 Pension reserve 228 8. Reserves for collection expense, bad debts, and contingent losses on receivables, and deferred profits on forward sales 229 Collection expense 229 Bad debts and contingent losses on receivables 229 Deferred profits on forward sales 231 9. Net earnings and rates of profit on investment, as computed by Bureau. 233 Net earnings 233 Assets and liabilities 234 Rate of profit 238 10. Profits and prices in particular lines 239 Prices in relation to cost of production 240 Net earnings on sales 241 Return on investment 242 11. Prices and profits in export trade 244 Prices in United States and in foreign countries 244 Profit on sales in the export trade 245 12. Movement of prices, 1903 to 1911 246 CHAPTER VI.— PRODUCTIVE EFFICIENCY AND FINANCIAL RESOURCES. Sec. 1. Introduction 256 2. Cost of production 256 Importance of volume of business 257 Cost of grain binders 258 Vm CONTENTS. Sec. 1. Introduction — Continued. Page. Costs of mowers and rakes 263 Cost of other machines — -New lines 265 Manure spreaders 266 Disk harrows 266 Two-horse wagons 267 General position of the International Harvester Co. with respect to cost of production 267 Importance of integration in cost of production of the Interna- tional Harvester Co 267 S. Selling organization and selling expense 270 Selling expense of the International Harvester Co 270 Selling expense for different kinds of machines, etc 273 Comparison of selling expense of International Harvester Co. with independents 275' Harvesting machines 275 Selling expense in relation to a "full line " 276 4. Policy of the International Harvester Co. in granting long terms of credit 278 5. Summary 288 CHAPTER VII.— COMPETITIVE METHODS OP THE INTER- NATIONAL HARVESTER CO. Sec. 1. Introductory 290 2. Retail distribution of farm machinery 291 3. Distributing system of the International Harvester Co 295 4. Pretended competition in early years 296 Osborne 296 Minnie 298 Aultman-Miller 298 Keystone 298 5. Effort to secure undue proportion of dealers 299 6. Exclusive handling 304 7. Full-line forcing 306 8. Use of "suggested" retail price lists 310 9. Discriminations in prices and terms 315 Harvesting machines 317 New lines 319 Harrows 320 Farm wagons 321 Manure spreaders 322 Gasoline engines 323 10. Misrepresentation of competitors by salesmen 323 11. Conclusions 325 LIST OF TABLES. 1. Number of specified kinds of agricultural implements manufactured in the United States, according to the census reports, 1869-1909 41 2. Growth of the manufacture of agricultural implements, according to the census reports, 1849-1909 43 3. Net profits of five specified harvesting machine companies, 1898-1902 63 4. Number of binders, mowers, and rakes produced in the United States, according to the census reports for the years 1889 and 1899 64 5. Niunbers of binders and mowers sold by the five companies forming the International Harvester Co. , by years, 1898-1902 65 6. Disposition of original $120,000,000 capital stock of International Harvester Co 86 7. Production of chief kinds of harvesting machines of companies originally merged in the International Harvester Co. for 1902 92 8. Numbers of binders, mowers, and rakes sold by the companies merged in the International Harvester Co. and by independents, season of 1902 92 9. Book valuations of physical properties of McCormick Harvesting Machine Co. transferred to the International Harvester Co. in 1902, and valuations of these properties adopted by International Harvester Co 98 10. Valuations of the International Harvester Co. of the physical properties transferred to it by the McCormick Harvesting Machine Co. in 1902, and valuations of these properties adopted by the Bureau 107 11. Book valuations of physical properties of Deering Harvester Co. transferred to the International Harvester Co. in 1902, and valuations of these prop- erties adopted by the International Harvester Co 108 12. Book valuations of ore, coal, iron, and steel properties of the Deering Har- vester Co. transferred to the International Harvester Co. in 1902, and valuation of these properties adopted by the International Harvester Co. . Ill 13. Bonuses paid for specified ore leaseholds on the Mesabi Eange in 1902 113 14. Valuations by the International Harvester Co. of the physical properties transferred to it by the Deering Harvester Co. in 1902, and valuations adopted by the Bureau 121 15. Comparison of appraisal values of inventories of four vendor companies, and valuations of same inventories as of 1902 subsequently used by the Inter- national Harvester Co., with the valuations adopted by the Bureau 124 16. Valuations of the International Harvester Co. of the physical properties transferred to it by the five predecessor companies in 1902, and valuations adopted by the Bureau, by chief elasses of property 125 17. Valuations of the International Harvester Co. of the physical properties transferred to it by the five predecessor companies in 1902, and valua- tions adopted by the Bureau, by companies 125 18. Comparison of the appraised values adopted by the International Harvester Co. for the physical property acquired in 1902, with the values estimated by the Bureau and the stock issued therefor, by companies 126 19. Value of the good will of the four vendor companies in 1902, based on profits as computed by the accountants 132 IX X CONTENTS. rage. 20. Method of payment of cash stock subscription, including interest on unpaid subscriptions from Aug. 15, 1902, as shown by the statements of the Inter- national Harvester Co 134 21. Comparison of original and ultimate distribution of cash stock subscrip- tions 135 22. Implement manufacturing plants of the International Harvester Co. and rated capacity in 1911 for machines specified 151 23. Production of chief kinds of machines at domestic implement manufactur- ing plants of the International Harvester Co. in 1911 152 24. Production of chief kinds of machines at foreign implement manufacturing plants of the International Harvester Co. in 1911 152 25. Subsidiary companies of the International Harvester Co. in July, 1912 165 26. Subsidiary companies of the International Harvester Co. doing business in foreign countries and transferred to the International Harvester Corpora- tion about February, 1913 174 27. Subsidiary companies of the International Harvester Co. engaged in trans- portation, etc., in the United States, and transferred to the International Harvester Corporation about February, 1913 175 28. International Harvester Co. (now International Harvester Co. of New Jer- sey) and aflSliated companies, preliminary combined balance sheet, Dec. 31, 1912 176 29. International Harvester Co. of New Jersey (formerly International Har- vester Co., the old company), preliminary combined balance sheet, Feb. 1, 1913 176 30. International Harvester Corporation, preliminary combined balance sheet, Feb. 1, 1913 177 31. Total production of specified harvesting machines made in United States, according to the census, compared with the domestic production of the International Harvester Co. in 1904 and 1909 179 32. Production of binders of the International Harvester Co. in the United States compared with that of independent companies, 1902-1911 180 33. Number of binders sold in the United States by the International Harvester Co. compared with domestic sales of independent companies, 1903-1911. 181 34. Production of mowers of the International Harvester Co. in the United States compared with that of independent companies, 1902-1911 182 35. Number of mowers sold in the United States by the International Harvester Co. compared with domestic sales by independent companies, 1903-1911 . 182 36. Total production of certain kinds of farm machinery in the United States, according to the census, compared with the production of the International Harvester Co. in the United States, in 1909 185 37. Domestic production of disk harrows and manure spreaders by the Inter- national Harvester Co. in 1911 compared with the total production in the United States 187 38. Domestic production of farm wagons by the International Harvester Co. in 1910 compared with the total production in the United States 187 39. Statement of assets and liabilities of International Harvester Co. on Oct. 1, 1902, and Dec. 31, 1903, based on Bureau's valuations 206 40. Net earnings, dividends, additions to surplus, and capital stock and sur- plus of the International Harvester Co. as reported by the company, and rate of net earnings on capital stock and surplus, and rate of dividends on capital stock, 1903-1911 211 41. International Harvester Co. combined balance sheet, Dec. 31, 1911 213 CONTENTS. XI Page. 42. CJondensed balance sheets of International Harvester Co., as shown by its accounts, 1902-1911 215 43. (Comparison of additions to property account of the International Har- vester Co., 1903-1911, made by the company with those made by the Bureau 219 44. Net reserves for plant depreciation set up by the International Harvester Co., 1903-1911 222 45. Reserves for extinguishment of ore and timber set up by the International Harvester Co., 1903-1911 223 46. Rates of extinguishment applied by the International Harvester Co. to its iron-ore mines, 1903-1911 223 47. Reserves for fire insurance set up by the International Harvester Co., 1905-1911 227 48. Reserves for pensions set up by the International Harvester Co., 1908- 1911 228 49. Reserves for bad debts and contingent losses on receivables by the Inter- national Harvester Co., 1903-1911 230 50. Net earnings of the International Harvester Co., according to the company's statements and as computed by the Bureau, by years, 1903-1911 234 51. Condensed balance sheets of International Harvester Co., as revised by the Bureau, Dec. 31, 1902-1911 236 52. Ra,te of net earnings of the International Harvester Co. on net assets, ex- clusive of good will, as computed by the Bureau, by years, 1903-1911. . 238 53. Comparison of factory costs and average net prices for specified machines and twine for the total business of the International Harvester Co. in 1910 andl91l! 240 54. Percentages of net earnings to net proceeas of the International Harvester Co. on sales in the United States, by specified lines, 1910 and 1911 242 55. International Harvester Co.'s percentage of domestic trading profit to investment in the United States, by specified Unes, 1910 and 1911, based on company's statements, 243 56. Average net prices of specified lines of the International Harvester Co. in the United States and in foreign coimtries, excluding Canada, in 1910.. 244 57. Comparison of International Harvester Co.'s domestic net sale proceeds and trading profit in the United States and in foreign countries for the years 1910 and 1911, according to the company's statement 246 58. Average net prices in the United States of the International Harvester Co. for specified kinds of farm machinery, etc., by years, 1903-1911 248 59. Average wholesale prices of binder twine, in cents per pound, as reported by the International Harvester Co. , by years, 1902-1911 253 60. Contract list prices, f. o. b. Chicago, for two tall payments of specified Deering harvesting machines, by years, 1903-1911 254 61. Comparison of costs of binders at one of the larger plants of the International Harvester Co. in 1907, showing chief elements of cost tor specified foreign and domestic machines 259 62. Average factory cost of grain binders at different plants of the International Harvester Co. in 1911 260 63. Average factory cost of all grain binders at different domestic plants of the International Harvester Co. tor the years 1910 and 1911 combined 260 64. Comparison of the average costs of binders for the International Harvester Co. and for the independent manufacturers reporting, for the years 1910 and 1911 combined 261 XII CONTENTS. Page 65. Average factory cost of all mowers and rakes at the different domestic plants of the International Harvester Co., for the years 1910 and 1911 combined 263 66. Comparispn of the average costs of mowers and rakes for the International Harvester Co. and the independent manufacturers reporting, for the years 1910 ajod 1911 combined 264 67. Relation of intercompany profit of the Wisconsin Steel Co. to the cost of pro- duction of farm machinery by the International Harvester Co. in 1910 and 1911 - 269 68. Domestic and foreign selling expenses of International Harvester Co. and aflSliated companies for 1911 season 271 69. Comparison of sales and selling expense, excluding freight, duty, and marine insurance, of the International Harvester Co., domestic and for- eign, in 1911 272 70. Total number of canvassers employed by the International Harvester Co. in the United States from 1902 to 1912, by months, and total mmiber of days canvassed each year 273 71. Net sales proceeds, less freight and duty, in the United States and percent- age of selling and collection expense, bad debts, etc., thereof, for the International Harvester Co. in 1910 and 1911, for chief classes of machines, according to allocation made by the company 274 72. Comparison of ratios of cost, selling expense, and profits to sales between the International Harvester Co. for its harvesting-machine business and four independent harvesting-machine companies, for 1910 and 1911 combined 276 73. Variations in the rates of interest received by the International Harvester Co. on farmers' notes in the United States, by States, in 1911 281 74. Comparison of percentages of cash and credit sales to total sales of the Inter- national Harvester Co. in the United States, 1904-1911 283 75. Comparison of percentages of amounts of notes maturing in specified periods taken by the International Harvester Co. in a given year, with the total amount of notes taken in the same year, 1904-1911 284 76. Number of local agents or dealers selling specified International Harvester Co. lines, in the United States, according to a statement of the company, 1908-1912 308 LIST OF EXHIBITS. Page. 1. Statement made by Mr. Stanley McCormick and Mr. Bentley to Mr. Perkiiis, June 27, 1902, in New York City 327 2. Statement submitted to bankers by McCormick Harvesting Machine Co. in 1902 333 3. Agreement between Deering Harvester Co. and William C. Lane, July 28, 1902 342 4. Supplemental agreement between Deering Harvester Co. and William C. Lane, Aug. 11, 1902 : 349 5. Proposition from William C. Lane to International Harvester Co., Aug. 12, 1902 351 6. Recommendation of committee of board of directors of International Har- vester Co. in re proposition of William C. Lane of Aug. 12, 1902 352 7. Resolution of International Harvester Co. accepting offer of William C. Lane, Aug. 13, 1902 353 8. International Harvester Co.:. Voting trust agreement between William C. Lane and George W. Perkins, Charles Deering, and Cyrus H. McCormick, voting trustees, dated Aug. 13, 1902 355 9. Agreement between Charles Deering, James Deering, and Richard F. Howe and William C. Lane, Mar. 24, 1903 360 10. AgreementbetweenWilliamC. Laneand J. P. Morgan & Co., Aug. 13, 1902.. 362 11. Agreement between McCormick Harvesting Machine Co., Deering Harvester Co., The Warder, Bushnell & Glessner Co., Piano Manufacturing Co., and William C. Lane and International Harvester Co., Aug. 17, 1903 363 12. Agreement between International Harvester Co. and the Milwaukee Har- vester Co., Sept. 2, 1902 368 13. Agreement between Thomas M. Osborne and Edwin D. Metcalf and Inter- national Harvester Co., Jan. 15, 1903 370 14. McCormick Harvesting Machine Co.: Preliminary balance sheet close of 1901 season, Sept. 30, 1901 376 15. McCormick Harvesting Machine Co.: Profit and loss, season 1901 378 16. McCormick Harvesting Machine Co.: General balance sheet, Sept. 30, 1902. 379 17. McCormick Harvesting Machine Co.: Profit and loss, season 1902 380 18. Deering Harvester Co. : Assets and liabilities, Feb . 1, 1902 381 19. Deering Harvester Co. : Profit and loss, Feb. 1, 1902 382 20. Deering Harvester Co. : Assets and liabilities, Jan. 31, 1903 383 21. Deering Harvester Co.: Loss and gain, Jan. 31, 1903 384 LETTERS OF TRANSMITTAL. Department of Commerce and Labor, OrncE OF the Secretary, Washington, March 3, 1913. Sm: I have the honor to transmit herewith a report of the Com- missioner of Corporations on the International Harvester Co. This report deals largely with the organization, capitahzation, profits, and competitive methods of that company and its present position in the farm-machinery industry. Very respectfully, Charles Nagel, Secretary. The President. Department of Commerce and Labor, BxiREAU OF Corporations, Washington, March 3, 1913. Sir : I have the honor to transmit herewith a report on the Inter- national Harvester Co., made to the President under your direction and in accordance with the law creating the Bureau of Corporations. This report deals largely with the organization, capitalization, profits, and competitive methods of the International Harvester Co. and its present position in the farm-machinery industry. I desire to mention as especially contributing to the preparation of this report ]\Ir. Francis Walker, the Deputy Commissioner, and Messrs. Le Claire Hoover, Harry C. McCarty, and Worthy P. Sterns, of this Bureau. Very respectfully, Luther Conant, Jr., Commissioner. To Hon. Charles Nagel, Secretary of Commerce and Labor. XV LETTER OF SUBMITTAL. Department of Commerce and Labor, Bureau of Corporations, Washington, March 3, 1913. Sir : I have the honor to submit herewith a report on the Inter- national Harvester Co. organization of international harvester CO. The International Harvester Co. vras organized in 1902 as a con- solidation of the five principal manufacturers of harvesting machines in the United States, namely, the McCormick Harvesting Machine Co., Deering Harvester Co., Piano Manufacturing Co., the Warder, Bushnell & Glessner Co., and the Milwaukee Harvester Co. The companies thus consolidated had in 1902 about 90 per cent of the total production of grain binders in the United States, and about 80 per cent of the total production of mowers, the two chief kinds of harvesting machines. The principal outside makers of harvesting machines were located in New York State, and their market was chiefly confined to the North Atlantic States and to the export trade. The interests included in the combination had previously been in keen competition. An attempt made in 1890 to establish a general consolidation of makers of harvesting machines was a failure, and from that time until the merger, competition was severe. In fact, it has been asserted that the combination was virtually forced by such competition. However, the two most important concerns, namely, the McCormick and Deering companies, were making large profits just prior to the merger, and two of the other companies merged were making at least fair profits. Obviously, therefore, it can not be con- tended that this competition was destructive. It has been represented in formal testimony by officers of the com- pany and its financial promoter, G. W. Perkins, then of the firm of J. P. Morgan & Co., that its organization was not the result of con- certed action by the former competing owners, but merely of the purchase of their properties by new and outside interests. Docu- mentary evidence gathered by the Bureau completely disposes of this contention and shows that the principal competing interests con- sidered and discussed among themselves the formation of this combi- nation and were active in bringing it about. 77854°— 13 2 ^vii XVni LETTER OP SUBMITTAL. The chief features of the International Harvester Co.'s operations are the substantial maintenance of its monopolistic position in the harvesting-machine business, originally acquired through combina- tion, and its extensions on a large scale into new lines of the farm- machinery industry. The company has been able to do this in part through the acquisition of some of its chief rivals in the harvesting- machine business; in part by using its monopolistic advantage in these harvesting-machine lines to force the sale of its new lines; in part by certain objectionable competitive methods; and especially through its exceptional command of capital, itself the result of com- bination. ACQUISITIONS OF COMPETING CONCEENS. Almost immediately after its organization the International Har- vester Co. commenced the acquisition of competing makers of har- vesting machines. In January, 1903, it secretly acquired control of D. M. Osborne & Co., of Auburn, N. Y., its chief competitor. This secret control was maintained for nearly two years, during which the Osborne company was operated and advertised as an inde- pendent concern. Two of the chief stockholders of the Osborne company agreed to refrain from engaging independently in the same lines of business for a period of 10 years. Again, the combina- tion, between 1903 and 1904, acquired and secretly operated several other competing harvesting-machine concerns, namely, the Minnie Harvester Co., the Aultman-Miller Co., and the Keystone Co. In some cases it was contended that the concealment of ownership was employed to facilitate liquidation of certain accounts of the purchased concerns. Negotiations for the acquisition of several other harvesting-ma- chine concerns were not consummated; in some cases the initiative came from the competitors. EXTENSIONS INTO NEW LINES. The company's acquisition of competitors in harvesting machines was followed by extension of its manufacture into numerous new lines, partly by the purchase of established concerns. Among the most important of such lines were tillage implements, manure spreaders, farm wagons, gasoline engines, tractors, and cream sepa- rators. The extension of the company into these lines was directly furthered by its substantially monopolistic control of the harvest- ing-machine business. It is obvious that the possession of a monopo- listic position in that important branch of the business afforded a powerful lever for forcing the sale of its new lines. LETTEB OP SUBMITTAL. XIX COMPETITIVE METHODS. The competitive methods employed by the company have been the subject of much complaint. Some of these complaints relate to practices which, like the use of the exclusive clause in agency con- tracts and the operation of purchased companies as independent, were at one time extensively practiced, but which have since been abandoned. As above noted, some of these acquired concerns were openly advertised as independent. Among the most important complaints charged against the com- pany in recent years is an effort to secure an undue proportion of local dealers in farm machinery by allotting, as a rule, only a single brand to any one dealer in the same place, thus tending to restrict the outlet for competitors' goods. The company's own records show that this was one purpose at least in making this distribution of its brands, and it appears to have had some practical effect in handicap- ping competition. Compulsion of dealers to take the company's " new " lines by reason of its monopolistic control of harvesting machines (" full-line forc- ing ") has been attempted with more or less success by the company's representatives. Attempts to secure the exclusive handling of cer- tain lines of the company by similar methods were also reported to the Bureau. Special discriminatory prices and terms have been reported in a number of instances, but the general policy of the company is to maintain high prices in the monopolized lines; in the principal new lines, however, where considerable competition is encountered, un- usually low prices and long terms have been generally employed. Another rather general complaint is that salesmen of the Inter- national Harvester Co. represent that purchasers of competing lines of harvesting machines will be unable to secure repair parts, a mat- ter of much practical importance. Officers of the International Harvester Co. admit that this was at one time a common charac- teristic of competition in the harvesting-machine industry, but that the company is opposed to the practice and has used active efforts to eliminate it. The Bureau, however, received rather numerous complaints of this character. The company at one time openly attempted, through a clause in its commission contracts, to control the price paid for its machines by the farmer to the retail dealer. Since the elimination of this clause, "suggested" retail price lists have been rather generally circulated by some of its branch offices, apparently for the purpose of indirectly maintaining the retail price, although the company contends that these lists are intended for the use of its employees XX LETTBE OF SUBMITTAL. in furnishing information to purchasers and professes to discourage their issuance to dealers. It is evident, however, that it could com- pletely stop this practice if it really wished to. SUPEEIOK EESOUECES. The company's exceptional financial resources, including its con- nections with J. P. Morgan & Co. and John D. Rockefeller, constitute one of the chief sources of its power. They not only enable it to secure the economies of large-scale operations, which, as a rule, give it marked advantages in manufacturing costs, but also enable it to maintain a very elaborate selling organization, by virtue of the variety and extent of its business. Furthermore, they give it a great advantage in extending credits to purchasers, an exceedingly im- portant feature of the farm-machinery industry. While apparently any such use of credits has not been a controlling factor in restricting competition, it appears to have been felt to some extent in certain lines, and is one of the chief sources of complaint from manufac- turers as distinct from dealers in farm machinery. , PRESENT POSITION. As a result of the developments and practices above described, the position of the combination has changed from that of a maker of harvesting machines only, until it is now an important factor in several other branches of the farm-machinery business. In manure spreaders it appears to have over one-half of the business, and in disk harrows approximately 40 per cent; and it is increasing its proportion in several other new lines, such as wagons and gasoline engines. New competition has, however, begun to appear, especially from certain large plow and tillage-implement makers, whose fields have been invaded by the combination, and who likewise have arranged to establish a " full line ; " that is, a large assortment of the chief kinds of farm implements. This new competition is apparently of great significance. However, in 1911 the company still had about 8G per cent of the production of binders, 78 per cent of the produc- tion of mowers, and 72 per cent of the production of rakes. INVESTMENT AND CAPITALIZATION. The extraordinary overcapitalization which characterized most of the large industrial consolidations of the period 1898 to 1901 was absent in the case of the International Harvester Co. The original capital stock was $120,000,000. The "cash stock" of $60,000,000 appears to have been paid up in full. The appraisal value of the plants, inventories, etc., for which the remaining $60,000,000 of stock LETTER OP SUBMITTAL. Xil was issued was $67,000,000; the Bureau places the value of these physical properties at, roughly, $49,000,000. The bankers and pro- motere received $3,700,000 stock for their expenses and services. It is worth noting that certain ore leaseholds acquired by the Deerings about seven months before the merger for $675,000, of which $500,000 was paid in notes, were valued for purposes of con- solidation, after deduction of this indebtedness, at no less than $7,963,000. The price paid by the Deerings was rather more than the current average value of Mesabi leases at the time. It is claimed that during the period that the Deerings had owned these leases there had been some increase in the estimated tonnage of these ore prop- erties, but no evidence was produced to indicate any great increase in their value. However, in order not to undervalue them, the Bureau arbitrarily allowed an increase of $500,000, and also added about $100,000 expended for improvements, etc. This is probably too lib- eral, but the resulting net valuation is over $7,000,000 less than that claimed by the International Harvester Co. The high valuations placed on these ore properties caused much dissatisfaction among the combining interests themselves, especially on the part of the McCor- micks. The banking interests back of the International Harvester Co., however, had only a few weeks earlier claimed an extravagant value for ore in defending the capitalization of the United States Steel Corporation in important litigation then pending, and they were therefore in no position to deny excessive valuations for this Deering ore. In several other respects the appraisal valuations were clearly excessive. However, after deducting such excesses, the Bureau, as indicated, found that the value of the physical properties plus th© working capital covered substantially 90 per cent of the capital stock issued. The company claimed a large value for good will, but has not entered any good-will value in its accounts. It is not unlikely that a fair valuation for good will would have covered the difference between the original capitalization and the tangible assets. A much larger capitalization was at one time contemplated. For purposes of consolidation, the fixed properties, good will, and in- ventories, exclusive of working capital, were nominally valued in the first instance at $132,000,000. This figure, however, was grossly ex- cessive. Furthermore, the subsequent appraisal value of the physical properties (excluding good will) of $67,000,000, above noted, was later written down to $60,000,000. In this connection it may be noted that inventories which were appraised at $25,550,000 were later- reduced for " trading purposes " to $18,155,000. In 1907 the capital stock was rearranged by making $60,000,000 a 7 per cent preferred issue, leaving the common stock at $60,000,000. XXn LETTEB OF SUBMITTAL. In 1910 $20,000,000 additional common stock was issued as a stock dividend, making the total capitalization $140,000,000. The stock of the company has been closely held by the former interests. The McCormick and Deering families have throughout held a large majority of the total stock, while considerable amounts have also been retained by a few other stockholders. This fact assumes especial importance in view of the pending dissolution Suit of the Government against the company. Recently, on account of this suit, the company has been split into two corporations, one of which, the International Harvester Co. of New Jersey, retains the old harvesting-machine plants and related business; the other, the International Harvester Corporation, takes over the new lines and foreign business. Each of these concerns is capitalized at $70,000,000. If this is intended as part of a plan for ultimate disintegration of the combination, in the opinion of the Bureau it is unsatisfactory. PROFITS. There has been a marked increase in the earnings of the Interna- tional Harvester Co. From a distinctly low rate early in its organi- zation they have risen to a rather high rate in recent years. For the entire period 1902 to 1911 the average rate of net earnings on net assets, as computed by the Bureau (exclusive of good will), is 8 J per cent. However, for the three years 1909 to 1911 the average was 12| per cent. As computed by the company on capital stock and sur- plus, the average for the entire period is 7^ per cent, and for the years 1909 to 1911, 10| per cent. The rate in 1911 was somewhat less than in 1909. Returns for 1912 are not yet available. The increase in recent years is more significant because in certain of the new lines, which the company has been pushing aggressively, the rate of return is comparatively low. This means that the rate of return on some of the older monopolized lines has been very high. Thus, the rate of profit for grain and grass harvesting machinfes is very much higher than the rates for such lines as wagons, maiiure spreaders, and twine, where the company encounters a greater degree of competition. The rate on some of the new lines, however, has been liberal. Generally speaking, the prices obtained by the company on foreign sales are relatively higher than those in the domestic market but claims made by the company that the net return is invariably o-reater were not sustained by its records; in some important instances at least the foreign nettings were lower than the domestic. LETTER OF SUBMITTAL. XXTtl CONCLUSION. It appears, therefore, that the International Harvester Co.'s posi- tion in the industry is chiefly attributable to a monopolistic combina- tion in the harvesting-machine business, certain unfair competitive methods, and superior command of capital. Very respectfully, Luther Conant, Jr., Commissioner of Corporations. The PEEsmENT. EEPORT OF THE COMMISSIONER OF CORPORATIONS ON THE INTERNATIONAL HARVESTER CO. SUMMARY. This investigation was conducted in pursuance of a resolution of the United States Senate which directed especial attention to the oper- ations of the International Harvester Co., and to the question whether there existed among local dealers in farm machinery a healthy com- petition. On the latter subject a more detailed report is contem- plated later. The essential features of the operations of the Inter- national Harvester Co., as developed by the investigation, are: A substantially monopolistic position — 85 per cent of the total output — in the harvesting-machine business proper at the beginning..; .Organization of combination terminated a long period of severe, but by no means destructive, competition among the concerns merged. Combination arranged by the former owners in connection with bankers, and not, as frequently asserted, a mere sale of their proper- ties to new interests. An absence of important overcapitalization. Substantially 90 per cent of the original $120,000,000 capital stock covered by tangible -property and working capital. There was in addition a considerable real good will. Acquisitions of competitors and extensions into new lines, until to-day the company is also an important factor in certain other branches of the farm-machinery industry. Low rates of profit in early years, partly owing to imperfect or- ganization and internal jealousies, but much higher rates in recent years, averaging about 12| per cent in 1909-1911 on net assets (exclu- sive of good will) as estimated by the Bureau. Much higher rates of profit on investment in highly monopolized lines, such as harvesting machines, than in certain " new " lines, i. e., wagons, manure spreaders, etc. Prices of machines sold in foreign markets generally higher to retailer and farmer than in United States, but in some cases a lower margin of profit in export trade. 2 ■ EEPOET ON THE INTERNATIONAL HAEVESTEE CO. Low manufacturing costs of harvesting machines compared with the average costs of independents ; an elaborate selling organization and ability to grant extensive credits to purchasers. These advan- tages due to large volume of business and superior financial resources. Extensive use especially in early years of objectionable competitive practices, e. g., the exclusive clause in dealers' contracts (later aban- doned), monopolization of dealers, "full line forcing," discrimina- tory price concessions, attempted control of retail prices. These methods less extensively practiced in recent years, but still the source of much complaint. Of over 800 dealers interviewed by the Bureau, about one-half criticised unfavorably the company's methods ; some of these complaints unimportant. Eecent expansion by some of the largest makers of farm implements into the harvesting-machine business, making them, like the Inter- national Harvester Co., " full-line concerns." This development ap- parently one of great importance. Monopolistic position of the International Harvester Co. in har- vesting machines thus far substantially maintained, while it now controls a considerable and increasing percentage of the business in new lines. CONDITIONS LEADING UP TO ORGANIZATION OF INTERNATIONAL HARVESTER CO. The International Harvester Co. was organized in August, 1902, under New Jersey laws, as a consolidation of the following com- panies : McCormick Harvesting Machine Co. Deering Harvester Co. (a partnership). "Warder, Bushnell & Glessner Co. (Champion). Piano Manufacturing Co. Milwaukee Harvester Co. These concerns were the principal manufacturers of harvesting machines. In fact, the only other important manufacturers of such machines were a few companies located in New York State, engaged largely in trade with foreign markets, none of which did an* extensive business in the principal domestic market for harvesting machines, namely, the grain-producing States of the Mississippi River basin. The organization of the company followed a long period of keen competition among manufacturers of harvesting machines. An earlier attempt (in 1890) to bring about a general consolidation of the principal manufacturers of such' machines proved abortive. Although a formal organization was effected in that year under the name of the American Harvester Co., with $35,000,000 authorized capital stock, this had hardly been accomplished before the scheme fell through. From that time down to the organization of the Inter- SUMMAEY. 3 national Harvester Co., the harvesting-machine industry appears to have been peculiarly free both from efforts at consolidation and also from the ordinary price agreements which were characteristic of many industries. In fact, the formation of the International Har- vester Co. has repeatedly been attributed by some of its principal officers to the severity of competition during this period. Cyrus H. McCormick, president of the company, in testimony in judicial proceedings in Missouri in 1908, described this competition as " fierce," and stated that a desire to remove what he termed " un- businesslike methods" was one of the principal reasons for forming the consolidation. He further stated that during this period of com- petition a large portion of the sales of the competing companies were made below the listed prices. Again, J. J. Glessner, formerly of the Warder, Bushnell & Gless- ner Co., makers of the Champion machines, referred to the competi- tion as a " bitter fight," stating that his concern did everything that it possibly could to prevent its competitor from making a sale. Still again, W. H. Jones, formerly of the Piano Manufacturing Co., stated explicitly that the merger was organized to abolish " fierce competition." This is shown by the following excerpt from his testimony in the Missouri proceedings : Q. So in order to get rid of this fierce competition you formed this new organization ? — A. We had to do it or wind up the busi- ness. If we had not, we would have thrown all our men out of employment. The best thing to do was to get rid of the fierce competition, to get rid of the waste of money in canvassers. We have not half as many canvassers to-day as we did have. Q. The canvassers were necessary to maintain your competi- tion ? — ^A. Before that, we did it to beat one another out of busi- . ness. Q. Is that not what you call competition? — A. Pretty sharp competition. Q. It was to get rid of that you made your combination? — A. Yes, sir ; to better the entire thing ; no question about that. While it has also been claimed that economies of consolidation and the possibility of developing more satisfactorily the export trade were likewise considerations in bringing about the merger, it may be accepted as established that the principal reason for the formation of the International Harvester Co. was the elimination of the com- petition complained of. The severity of this competition has frequently been set forth as a full justification for the combination. It is important to point out, therefore, that notwithstanding this competition the profits in the business were large. Thus, the profits of the five combining concerns during the five years 1898-1902 aggregated nearly $43,000,000, or an average of nearly $8,600,000 a year. In the case of the McCormick con- cern, the profits for the year preceding the merger were nearly 12 per 4 BEPORT ON THE INTERNATIONAL HARVESTER CO. cent of the net assets as shov^n by its books, while those of the Deering business were nearly 18 per cent of such book assets, and those of the Milwaukee Harvester Co. over 11 per cent. Data for comparisons in the case of the other two companies are not available, but the profits of these apparently were smaller. These 1902 profits may have some- what overstated the net earnings available for dividends, and the book assets are not an entirely satisfactory criterion for judging their exact significance, but it is certain that such profits were liberal. During this interval, moreover, there was a very great expansion in the volume of business of these companies. It is apparent, therefore, that while competition was severe it was by no means destructive. It may be noted that many of the basic patents for harvesting ma- chinery had expired, and were open to all who cared to engage in the manufacture of such machinery. METHODS BY WHICH THE COMPANY WAS OBGANIZED. Representatives of the company, and particularly of its financial organizers, have repeatedly insisted, at times in sworn testimony, that the combination was not brought about by the concerted action of the interests united, but instead that the five concerns were purchased independently the one of the other by the banking interests, and sub- sequently merged into a single organization. These assertions may be sufficiently disposed of by citing from a statement made by Stanley McCormick and Cyrus Bentley, legal counsel of the McCormicks, to G. W. Perkins on June 27, 1902, in New York City, and confirmed by a typewritten memorandum left with Mr. Perkins after having been revised at the head offices of the McCormick concern. This statement, which is given in full in this report, contained repeated references to conferences between repre- sentatives of the harvesting machine companies themselves, as the following excerpts show : The McCormick and Deering people, in talking over how they might get together, estimated in the matter of good will that about two average years' profits ought to represent the good will of each company's business. In negotiations, not a great while ago, the Deerings rather expressed the opinion that if the McCormick and Deering companies were to come together it ought to be on a basis of about 53 for the McCormick company and 47 for the Deering, while the McCormicks' figures had been anywhere from 55 to 60 for the McCormick company and 40 to 45 for the Deering company. * * * Mr. Glessner is president of this [the Champion] company. Mr. Harold McCormick saw him three or four weeks ago and sounded him as to what he would think of the several harvesting machine companies getting together. Mr. Glessner seemed to be very much interested in having it done, and said that his SUMMARY. • 5 company would not be particular as to details or as to what influence would predominater * * * Mr. W. H. Jones is president of this [the Piano] company, and is the dominating influence. Mr. O. W. Jones, his brother, is vice-president. He visited Mr. McCormick about four weeks ago, and in a casual way asked if something could not be done in the way of combination. He remarked : If you and I were appointed a committee of two to put this through, it wouldn't take us a week to wind it up " — givmg the impression that he was anxious to see it put through. * * * Mr. Deering has approached both the Piano and Champion companies, but so far as is known he has no option on either one. * * * ipj^g Deerings have indicated that they would prefer not to sell for cash, but would take securities and keep an interest in the management of the new organization. Mr. Deering has urged that the whole trade be taken into the combination. Against this it has been suggested to him that if only 90 per cent were brought in, it would be quite possible to deal with another of the mmor companies if any one made ex- cessive demands. That is, no minor company is probably essen- tial to the combination, although the five named are undoubtedly the most desirable. It is therefore conclusively established by documentary evidence that a consolidation of the five leading harvesting-machine makers had been considered, not merely by the bankers, but actively con- sidered and discussed by the leading interests themselves, and this for a considerable period prior to the organization of the company. These discussions had specifically covered the relative values of some of the combining companies, the policy to be adopted with respect to other concerns than the five mentioned, and also the question as to who should have a controlling interest in the new organization. Moreover, the McCormick interests assisted the bankers in arranging for the acquisition of the Milwaukee Harvester Co. TEEMS or CONSOLIDATION. The process by which the merger was actually accomplished in- volved a number of formal legal transactions. On July 28, 1902, four separate agreements were entered into between the McCormick, Deering, Piano, and Champion concerns, respectively, called the " vendors," and William C. Lane, called the " purchaser," all in sub- stantially the same general form, but differing in certain details. These contracts set forth that the respective vendors were the owners of certain plants for the manufacture of harvesting machines, and that Lane, the purchaser, desired to acquire them for the purpose of selling them to a company to be for|ned subsequently, and referred to as the " purchasing company." In i^ursuance of these contracts and certain subsequent agreements, it was arranged 6 BEPOET ON THE ^NTEENATIONAL HAEVESTEE CO. that for the plants and other physical properties thus conveyed, together with the entire property of the Milwaukee Harvester Co., which was put in by the bankers as a going concern, and for the payment of the bankers' commission, $60,000,000 of stock was to be issued. An additional $60,000,000 of stock was to be issued for $60,000,000 cash. Of this amount $19,000,000 was to be contrib- uted by the bankers and their associates, and $41,000,000 by the four vendor companies, as follows: McCormick, $20,000,000; Deer- ing, $16,000,000; Piano, $4,000,000; Champion, $1,000,000. By a subsequent arrangement, however, the McCormick and Deering in- terests agreed to contribute about $9,000,000 additional working capi- tal, so that only about $10,000,000 was directly raised by the bankers. The payment of most of the working capital provided by the vendor companies was arranged through the assignment of bills receivable for collection. The contracts further provided that the purchase price of the phys- ical properties should equal their appraised value. Provision was made for valuing the good will on the basis of two years' profits, plus 10 per cent. These arrangements were subsequently modified by additional contracts. Immediately after the contracts of August 11, 1902, were entered into, the International Plarvester Co. was organized by a group of temporary or " dummy " incorporators, the certificate of incorporation being filed in New Jersey on August 12, 1902. Temporary directors were elected, who at once took under consideration a written offer from W. C. Lane to transfer the plants, good will, and other prop- erty, excluding receivables, of the McCormick, Deering, Piano, and Champion concerns, together with the Milwaukee company as a whole, and working capital of $60,000,000. The plants, good will, etc., were nominally valued at $132,000,000, thus making a total nom- inal value of $192,000,000. In payment therefor Mr. Lane offered to accept the entire capital stock of the International Harvester Co., namely, $120,000,000 par value, subject to a provision that if any additional stock were issued by the company prior to July 1, 1903, on account of the nominal surplus of $72,000,000, then this original $120,000,000 of common stock should become preferred stock and the additional stock should be common stock, to be issued to the holders of the preferred, pro rata. On August 13, 1902, W. C. Lane and E. H. Gary (chairman of the United States Steel Corporation) appeared before the temporary board of directors and explained Lane's offer, which was promptly accepted. Eesolutions were adopted to the effect that the properties and working capital were worth the amount stated by Lane ($192,- 000,000), and that the treasurer should enter the proper amount^, in the books of account, including a surplus of $72,000,000. SUMMAEY. 7 This surplus of $72,000,000 was entirely arbitrary, and, in fact, wholly fictitious. It is obvious that at the time it had not been defi- nitely decided whether the company should be organized with a capitalization approximately commensurate with the value of its assets or whether it should issue stock greatly in excess of that capitalization. On the same day (August 13) the new stockholders took control of the company. The temporary directors resigned, and 18 directors were elected in their places. Of these 18 directors, 10 were largely interested in the four companies merged ; 3 others had been connected with such concerns or individuals as counsel; 4 represented either the bankers (J. P. Morgan & Co.), or capitalists associated with them; the only remaining director was put in to comply with the corporation laws of New Jersey requiring a resident director. On the same day also the temporary oiEcers of the company re- signed and the principal officers elected in their places were as fol- lows: Cyrus H. McCormick, president; James Deering, Harold F. McCormick, W. H. Jones, and J. J. Glessner, vice presidents; Rich- ard F. Howe, secretary and treasurer. The executive committee, of which Charles Deering was made chairman, included the principal representatives of four of the companies merged, and G. W. Perkins, who was also made chairman of the finance committee. An important step in carrying out the original contracts of July 28, 1902, with the principal companies entering the merger, namely, the establishment of a voting trust, was made on August 13 by execution of the voting trust agreement and the appointment of the following persons as voting trustees, namely, George W. Perkins^ Charles Deering, and Cyrus H. McCormick. The actual consummation of the merger, as explained in more de- tail in the full text of the report, involved certain additional con- tracts. This was due to the fact that since the contracts of August 11, 1902, limited the total issue of capital stock to $120,000,000, and since $60,000,000 of this was to be issued for working capi<-al, there would have been nothing left for the bankers and promoters or for the purchase of the Milwaukee Harvester Co. in case the appraisal of the physical properties of the four vendor companies amounted to as much as $60,000,000. The contemplated compensa- tion of the bankers was $3,000,000 in stock, and the cost of the Mil- waukee company (put in by the bankers), together with certain ex- penses, amounted to more than $3,500,000. If these items were to be provided for, therefore, there would be only about $53,500,000 of stock left to pay for the plants and other physical properties of the four vendor companies. It was agreed, therefore, by an addi- tional contract dated August 17, 1903, that certain specified amounts 8 REPORT ON THE INTERNATIONAL HARVESTER CO. of stock should be allotted to each of the vendor companies in lieu of the amounts to be determined by the appraisals. The amounts agreed upon, subject to slight adjustments, were as follows : McOormick company $26,321,656.86 Deering company 21, 302, 554. 64 Cliampion company 3,372,185.91 Piano company 2,193,603.09 Total 53,250.000.50 It will be seen, therefore, that the elaborate appraisals made of the physical properties of the vendor companies really did not determine the amounts of stock issued. Subsequently, however, these ap- praisals, when completed, were used to some extent for bookkeeping purposes. The final allotment of the $120,000,000 capital stock of the International Harvester Co., except for a small amoXmt of the ex- pense stock, is briefly summarized in the following table: DISPOSITION OF ORIGINAL $120,000,000 CAPITAL STOCK OF INTERNATIONAL HAR-S'ESTER CO. Plant stock. J. P. Morgan & Co. ; Commission ?3, 000, 000. 00 Less contribution to Cliampion and Piano companies 42, 857. 14 2, 957, 142. S6 Milwaukee Harvester Co 3, 000, 000. 00 $5, 957, 142. 86 McCormick interests : Original allotment 26, 321, 056. 86 Less contribution to Champion and Piano companies 59, 142. 86 26, 262, 514. 00 Deerin;; interests : Original allotment 21, 362, 554. 64 Less contribution to Champion and Piano companies 48, 000. 00 21, 314, 554. 64 Piano interests : Original allotment 2, 193, 603. 09 Plus contributions from other in- terests 75,000.00 2, 268, 603. 09 Champion interests : Original allotment 3, 372, 185. 91 Plus contributions from other in- terests 75,000.00 3, 447, 185. 91 Organization expenses (crcludlns Mil- waukee company and incorporators' stock) : Sold 611, 803. 34 tin hand 138, 196. 16 749, 999. 50 — " ■ — $60, 000, 000. 00 SUMMAKY. 9 Cash stoclc. J. P. Morgan & Co. : Cash $9, 940, 000. 00 Incorporators 60, 000. 00 Milwaukee excess 148, 196. 66 $10, 148, 196. 66 McCormick Interests : Original subscription 20, 000, 000. 00 Subsequent subscription 4, 886, 190. 13 24, 886, 190. 13 Deering Interests : Original subscription 16, 000, 000. 00 Subsequent subscription 3, 965, 613. 21 19, 965, 613. 21 Piano interests 4, 000, 000. 00 Champion interests 1, 000, 000. 00 $60, 000, 000. 00 The table is in the main explained by the preceding discussion. It will be noticed that certain small amounts were deducted from the " plant stock " issued to the bankers and to the McCormick and Deering interests, together aggregating $150,000, this amount being divided equally between the Champion and Piano interests. Again, while $3,000,000 of stock was allotted for the acquisition of the Milwaukee Harvester Co., on actual appraisal the value was estab- lished at $3,148,196.66. The excess was issued to the bankers out of the cash stock. The banking interests also raised $10,000,000 of cash capital (including $60,000 paid in by the temporary incor- porators). The remaining cash capital was raised by the various manufacturing interests as indicated in the table. Of the $120,000,000 capital stock of the company, $103,144,660.98, or 86 per cent, was received by the McCormick, Deering, Champion, and Piano interests. The McCormick interests alone received $51,- 148,704.13, or 42.6 per cent, and the Deering interests $41,280,167.85, or 34.4 per cent. These two groups together, therefore, received no less than 77 per cent of the total capital stock. As a matter of fact, while the voting trust technically gave the McCormick, Deering, and Morgan interests equal voice in the management of the company, the predominating influence appears to have been with the McCor- mick interests. POSITION OF THE INTERNATIONAL HAKVESTEE CO. AT ITS ORGANIZATION. At its organization the International Harvester Co. controlled approximately 85 per cent of the total production of harvesting machines in the United States. "^Vhile exact data on production are not available, statistics of sales show that in binders the companies composing the new combination had handled approximately 90 per cent in the business year prior to the merger; in mowers, about 7TS54°— 13 3 10 EEPOET ON THE INTERNATIONAL HAEVESTEE CO. 81 per cent ; and in rakes, about 67 per cent. This is shown by the following comparison of sales in the 1902 season : Sold by International Harvester Co. companies, season of 1902. i Sold by independent companies, season of 1902.2 Binders Number. 180,024 297,880 165,219 Per cent. 90.9 81.2 67.0 Nurnber. 18,128 68,890 •81,376 Per cent, 9 1 Bakes 33.0 1 Number produced in case of the Milwaukee company. 2 Number produced in case of the Osborne company. ■8 Number for independents partly estimated. The important machines were binders and mowers, and combining these it may be safely said that 85 per cent of the business was handled by the new consolidation at its organization. The McCormick company had much the largest production for each class of harvesting machines; the Deering company was second in each case. The Champion concern stood third with respect to binders and mowers, while the Milwaukee had the smallest output for all the principal machines. COMPARISON OF CAPITALIZATIOIT WITH IKrVESTMElTT. As already shown, of the capital stock of $120,000,000 at the time of organization, $60,000,000 was issued for plants, inventories, and similar property, and $60,000,000 for working capital. The appraised value of the property acquired by the $60,000,000 of " plant stock," so called, was $67,000,000, exclusive of good will, and the company claims therefore that it started with a surplu.s of $7,000,000. This surplus was later written off. As a matter of fact, this appraisal of $67,000,000 for the property acquired by the plant stock was in excess of a fair valuation, exclusive of good will. As shown below, the Bureau has arrived at a valuation for this property of only about $49,100,000. The difference between this and the $60,000,000 of stock issued therefor must be regarded as having been issued for promo- tion services and good will. VALUE or PHYSICAL PROPERTIES AND INVENTORIES. In the first instance, it should be noted that the Bureau experienced great difficulty in arriving at a satisfactory valuation of the property acquired by the company. The company has repeatedly asserted that it did not have the original books or records of the constitutent com- panies, and the representatives of some of those companies, moreover, persistently refused or evaded compliance with the Bureau's request that they produce them. Moreover, the available records were in unsatisfactory shape. No such records were secured for the Cham- pion and Piano concerns. For the McCormick, Deering, and Milwau- SUMMAEY. 11 kee companies, however, certain data taken from the books or submitted to the bankers were obtained, and since the property acquired from these three companies together comprised 90 per cent of the total appraised value of the plants and inventories the data secured covering them enabled the Bureau to arrive at a fairly close determination of the total value of this class of property. The results of the Bureau's analysis for the McCormick and Deer- ing concerns are compared with the old book values and with the values adopted by the International Harvester Co. in the following table: McCOEMICK HARVESTING MACHINE CO.: VALUATIONS OP PHYSICAL PROPER- TIES, 1902. Book. Harvester Co. Bureau. Factory real estate Factory buildings and machinery . Agency property Illinois Northern Ey Timber Miscellaneous Inventory $1,341,149.12 5,845,858.10 1,176,306.11 (') 314,950.65 620,764.23 2 10,562,793.59 $4,993,909.00 7,401,692.92 1,571,905.85 2,653,944.31 314,363.86 886,842.39 11,738,822.70 $3,772,032.80 6,895,942.99 1,649,557.71 485,264.71 314,363.86 655, 150. 80 9,818,476.54 Total. 19,761,821.80 29,461,481.03 23,490,789.41 DEEEING HARVESTER CO.: VALUATIONS OF PHYSICAL PROPERTIES, 1902. Factory real estate Factory buildings and machinery. Agency property Ore, coal, iron, and steel Timber Miscellaneous Inventory Total. $670,642.45 2,679,231.38 226,495.26 11,589,093.31 276,567.88 < 356, 773. 01 « 8, 060, 698. 58 13,758,401.87 $1,563,165.63 5,623,041.88 471,898.94 9,511,400.44 1,560,436.36 546,511.66 8,905,059.78 28,081,614.69 $1,260,775.86 6,070,274.73 417,904.31 1,795,688.57 526, 189. 12 516,706.32 7,271,265.98 16,856,704.89 1 Leasehold and equipment not separately booked by McCormick Co.; equipment included apparently in item of factory buildings and machinery (appraised at $53,944.31). ! Includes on hand freight and duty ($231,504.15) as shown by appraisal; not shown in McCormick bal- ance sheet. " Without deduction of purchase-money obligations of $916,753.40, which are deducted in the Harvester Co. and Bureau valuations. *Not including Mann property, appraised at $28,414.89 and at $34,532,68, respectively. 'Includes $240,590.18 on hand freight and duty, not shown in Deering data. In explanation of these tables it should be stated that for most of the property of the two chief vendor companies the organizers of the International Harvester Co. had two appraisals made. Almost invariably the higher of these appraisals was selected by the Inter- national Harvester Co. in making up its valuations. This fact alone is strongly suggestive of a tendency to overvalue. In most cases even the lower appraisals were decidedly higher than the old book valuations. Representatives of the International Harvester Co., 12 BEPOET ON THE INTEElirATIONAL HAEVESTEK CO. however, have insisted that the entries on the books of the prede- cessor companies were not a reliable indication of the true values of the property in 1902. While in the opinion of the Bureau these book valuations certainly appear in some cases to be a far better indication of the real value of the property than are the values adopted by the Harvester Co. itself, nevertheless, in view of the element of doubt, the Bureau as a rule did not use these book valua- tions, but instead established valuations according to its best judg- ment in the light of all available data and after full consultation with the Harvester Co. representatives. In some cases the Bureau adopted . the lower appraisals, while for the Champion and Piano companies all the properties except the inventories have been put in at the appraised values adopted by the International Harvester Co. In some cases collateral evidence sustained the book valuations. The most striking differences between the valuations adopted by the Bureau and those adopted by the International Harvester Co. occur in the ore and timber properties of the Deering interests, in the factory real estate and in the industrial railroad of the McCormick interests, and in the inventories of materials and products for all companies combined. Deering ore properties. — The Deerings purchased about January, 1902, or about seven months before the merger, two ore leaseholds on the Mesabi range, the Hawkins and the Agnew, for $525,000 and $150,000, respectively. Of the purchase price of the Hawkins, $350,- 000 was in notes, making the net investment value at the time of purchase only $175,000. The Deerings expended $46,996.57 on this property for development, etc. It was valued for purposes of consoli- dation, after deduction of indebtedness, at $5,770,000. In the case of the Agnew the entire purchase price, $150,000, was in notes. The Deerings had expended $54,284.18 for improvements, etc. It was valued, after deduction of indebtedness, at $2,193,750. In both cases the notes were still outstanding at the time of transfer to the International Harvester Co. and were assumed by it. In the case of leasehold ore property the current value of the equity is ordinarily expressed by the bonus ; that is, the price at which the leasehold is or can be transferred. The bonus value in the case of the Hawkins mine was about 4 to 6 cents per ton of the estimated deposit, and in the case of the Agnew mine about 3 to 4 cents. The Bureau in this investigation and that of the steel industry found that the aver- age rate of bonus on ten Mesabi leasehold mines, including the HaW' kins and Agnew, which were transferred during 1902, was approxi- mately 3^ cents. The valuations assigned the equity in these mines by the International Harvester Co., however, amounted to 42J cents for the Hawkins per ton of ore in the ground and 37^ cents for the Agnew, or several times the respective bonuses actually paid. SUMMABY. lo" These were absurdly high valuations. The Bureau is satisfied that there were no unusual conditions surrounding the purchase of the Hawkins and Agnew mines which indicated that the value of these leaseholds was exceptional. Eepresentatives of the International Harvester Co. claimed, however, that there had been some increase in the estimated tonnage of the deposit during the interval that the Deerings had held the property. While the Bureau is disposed to regard the price paid by the Deerings as fairly expressing the value in August, 1902, it arbitrarily added $500,000 to that price to make certain not to undervalue this ore. Adding thereto the cost of im- provements, etc., made in the interim, and deducting, as in the ap- praisal, the purchase-money obligations, gives a net value of $776,- 280.75 instead of the appraised value of $7,963,750. It is undoubt- edly true that these leaseholds are to-day worth much more than this sum, but this obviously has nothing to do with their value in 1902. It is important to consider that the bankers who dominated the organization of the International Harvester Co., also organized the United States Steel Corporation, officers of wMch had only a few weeks before in important litigation then pending against that com- pany submitted affidavits to the effect that the value of its ore, tak- ing leaseholds and fee indiscriminately, was $700,000,000, or ap- proximately $1 per ton. Mr. Perkins, to whom was left the appraisal of these ore properties and who was also chairman of the finance committee of the Steel Corporation, was therefore in no position to deny an excessive valuation for this Deering ore. The valuation placed on this Deering ore was vigorously opposed by the McCor- mick interests, and a final book value was reached only after several years of controversy, and after the distribution of the company's stock had been decided upon. Deeeing timber properties. — In the case of the Deering timber properties, there was likewise a very great overvaluation. The most important of these properties, namely, that in Missouri, was acquired by the Deering interests mostly in 1899, at a total cost of approxi- mately $250,000, which was the value entered on their books. This was transferred to the books of the Harvester Co. at about $1,535,000. This valuation, however, was not established before 1905, and then only by a single appraiser, who was largely interested in the timber business. The valuation was admitted by a representative of the Harvester company to be excessive. The timber was almost entirely hardwoods. Information obtained by the Bureau in the course of its investigation of the lumber industry indicated that for hard- woods in this particular locality the advance in value during the three-year period from 1899 to 1902 (that is, during the period that this timber was held by the Deering interests) would on the average 14 BEPORT ON THE INTERNATIONAL HARVESTER CO. be less than 50 per cent. In order to be liberal, however, the Bureau allowed an increase of 100 per cent, giving this timber a valuation of $500,000. This, it will be seen, is about $1,035,000 less than the valuation claimed by the International Harvester Co. McCoKMTCK REAL ESTATE. — In the case of the factory real estate of the McCormick company, the higher appraisal fixed the value at $4,994,000, while the lower appraisal fixed it at $2,550,000. This land was carried on the books of the McCormick concern at only $1,341,000. There was a considerable division of opinion among experts called in to value this property, and a representative of the accountants who had charge of these appraisals, now an official of the Harvester company, while of the opinion that a majority had favored the higher appraisal was not altogether clear on this point. Furthermore, he stated that "inasmuch as the capitalization in- cluded no good will, we concluded that there could be no question about our adopting the higher valuation if the directors so decided." This reference to good will clearly indicates that the higher ap- praisal was excessive. The Bureau regards it as possible that the lower appraisal was a full valuation, but as there was some doubt on this point it allowed the average of the two appraisal values, or $3,772,000. I1J.1NOIS Northern Railway (McCormick) . — The book valuation of the franchise of this company, according to the balance sheet for the year 1903, was only $431,000, and its equipment was appraised at $54,000, which together make $485,000. The International Har- vester Co. adopted a valuation of $2,554,000, of which $2,500,000 was for the franchise alone. It relied for this valuation largely on a statement by J. E. Gorman, at that time general freight agent of the Santa Fe. His valuation, however, was almost entirely based upon the earning capacity of the road, and, furthermore, upon freight divisions which were grossly exorbitant, and which were shortly afterwards (1904) condemned by the Interstate Commerce Com- mission and reduced from $12 a car to $3.50 a car, in accordance with its ruling. Mr. Gorman specifically stated that the road would not be worth anywhere near his valuation if it were owned merely by an ordinary railroad company like the Santa Fe. The evidence of overvaluation in this case was conclusive, and the Bureau simply allowed the value of $485,000 shown above. Inventories. — The inventories of the five combining companies were valued on the International Harvester Co.'s books at $25,548,000. This was admittedly a high valuation. Under the contracts of mer- ger raw materials were to be taken over at market value instead of at cost, and on September 30, 1902, market values were generally high, and for iron and steel products exceptionally so. These ap- praisal inventories were made in great detail, and included consid- SUMMAKY. 15 erable miscellaneous property not ordinarily considered in inventory taking. No allowance was made for depreciation of finished ma- chines nor for old models carried over. The overvaluation of these inventories is, moreover, conclusively proved by the fact that the International Harvester Co. itself in 1904, when making up its ac- counts for 1903, wrote them down from $25,548,000 to $18,155,000, on the specific ground that they were entered too high for " trading purposes." The company, however, claims that the higher valuation of $25,548,000 should be allowed by the Bureau in computing the assets,^ although the company itself wrote off most of the reduction from its surplus. The Bureau's position is, especially as the com- pany was a merger of going concerns, that a valuation which is proper for trading purposes is also proper for purposes of reckoning assets. However, the Bureau, after extended consideration of the company's contentions on this point, is satisfied that the reduction of these inventories to $18,155,000 was unduly severe, and apparently was made because otherwise the company's accounts for 1903 would have shown a loss, although this is flatly denied by the company's representatives. The real values, as nearly as could be established by the Bureau from the rather confused records, aggregated about $22,730,000. In these book valuations, however, no deduction had been made for depreciation of finished machines, which, under the condition of the trade at that time, apparently was considerable. The Bureau made an arbitrary allowance of $1,500,000 for deprecia- tion, thus leaving the net value of these inventories at $21,230,000. These and various other adjustments made by the Bureau in certain items are fully discussed in the text. The net result of the Bureau's readjustment of the valuations was to give a total of $49,117,356.08 as the aggregate valuation of the physical property and inventories acquired by the International Harvester Oo. from the five companies forming the combination, as follows : rrVE PREDECESSOR COMPANIES: VALUATIONS OF PHYSICAL PROPERTIES, 1903. IN. B. — No took values available for Champion and Piano, therefore total book valuations can not be given.] Harvester Co. Bureau. Difference. Factory real estate, buildings, and machinery Agency property Railroads Ore, coal, iron, and steel Timber Miscellaneous ' Inventories Total $23,270,218.14 2,249,882.33 2,579,324.82 9,574,138.79 1,874,800.22 1,979,702.93 25,648,162.42 $20,787,435.09 2,173,539.56 510,645.22 1,858,326.92 839,552.98 1,717,206.00 21,230,650.31 67,076,229.65 49,117,356.08 $2,482,783.05 76,342.77 2,068,679.60 7,715,811.87 1,035,247.24 262,496.93 4,317,512.11 17,958,873.57 1 For Milwaukee company includes net working capital other than inventory after deducting $148,196.08 for plant stock excess. 16 EEPOBT ON THE INTERNATIONAL HAEVESTEE CO. The Bureau believes that while this valuation might be somewhat reduced if all the facts were available, any adjustment which would be made would not be of decisive importance. This maximum valu- ation of $49,100,000 compares with $60,000,000 " Plant stock " issued for such property and for promoters' expenses and services. This, as already noted, leaves a difference of, roughly, $10,900,000 to be represented by intangible considerations, such as good will. GOOD WILL. The Bureau has not attempted to value any good will which the constituent concerns of the consolidation may have brought into the merger. In the original contracts on which the combination was based it was agreed that good will should be valued at the sum of the profits of the two preceding years plus an additional 10 per cent. By this method of valuing good will, which was more or less commonly used among manufacturers, the total value of the good will was placed at about $20,800,000. If good will be allowed for the Mil- wauliee company on the same basis, the total good will of the combi- nation would be about $21,300,000. Without indorsing this valuation, the Bureau is nevertheless of the opinion that there was a substantial good-will value brought into the merger. The McCormick, Deering, and Milwaukee companies, as already shown, made a liberal rate of profit while operating inde- pendently. This fact, together with the fact that their business had been long established, and that their machines were always sold under brand name, indicates that these concerns must have had a large good, will. Against this there should be set the fact that the harvesting- machine business had apparently been somewhat overdone prior to the merger, and that there was some danger of a loss of good will as the very result of the formation of a combination or trust like the International Harvester Co. The company claims, however, that its accounts contain no allow- ance for good will. WORKING CAPITAL. The stock issued for working capital, so far as the vendor compa- nies are concerned, was paid in chiefly through the collection of bills receivable of the principal constituent companies. About $10,000,000 of this cash stock was subscribed for at par by the bankers. The Bureau made an extended investigation of the accounts relating to this provision of working capital, and so far as these may be relied upon they indicate that the full amount of $60,000,000 was actually paid in in cash. Eepresentatives of the International Harvester Co. moreover, repeatedly declared that there was no deduction or allow- ance from this cash payment, but that the full amount was actually paid in as represented. SUMMAEY. 17 SUBSEQUENT ACQUISITIONS AND EXTENSIONS. Immediately after its organization and almost continuously there- after the International Harvester Co. pursued the policy of ex- panding its control over the farm-machinery business, not only in harvesting machines but also in various other branches. This process may be divided into three parts: (1) Acquisition of compet- itors in the harvesting-machine business; (2) acquisition of con- cerns making other lines of farm machinery; and (3) construction of new plants in the United States and in various foreign countries for the manufacture of harvesting machines and other farm ma- chinery. Shortly after its organization, namely, in January, 1903, it ac- quired secret control of D. M. Osborne & Co., of Auburn, N. Y., the most important manufacturer of harvesting machines not originally taken into the combination. This secret control was maintained for nearly two years. During this period the Osborne company was operated and advertised as an independent concern, and these rep- resentations were supported by its manager in sworn statements that it was an independent company. The International Harvester Co. claims that this was done to enable the original owners to collect cer- tain obligations due them and that it was done at their request. While the Osborne company had a valuable line of tillage imple- ments, its chief importance lay in the production of harvesting ma- chines, in which it had an extensive foreign trade. In selling this concern the two largest active stockholders of the Osborne company (T. M. Osborne and Edwin D. Metcalf ) covenanted with the Inter- national Harvester Co. that they would refrain from engaging inde- pendently in the same business for a period of ten years. In a similar secret manner the International Harvester Co., in 1903 and 1904, acquired control of several other concerns which com- peted in the manufacture of harvesting machines and twine, namely, the Minnie Harvester Co., of St. Paul, Minn, (harvesting machines) ; the Aultman-Miller Co., of Akron, Ohio (harvesting machines and twine) ; and the Keystone Co., of Sterling, 111. (harvesting machines and hay tools) , and operated them without disclosing such control for various periods. In the case of the Minnie Harvester Co. it is claimed that this method was used merely to facilitate the liqui- dation of the company. Negotiations were also had with a number of other competing makers of harvesting machines with a view to acquiring their prop- erties or business, in whole or in part. Among these were the Walter A. Wood Mowing & Reaping Machine Co., of Hoosick Falls, N. Y. ; the Acme Harvester Co., of Peoria, 111.; and Massey-Harris Co. (Ltd.), of Toronto, Canada. These negotiations, however, were 18 EEPOBT ON THE INTEBNTATIONAL HAEVESTEE CO. not consummated. Massey-Harris Co. was one of the companies «,pparently under consideration as a desirable acquisition at the time the merger was being arranged, and when negotiations for its pur- chase finally fell through the International Harvester Co. proceeded to enlarge the factory already begun in Canada. Several other concerns were apparently offered to the Interna- tional Harvester Co., or proposals made with reference to their ac- quisition by that company, including Adriance, Piatt & Co., of Poughkeepsie, N. Y. ; and the Johnston Harvester Co., of Batavia, N. y. These negotiations occurred during the period 1903-1905, but the offers or proposals were ultimately declined by the International Harvester Co., for reasons which do not appear. EXTENSIONS INTO NEW LINES. Aside from these acquisitions of competing concerns, the Interna- national Harvester Co. has greatly expanded its business by branch- ing out into new lines of manufacture or sale. Among the most im- portant lines which the company entered in this way were manure spreaders, wagons, plows, and seeders. Here again expansion was accomplished in part by the acquisition of concerns already organ- ized. In 1906 two plants for the manufacture of manure spreaders, operated by the J. S. Kemp Manufacturing Co., were acquired, one at Newark Valley, N. Y., and the other at Waterloo, Iowa, the latter being leased. In 1904 the company acquired the Weber Wagon Co., and in the next year, moreover, entered into a selling arrangement with the Bettendorf Axle Co., of Davenport, Iowa, for the sale of all its output of steel wagons. Still again, about 1909, the company en- tered into a contract for the sale of the plows of the Parlin & Oren- dorff Co., of Canton, 111., in Canadian markets only, and somewhat later, it made a similar contract with the Oliver Chilled Plow Co., of South Bend, Ind., for the sale of the latter's plows in Canada. It also acquired, in 1910, an interest in this company's new Canadian plow works. Very recently — namely, in 1912 — the International Har- vester Co. made an arrangement for the distribution and sale of the -entire output of the Richmond, Ind., plant of the American Seeding Machine Co. At a much earlier date the International Harvester Co. had considered the advisability of obtaining a large stock in- terest in the latter company, but finally decided not to do this be- cause it deemed the price excessive. By thus extending its business into a number of new lines the In- ternational Harvester Co. not only increased the extent of its busi- ness, but where it was thus provided with satisfactory goods, it was able to accomplish their sale more successfully than some of the former owners, partly on account of its larger financial resources and elaborate selling organization, and also in part on account of SXTMMAEY. 19 the pressure it was able to exert to induce dealers to handle these new lines. To a considerable extent such dealers were not allowed to handle its harvesting machines (in which it had obtained, as already shown, a substantially monopolistic position by means of combina- tion), unless they would take these new lines also. It is apparent, therefore, that not only did the company's strong position in the har- vesting-machine business facilitate its entrance into new lines, but also that these new lines in turn afforded a further means of main- taining its position in the harvesting-machine business itself. CONSTRUCTION OF NEW PLANTS. The International Harvester Co. extended its business in the manu- facture of harvesting machines, and also in the production of new lines by building new plants, both in the United States and in foreign countries. Some of the old harvesting-machine plants were remodeled and used for making new lines of farm machinery. The most important new plant built in the United States was a large tractor plant at Chicago. The company, furthermore, greatly en- larged its plants for the manufacture of iron and steel. The most important new construction of the company was in for- eign countries, where large factories have been built for the manu- facture of harvesting machines and other farm machinery, namely, in Canada, Sweden, France, Germany, and Russia. ORGANIZATION OF THE INTERNATIONAL HARVESTER CO. OF AMERICA. One important feature of the policy of the combination was the use of the Milwaukee Harvester Co. as a selling agency for the International Harvester Co. of New Jersey. For this purpose the name of the Milwaukee company was changed in September, 1902, to International Harvester Co. of America; the capital stock, fixed at $1,000,000, is all held by the New Jersey company. The officers and directors of the America company were until 1910 all officers or direc- tors of the International Harvester Co. of New Jersey. Apparently, a separate organization was adopted in order to avoid heavy taxa- tion and the delay and difficulty of procuring new licenses to do business required in various States. Such licenses were often pro- hibited in case the foreign corporation applying was a trust or com- bination in restraint of trade. REARRANGEMENT OF CAPITALIZATION. In 1907 the International Harvester Co. divided its capital stock of $120,000,000 into $60,000,000 of preferred and $60,000,000 of com- mon stock. Furthermore, in 1910 a stock dividend of $20,000,000 of common stock was declared from surplus, making the capital stock of the company $140,000,000, consisting of $60,000,000 pre- ferred and $80,000,000 common. In this connection it should be noted that the voting trust was finally dissolved in August, 1912, and the 20 EBPOKT ON THE INTEKNATIONAL HAEVBSTEB CO. stock distributed among the holders of the stock trust certificates. The great bulk of the stock of the company has throughout been closely held by a comparatively few interests, who have also been active in the management of the concern. It will be recalled that the McCormick interests had approximately 43 per cent of the stock at organization and the Deerings about 34 per cent. On January 29, 1913, the directors of the International Harvester Co. announced that they had transferred to a new concern, the International Harvester Corporation, all of the foreign plants and all of the foreign business, also certain domestic plants engaged in the manufacture of the so-called new lines, together with certain assets pertaining thereto. This company is capitalized at $70,000,000, consisting of $30,000,000 of 7 per cent preferred stock and $40,000,000 of common stock. The present International Harvester Co., the name of which it is proposed shall be changed to International Har- vester Company of New Jersey, will retain the remaining assets, and its capital stock will be reduced to $70,000,000, likewise con- sisting of $30,000,000 of 7 per cent preferred and $40,000,000 of common. For the $70,000,000 stock of the present company can- celed, the stockholders will be entitled to receive cash or a pro rata distribution of the stock of the new International Harvester Corpo- ration. This action by the company is admittedly taken in view of the pending dissolution suit of the United States Government against the company. This rearrangement of capitalization was approved by the stockholders on February 10, 1913. If intended as part of a plan of disintegration the Bureau regards this method of division as very unsatisfactory. PRESENT POSITION OF THE INTEBNATIONAL HARVESTER CO. The original monopolistic position of the International Harvester Co. in harvesting-machine lines had been substantially maintained up to the close of 1911, as the following table shows : PROPORTION OF THE HARVESTING-MACmNE BUSINESS OF THE UNITED STATES CONTROLLED BY THE INTERNATIONAL HARVESTER CO. IN 1911.1 Machines. Manu- factured in United states. Sold in United States. Grain binders Per cent. 87.0 76.6 72.0 Per cent. 87.2 74.6 68.0 Mowers Rakes 1 Percentages based on practically complete returns for binders and mowers, but partly on estimates for ralces for which the returns covered about 93 per cent of the total business. For the new lines of farm machinery it is not possible in most cases to show the precise position of the International Harvester Co., but SUMMARY. 21 in several of them it has acquired a very considerable proportion of the trade. For spreaders the Bureau has obtained statistics covering a large majority of the independent production and sale in the United States, and has made estimates for the remainder which it is satisfied are approximately correct. A comparison of these figures with those of the International Harvester Co. shows that the company has about 65 per cent of the 1911 production in the United States and about 50 per cent of the sales. A comparison for disk harrows on a similar basis, for which the Bureau also had returns for a substantial majority of the total independent business, indicates that the Harvester Co.'s proportion of the number produced was at least 43 per cent, and its proportion of the number sold at least 37 per cent. For certain other lines also the International Harvester Co. has ac- quired a large proportion of the business, but satisfactory data are not available to show its percentage. In the case of wagons, the International Harvester Co. had nothing at the start, but according to the best estimates that can be made by the Bureau, had in 1911 about 15 per cent of the number manufactured in the United States and over 13 per cent of the number sold, although the total produc- tion of farm wagons in the United States has decreased in recent years. It is apparent, therefore, that the International Harvester Co. not only has maintained a high degree of monopoly in the harvesting- machine business proper, but has also become an important factor in several new lines. A noteworthy recent development of the farm-machinery business has been the expansion of several old concerns, some of which had not previously engaged in the harvesting-machine business. This devel- opment has occurred particularly with respect to certain large con- cerns making plows and a variety of other lines, such as Deere & Co., the Emerson-Brantingham Co., and the Moline Plow Co., while certain other important concerns, such as the J. I. Case Threshing Machine Co. and M. Eumely Co., according to reports, have contem- plated an expansion into the harvester business. The expansion of these various concerns is one of the most signifi- cant features of the farm-machinery industry to-day, and one involv- ing possibilities of great importance. It is important to note that these new developments have been made on the principle of carry- ing a so-called full line of farm machinery, although it should be understood that no company, not even the International Harvester Co., has a really complete line. PROFITS OE THE I1TTEE.1TATI0NAL HARVESTER CO. The chief feature of the profits of the International Harvester Co. is the increase from a low rate in the early years of the organization to a rather high rate in recent years, averaging about 12| per cent 22 REPORT ON THE INTERNATIONAL HARVESTER CO. on the net assets, as computed by the Bureau, for the period 1909- 1911; figures for the year 1912 are not available. It should be explained that the Bureau met with exceptional difficulties in verifying and analyzing the accounts of the Harvester Co., because of the fact that the accounts were for several years kept in an extraordinarily loose manner, and that the company, accord- ing to the statements of its comptroller, had actually made no com- plete and authentic balance sheets prior to that for December 31, 1906. Furthermore, the opening entries in respect to certain ac- counts, at least, were not definitely established by the International Harvester Co. until it made up this 1906 balance sheet during the first part of 1907. At the request of the Bureau, the company pre- pared balance sheets for the earlier years. In computing the net profits the Bureau made certain revisions both of the reported assets and profits, particularly with respect to the opening entries on the books and the treatment of certain reserves. As already noted, the International Harvester Co. at an early date in its operations readjusted the opening entries of inventories, reduc- ing them from about $25,550,000, the figure at which they were ap- praised, to approximately $18,155,000, on the ground that the ap- praisal valuations were altogether too high for trading purposes. The Bureau, it will be recalled, does not accept this treatment, main- taining that the same valuations should be used both for figuring the investment and for computing profits. The Bureau established these inventories, after an arbitrary allowance of $1,500,000 for de- preciation, which in its opinion is liberal, at about $21,230,000. The Bureau also treated differently certain expenses, amounting to $1,780,000, in the fall of 1902, charging these against the profits. The effect of these changes is chiefiy shown in the year 1903 (this really covering a period of 15 months), for which the Bureau's computation shows a total profit of, roughly, $797,000, whereas the company figures a profit of $5,641,000. The Bureau also made certain revisions of the reserve accounts of the company, particularly the contingent reserve to cover deferred profits on forward sales, the special maintenance reserve, and the de- preciation and extinguishment reserve. The first of these reserves amounted at the end of 1911 to $2,500,000. The Bureau takes the ground that while this is a provision which, as a matter of prudence, the company might set up, it does not really represent a deduction from profits, but is merely surplus in another form. In the case of the company's special maintenance reserve, which amounted at the close of 1911 to approximately $1,340,000, the Bureau is of the opinion that rather more than $1,000,000 really represented SUMMARY. 23 profits, inasmuch as to this extent the expenditures had not yet been iucurred or any liability definitely accrued. Owing to the excessive valuations placed by the company on its ore properties, the extinguishment charged therefor was excessive, and consequently the Bureau restored a large portion thereof to earnings. In this connection, as an interesting side light on the company's ore valuations, it may be noted that in the first year of its operations the company charged an extinguishment of 10 cents per ton on ore mined from the Hawkins leasehold, and the same amount per ton on that mined from the Agnew, whereas the extinguishment subsequently charged amounted at the maximum to 52^ cents on the Hawkins and 37^ cents on the Agnew. Certain other minor depreciation charges which the Bureau regarded as unwarranted, and which had been charged against the property account, were restored to property and to earnings. On the other hand, certain amounts charged by the company to in- surance and pension funds, parts of which, in the opinion of the Bureau, might properly have been restored to earnings if readily ascertain- able, were accepted, as shown by the company's books. The collec- tion expense reserve of $1,000,000 on receivables and contingent reserves for bad debts, amounting to over $3,000,000, were likewise accepted by the Bureau. KATE OF PROFITS ON INVESTMENT, AS COMPUTED BY BUREAU. The net assets and profits of the company and the rate of profit on the net assets for 1903-1911, as thus computed by the Bureau in both cases, are shown in the following table. The rates are com- puted on the net assets at the beginning of each year; this is the method adopted by the company in computing the rates on capital and surplus. EATE OF NET EARNINGS OF THE INTERNATIONAL HARVESTER CO. ON NET ASSETS, EXCLUSIVE OF GOOD WILL, AS COMPUTED BY THE BUREAU, BY YEARS, 1903-1911. Year ending Dec. 31— Net assets, ex- clusive of good will. Net earnings. Profit on assets at begin- ning of year. Year ending Deo. 31— Not as.'sets, ex- clusive of good wiU. Net earnings' Profit on assets at begin- ning of year. 1902' $109,117,356.08 106,314,179.00 107,190,624.97 109,907,909.12 112,514,855.99 116,542,572.83 Per cent. 1908.... 1909.... 1910.... 1911.... $122,622,298,85 134,781,142.61 144,589,739.95 $10,179,726.02 16,458,843.76 17,208,697.34 16,038,703.28 Per cerU. 8.73 1903 1904 1905 1796,822.92 5,682,445.97 7,511,284.15 7,406,946.87 8,227,716.84 '0.73 S.34 7.01 6.74 7.31 13.43 12.77 11.61 Total. 90,111,087.15 8.47 1907 » Oct. 1. 2 This covers 15 months, hut no change has heen made for this period nor for the average of all the years on that account. This is in harmony with the company's method of treatment. For an explanation ol the exceptionally low earnings of 1903, see text. 24 EEPOET ON THE INTEBNATIONAL HAKVESTEB CO. From the foregoing computation of the Bureau it appears that the average net earnings on the net investment of the company for the nine years and three months ended December 31, 1911, were 8.5 per cent. The rate of earnings for 1903 (really 15 months) was less than 1 per cent, and only in this year does the Bureau's percentage differ very markedly from that of the company ; the reasons for this differ- eiice have been already fully explained, and relate chiefly to the different method of handling the inventory. Leaving this excep- tional period out of consideration the rate of earnings ranged from 5.3 per cent in 1904 to 13.4 per cent in 1909. The average rate of earnings for the last three years, namely, 1909 to 1911, inclusive, was 12.5 per cent. It will be noted that the rate of profit for 1911 was about 2 per cent lower than the maximum in 1909. The company claims that on account of the reduction of prices beginning in 1912 its rate of profit will prove to have been lower in that year, but it has not as yet completed its figures for this period. In the foregoing computations of profit the net assets of the com- pany as revised by the Bureau have been used without any allowance for good will. In view of the difficulty of establishing a fair valu- ation for the good will, which might change from year to year, and furthermore in view of the fact that the company makes no entry for good will on its books, any attempt to compute a rate of earnings which would include this would be more or less problematical. Had any considerable allowance been made in the net assets for good will, the rate of profit would necessarily have been lower. Hence, while the profits of the International Harvester Co. on the average for the whole period of its operations have not been exces- sive, the profits for the three-year period, 1909 to 1911, inclusive, have been distinctly high. In judging of the reasonableness of this rate of profit it is proper to consider the fact that the risk of the company's business is comparatively small, owing to its world-wide character, which to a large degree is an insurance against the effects of local disturbances of business prosperity. It is also important to bear in mind the fact that the business rests in part on a monopolistic basis, which not only tends to reduce the element of risk, but also makes it desirable from a public standpoint that the rate of profit should not be higher than a reasonable return to the capital invested. For purposes of comparison, the net earnings as computed by the International Harvester Co. itself and the ratio of these earnings to the capital stock and surplus are shown in the table following. , MMAEY. 25 RATE OF NET EARNINGS OF INTERNATIONAL HARVESTER CO. ON CAPITAL STOCK AND SURPLUS, AS SHOWN BY COMPANY'S ACCOUNTS, BY YEARS, 1903-1911. Year. Net eaminp. Rate of net earnings to capital stock; and surplus at beginning of year. Year. • Net earnings. Rate of net earnings to capital stock and surplus at beginning of year. 1903 $5,041,180.01 5,058,634.68 7,479,187.30 7,346,947.32 8,080,457.51 8,885,082.13 4.70 4.04 0.08 6.85 6.31 0.73 1909 114,892,740.21 16,084,819.19 16,621,397.89 10.89 1904 1910 10.91 1905 -.. 1911 9.96 1906 Total 1907 89,590,946.90 7.62 1908 EFFECT OF BTJEEATJ S REVISION OF ASSETS AND EARNINGS ON SURPLUS. In the course of operations a large part of the net earnings of the company were left in the business and not distributed in dividends, so that by the end of 1908 all original deficiency in physical assets, compared with capital stock, according to the Bureau's computations, had been wiped out and a surplus balance established of $2,522,- 298.85. In 1910 the capital stock was increased, as already stated, to $140,000,000, and at the end of 1911 a surplus existed, according to the Bureau's computations, of $13,028,443.23, exclusive of good will. This surplus may be compared with the surplus shown by the balance sheet of the company for December 31, 1911, of $23,390,- 946.90, which is also exclusive of good will. The difference is the net result of the Bureau's reduction of the assets on the one hand and its reduction of the reserves on the other. The Bureau added nothing for subsequent appreciation which would be necessary if a fair appraisal were made at the present time. J PROFITS IN PARTICULAR LINES AND IN EXPORT TRADE. The best test of reasonable prices is found in profits, particularly if these can be shown for different branches of the business. A noteworthy feature of the business of the company is that the rate of profit, whether on sales or on investment, for the highly monopolistic lines — grain, grass, and com harvesting machines — is very much higher than the corresponding rates for several of the important new lines, such as wagons and spreaders, where the com- pany encounters greater competition, and also higher than the rate on twine. Thus, the rate of return on wagons, in which the com- pany's percentage of the business done is as yet relatively low, is admittedly much less than in the monopolistic lines; and even in manure spreaders, where the company does approximately one-half the business in the United States, the profits are comparatively low, probably due to the aggressive sales policy adopted by the company. 77854°— 13 4 26 BEPOET ON THE INTEENATIOKAL HAEVESTEB CO. For example, the company's own statements show that its profits on grain machines in the United States in the years 1910 and 1911 averaged over 20 per cent on net proceeds of sales (not investment) , while the profits on farm wagons and manure spreaders in the United States (again based on net proceeds of sales) were slightly less than 10 per cent. A similar disproportion, moreover, is found in the rates of profit on investment as computed by the company. For twine the rate of return on net sales in 1910 and 1911 was only a little above 7 per cent, while for 1910 alone it was less than 2 per cent (again on net sales), but this low rate was due to excesptionally large purchases of fiber by the company at high prices during 1909. It may be noted that the rate of profits on wagons alone is admittedly much lower than that on manure spreaders; the company claims, moreover, that the rate on wagons is lower than on any other line manufactured by it. Comparing the foreign business of the International Harvester Co. with the domestic business, there are comparatively few excep- tions, apparently, to the statement that the prices to the retail dealer or to the farmer are higher abroad than in the domestic market. This is due largely to the fact that the business in foreign markets must bear a large expense for freight and generally for duty, while the selling expense likewise is often high. The only proper basis of comparison for the returns to the company is found in the net price received at the factory in the United States, due account also being taken of the extra cost of packing or other extra costs of machines made for export. The company maintains that its net returns on this basis are higher for the export than for the domestic trade, but its own accounts show that this is by no means universally the case. PRODUCTIVE EFFICIENCY AND FIlTAlTCIAIi RESOURCES. Cost of pkoduction. — The International Harvester Co., generally speaking, has an advantage over independent manufacturers with respect to the cost of production of its machines. This is espe- cially marked in the case of grain binders, the most important of the harvesting machines. Thus, the average factory cost of binders for the International Harvester Co. at its domestic plants for the two years, 1910 and 1911 combined, was $56.32, and ranged from $54.11 to $73.78 at the different plants. While the company produces most of the iron and steel required — on which its subsidiary steel company makes a very large profit — the cost of these materials to its im- plement plants is based on prevailing market prices, so that its costs in this respect are comparable with those of the independent pro- ducers. For the four independent companies that reported to the Bureau the cost of their binders, the average factory cost for the SUMMAEY. 27 same period as computed from the data reported by them was $70.83. There was a wide range of cost among the four independent concerns, but only two of them showed a materially lower cost than the highest cost of the International Harvester Co. While differences in the style of construction of different niakes of binders undoubtedly ex- plain some of these differences in the cost, the chief reasons therefor were differences in economy of production, in which the Interna- tional Harvester Co. has a large advantage in its great volume of output, at least at its McCormick and Deering plants. The output at these plants, however, was equally large before the merger. These figures of factory costs do not take account of general and miscellaneous expenses, nor of a much heavier selling expense which for binders sometimes amounts to $20 or even $25 per machine. General and miscellaneous expenditures were relatively much heavier for the independent companies than for the International Harvester Co., chiefly on account of great differences in volume of business, though possibly due also to differences in methods of keeping cost accounts. They may properly be grouped with manu- facturing costs for the purpose of this comparison. If these ex- penditures are prorated over the cost of production, both for the International Harvester Co. and the independents, the average cost of binders for the International Harvester Co. becomes $58.57, and for the four independents $76.18. A proper understanding of these relations of cost of production to the competitive position of the independent binder manufacturers requires consideration also of the question of selling expense. The selling expense per binder for the International Harvester Co. is considerably higher than the average selling expense of the inde- pendents, and this fact partly compensates the latter for their higher average costs of production. Nevertheless the margin of profit be- tween prices and cost of production and selling expense combined IS markedly lower for the independents than for the International Harvester Co. Apparently the relatively high selling expense of the International Harvester Co. is due to the policy of maintaining a very elaborate selling organization, which gives it a strong hold on the trade and helps to secure to it a large volume of business. It appears to be the company's policy thus to maintain an expensive selling organization to push the sale of its goods rather than reduce prices on some of its most important lines, particularly harvesting machines. Similarly in the case of mowers and rakes, for which the Bureau had sufficient data for comparing the costs of the International Har- vester Co. with those of independents, it was found that the average cost of manufacture at the plants of the International Harvester Co. 28 EEPOET ON THE INTEENATIONAL HAEVESTEK CO. for the years 1910 and 1911 combined was lower than the average cost of the independents reporting. Prorating general and miscel- laneous expense over the factory cost of these machines the advantage of the International Harvester Co. in this respect over the inde- pendents was even greater. Again for some of the newer lines, data secured by the Bureau indicated some advantage for the International Harvester Co. in cost of production, but the data were not sufficient to be conclusive. The foregoing comparisons of production costs indicate one of the most important advantages enjoyed by the International Har- vester Co. The striking advantage it has with respect to cost of pro- duction of binders, taken in connection with the great importance of this machine in the farm- implement trade, is one of its chief elements of power. Financial resources. — Another chief element of strength of the International Harvester Co. is the possession through combination of large financial resources. This is reflected principally in three ways: First, the ability to reap the advantages of large-scale produc- tion already described; second, the ability to carry a full line and maintain an elaborate selling organization ; third, the ability to grant long terms of credit. Most of the concerns which compete with the International Har- vester Co. are not full-line concerns. Those which make harvesting machines in most cases do not produce other lines to an important extent. Again, most of those which make other kinds of farm machines have only a few lines, and sometimes only one. On the other hand, there are three large full-line companies, the operations of which, in this connection, are compared with the International Harvester Co., namely, Deere & Co., Emerson-Brantingham Co., and Moline Plow Co. Of these three full-line houses, Deere & Co. was distinctly the most important, from the point of view of financial resources, in 1910 and 1911, but even this company was not in the same class with the International Harvester Co. in this respect. Those competitors of the International Harvester Co. which did not carry a full line were, in most instances, small. The advantage of relatively low costs of manufacture has already been shown above, and undoubtedly rests chiefly in large-scale pro- duction. Except possibly for the three full-line companies mentioned above, the International Harvester Co. enjoyed a great advantage with re- spect to the distribution of similar kinds of implements, in so far as the methods of distribution employed were similar. There are generally great differences in the selling expense of different kinds of machines, owing to different methods and customs regarding sale SUMMAEY. 29 and distribution, these being partly due to the technical require- ments of the business. Custom has generally established a more elaborate system of distribution for harvesting machines than for tillage implements, while the character of the goods themselves and the necessity for " setting up," etc., in the case of harvesting ma- chines involves a greater expense than for most other lines. While nearly all companies engaged in the distribution of certain harvest- ing machines utilize an elaborate organization for distribution, full- line companies with great financial resources are, to a considerable extent, able to apply the same system to other lines, such as manure spreaders, engines, and wagons. Wliile this undoubtedly increases their actual outlay for selling expense per unit in these lines, in so far as they eliminate the jobber, they obtain thereby a higher price, generally, for the goods. Moreover, they are thereby enabled to obtain a much stronger hold on the trade; for example, by selling directly to the local dealer instead of to the jobber, and, further- more, by getting in direct contact with the farmer, through the employment of canvassers and other salesmen. The granting of long terms of credit was originally developed in the harvesting-machine industry on account of the general inability of farmers to purchase expensive machines, like binders, for cash, but it has been continued, to a certain extent at least, as a special means of getting trade by those concerns which had ample financial resources. Moreover, it has been extended by them to other lines of farm implements of a less expensive character, in which this cus- tom was not developed until a comparatively recent time. The International Harvester Co., which, through combination, acquired extraordinary financial resources, not only perpetuated the system of selling harvesting machines on long terms of credit, but, more conspicuously than any other concern, has extended this system to its new lines. This system of selling these new lines on long terms of credit has made it dilEcult for the manufacturers of such lines, except possibly a few full-line concerns, to meet its competi- tion, and is the principal complaint which they make regarding the present conditions of business. Representatives of the International Harvester Co. claim that its leading competitors grant equally long credits and declare that its policy is to develop as far and as rapidly as possible the system of cash sales, that is, cash payment in the same season as the goods are purchased, and that discounts for cash are allowed for this reason. While in some localities there has been a great increase in the proportion of cash sales, nevertheless, taking the business of the International Harvester Co. as a whole, it appears that the proportion of sales on long credit (i. e., one or more years) to total sales was higher in 1911 than at the beginning of business. 30 EEPOET ON THE INTERNATIONAL HAEVESTEK 00. This increase in the proportion of credit sales is partly due, at least, to the application of long credits to the new lines of goods for which they were formerly uncommon. Thus, comparing 1904 (no data for 1903 being available) with 1911, the proportion of credit sales to total sales in the United States was 31.1 per cent in 1904, while in 1911 it had increased to 35.8 per cent. Inasmuch as there was a decrease in the harvesting-machine business as compared with the total business, this fact indicates the extensive use of credit in new lines. Furthermore, while notes maturing in one year showed a decrease as between 1904 and 1911, namely, from 34.7 per cent to 28.9 per cent, as compared with the total of notes received in those years, the two- year notes showed a large increase, namely, from 48.0 per cent to G4.2 per cent. On the other hand, the notes maturing in three and four years showed marked decreases, namely, from 14.4 per cent to 6.5 per cent and from 2.9 per cent to 0.4 per cent, respectively, from 1904 to 1911. It is evident, however, that these long-term notes covered but a small proportion of the total business done on credit. The International Harvester Co. is enabled to pursue this policy, as already stated, because of the large resources it acquired through combination, and furthermore, it has been aided therein by financial support of an exceptional character through its connection with J. P. Morgan & Co., its fiscal agents. The company has also secured large loans from John D. Rockefeller, father-in-law of one of the McCormicks. Thus far it appears that instead of sharing the advantages of its superior efficiency and exceptional resources with the consumer, the company has generally used these advantages in connection with its monoiiolistic position in harvesting machines to extend its operations in new lines. COMPETITIVE METHODS OF INTERNATIONAL HABVESTER CO. In discussing the competitive methods of the company it should be recognized that some pi-actices which might be regarded with indifference if there were a number of competitors of substantially equal size and power may become objectionable when one competitor far outranks not only its nearest rival, but practically all rivals com- bined, as is true of the International Harvester Co. so far as several of its most important lines are concerned. It should also be observed that during the first two years of its operations the company was badly organized, and that instead of a harmonious policy, " divisions " corresponding to the five old con- cerns acquired were maintained, and that under this arrangement various objectionable practices prevailed, some of which appear to have been subsequently abandoned. At the same time, there has con- SUMMARY. 31 tinued to be a rather general complaint among dealers, and competing manufacturers as well, against the methods employed by the company. In the course of the Bureau's investigation, its agents visited over 800 retail dealers at some 600 towns scattered through 27 States. This probably represented fully 75 per cent of the total number of active dealers at these particular points. Effort was made to secure as representative statements as possible. The results were approxi- mately as follows : Twenty-five per cent favorable ; 20 per cent non- committal ; 50 per cent specifically unfavorable ; 5 per cent unfavor- able without specific complaint. Naturally it is to be expected that a considerable portion of those doing business with a large corporation will be favorably disposed toward it. Indeed, this should be the normal condition. The fact, therefore, that one-half of the total number of dealers interviewed made some specific statement involving adverse criti- cism of the methods of the company shows beyond doubt that there must be some substantial ground for criticism; a number of these complaints, however, in the opinion of the Bureau, were unimportant. In addition to dealers, the Bureau's representatives saw the com- peting manufacturers and their general agents and also various implement jobbers at the chief jobbing centers. Among such objectionable competitive methods here discussed are : (1) Maintenance of bogus independent companies in the early years of the company's operation. (2) Attempts to force dealers carrying its harvesting machines into carrying additional lines or certain International lines exclu- sively. At an earlier date the contracts of the Harvester company contained an exclusive clause for harvesting machines. (3) Efforts to secure an undue proportion of desirable dealers in a given town by giving only one of its several brands of harvesting machines to a dealer, thus tending to restrict the outlet for competi- tive goods. (4) Use of " suggested price " lists, tending to influence the final retail price; earlier the contracts themselves provided for fixing of retail prices by the company. (5) Occasional discrimination in prices and terms. (6) Misrepresentations by salesmen regarding competitors. PRETENDED COMPETITION IN EARLY YEARS. So far as the maintenance of bogus independent companies is con- cerned, this has already been referred to in discussing the acquisi- tions of the Osborne, Minnie, Aultman-Miller and Keystone concerns. The impropriety of continuing the operation of these companies under the old names, without disclosing the real ownership, after they had 32 KEPOET ON THE INTEENATIONAL HAEVESTEB CO. been acquired by the International Harvester Co., is obvious. Some of these concerns were openly advertised as independent. It should be repeated that in some cases it is alleged that the ownership was concealed merely to facilitate the liquidation of the old concern, but the Bureau does not regard this as a justification of the practice. COERCION or DEALERS TO HANDLE INTERNATIONAL HARVESTER CO. GOODS. ExcLTJSiVE CONTRACT. — In 1905 and previous years the Harvester company's usual commission-agency contract contained substantially the following clause : Said agent especially agrees not to accept the agency for or to be interested in the sale of any grain binder, header, corn binder, husker and shredder, reaper, mower, stacker, sweep rake, hay- rake or hay tedder, other than those manufactured by the Inter- national Harvester Company, either directly or indirectly, nor to permit anyone acting for him as employee, agent, or partner, so to do while acting as agent for the said company under this contract, and said agent agrees to pay said company on demand as liquidated damages, twenty-five dollars for each grain binder, header, or corn binder; fifty dollars for each husker and shred- der; ten dollars for each mower, reaper or stacker; five dollars for each sweep rake, hayrake, or hay tedder sold in violation of this paragraph of this contract. It is obvious that the use of this clause in the contract, even if not enforced, would have a powerful effect upon most dealers. It is indicative of the real intent of this clause that it was elimi- nated from the contract after 1905, when antitrust proceedings against the company were threatened in several States. In fact, in Texas the use of this clause was discontinued as early as October, 1902. On the other hand, it should be noted that this clause was cus- tomary among harvesting-machine companies prior to the merger and has been used by some other companies in the implement trade even since it was abandoned by the International Harvester Co. It is especially objectionable, however, when used by a concern which has a monopolistic position. ExcLusrvTE HANDLING. — After the elimination of the exclusive clause from dealers' contracts, other means were not infrequently employed to secure the same end. In a considerable number of in- stances reported to the Bureau, salesmen of the International Har- vester Co. endeavored to prevent the handling of a competitor's line by threats to discontinue the dealer's agency for the International Harvester Co.'s machines, and in some instances canceled or discon- tinued the dealer's agency when he insisted upon handling an inde- pendent line. The company asserts, however, that such practices are contrary to its policy. SXJMMAKY. 33 " Full-line " forcing. — This complaint was a rather general one among the dealers interviewed. Obviously it is difficult to say just where this practice of trying to induce dealers to take additional kinds of products ceases to be legitimate competition and becomes objec- tionable. The International Harvester Co., like any other concern, desires to push the sale of its goods, and naturally is disposed to take advantage of the fact that it has certain desirable machines, in order to force the sale of its newer lines. Aside from any question as to motive, it is apparent that any concern having a monopoly of such an article as harvesting machinery has an enormous advantage in forc- ing its entrance into new fields, and that this advantage is very sus- ceptible of abuse. There were numerous complaints that the sales- men of the company attempted to force dealers to take on lines in addition to those already handled, frequently under penalty of loss of their agencies for the company's harvesting machines. Frequently, however, it appeared that these threats were not carried out. EFFORT TO SECURE UNDUE PROPORTION OF DEALERS. As a rule there are not more than three dealers in farm machinery in an ordinary town in the grain States. It is the policy of the Inter- national Harvester Co., in general, to allow a given dealer to handle only one of its several brands of harvesting machines, thus absorbing the services of a large number of these dealers ; of course, not all of the company's brands are handled in every town. Complaint is made that this tends to give it such an undue proportion of dealers as to restrict the outlet for competitors' goods. The company, however, expressly denies that in adopting this policy of distributing its brands it is actuated by any desire to handicap its competitors in this way. The company's position on this point is illustrated by the following excerpt from testimony of the assistant general manager to the Bureau : Q. I understand then that your position is that the company does not place its brands in this way for the purpose of handicap- ping its competitors; and you also contend that, regardless of intent, the practical effect is not to handicap your competitors ? — A. It does not. Its sole purpose is to get more active representa- tion of your goods, which you can not do if you allow them to get into the hands of one man in a town. He will not give your customers the same consideration, the same service, as he will if he is handling a less number. Not only do we not try to elimi- nate them in that way, but it is a matter of real benefit to us in new sections when a competitor will get a real, live, active man in the trade. We sell more goods than we could do if we gave all our lines to one man and there was not any competitor there. However, it seems significant that the record in the Government suit shows that in 1903 a report of the sales committee of the Inter- 34 REPORT ON THE INTERNATIONAL HARVESTER CO. national Harvester Co. of America, which was approved by the execu- tive committee, contained the following statement: We believe that so long as there is competition it is desirable for the International Harvester Co. to maintain five selling organizations for the purpose of getting the largest amount of effort from the greatest number of local agents without expense to the company, and for the purpose of utilizing in its own busi- ness as much as possible of the available local agency material rather than permit any of it to become available for competitors. Still again, in 1902, when the exclusive contract was discontinued in Texas, the executive committee of the International Harvester Co. of America directed each division of the company " to discourage any agent in Texas from handling more than one brand of machine." These oiEcial statements seem to show conclusively that the dis- tribution of brands among various dealers in the manner indicated was at one time the result of a settled policy of the company to secure as many of these dealers as it could for its own business, and with a view to embarrassing competitors. In view of these official statements, the fact that the company still distributes its brands in this way seems significant. Practically, the supply of dealers even in the smaller towns usually has been sufficient to prevent anything like an effective monopoly of these channels of distribution, although it does appear that the company's practice in this respect has to some extent handicapped its competitors. Formerly the commission agency contracts of the International Har- vester Co. expressly provided for the maintenance of retail prices fixed by the company. In recent years, however, this clause has been omitted from these contracts, and the company now expressly disclaims any attempt to control the retail price charged by the dealer. The posi- tion of the International Harvester Co. is that dealers in farm ma- chinery are not strictly its agents, although generally so called, but that they are free to do as they like in the matter of prices, subject to the right of the company to cease dealing with them if they adopt methods which tend to injure its business or demoralize the trade. The Bureau found, however, that following the elimination from the company's contracts of the clause relating to retail prices there has been a rather general issuance of price lists in different parts of the country, usually by general agents of the company, naming so-called " suggested prices " to be paid by the farmer. These price lists are sometimes gotten out in rather elaborate form, and over the name of the International Harvester Co. of America, and they have had a rather wide circulation among dealers. Representatives of the Bureau found that such price lists had been issued by several general agencies of the company in recent years. SUMMAEY. 35 The assistant general manager of the company explained these price lists on the ground that there was a constant demand on the part of the company's salesmen for suggested prices, largely as a matter of information for the benefit of final purchasers who fre- quently made requests for quotations. In this connection he said : There is a constant demand on the part of our salesmen for these suggested prices. * * * gome of our men have been stupid enough — indiscreet enough — to comply with this request to the extent of getting out a " suggested list. I may say, how- ever, in justice to them that there was a period along about 1904-5 when that was recognized by our counsel at the time as not being objectionable. Later instructions were issued not to do it, as it led to a misunderstanding as to what our motives were. It is obvious that the company could immediately stop the issuance of such lists if it genuinely desired to do so. The company's position is that these lists have no effect and are not intended to have any effect in the direction of maintaining uni- form retail prices. The Bureau, however, is of the opinion that the distribution of these lists tends to the maintenance of more uniform retail prices by deterring dealers from making concessions. LOCAL DISCRIMINATION IN PRICES AND TERMS. The general policy of the International Harvester Co. is one of uniform prices to dealers. Complaints were submitted to the Bureau, however, to the effect that at times it engages in local price cutting for purposes of competition. Admissions of the company show that moderate concessions are rather frequent. The Bureau found a large number of such moderate concessions and also a limited number of deep cuts, but the company itself admitted such deep cuts in only a very few instances. The company specifically denied that its policy is to make deep cuts to injure competitors. It is obviously difficult to say just where moderate concessions in prices cease to be an ordi- nary incident of competition and become subject to condemnation. It should be noted that the laws of several States in which the In- ternational Harvester Co. does business specifically provide against local discrimination in prices. However, the Bureau is of the opinion that such discrimination in prices has not had a serious effect on the business of competitors. It may be pointed out that in some of its newer lines the company has adopted a general policy of distinctly low prices. The important point in this connection is that the International Harvester Co. reaps a monopolistic profit from its harvesting machine lines, and is thereby enabled to pursue an unusually low-price policy in other lines, apparently with the object of securing control of them also. In this connection there is much complaint that the company grants unusually long terms of credit to purchasers of some of these newer lines. One of the competitors of the company said, " The Interna- 36 EBPOKT ON THE INTERNATIONAL HAEVESTER CO. tional Harvester Co. sells terms, not harrows." Other complaints as to the company's terms were made especially with respect to manure spreaders, wagons, and gasoline engines. The advantage of the Har- vester company in this respect, because of its superior resources, is re- ferred to elsewhere. This, however, is a matter distinct from local discrimination, although, in the opinion of the Bureau, it is more serious in its effect on competitors in the new lines, where the propor- tion of the company's business has been rapidly increasing. MISREPRESENTATIONS REGARDING COMPETITORS. Complaint was also made to the Bureau that there has been more or less general misrepresentation of competitors by the salesmen of the International Harvester Co. While some years ago there were a few such complaints involving misrepresentation of the financial standing of competitors by the company's salesmen, no recent com- plaints on this score were received. The International Harvester Co. stated that in the most recent case for which proof was submitted to it the salesman was dismissed. Recent complaints were chiefly to the effect that the salesmen of the International Harvester Co. fre- quently represent that purchasers of competing harvesting machines will be unable to secure repair parts, the implication being that the competitors may not continue in business. A representative of the International Harvester Co. admitted that this practice existed to some extent, and said that the company had " used a lot of time, energy, and money trying to eliminate it." He contended that this was an inheritance from the bitter competition which preceded the formation of the company. He insisted positively that it was con- trary to the policy of the company. In the opinion of the Bureau there is foundation for this com- plaint, but apparently the practice has not resulted in seriously handicapping competitors. While notwithstanding the various objectionable practices above set forth the business of the competitors of the International Har- vester Co. in harvesting machines has increased, obviously this is no defense of methods in themselves objectionable. Moreover, as already shown, the International Harvester Co. has thus far sub- stantially maintained its monopolistic position in the harvesting- machine business, while in several of the newer lines in which it had no interest at its organization it has, in a short period of years, built up its business so rapidly that in some of these it now has a large proportion of the trade, and in one, manure spreaders, a majority of the business. It is also worth noting that the company's business in wagons has increased rapidly in the face of a reduction in the total demand. SOTTECES OF THE COMBIlTATIOISr'S POWER. Three principal factors appear, therefore, to have been chiefly re- sponsible for the position attained by the International Harvester Co.: (1) Combination of competitors; (2) superior command of capital; (3) certain objectionable competitive methods. The prime source of the company's power is undoubtedly to be found in the original combination of the principal competing com- panies in the harvesting-machine business. As already shown, the company was also Eible to use its position in this branch to great advantage in forcing its way into new lines. Next to this monopolistic control of the harvesting-machine busi- ness proper is the company's exceptional command of capital. While its financial advantage has been supplemented by the adop- tion of certain objectionable competitive methods, the mainspring of its power was the consolidation of the leading competitive factors in the industry. CHAPTEE I. CONDITIONS BEFORE THE FORMATION OF THE INTERNATIONAL HARVESTER CO. Section 1. Introductory. This investigation was instituted in pursuance of a resolution of the Senate of the United States which directed the Department of Commerce and Labor to investigate " the character and operation and effect upon interstate commerce of the combination or trust organization known as the International Harvester Co. and allied concerns engaged in the production, handling, and sale of farm machinery; the investigation to include an inquiry as to whether the prices and output of such machinery appear to be or to have been controlled and regulated by direction of any particular in- dividual or combination of individuals, by a corporation or other- wise ; whether there exists at present a healthy competition between local dealers in farm machinery; and whether the quality of the same is on the average as good as in former years." This investigation covers, therefore, on the one hand, the affairs and conduct of the International Harvester Co., and, on the other hand, the conditions of the implement trade, particularly in harvest- ing machinery and other lines of farm machinery made by the In- ternational Harvester Co. The present report is chiefly devoted to the International Harvester Co. Section 2. Importance of large-scale operations in the implement industry. All the tools of husbandry may be included under the general term agricultural implements. In this broad sense, wagons and vehi- cles used in farming are included, as well as implements, as that terra is ordinarily used in the trade. The extent of the saving of manual labor and money resulting from the application of implements and machinery to agricultural production varies greatly, and, owing to these great variations of conditions, can not be measured accurately for the agricultural in- dustry as a whole. Attempts have been made to indicate statistically the amount of this saving, but it is impossible to state any average results. 89 40 EEPOET ON THE INTERNA TiUJNAL H aimraxmxv .^v^. In order that such machines should be produced cheaply, it is essential that there should be an extensive division of labor in the manufacturing industry, and that the several kinds of machines should be produced in very large quantities. This makes it possible to produce machines of interchangeable parts at a comparatively low cost. The process of manufacture, which requires the use of a con- siderable variety of raw materials, is elaborate and demands large plants with expensive equipment. Another fact that tends to promote concentration in the implement industry is that the products are largely marketed or distributed by the producers themselves, and the cost of marketing naturally tends 1o be lower for concerns which produce and sell a considerable Aariety of implements, i. e., those which carry a " full line." Further, the demand for agricultural implements varies consider- ably with the size of crops from year to year. In order to meet a large demand promptly, the producers must manufacture great quan- tities to be carried in stock, although the demand may not prove sufficient to take all of them in the following season. This involves carrying large inventories, which require a relatively large invest- ment of capital in that form. Finally, the methods of selling on credit which have been estab- lished in some branches of the .trade, particularly harvesting ma- chines, and which have in some respects proved a great advantage to the farmer, demand large financial resources on the part of the manufacturer. Section 3. Growth of the industry according to census statistics. The growth of the agricultural-implement industry in the United States has been very rapid, corresponding, on the one hand, to the constantly increasing settlement of the agricultural sections and, on the other hand, to the progress of invention and the increased use of labor-saving implements and machines. This growth may be shown for recent years from the census statistics ; for this branch of the industry these do not extend back of 1869. The census data make a division of the industry in such a manner as to exclude certain kinds of implements and machines which are properly included within the scope of this report, as, for example, farm wagons, farm engines, cream separators, etc. The census statistics, however, include most of the important branches. The data which are of especial interest are (1) the quantities pro- duced, and (2) investment of capital and value of products. In con- sidering the census data it should be remembered that they generally refer to the last business year preceding the date of the census. CONDITIONS PBECEDING OKGANIZATION. 41 The production of the chief kinds of agricultural implements and machines, as reported by the census, is shown in the following table : Table 1.— NtTMBER OF SPECIFIED KINDS OF AQRICULTUEAL IMPLEMENTS MANUFAC- TURED IN THE UNITED STATES, ACCORDING TO THE CENSUS REPORTS 1869-1909. [Owing to variations In elassiflcatlon, etc., and to tlie fact that census years were sometimes exceptional years — which was especially true of 1899, 1904, and 1909 for certain products — the comparison here given should be used only to obtain a view of the general trend of the 40-year period.] Kind. 1879 1904 1909 Grain binders, harvesters, and headers . Com harvesters Hay carriers Hoise hayforks Hay loaders Horse hayrakes Haystackers Hay tedders Mowers^ Reapers Comlmskeis' Power com shellers Horse thrashers Steam thrashers Thrashers and separators combined Horse com planters Cotton planters Potato planters Com drills Grain drills Grain sowers Manure spreaders Seed sowers Small cultivators Wheeled cultivators Disk harrows Other liarrows Disk plows Shovel plows Steam plows Sulky or wheel plows Walkingplows 3,566 125,737 125,942 80, 619 8,957 95,625 99,131 2,334 127,010 35,327 44,370 24,3.')1 1,823 3,019 114,790 6,184 12,176 186,674 8,834 < 22.931 no, 424 2,000 19,288 5,726 2,769 2,661 5,937 54,639 56, 740 32,033 1" 6,900 88,740 43,222 15,563 9 8,155 20,289 44,830 16,728 9,150 67,716 239,008 206,482 53,980 214,985 864,947 1,326,123 67,286 1,182,059 233,542 20,707 64,303 51,770 7,273 216,345 12,069 14,510 398,616 35,945 10, 726 8,185 1,314 3,651 5,394 » 78,335 45,575 25,338 21,940 91,636 36,862 6,263 83,283 '•207,171 295,799 97,261 380,259 17,345 102,320 207 136,105 819,022 108,810 6,924 85,121 62,801 27,174 236,297 8,670 35,745 273,385 60,996 1,327 6,082 2,237 7,950 90,929 127,052 36,756 28,228 76,929 33,546 22,236 69,910 239,173 313,088 104,323 348,850 39,146 121,899 1,699 138,899 966,898 129,274 19,693 45,064 43,675 34,705 266,260 17,212 34,396 369,264 68,294 1,612 9,049 822 23,586 122,780 79,271 23,092 •41,429 68,611 '61,970 (•) 7,847 469,696 435,429 193,000 507,820 22,132 254,737 2,355 134,936 1,110,006 r Includes all harvesters. J Includes combined reapers and mowers for which numbers were not given in 1909. For preceding census periods production of combined mowers and reapers was as follows: 1869, 59,645; 1879, 54,920; 1889, 16,681; 1899, 1,055; 1904, 5,693. 3 Includes combined com huskers and shredders; apparently a change made in classification. • Not reported separately. ' Includes bean planters. • Includes 21,292 disk drills. ' Broadcast and combination seeders. 8 Not reported. • Classified as "fertilizer distributors.'^ 10 Includes 189 bean cultivators. n Including bean and beet cultivators. 77854°— 13 5 42 EEPOBT ON THE INTEENATIONAL HAEVESTER CO. Owing to variations in classification, etc., and to the fact that census years were sometimes exceptional years, the comparison here given should be used only to obtain a view of the general trend of the 40-year period. The foregoing table does not include all the implements and ma- chines reported by the census, the hand tools, especially, not being shown here. For hand tools, such as hoes, rakes, etc., some were not reported for the census of 1910, while others, such as shovels, have not been reported at all. Such hand implements, moreover, form a distinct branch of industry with which this report is not concerned. Some hand tools — for example, grain cradles, scythes, rakes, etc. — have comparatively little importance at the present time, having de- creased in output positively as well as relatively ; for others, for ex- ample, hay forks, hoes, etc., there has been, however, a positive in- crease during the period under consideration, so far as the figures are shown. In general, of course, there has been a large substitution of machines for hand tools. For some kinds of elaborate or complicated machines there has been an almost steadily increasing output, while for others the out- put has been decreasing. In some cases, for example, plows and thrashers, the increase in the more elaborate types of machine has probably offset the decrease in the less elaborate types. For grain- harvesting machines it should be noted that the fact that 1899 was a year of abnormally large production, and the year 1909 a year of unusually small production, makes the comparison unsatisfactory for determining the general trend of the business. It is a fact, how- ever, that during this period there was a rather considerable decrease in the production of binders (see p. 180). This decrease in domestic demand appears to be partly due to the fact that many of the farms were already largely equipped with such machinery. It should be borne in mind, moreover, that the foregoing table of production includes not only the quantity used in the United States but the quantity made for export. There is a large and increasing export trade in several of the more important kinds of agricultural implements, and particularly in grain and grass harvesting machines. Another view of the development of the agricultural-implement industry is obtained from the census data regarding the investment and the value of the product. It should be noted that the invest- ment is that which is reported by the companies themselves to the Census Bureau. Such figures of investment may vary considerably, of course, from the true investment in many cases, and sometimes in sufficient degree to considerably affeot the total amount. This prob- ably affects the census reports since 1890 more than those of earlier years, because since that time there has been a pronounced develop- ment of large corporations in this branch of the industry, and these CONDITIONS PEECEDING ORGANIZATION. 43 corporations have sometimes a reported capital and surplus con- siderably in excess of the true investment. Table 2.— GROWTH OF THE MANUFACTURE OF AGRICULTURAL IMPLEMENTS ACCORDING TO THE CENSUS REPORTS, 1849-1909. [The figures In this table should be used only for the purpose of obtaining a broad view of the trend of development.] Year. Number of estab- lish- ments. Capital invested. Number of wage earners. Total value of product. 1849 1,333 2,116 2,076 1,943 910 715 648 640 13,564,202 13,866,389 34,834,600 62,109,668 145,313,997 157,707,951 196,740,700 256,281,000 7,220 ' 17,093 25,249 39,680 38,827 46,582 47,394 60,551 J6,842,611 1859 20,831,904 1869 62,066,875 1879 . ... 68,640,486 1889 81,271,651 101,207,428 1899 1904 112,007,344 1909 146,329,268 The table shows a reported investment of only $3,564,202 for 1849 as compared with $256,281,000 for 1909, or about seventy-twofold increase. The value of the product at the factory increased from $6,842,611 in 1849 to $146,329,268 in 1909, or about twenty-one- fold in the 60-year interval. It is to be expected, of course, that the value of the product would not be multiplied nearly as rapidly as the investment. The number of wage earners for the same two years increased from 7,220 to 50,551, or about sevenfold. The average value of the product per wage earner increased from $948 in 1849 to $2,895 in 1909, or threefold. In other words, the greatly increased use of capital increased the average output per wage earner. The general relations shown by the above figures for the agricultural- implement industry are characteristic, however, of the general de- velopment of manufactures in the United States. Another important fact indicated by the foregoing table is the marked decrease in the number of establishments. There were 1,333 establishments in 1849, with an average output of about $5,133, and only 640 in 1909, with an average output of $228,639. From 1849 to 1859 there was a considerable increase in the number of establish- ments, but from 1859 on there was a decrease. This marked tendency toward a concentration of the industry in fewer and larger plants, resulting in a smaller number of establishments and greater average importance for each, is not peculiar to the implement industry, but is characteristic of most other branches of business in the United States. While this general tendency in all branches of industry has largely arisen from economic progress, a part of it has been due to circum- stances of a different character, two of which may be especially men- tioned — (1) railroad favoritism, which enabled the larger concerns 44 BEPOET ON THE INTEENATIONAL HAEVESTER CO. to drive out the weaker, and (2) combinations of competitors, with a view to obtaining a monopolistic influence in the market. The impor- tance of the first tendency has been very great in the industrial history of the United States and requires no demonstration here. With respect to the second, certain instances which affect the agri- cultural-implement industry will be considered in some detail in this report. Section 4. Development of invention and use of agricultural implements. In the early part of the last century agriculture was, of course, to a very large extent dependent upon the use of hand tools. While a number of implements were in use at this time, most of them were very crude. Cast-iron plows did not come into general use until after 1820 in the prairies of the Middle West, and it was not until after 1840 that grain and grass cutting machines came into general use. It was from these machines that the harvesting-machinerj' industry of the present day developed. The Civil War, while it greatly interfered with the agricultural development of the country, nevertheless, by drawing labor from the farms, tended to increase the demand for labor-saving machinery. This demand was furthermore increased by the rapid development of agriculture in the prairie regions, which were especially adapted to the use of such machinery. During this decade marked improve- ments were made in the manufacture of agricultural implements. Changes in harvesting machinery were especially important, this period being marked particularly by the development of the Marsh harvester and the wire binder. The usefulness of the wire binder was limited by difficulties in thrashing and by the great cost of wire. Moreover, just as the wire binder was being perfected and coming into more general use — at the end of the seventies — an inven- tion appeared which entirely displaced it, namely, the twine binder. Somewhat later the twine binder, in turn, was improved by changing from wood to steel construction. In the last quarter of the nineteenth century a great variety of im- portant machines came into more general use, such as hay loaders, hay tedders, disk harrows, wheel plows, etc., while the use of vari- ous other machines was greatly extended. In consequence, there was not only a relative but in some cases an absolute reduction in the use of hand implements, while the reaper itself gave place very largely to the more efficient binder. Practically all the important classes of implements (except gaso- line engines) now used on the farm were extensively employed at the beginning of this century, although the increase in certain lines has been particularly marked since then, as, for example, in gasoline engines, motor vehicles, manure spreaders, and cream separators. CONDITIONS PEECEDING OKGANIZATION. 45 The chief lines of harvesting machines (e.g., binders, reapers, mow- ers, rakes), with the exception of the com harvester, which came out in the nineties, were well developed 15 years or more before the be- ginning of the twentieth century ; that is, before the organization of the International Harvester Co. In each of these lines there were various types of machines on the market, and before the beginning of this century practically all the basic patents had expired, so that the field of manufacture was open to all. It is evident, therefore, that the existence of monopolistic conditions in this branch of the business can not be attributed to patent rights. By 1850 the beginnings of factory industry were made, and the development since that time has been almost entirely along this line. Even in these early days the industry took on many of the charac- teristics Avhich have been peculiar to it until within a very recent period, namely, the specialization of production along particular lines of implements or farm machinery. One of the causes for this line of development was the fact that the most important types of machine^ were constructed under patents, and these tended to be developed by particular individuals or companies. Where the machine was suc- cessful the production tended to be large and involved the establish- ment of factories of considerable size. This tendency toward speciali- zation of production was characteristic of the business until a com- paratively recent period, when a counter tendency appears toward the production of several different lines by one concern, in order to ob- tain the advantages arising from marketing a " full line." This tendency appeared somewhat earlier among jobbers. In discussing the growth of the principal industrial enterprises prior to the organization of the International Harvester Co., there- fore, the discussion of the history of the implement industry is natu- rally divided according to the lines of implements produced. The chief interest in this connection naturally attaches to the harvesting machines, as these formed the basis for the organization of the Inter- national Harvester Co. As, however, a proper understanding of more recent developments in the implement business requires some informa- tion as to the development of other lines, these also will be discussed, but in a briefer manner. Section 6. Development of the harvestii^f-machine industry. General character or harvesting-machine concerns. — The harvesting-machine industry developed from the manufacture of the reaper and mower. With the manufacture of these machines there was subsequently connected the manufacture of rakes. After its in- vention the binder came to be the most important branch of pro- duction for the harvesting-machine companies, the mower being second, and the reaper becoming quite subordinate. Practically all the binder factories which acquired any importance in the past 46 KEPOET ON THE INTEENATIONAL HAEVESTEE CO. liave continued in existence down to the present time. The most important exceptions are certain factories acquired by the Interna- tional Harvester Co., either in 1902 or shortly after, which were converted to other uses. The introduction of the binder depended on the development of a suitable binder twine, as well as on the invention of a successful knotting device. When the Deerings got out their first binder with the Appleby knotter, the question of a cheap and serviceable twine was a problem of vital importance. At first the harvester manufac- turers procured their twine from established twine and cordage con- cerns, but the great importance of binder twine and its peculiar re- quirements soon led to the establishment of twine factories by a few of the large manufacturers of harvesting machines, notably McCor- mick, Deering, Osborne, and Aultman-Miller. A large part of the supply of binder twine, however, continued to be furnished by twine and cordage companies. Before 1900 few of the harvesting-machine makers had developed other lines of manufacture in an important degree. The chief ex- ception was D. M. Osborne & Co., which had a considerable line of tillage implements. The makers of harvesting machines, therefore, formed a very distinct group among the manufacturers of farm im- plements as a whole. The harvesting-machine industry, which embraces primarily the production of grain and grass harvesting machines, such as binders, reapers, mowers, etc., may be said to have commenced with the estab- ment in 1847 of the first important factory, the McCormick factory at Chicago. Shortly after this a number of other important con- cerns were organized, both in the East and West, partly working un- der different original patents, and partly under licenses granted to two or more concerns by the inventors. With the improvement in harvesting machines, new concerns naturally arose from time to time. While the number of enterprises which were started for the manu- facture of harvesting machines between 1850 and 1870 was large, only a comparatively small number ever acquired much importance, and most of these have continued in one form or another down to the beginning of the present century. Subsequent to 1870 comparatively few new enterprises were started. In the following paragraphs a brief statement is given of the principal concerns which developed in this branch of the industry during this period. These are not noted chronologically, or in order of importance, but in three groups, namely, (1) companies originally combining to form the Interna- tional Harvester Co.; (2) companies subsequently acquired by the combination; and (3) companies not acquired by the combination. Companies merged in the combination in 1902. — There were five of these harvesting-machine companies, which are mentioned below in the order of magnitude. CONDITIONS PRECEDING ORGANIZATION. 47 McCormick. — The reaper factory of McCormick, which was estab- lished in 1847, in Chicago, 111., was not only one of the first in the field, but was also eventually the greatest harvesting-machine plant in the industry. The McCormick business was incorporated in 1879, as the McCormick Harvesting Machine Co., and down to the time of its merger with the International Harvester Co. in 1902 it was almost exclusively engaged in the manufacture of grain and grass harvesting machines. McCormick automatic wire binders were first gotten out during the seventies, and the twine binder in 1881, using the Appleby twine-knotting device, under license from the patentee. Deering. — The origin of the Deering concern is found in a partner- ship established by Easter & Gammon, which underwent several changes of name. At first they were merely dealers in implements, but they acquired an interest in the factory of Marsh & Steward at Piano, 111., in 1869. William Deering became identified with this con- cern in 1870, and in 1874 a partnership was formed, known as Gam- mon & Deering. Until 1879 its business was located at Piano. In that year the partnership of Gammon & Deering was dissolved, and Deering continued the business at a new factory established at Chicago. During the later seventies Gammon & Deering manufac- tured a wire binder under the Gordon patent. Deering was one of the first to exploit the Marsh harvester, but was chiefly notable for first developing commercially a twine binder using the Appleby knotting device. This achieved practical success as early as 1880. In 1883 this concern was incorporated as William Deering & Co., but this title was changed to the Deering Harvester Co., in 1894, which be- came a copartnership in 1899. Ghmnpion. — ^About 1850 B. H. Warder established himself at Springfield, Ohio, as a manufacturer of reapers, working under licenses from the inventors, Seymour and Morgan. The business was continued under various names as new partners were admitted to the concern, the firm name becoming Warder, Bushnell & Glessner in 1879. In 1867 this concern pooled its business with another Spring- field concern, known as Whitely, Fassler & Kelly, which had been established in 1856 by William N. AVhitely, the inventor. A certain community of interest was thereby established, and the output of this group was known as the Champion line. The Champion Machine Co. was organized to handle their products in certain regions. In 1887 Whitely, Fassler & Kelly failed and the Warder group took over some of their assets, and in the same year the partnership was changed to a corporation, the Warder, Bushnell & Glessner Co., which thenceforward controlled all the Champion lines. Plarw. — This concern was organized in 1881 by William H. Jones. It took over the abandoned factory of Gammon & Deering at Piano, and obtained financial support from Gammon and Steward. It imme- diately began to manufacture grain binders and other harvesting 48 BEPORl ON THE INTEENATIONAL HAKVESTEE CO. machines at the Piano factory. In 1893 it transferred its business to a new factory at West Pulhnan, Chicago. Milwaukee. — This concern was originally known as the Parker- Dennett Co., which was organized in 1881 and located at Milwaukee, Wis. In 1884 its name was changed to the Milwaukee Harvester Co. It manufactured grain and grass harvesting machines. As above noted, these five concerns were acquired by the Inter- national Harvester Co. in 1902. Companies subsequently acquired by the combination. — Of the other harvesting-machine companies existing in 1902, the three fol- lowing were subsequently acquired by the combination : Osborne. — D. M. Osborne apparently first entered the farm-imple- ment trade at Buffalo in 1856, when he became interested in the Kirby mower patents. In 1857, with some associates, he acquired shops at Auburn, N. Y., and in the following year organized the firm of D. M. Osborne & Co. This concern manufactured mowers imder Kirby's patent and later took up the manufacture of a varied line of implements. In 1875 the Osborne concern absorbed the busi- ness of the Cayuga Chief Manufacturing Co., which at that time enjoyed a very high reputation. It got out a successful wire binder in 1877 under Gordon's patent. In 1882 it produced its first twine binder, but did not use the Appleby knotting device until the follow- ing year. Considerably later this concern entered into the production of tillage implements. D. M. Osborne & Co. was acquired by the International Harvester Co. in 1903., Aultman-Miller Go. — The beginnings of this concern date from 1848, when John Miller, Cornelius Aultman, and Ephraim Ball commenced the manufacture of the Hussey reaper at Greentown, Ohio. Later they brought out and perfected harvesting machines which were known in the trade as the Buckeye. Disputes over the Buckeye patents led to an agreement between the various parties by which a community of interest was established in these patents ; and subsequently thereto the Buckeye machines, as they were Imown, continued to be manufactured by the Aultman-Miller Co. and certain other makers, particularly Adriance, Piatt & Co., who are referred to below. The Aultman-Miller Co. came under the control of the International Harvester Co. in 1903. Minneapolis. — The Minneapolis Harvester Co., which was organ- ized some time in the eighties, and located at Minneapolis, Minn., was based on a manufacturing enterprise previously established concern- ing which the details are not known. This concern was taken over by Walter A. Wood and certain other parties m 1892, and organized as the Walter A. Wood Harvester Co., which was not a part, however of the Walter A. Wood Mowing & Reaping Machine Co., of Hoosick Falls, N. Y., although it had to some extent the same stockholders. The business was removed to St. Paul at that time. The Walter A. CONDITIOKS PRECEDING OBGANIZATION. 49 Wood Harvester Co. got into financial difficulties shortly after its organization, and was reorganized as the Minnie Harvester Co., under the control of the American Grass Twine Co. In 1903 the Minnie Co. came under control of the International Harvester Co. Companies not acquired by the coiibination. — The following manufacturers of harvesting machines prior to 1902 have not been absorbed by the combination. The first four only were binder man- ufacturers in 1902. "Wood. — Walter A. Wood was one of the pioneers in the manufac- ture of mowing and reaping machines, and became interested in the business about 1852, establishing a factory at Hoosick Falls, N. Y., and utilizing the patents of J. H. Manny. This concern was incor- porated as the Walter A. Wood Mowing & Reaping Machine Co. in 1865. In 1870 they brought out an automatic wire binder under Locke's patent, which had a very wide sale. Later the company produced twine binders as licensee of Holmes, the inventor, this patent being the chief rival of the Appleby. Adriance, Piatt <& Go. — This concern was established as makers of harvesting machines at Poughkeepsie, N. Y., some time during the fifties and was incorporated in 1882. As just stated, they made the Buckeye line. In 1894 they bought the patents, patterns, and good will of D. S. Morgan & Co., of Brockport, N. Y. D. S. Morgan was the successor of Seymour & Morgan, who began the manufacture of implements in 1844. Adriance, Piatt & Co. was absorbed by the Moline Plow Co., of Moline, 111., in 1913. Johnston. — This enterprise was first known as Fitch, Barrie & Co., and was located at Brockport, N. Y., in the early forties. Later it was known as Huntley, Bowman & Co. It was incorporated as the Johnston Harvester Co. in 1871, and in 1882 removed to Batavia, N. Y. It appears that they used originally the Ketchum mower patents. In 1910 a controlling interest in the stock of this concern was acquired by the Massey-Harris Co.j of Toronto, Canada, large manufacturers of harvesting machines and other agricultural imple- ments. Acme. — The beginnings of this company are found in a concern established in the late seventies by John E. Kirk, at Salisbury, Mo., which made hay stackers. This enterprise was moved in 1881 to Milan, Mo., and incorporated as the Milan Manufacturing Co. In 1883 the name was changed to the Acme Hay Harvester Co. In 1890 it purchased the harvester business of A. J. Hodges & Co., at Pekin, 111., and changed its name to the Acme Harvester Co. This concern, in 1895, bought the business of the Minneapolis-Esterly Co., an enter- prise whose origin goes back to the early forties. In 1899 it acquired the Harvester King Co., of Harvey, 111. In 1900 the factory was 50 EEPOET ON THE INTEENATIONAL HARVESTER CO. moved to Peoria, 111., and the concern is now known as the Acme Harvesting Machine Co. Emerson. — In 1853 the inventor, John H. Manny, started a reaper factory at Rockf ord. 111. ; from this enterprise developed the firm of Emerson, Talcott & Co., organized in 1860 and incorporated in 1874. This concern built Burson wire binders, which had a large success until supplanted by the twine binder. Previous to this, namely, in 1870, they had tried to get out a twine binder under Behel's patent for knotting twine, but this did not prove a commercial success on account of the impossibility of getting a cheap binder twine at that time. This concern was later reorganized as the Emerson-Brant- ingham Co. It never seems to have marketed twine binders to any extent, and its principal lines came to be mowers and tillage imple- ments. In 1912 this concern absorbed several other companies pro- ducing chiefly hay tools, traction engines, thrashing machinery, gas engines, and wagons. Thomas. — This concern, which is known as the Thomas Manufac- turing Co., was established some time during the seventies at Spring- field, Ohio, where it still continues to do business. It makes no bind- ers, but manufactures principally mowers, rakes, and tillage imple- ments. Richardson. — This concern, now known as the Richardson Manu- facturing Co., is located at Worcester, Mass., where it was at first established during the seventies. It produces mowers but no binders. Othbe manttfactueees of harvesting machines. — There were several other manufacturers of harvesting machines which existed prior to 1900, besides those already described or referred to, which deserve mention. Among these are George Esterly & Son, of White- water, Wis. (see p. 49) ; D. S. Morgan (successor to Seymour & Morgan), Brockport, N. Y. (see p. 49) ; J. F. Seiberling & Co. and Seiberling, Miller & Co., of Doylestown, Ohio ; the Winona Harvester Works, of Winona, Minn. ; and Hoover & Gamble, of Miamisburg, Ohio, whose business is now limited to twine machinery. None of these concerns ever attained great prominence in the trade. Of course, besides these, as already intimated, there were a great num- ber of enterprises, especially before 1870, which never attained promi- nence. One other concern which deserves special mention, although not a manufacturer of harvesting machines, is the Whitman & Barnes Manufacturing Co., of Akron, Ohio. This company was a manu- facturer of parts of machines for other harvester companies, an(^ also of repair parts. (See p. 58.) Section 6. Development of other branches of the implement indnstry. There are certain other branches of the implement industry which are of importance in connection with this report either because the CONDITIONS PEECEDING OKGANIZATION. 51 International Harvester Co. has extended its activities into these lines (e. g., wagons, harrows, and engines) or because important concerns in certain of these lines (e. g., plows, tractors, engines, and thrashers) have also undertaken the manufacture of harvesting ma- chines or other implements made by the International Harvester Co., with the result of bringing them into competition with it. The chief lines of agricultural implements which are of importance in this connection are as follows: (1) Plows, harrows and other till- age implements ; (2) drills and planters ; (3) thrashers; (4) wagons; (5) manure spreaders ; (6) engines; (7) cream separators. For certain of these lines (e. g., plows and thrashers) , it is im- portant to indicate the character of some of the chief concerns, while for certain other lines it is only necessary to notice briefly the gen- eral character of the companies engaged in manufacturing them. Plows. — Not only were plows among the first lines of agricultural implements in which a factory industry was established, but also in this branch larger concerns were developed than in any other branch of the implement industry, except that of harvesting and thrashing machines. Moreover, the plow manufacturers are the chief makers of harrows, and thus come into direct competition with the Inter- national Harvester Co. The John Deere Plow Co., also referred to on page 188, has developed into the largest single implement concern except the Inter- national' Harvester Co. It is now known as Deere & Co. The Deere company expanded its business gradually from plows to other tillage implements, planting machinery, wagons, and manure spreaders, and even 20 years ago handled such a variety of implements as to be fairly described as a " full-line " concern. This expansion of its manufac- turing activity followed in the main a development of its market- ing facilities. An elaborate system of distribution had been or- ganized, with the establishment of subcompanies for marketing pur- poses. At the time of the formation of the International Harvester Co. it was not a manufacturer of harvesting machines, but several years ago it extended its manufacturing activities into that field also, first only in mowers, but more recently in binders. Several other plow concerns which have been important factors in this branch of the industry are the Oliver Chilled Plow Co., of South Bend, Ind.; the Moline Plow Co., of Moline, 111.; the Eock Island Plow Co., of Kock Island, 111.; the Emerson-Brantingham Co., of Rockford, 111. ; the J. I. Case Plow Co., of Racine, Wis. ; and the Parlin & Orendorflf Co., of Canton, 111. Of these, the first four were established in the decade preceding 1860, the fifth company be- ing established in the following decade, and the sixth prior to 1850. The Moline Plow Co. is of especial importance because, like Deere & Co., at a comparatively early date it developed its business in other 62 BBPOET ON THE INTEENATIONAL HARVESTER CO. lines, particularly in drills and wagons. As noted above, in 1913 it absorbed Adriance, Piatt & Co., and thus obtained a line of har- vesting machines. The Emerson-Brantingham Co. also is engaged in the production of mowers. The other three concerns confined tkemselves strictly to the plow and tillage implement business down to the time of the formation of the International Harvester Co. Sub- sequent developments with respect to these plow concerns are noted elsewhere. (See p. 188.) While there were numerous plow concerns in the period following the Civil War, toward the end of the century there was a marked decrease. In 1884 a plow association was organized. Later a broader organization was formed, known as the National Plow Association. These two associations attempted, among other things, to restrict competition and to regulate prices, and obtained a considerable in- fluence in both these directions. The second of these associations comprised about 20 plow concerns, including such important com- panies as the Deere, Moline, Parlin & Orendorff, and Avery con- cerns. In 1901 an effort was made to form a comprehensive con- solidation of the chief plow companies, with a capital stock of $70,000,000, but this project failed. While the plow companies had few points of contact with the harvesting-machine companies at the time the International Har- vester Co. was formed, they have become competitors since the latter took up the production of harrows, while some of them have become important potential competitors in harvesting machines in the last few years, chiefly through their development of the policy of car- rying a full line. Drills. — Machine methods of planting began before 1850, and two factories were organized before that date in small towns in New York State, namely, the Empire Drill Co. and Bickford & Huffman. In the decade following 1850 three important factories were estab- lished, namely, the Hoosier Drill Co., of Richmond, Ind., Thomas & Mast, of Springfield, Ohio, and A. J. Munn, of Louisville, Ky. The utility of the drill was greatly increased in the succeeding decade by the introduction of force feed. About this time also another impor- tant drill factory was established, namely, the Superior Drill Co., of Springfield, Ohio, which later took a prominent part in the organi- zation of the American Seeding Machine Co., which is mentioned below. The drill companies, generally speaking, did not branch out into other lines of implement manufacture. In 1903 most of the important drill-making plants were consolidated into a single com- pany, the American Seeding Machine Co. This concern established a very comprehensive control over this branch of the industry. Although the International Harvester Co. entered into this branch of the business to a small extent shortly after its organization it CONDITIONS PRECEDING OKGANIZATION. 53 never became an important manufacturer of such machines. In 1912, however, as noted elsewhere (p. 142), it undertook to sell three im- portant brands of drills manufactured by the American Seeding Machine Co. Wagons. — Although wagon factories were established before 1850, notably the Weber and Peter Schuttler works, in Chicago, and the Mitchell works, in Racine, Wis., this business continued for a longer period than most branches of the implement business to be con- ducted by local mechanics also. The changed conditions in manu- facture, due to the depletion of local supplies of suitable lumber, has been a special factor in eliminating small wagon shops in the last few decades. The most successful wagon manufacturers have de- veloped in part, however, from the local wheelwright, of which the Studebaker Co., of South Bend, Ind., founded about 1860, is the most conspicuous example. The wagon makers have, to a marked extent, confined themselves either to this line or, where they have expanded their business, it has been generally in the direction of motor vehicles. An important feature of the wagon trade was the organization of the National Wagon Manufacturers' Association. This association has had apparently a considerable influence on the prices of wagons. In 1887 it attempted unsuccessfully to form a pool among the wagon makers. Again, since 1899 several unsuccessful efforts have been made to form a general consolidation of the chief wagon manu- facturers. At the time of its organization the International Harvester Co. was not engaged in the manufacture of wagons, but later it entered this branch of business on an important scale. Thrashers. — In separating the grain from the chaff, the fanning mill was the first machine generally used ; thrashing machines came later, but both were used in the eighteenth century. Before 1840 one type of thrasher, the so-called " ground-hog " thrasher, consisting of an open cylinder with a wooden case, had been combined with a fanning mill. By the middle of the last century steam power was being used. The J. I. Case Threshing Machine Co., of Racine, Wis., which is to-day one of the leading concerns in this branch of the implement business, was established shortly before 1850, and there were sev- eral other factories before that date. The thrasher industry de- veloped chiefly through a number of large concerns, and most of the trade at the present time is in their hands. In 1911 the M. Rumely Co., of Laporte, Ind., an important thrasher manufacturer, ab- sorbed two other important thrasher concerns, namely, the Gaar- Scott Co., of Richmond, Ind., and the Advance Thresher Co., of Battle Creek, Mich. The large thrasher concerns have tended to ex- tend their business into other lines, particularly into tractors and portable engines. 54 BEPOKT ON THE INTEENATIONAL HABVESTEE CO. This line of implements is of comparatively small significance for the International Harvester Co., as that company does not manufac- ture thrashers, although it sells a comparatively small number of them through its marketing organization. Other machines. — Of the other important classes of implements and machines which are of interest for this report, a briefer notice is sufficient. The development of the manure spreader is of comparatively re- cent date. Manure spreaders have generally been manufactured by concerns V70rking on particular patents and not engaged in the pro- duction of other implements or machines. The number of important manufacturers is comparatively small, but includes some of the largest plow concerns. Cream separators are generally made by concerns not engaged in the manufacture of other farm machinery. The farm engine has recently become a very important machine and is produced by a considerable number of manufacturers, most of whom are not engaged to an important extent in making other classes of farm machines. In some cases, however, one or two other classes of machines or vehicles are produced by concerns making farm engines. Tractors are another important class of farm machines. They are manufactured chiefly by large thrasher concerns. In each of the four lines mentioned above, the International Har- vester Co. has become an important factor. Extent or " full-line " development. — Taking the implement and vehicle industry as a whole, the general characteristic prior to the beginning of the present century was specialization of manufacture in particular lines. The plow companies, as a general rule, made other tillage imple- ments, and in some instances, also, a few other kinds of machines. Some of them had developed a marketing organization also, through which they did a jobbing business in machines manufactured by other concerns. In this way some of them approached to what may be fairly called a " full line," though none of the larger plow com- panies made harvesting machines or handled them to any consid- erable extent. The harvesting-machine companies made, of course, several dis- tinct kinds of machines, particularly binders, reapers, mowers, and rakes, and sometimes, in addition thereto, corn binders. In one or two instances they also produced tillage implements. The "full line," however, was nowhere really developed among the harvesting- machine companies before the formation of the International Har- vester Co. The companies in the other chief branches of implement manu- facture, as shown above, were generally restricted to one or two CONDITIONS PRECEDING OBGANIZATION. 55 principal lines, such as wagons and thrashers ; in engines and tractors there was not a very extensive industry along present lines before 1902. The recent development of the " full line " and its significance in the implement industry will be noted in another place (p. 188) . Section 7. Methods of sale and distribution in the harvesting-machine trade. An important feature of the harvesting-machine industry was the development at an early date of an elaborate system of distribution by the manufacturer. Similar methods were employed to a consider- able extent in other branches of the implement trade also. While such methods of sale of products are not uncommon at the present time, they were especially characteristic of this industry almost from the beginning. The principal explanation for this early development is to be found in the fact that the most important agricultural sec- tions of the country were to a large extent recently settled, and the farmers were comparatively poor. Moreover, the credit facilities of the chief farming sections of the country were not adequate, appar- ently, to the need of agi'icultural development; the farmer, especially the new settler, was often unable to pay cash for the machines that were absolutely essential to the successful working of his farm, but, if furnished with such machines, was in a position to pay for them in installments from the proceeds of his crops. Manufacturers who produced and sold for cash would have, therefore, a limited market, while those who could give credit would greatly enlarge their sales. From these circumstances developed the practice, particularly among more successful manufacturers, such as McCormick, of selling their machines to the farmers on credit, the trade being conducted through retail dealers, who became local agents for the manufacturer for their respective localities. The usual form of payment made by the farmer for such machines was a part payment in cash at the end of the harvesting season and a promissory note or notes for payment of the balance in one or two annual installments. Such notes were generally guaranteed by the retail dealer who acted as the local agent for the manufacturer. The advantage of this system not only, to the farmer, who thereby got his machines on credit, but also to the manufacturer, who was thus enabled to foster a much larger demand, led to its rapid devel- opment on an elaborate basis. It became necessary for the manu- facturer to have large warehouses and general agents at various places in order to supply the retail dealers in the vicinity and to ex- ercise some control over the credit extended to farmers. It also be- came necessary to furnish the retail dealer and farmer with me- chanical experts to supervise the setting up and starting of the machines (which were shipped in several packages, or "knocked down"), to explain the proper method of operating them, and to 56 REPOET ON THE INTEBWATIONAL HARVESTER CO. repair them if they broke down. The retail dealer had also to carry in stock supplies of repair parts furnished by the manufacturer, so that if such breakdowns occurred during the harvesting season the machines could be put into working order without loss of valuable time or even of the crop itself. This elaborate system of distribu- tion through retail dealers also gave to the concern which developed it on a large scale not only a much more intimate knowledge of the local demand, but also a better hold on the trade of the farmers, par- ticularly through the use of canvassers who visited the farms and obtained orders from them which were filled through the local agent or retail dealer. The manufacturer, retail dealer, and farmer were brought into very close relations. This method of distribution involved, of course, a very large sell- ing expense, but the proportion of selling expense to the total sales, or the amount of selling expense per machine, tended to be much lower for concerns which did an extensive business than for small concerns, unless the latter limited their business to a restricted ter- ritory or adopted a different and less effective system of distribu- tion. This method of distribution, therefore, gave great competitive advantages to the large concerns. During the manufacturing season which preceded the selling sea- son the manufacturer of harvesting machinery produced a quantity of machines, the number of which was calculated partly on orders from the farmer, partly on orders from the retail dealer, and partly on the expected demand as indicated by crop conditions, etc. This system of production and sale involved a large investment in raw material, partly manufactured machines, and finished machines, as compared with the investment in plant, because the turnover of the manufacturer was practically only once a year. Furthermore, the system of payment by installments tied up a large amount of the manufacturer's capital in farmers' notes, although, of course, inter- est — and often a very high rate of interest — was payable on them. Both of these factors, however, gave additional advantages to the manufacturing concerns which had large capital and credit. Specific and detailed descriptions of the distributing system and business methods of the McCormick company are shown in Exhibits 1 and 2. These statements were made by the representatives of the McCormick Harvesting Machine Co. to George W. Perkins, of J. P. Morgan & Co., the financial promoters of the International Harvester Co., shortly before the merger in 1902. Section 8. Competition and combination in the harvesting-machine indus- try prior to the International Harvester Co. Before the organization of the International Ha.rvester Co. in 1902 the harvesting-machine industry was generally subject to competitive conditions, and particularly in the decade immediately preceding that CONDITIONS PRECEDIHTG OKGANIZATION. 57 date. The natural tendency toward concentration of production in a comparatively small number of large f actories'Vhich made itself gen- erally felt in the implement industry was likewise in evidence in this branch. This was particularly true for the more elaborate machines, such as binders. The comparatively simple lines, such as horse hay rakes, continued to be produced by a more numerous group of manu- facturers. The rapid improvements in the processes of manufacture, together with the growth of large factories, resulted in great reduc- tions in cost of manufacture and, under the influence of competition, in marked reductions in price also. Efforts were made by the harvesting-machine manufacturers to check the reduction of prices by means of loose agreements on prices at various periods during the eighties, especially in 1887, but appar- ently without influencing the market conditions in a very important degree. Furthermore, in 1887 a meeting of the manufacturers of harvesting machines was held in Saratoga, with a view to establish- ing a general consolidation in this branch of the implement business, but this was without practical result. Another attempt of the same sort was made in 1890, which came near realization. Indeed, a gen- eral consolidation was planned and a company entitled the "American Harvester Co." was incorporated under the laws of Illinois for this purpose. American Harvester Co. — The chief promoter of the American Harvester Co. was A. L. Conger, president of the Whitman & Barnes Manufacturing Co., of Akron, Ohio. Some time before the end of 1890 be succeeded, apparently, in obtaining options on the plants of about 20 different manufacturers of harvesting machinery ,i including the McCormick, Peering, Walter A. Wood, Johnston, Adriance-Platt, Milwaukee, Champion, Piano, Aultman-Miller, and Whitman & 1 The companies which were to be merged Into the American Harvester Co. were as follows : Anitman, Miller & Co Akron, Ohio. Adriance, Piatt & Co Poughkeepsie, N. T. Deerlng (William) & Co Chicago, 111. Emerson, Talcott & Co Rockford, 111. Esterly Harvesting Machine Co Whitewater, Wis. Hoover & Gamble JMiamisburg, Ohio. Johnston Harvester Co Batavla, N. Y. McCormick Harvesting Machine Co Chicago, III. Milwaukee Harvester Co Milwaukee, Wis. Minneapolis Harvester Co Minneapolis, Minn. Morgan (D. S.) & Co Brockport, N. Y. Osborne (D. M.) & Co Auburn, N. Y. Piano Manufacturing Co Chicago, III. Richardson Manufacturing Co Worcester, Mass. Seiberling, Miller & Co Doylestown, Ohio. Seiberllng (J. P.) & Co Doylestown, Ohio. Wood (W. A.) Mowing & Reaping Machine Co Hooslck Falls, N. T. Warder, Bushnell & Glessner Co Springfield, Ohio. Whitman & Barnes Manufacturing Co Akron, Ohio. Whlteley (Amos) & Co Springfield, Ohio, 77854°— 13 6 58 EEPOET ON THE INTEKNATIONAL HAEVESTEE CO. Barnes. The Whitman & Barnes Manufacturing Co. was itself a consolidation of 13 mower and reaper knife-making concerns, and sold its output to practically the whole trade, including the McCor- micks and Deerings. The leading manufacturers who were interested in this proposed consolidation held meetings in Chicago in September and November, 1890, at which the plans for the merger were developed. On Novem- ber 19, 1890, the American Harvester Co. was incorporated in Illi- nois, and was authorized to engage in the manufacture of harvesting machines, other agricultural implements, twine, etc. The authorized capital stock was fixed at $35,000,000, and according to the official records of the State was subscribed to as follows : Walter A. Wood $4,000,000 William Deering 5,000,000 Cyrus H. McCormlck 8,750,000 Lewis Miller 3,000,000 Asa S. Bushnell 3,000,000 A. L. Conger 5,000,000 Do 6, 250,000 Total 35, 000, 000 A part of A. L. Conger's subscription apparently was intended to be issued to various concerns which were to be brought into the con- solidation, but which were not represented among the subscribers in the foregoing list. The above-mentioned subscribers to the stock held a meeting and elected themselves directors of the American Harvester Co., together with one William C. Goudy. The officers elected were as follows : President, C. H. McCormick ; vice president, Walter A. Wood ; chairman and treasurer, William Deering ; general manager, E. K. Butler; secretary and assistant general manager, A. L. Conger. It was said that the new company would divide the markets of the United States into three divisions, and that E. K. Butler would manage the western division, A. L. Conger the middle division, and Walter A. Wood the eastern division. The officials of the American Harvester Co. went so far appar- ently as to send out forms of contracts with definitely fixed retail prices, and to notify some employees of the merged companies that their services would not be needed any longer. Meantime it seems some of the parties interested became convinced that the merger in- volved taking over numerous plants at excessive valuations, which would not only be prejudicial to their particular interests, but also would tend to endanger the financial success of the undertaking. It is not quite clear how far the various parties connected with the American Harvester Co. were committed to this project, but ap- CONDITIONS PRECEDING OKGANIZATION. 59 parently definite agreements for the transfer of property had been executed. It is understood, however, that these agreements were finally abrogated on the basis of legal advice that this could be done, inasmuch as they were void as being in restraint of trade. Thus the American Harvester Co. became practically defunct a few weeks after it was formed. Competition during the nineties. — From 1890 until the forma- tion of the International Harvester Co. in 1902, there does not ap- pear to have been any attempt to form a general consolidation of the harvesting-machine companies. In fact, throughout this period competition appears to have been very active. The chief, if not the only, exception to this statement appears to have been in 1900, when there was apparently a gentlemen's agreement as to prices between the McCormick and Deering concerns, which may have included some of their competitors also. The fact that this period was one of active competition has been insisted upon by the chief representatives of the harvesting-machine companies, who, indeed, have declared that during this period com- petition was carried to an excessive degree. Several statements to this effect were made by witnesses in judicial proceedings in Mis- souri in 1908, excerpts from which follow : Testimony of Gyrus H. McCormick. Q. Was the competition in the country pretty fierce prior to 1902?— A. Yes, sir; it was. Q. That is, by " fierce " I mean, and I suppose you understand, that there were vigorous efforts made by each company to sell its machines to the retail dealers and farmers? — A. Yes, sir; it was. Q. You adopted methods of advertisement and the employ- ment of special agents to convince the retail dealers and the public that your machines were better than the others? — A. Yes, sir; we did. Q. That is a correct statement? — ^A. Yes, sir. Q. During that time, I suppose, during these years from 1891 to 1902, you carried on the same method of competition, and they carried on the same that you did ? — A. About the same manner, I think. Q. There was no combination or agreement to fix prices or restrain competition between these six leading companies? — A. No, sir; none whatever. ******* Q. Was a part of the unstable conditions incident to this un- settled condition prior to the formation of- the New Jersey cor- poration a variation from the listed price and the selling of the machines, did that constitute a part of the unbusinesslike methods that you mentioned? — A. The unbusinesslike methods were a multitude of things. 60 KEPOKT ON THE INTERNATIONAL HARVESTER CO. Q. That a part of it? — A. Yes, sir. Q. That is, the Deering people would have a machine listed at $90 and let the dealer have it for $80 ? — A. Yes, sir. Q. Was that a common practice in giving of rebates ? — A. All kinds of subterfuges for modifying prices, taking old machines at large values when they had no value, throwing in other prop- erty, wasteful expenditure of money and time and salary of men. Q. I was not asking you what you complained [of] in detailed statement. I asked you if the selling below listed prices was one ; was that true? — A. Yes, sir. Q. Now, since that time did you make one price on paper and get another price from the dealer? — A. We do not. Q. You maintain the prices listed? — A. Yes, sir. Q. And before that consolidation that was not done by any of the companies ? — A. Was not done so generally. Q. Well, the truth of the matter is that a very large propor- tion, if not the larger proportion, was made ; the sales were made below the listed price? — A. I could not say about the larger proportion. Q. But a large proportion was? — A. Yes, sir. Testimony of John J. Glessner. Q. Did not the Champion, the Deering, McCormick, and Piano have the best business here in Missouri ? — A. I think so. Q. You all were competitors of each other? — A. Yes, sir. Q. There was no understanding or agreement, secret, between you people prior to 1902 ? — A. No, sir. Q. There was actual competition between you ? — A. Yes, sir. Q. The fact is, the competition was pretty vigorous? — A. Yes, sir ; we tried to make it so. Q. The competition of the harvester business had been more pronounced in their early part ? — A. No, sir ; it grew [in] bitter- ness and extended right along. Q. You think it increased ? — A. Yes, sir. Q. You think there was more competition in 1902 in the har- vester business than any time before? — A. It depends on what you can call competition. It was a bitter fight between every- body to get business and get the better of your competitor. ******* Q. Mr. Glessner, previous to 1902 you described the competi- tion that was general throughout the United States in the har- vesting machine business. I want to ask you a little more about it. What was the nature of that competition? — A. Well, it was to affect sales primarily and incidentally or indirectly to prevent somebody else from making sales. Q. You are aware, as a matter of general information, of the competition that exists between different stores or between dif- ferent manufacturers in order to sell their goods, was that the character of competition that was in vogue prior to 1902? — A. No, sir; I think in the harvester business there was a competi- tion never known in any other business in the world. CONDITIONS PRECEDING ORGANIZATION. 61 Q. What way? — A. We did everything we could possibly do that would prevent our neighbor from making a sale. We had a very large number of salesmen out on salary, and these men, of course, were instructed that they had to produce results; if they did not get results, we did not want them; they would do any- thing, it did not make any difference what it was, to make a sale. It had been the custom to make a house-to-house canvass to find out who would probably want machines; as quick as one man would sell a machine his neighbor or competitor would follow after him to get the purchaser to give up that machine and take another one. The result was there were field trials which would not give the order to the most successful machine, but to the agent who made the most promises. I know when I was in competition I naturally would show my machine off the best I could. I natu- rally thought my machine was the best, and the farmer said it was the best, but he said, " I can not afford to take your machine, because this other man says he will take $15 discount " ; and then I said, " I will make $15 discount " ; then the other man said, " I will take off ten more " ; then I made it ten more ; and it kept up until he got the price down less than half, so tiie farmer said, finally, " I will take them both." Testimony of Wm. H. Jones. Q. In the years preceding 1902 you said the competition was demoralizing? — A. Yes, sir. Q. By competition, I generally understand that that rivalry between firms that brings down the prices of goods and enables the consumer in a fair competition to get the benefit. What do you mean by demoralized competition? — A. Busting up one another's orders. Q. Well, now go on and tell all about it. — A. That was a com- mon practice. Q. How do you mean "by busting one another's orders"? — A. For instance, you are a farmer, our agent could take your order for machinery, and Mr. Glessner's man would get on to that and would try to bust the orders — our orders — turn ours back ; that is what I mean. ******* Q. Did not this fierce competition you have been talking about, did not that result in the cutting of prices? — A. The dealers were not making anything nor the manufacturers. Q. Well, the dealers did not petition you to form the combina- tion? — A. No, sir; but they were going out of business the way they were doing. Q. How many had gone out of business in Missouri? — A. I don't know ; as a general thing they would naturally, though. Q. Did they not handle them on a commission ? — A. They did not get the price ; they cut the price and they were to pay us so much. Q. So the person that was being benefited by this competition was the farmer? — A. The farmer is better off to-day than ever before. 62 REPOET OH THE INTEENATIONAL HARVESTER CO. Q. He was getting his binders cheaper? — A. Yes, sir; but buying them more than he needed. Testimony of G. S. Funk. Q. Were you familiar with the conditions during the IQ years prior to 1902? — A. Yes, sir. Q. What were these conditions? — ^A. More like guerilla war- fare than anything else. Q. Illustrate and describe it. — A. I was the sales manager of the Champion Company in later years; I know that my efforts were devoted as much to tearing down the other fellow's organ- ization as the building up of my own, and I frequently spent sev- eral times over the price of a machine trying to make my own machine stick and knock out the other fellow's. Representatives of the International Harvester Co. have tried to justify its formation on the ground that competition was destruc- tive and resulted in numerous failures of harvesting-machine com- panies. However, the only concerns mentioned by Cyrus H. McCor- mick in the Missouri case, as failing during the decade preceding the formation of the International Harvester Co., were the St. Paul, Seiberling, Winona, and Esterly companies. None of these com- panies was an important manufacturer of harvesting machines. These few failures are generally attributable to deficient resources or management or poor location rather than to excessive competition. The whole tendency of the implement business, not only in harvesting machines, but also in other lines, was toward concentration into a comparatively small number of concerns, due to the superior efficiency of the larger companies. In the harvesting-machine branch, more- over, the competition was not so severe as to jDrevent most of the larger eompanies from making considerable profits, and sometimes very large profits, which were largely reinvested in the business. Profits or harvesting-machine companies prior to the merger. — Specific information as to the amount of profits earned by harvest- ing-machine companies in the years immediately preceding the merger of 1902 is limited to tlie five concerns which originally entered that consolidation, namely, the McCormick, Deering, Champion (Warder, Bushnell & Glessner Co.), Piano, and Milwaukee com- panies. This list, however, embraces the two most important har- vesting-machine companies, and three of the six companies which may be said to have occupied the second rank. Profits for the above- mentioned companies, moreover, are not generally available for years prior to 1898. For the five years from 1898 to 1902, inclusive, the net profits of these companies are shown in the table following. CONDITIONS PRECEDING OEGANIZATION. 63 TABtR 3.— NET PROFITS OF FIVE SPECIFIED HARVESTING MACHINE COMPANIES, 1898-1902.1 Year. McCormick.s Deering. Gharapion.' Piano. Milwaukee.' ===== Total. 1898 $4,723,985.26 4,560,157.78 3,914,745.81 4,844,736.38 5,042,780.55 $3,040,704.99 3,071,462.33 <2,~647,375.12 2,281,035.87 3,830,076.04 1724,730.49 709,212.98 209,835.96 208,796.04 .318,249.47 $516,781.49 426,586.13 i 76,925. 16 89,848.15 $514,376.62 694,507.25 254,197.65 85,680.27 356,674.56 $9,520,578.75 9,461,926.47 6,991,312.30 7,343,323.40 9,636,628.77 1899 1900 1901 1902 Total Average 23,086,405.78 4,617,281.16 14,870,654.35 2,974,130.87 2,170,824.94 434,164.99 921,448.37 184,289.67 1,904,436.25 380,887.25 42,953,769.69 8,590,753.94 • The profits as shown in this table were compiled from statements made by Jones, Caesar & Co., a Arm of accountants, but take into account items which they disregarded in accordance with their instructions in the determination of good will. The balance sheets of the McCormick Co. for 1901 and 1902 show profits ot $4,631,809.36 and 85,125,565.25, respectively, and the balance sheets of the Deering Co. for 1901 and 1902 show profits of $2,357,995.61 and $4,183,940.93, respectively. 2 The profits of the McCormick and Milwaukee companies for the years 1895 to 1897, inclusive, were as follows: Year. McCormick. Milwaukee. 1895 $2,620,839.48 2,743,192.32 2,754,634.31 267,687.97 164,467.69 210,302.29 1896 1897 • Warder, Bushnell & Glessner Co. ' Eight months. 'Loss. In general, the profits shown in the above table were very good, and the average for the five years for each of the companies, except the Piano, was fairly high.^ The Piano company, however, showed a loss in two years, namely, 1900 and 1901, while its profits were low in 1902. The profits of the Milwaukee company also were low in 1901. On the other hand, the profits of the McCormick and Deering com- panies were very high in each of the five years, while those of the Champion and Milwaukee companies were generally high also. The rate of profit on the net book assets at the end of the year for the McCormick, Deering, and Milwaukee companies, as shown by their own books, for the business years most nearly corresponding to the calendar years 1901 and 1902 were as follows : Company. Rate of profit. 1901 1902 McCormick * 12.3 12.1 2.9 11.7 17.9 11.0 ' In thiS connection it may be noted that the Champion company paid salaries of no less than $25,000 per annum to both the president and the vice president, who were among the largest stockholders in the com- pany. The president of the Piano company, who was likewise the largest stockholder, was paid a salary of $15,000 per aimum, oidy $3,000 less than the president of the McCormick company. • Years ending Sept. 30, 1901 and 1902. " Years ending Jan. 31, 1902 and 1903. 64 EBPOKT ON THE INTEENATIONAL HAEVESTEB 00. These 1902 profits may have somewhat overstated the net earnings available for dividends, and the book assets are not an entirely satis- factory criterion for judging their exact significance ; but it is certain that such profits were liberal. Again, taking the aggregate profits of these five companies for the years 1898 to 1902, inclusive, in no year did they fall below $6,900,000. The net earnings of the International Harvester Co. were not as high as the aggregate earnings of these five companies in either 1898, 1899, or 1902, until after the year 1908. That is to say, in three of the five years for which the profits of these companies are shown, the aggregate annual profit was greater than the reported profit of the International Harvester Co. during any one of the first six years of its existence. (See p. 211.) While the profits for these five companies collectively were con- siderably higher in 1898 and 1899 than in 1900 or 1901, they were highest of all in 1902. It is possible that the pending merger in 1902 tended to limit the severity of competition in that year, and thus to increase profits. Hence, while competition appears to have been quite active during the five years preceding the formation of the International Harvester Co., the profits of most of the large companies were quite high. Increase in volume of prodttction. — ^Undoubtedly one of the im- portant factors in making the harvesting-machine business profitable during the decade preceding the organization of the International Harvester Co. was a rapid increase in the volume of output. The number of harvesting machines produced in the census year 1899 (which, however, was an exceptional year) shows a very great increase over the number found in the census year 1889, as is shown by the following table for binders, mowers, and horse rakes : Table 4.— NUMBER OF BINDERS, MOWERS, AND RAKES PRODUCED IN THE UNITED STATES, ACCORDING TO THE CENSUS REPORTS FOR THE YEARS 1889 AND 1899. Machine. 1889 1899 Per cent Increase. 125,942 170, 893 114,790 233,542 397,561 216,345 85.4 132.6 88.6 1 Including grain liarvesters. » Excluding combined mowers and reapers. Complete data are not available for comparing the number of machines sold by the companies which went into the International Harvester Co. The following table shows, however, the numbers sold of the two chief kinds of harvesting machines for the five years 1898 to 1902, except that data are missing for the Deering company for the first two years. CONDITIONS PBECEDING ORGANIZATION. 65 Table 5.— NUMBERS OF BINDERS AND MOWERS SOLD BY THE FIVE COMPANIES FORM- ING THE INTERNATIONAL HARVESTER CO., BY YEARS, 1898-1902. I. Binders.^ Year. MoCor- mick. Deering. Piano. Cham- pion. Milwau- kee. Total. 1898 66,649 62,203 48,268 65,299 < 67, 592 43,545 60,771 60,981 13,147 17,515 16,367 16,960 15,344 20,836 24,991 21,211 24,472 23,480 12,895 14,226 10,228 " 13,525 8 12,627 (') 1899 (') 1900 139,619 1901 161,027 1902 180,024 II. Mowers. 1899. , 1900., 1901. 1002. 85,458 105,680 104,877 118, 702 * 129, 066 75, 103 91,905 92,494 12,775 19,565 18,727 20,705 20,545 30,452 36,225 34,345 39,704 35,655 12,792 17,512 15,517 ■ 16,550 ■ 20, 120 m 248,669 287,666 297,880 ' Includes harvesters (not headers). 2 Data missing. * Number produced. ' Another statement shows 66,816 harvesters and binders, and 128,677 mowers. Considering first the totals, which are available only for three years, 1900 to 1902, inclusive, this table shows a marked increase in the numbers of binders and mowers sold. Comparing 1900 with 1902, the increase in the number of binders was 29 per cent, and in the number of mowers 20 per cent. The greater part of this increase was due to the increase in the output of the McCormick and Deering companies. For the McCormick company the increase for the same two years was 40 per cent for binders and 23 per cent for mowers, while for the Deering company the increase was the same, namely, 40 per cent and 23 per cent, respectively. In both cases the year of largest output was 1902. For the McCormick company the increase from 1898 to 1902 in the number of binders sold was very small, but there was a large increase in the number of mowers. For the other three companies, the numbers sold in 1902 were not generally quite so large as in 1901 ; in some cases 1899 was the best year in this respect. Nevertheless, whether for binders or for mowers, the average number sold for the five-year period for each of these companies was not generally so large as the number sold in 1902. Two exceptions are found, namely, binders for both the Piano and the Milwaukee companies, but in each of these cases the average was only slightly higher than the figure for 1902. For 1901, the numbers sold of both binders and mowers was greater than the average for each of these three companies. For 1901 and 1902 com- bined, the volume of business, either in binders or mowers, was larger for each of these companies than for the two preceding years, except for binders in the case of the Piano company. Hence for these 66 EEPOET OX THE INTEENATIONAL HAEVESTEE CO. three companies also, the conditions of output just prior to the merger were favorable. It appears, therefore, that not only were the McCormick and Deer- ing companies enlarging and expanding their business, but also that the volume of business of the Champion and Piano companies was comparatively large during the two years preceding the merger. This large increase in the volume of business taken in connection with the comparatively high rates of profits earned on the capital invested is strong evidence of the fact that the companies which originally formed the International Harvester Co. were generally not suffering from excessive competition. The combination, there- fore, can not be justified on the principle of self-preservation. CHAPTER II. FORMATION OF THE INTERNATIONA! HARVESTER CO, Section 1. General character of this consolidation. The International Harvester Co. was organized under New Jersey laws in August, 1902. It merged the business of the five principal manufacturers of harvesting machines, as follows : Capital stock. McCormick Harvesting Machine Co )P2, 500, 000 Deering Harvester Co '3,000,000 Warder, Bushnell & Glessner Co 3,000,000 Piano Manufacturing Co 1,000,000 Milwaukee Harvester Co 1,000,000 As will be shown in some detail later, the capital stock of these companies does not even approximately indicate the amount of their net assets or their relative importance. The personnel of the stockholders, on the other hand, is of especial significance. The company at its organization embraced about 85 per cent of the total production of harvesting machines in the United States. The McCormick Harvesting Machine Co., which was the largest of these concerns with respect to both net assets and volume of business, was an Illinois corporation, organized September 11, 1879, and had a factory at Chicago. Practically all of its stock was held by mem- bers of the McCormick family.^ Cyrus H. McCormick was president and Harold F. McCormick secretary. Both of them were sons of the inventor and founder of the company, Cyrus H. McCormick the elder. The Deering Harvester Co., which was second in importance, was a copartnership organized under the laws of Illinois in 1899, suc- ceeding to a corporation of the same name. It had a factory at Chi- 1 Capital. 2 The stockholders of the McCormick Harvesting Machine Co. and the shares of stock held by them at the time of the merger were as follows : Shares. Nettie Fowler McCormick 5, 730 Nettie Fowler McCormick 1 Eldrldge M. Fowler, trustee \ 3, 038 Cyrus H. McCormick, jr., trustee J Cyrus H. McCormick 5, 300 Harold F. McCormick 3, 502 Stanley McCormick 3, 728 Eldrldge M. Fowler 200 W. E. Selleek 1 Anita McCormick Blaine, guardian of Emmons Blaine, minor 1 Anita McCormick Blaine 3, 500 67 68 BEPOET ON THE INTERNATIONAL HARVESTER CO. cago. The members of the firm were Charles and James Deering and Eichard F. Howe, a brother-in-law of the Deerings. The two Deerings were sons of one of the founders of the enterprise, William Deering.^ It also, therefore, was a strictly family concern. This company, besides its implement factory in Chicago, had iron-ore leases in the Mesabi Range, a steel plant under construction, and an interest in iron works in Chicago and timber properties in the South. The Warder, Bushnell & Glessner Co. was an Ohio corporation, or- ganized October 18, 1886, which made the " Champion " line of har- vesting machines, with a factory at Springfield, Ohio. A large part of the stock at the time of the merger was held in about equal parts by Asa S. Bushnell and J. J. Glessner. There were only two other stockholders of any importance, apparently, who were active in the business, but it is understood that a large block was held by the Warder estate.^ J. J. Glessner was president and G. B. Glessner secretary. The Piano Manufacturing Co. was an Illinois corporation, organ- ized March 3, 1881, with a factory at Piano, near Chicago, later moved to West Pullman. A large amount of the stock was held by W. H. Jones, president and founder of the company. Other mem- bers of his family also held considerable amounts of stock.* Most of the large stockholders in these four companies, as will be shown later, became stockholders in the International Harvester Co. The Milwaukee Harvester Co. was a Wisconsin corporation, organ- ized December 15, 1881, and originally called the Parker-Dennett Harvesting Machine Co. It had a factory at Milwaukee. The holders of this stock shortly before the merger were Stephen Bull, G. H. Schulte, Frederick Robinson, Frank K. Bull, Richard T. Rob- inson, and C. L. Mcintosh. In the case of this company, in distinc- tion from the others just mentioned, the old stockholders were bought 1 Large amounts of money were loaned to the Deering Harvester Co. by Wm. Deering and Wm. Deering & Co. Thus the balance sheet of the Deering Harvester Co. for Feb. 1, 1902, shows the following liabilities : William Deering, cash loan $2, 929, 346. 49 , William Deering, special account 1,484,672.89 William Deering & Co 2, 765, 811. 13 " Some of the stockholders of the Warder, Bushnell & Glessner Co., and the shares of stock held by them at the time of the merger, are reported as follows : Shares. Asa S. BushneU :: 842 J. J. Glessner 841 G. B. Glessner 150 E. C. HasUins 100 • Some of the stockholders of the Piano Manufacturing Co., and the shares of stock held by them at the time of the merger, are reported as follows : Shares. W. H. Jones 1, 822 O. W. Jones 250 G. B. Jones 25 W. O. Jones 25 Archer Brown 837 J. P. Prlndle 240 S. J. Llewellyn 230 W. F. Boyd 4 FORMATION OF COMPANY. 69 out, SO that they had no connection with the International Har- vester Co.^ This great combination was 'formed with the assistance of the bank- ing house of J. P. Morgan & Co., which, between 1898 and 1902, had organized other combinations of competing concerns, such as the Fed- eral Steel Co., the National Tube Co., the American Bridge Co., the United States Steel Corporation, and the International Mercantile Marine Co. All of these combinations took the form of large cor- porations in which the various companies acquired were consolidated. Other bankers and promoters within the same period had organized many similar consolidations. Indeed, this period was characterized by such a degree of activity in this direction that the movement to- ward combination has been aptly described as a " consolidation Section 2. Motives for forming the consolidation. The principal purposes which inspired the promoters of these vari- ous consolidations were, generally speaking, three, namely: (1) To eliminate competition; (2) to reduce costs and expenses; and (3) to issue inflated securities. But all of these purposes were not always combined in the case of a particular consolidation. Testimony as to the purposes of the Harvester consolidation was given in judicial proceedings in Missouri in 1908 by some of the chief representatives of the International Harvester Co. This testimony was to the effect that the chief purpose of its organizers was to abol- ish what they called the " unbusinesslike " conditions which prevailed as a result of the competitive methods referred to in their testimony as cited above (p. 59). W. H. Jones, of the Piano company, stated explicitly that the mer- ger was organized to abolish competition. This is shown by the fol- lowing excerpt from his testimony : Q. Your business was not as prosperous as the McCor- micks? — A. No, sir. Q. You think the McCormick was crowding you out of the home market? — A. No question about that. The survival of the fittest. . „ 1 ,^ Q. You think McCormick was the survivor?— A. Yes, sir; had more capital and the best chances in more ways than the rest of us. . . Q. So, in order to get rid of this fierce competition you formed this new organization ? — A. We had to do it or wind up the busi- ness. If we had not, we would have thrown all of our men out of employment. The best thing to do was to get rid of the fierce •The stockholders of the Milwaukee Harvester Co. at the actual date of the merger were simply representatives of J. P. Morgan & Co., the financial promoters. All the shares, except 8 shares to qualify directors, were in the name of Arthur W. Fairchild, an employee of the company. 70 EEPOET ON THE INTERNATIONAL HAEVESTEE CO. competition ; to get rid of the waste of money in canvassers. We have not half as many canvassers to-day as we did have. Q. The canvassers were necessary to maintain your competi- tion? — A. Before that we did it to beat one another out of business. Q. Is that not what you call competition? — A. Pretty sharp competition. Q. It was to get rid of that you made your combination? — A. Yes, sir ; to better the entire thing ; no question about that. Another reason alleged by its founders for the consolidation was that it would increase economy of operations by enabling them, on the one hand, to produce their own raw materials and, on the other hand, to diversify their lines of machines and implements. Thus. Cyrus H. McCormick testified as follows : We came to the conclusion if we could enlarge the business; * * * the McCormick business and get in more capital, cover a larger field, build more machines and different kinds of machines, and get back to the raw material our profits would be greater, and we could make a greater success of the business. Finally the promoters of the merger declared that one of their motives was to develep and increase the export trade in agricultural implements. On this point Cyrus H. McCormick testified as follows : Q. Was there any other purpose? — ^A. Well, another purpose was to help in regard to the foreign manufacture, the develop- ment of the business was such that it was evident that some capi- tal would be required and this was the method of getting it. There is no doubt that the principal motive for the formation of the International Harvester Co. was to eliminate competition and to secure a dominant position in the trade. This was also the salient fact of the transaction. The purpose of reducing costs and expenses by organizing a single great concern from several large ones was a secondary motive. As the plan was finally carried out, the usual practice of inflating the issues of stock was not attempted in any marked degree. The close ownership of the companies merged, as well as the market conditions in 1902, probably explain this varia- tion from the usual practice in the consolidations which were organ- ized at that time. It is noteworthy that not only did this combination include the great bulk of the total production of harvestingmachinesin the United States, but also that the only important companies manufacturing such machines which were not included in the combination were those located in New York State, none of which was a very important fac- tor in the principal markets for harvesting machines in the United States, namely, the States drained by the Mississippi Rivei*. To- gether with the two greatest rivals for tii* sale of harvesting machines in the United States, namely, the McCormick and Deering companies, FOBMATION OF COMPANY. 71 were included, therefore, all of their chief competitors in this great region. Those which were not included in the combination marketed their products chiefly in the North Atlantic seaboard States and in foreign countries. The economy in production costs which could be expected from such a combination as this depended chiefly on the concentration of production of particular kinds of machines at particular plants. While in certain industries, notably the steel industry, there were considerable advantages to be obtained in certain kinds of consoli- dations through integration (i. e., the linking together of successive stages of production under one control) , not so much advantage in this direction could be anticipated from a consolidation of the leading manufacturers of harvesting machines. It is true that one of these companies especially, namely, the Deering, had begun just before the merger to extend its operations in the direction of acquiring raw- material properties, such as iron-ore leases and iron and steel works, and also timber property and sawmills. The advantage of this policy in respect to iron and steel production was questionable, so far as any one of these companies taken alone was concerned, but the situation was different for such a large consolidation as the International Harvester Co. This question will be discussed in some detail later. (See p. 267.) The principal economy to be anticipated in such a consolidation lay chiefly in the reduction of selling expenses by uniting the sale of the product of all the companies in the hands of a single selling organization. The actual results achieved in this respect will be considered below. As noted, some importance was attached by the organizers of this consolidation to the extension of the foreign trade. It should be understood in this connection, therefore, that a considerable foreign trade had already been developed by the chief companies which en- tered the consolidation. Thus, Cyrus H. McCormick testified as follows : Q. You have no definite knowledge. Now, prior to the or- ganization of the New Jersey Company, the McCormick had sold machines abroad, had they not ? — A. Yes, sir. Q. Had a regular foreign trade? — A. Yes, sir. Q. And the Deering? — A. Yes, sir. Q. The Piano?— A. Yes, sir. Q. The Milwaukee Company? — A. Yes, sir. Q. The Warder Bushnell and Glessner Company? — A. Yes, sir ; rather small. Q. Had some foreign trade? — A. Yes, sir. Q. Your foreign trade prior to 1902 was large? — A. Very large. Q. What per cent of your business? — A. I never figured it up by per cent., the substantial per cent., fifteen or twenty per cent. 72 REPORT ON THE INTERNATIONAL HARVESTER CO. Furthermore, the four principal harvesting-machine companies in Ne-w York State, namely, the Osborne, Johnston, Wood, and Adri- ance-Platt companies, had a relatively large proportion of sales in export markets. In fact, American harvesting machines were then sold all over the world.^ Inasmuch as the principal stockholders of the several companies combined became the chief stockholders of the consolidation and continued in active control of the business, the motive for inflating the stock issues of the new company did not exist in the same degree as for many similar combinations formed at about the same time. Moreover, as already intimated, the stock market in 1902 was not particularly favorable to the sale of large issues of inflated stock, as it was already beginning to feel satiated with " undigested securi- ties," which shortly after brought about a crisis in the stock market, namely, the panic of 1903. Both of these reasons apparently had weight in inducing the International Harvester Co. to adopt a com- paratively conservative policy in the capitalization of the company. Section 3. Manner in which negotiations were conducted. The particular manner in which the negotiations for the formation of the International Harvester Co. took place is a matter of consider- able importance, and one in which the testimony of the chief repre- sentatives of this company in judicial proceedings in Missouri, already referred to, shows a marked disagreement from the informa- tion obtained by the Bureau of Corporations as to the manner in which they were actually conducted. The position taken by officers and representatives of the International Harvester Co. was fhat the project was first broached subsequent to June 15, 1902, and that the chief stockholders and officers of the companies merged had no conferences or understandings among themselves concerning the formation of the company prior to July 28, 1902, when the first con- tracts relating to the merger were signed. They asserted that all the negotiations up to the latter date were conducted by George W. Perkins, of J. P. Morgan & Co., with the representatives of the vari- ous companies separately. Mr. Perkins himself assumed practically complete responsibility for the organization of the company. It is inconceivable that all of the principal parties concerned in the formation of the International Harvester Co. had such scanty infor- mation as to the nature of the plans before they were consummated in a single session by the contracts of July 28, 1902. Indeed, the Bureau has obtained certain evidence as to the manner in which these negotiations were conducted which clearly shows that the lead- ing interests in the old companies had considered and discussed plans for a combination for some time. This evidence is found in a state- 1 Cf. list of agencies of McCormlck Harvesting Machine Co., Exhibit 2, p. 333. rOBMATION OF COMPANY. 73 ment obtained at the office of J. P. Morgan & Co., which was among the papers relating to the International Harvester Co. left there by Mr. Perkins after his separation from that firm. Such parts of this statement as are pertinent to the manner in which these negotiations were conducted are quoted below, and the complete statement is reprinted as Exhibit 1, page 327. Excerpt from statement made l>y Mr. Stanley McCormich and Mr. Bentley to Mr. PerJdns, June 27, 1902, in New York City, as revised at the office of the McCormich company in Chicago. The McCormick and Deering people, in talking over how they might get together, estimated, in the matter of good will, that about two average years' profits ought to represent the good will of each company's business. In negotiations not a great while ago the Deerings rather ex- pressed the opinion that if the McCormick and Deering com- panies were to come together it ought to be on a basis of about 53 for the McCormick Company and 47 for the Deering, while the McCormick figures have been anywhere from 55 to 60 for the McCormick Company and 40 to 45 for the Deering Company. These figures are not as far apart as they seem to be, because the Deering people have always refused to regard the outstand- ings as legitimate assets of the businesses in forming a combina- tion. Without these the percentages, according to the McCor- mick Company's figures, are about 55 to 45 as against the Deer- ing's figures of 53 to 47. Other companies: The Deering Company is estimated to be worth $25,000,000, including their B. R. [bills receivable]. The Massey Harris Co. of Canada 9,000,000 (This estimate was made by Mr. Swift of the McCormick Co. Mr. MiddlekaufC has estimated this company to be worth $18,000,000.) The Champion Company (Warder. Bushnell & Glessner) of Springfield O. is estimated to be worth 8, 000, 000 The Piano Manufacturing Co. of Chicago 6,000,000 The Milwaukee Harvesting Company 4, 500, 000 The Champion company: Mr. Glessner is president of this company. Mr. Harold Mc- Cormick saw him three or four weeks ago and sounded him as to what he would think of the several harvesting companies getting together. Mr. Glessner seemed to be very much in- terested in having it done and said that his company would not be particular as to details or as to what influence would pre- dominate. The Champion Company is a stock company ^nd the stock is rather closely held by the gentlemen directljr interested in the management of the company, with the exception of the Warder interests. Mr. Warder was the senior partner of the firm. He is now dead and Mrs. Warder lives in Washington. The Ward- ers have no active interest in the business. It has been said that Mrs. Warder owns about one-third of the stock of the company. 77854°— 13 7 74 EEPOET ON THE INTEE^ATIOSTAL HAEVESTEE CO. Mr. Fowler had a conversation with her about a year ago, in which he got the impression that she would like to sell. The Piano corrvpany: Mr. W. H. Jones is president of this company and is the domi- nating influence. Mr. O. W. Jones, his brother, is vice president. He visited Mr. McCormick about four weeks ago and in a casual way asked if something could not be done in the way of a combi- nation. He remarked : " If you and I were appointed a com- mittee of two to put this through it wouldn't take us a week to wind it up," giving the impression that he was anxious to see it put through. This Mr. Jones takes rather a pessimistic view of the trade. He thinks that prices will have to be reduced con- siderably. He thinks, for instance, that a machine now selling to the trade for $100 will soon have to be sold for $75. At one time he expressed himself as entirely friendly to control by the McCormicks. He also thought the smaller companies like the Piano company would stand a better show in the case of strenu- ous competition than the larger companies, because of smaller charges in the way of organization. General: Mr. Deering has approached both the Piano and Champion companies, but so far as is known he has no option on either one. Mr. Deering has claimed that the McCormicks have conducted their collection department in too liberal a manner. ******* Mr. Deering may oppose the kind of organization the Mc- Cormick Company has, which develops the strength and capa- bility of important men and places responsibility upon them. Plis plan has always been to keep the lines in his own hands and then play off one man against another. This plan has produced much jealousy and friction in the Deering Company. Mr. Deering's relations with Judge Gary are very close, but they are of such a nature that you would get a great deal more help if Judge Gary came to you with a proposition than if you got at Deering through Judge Gary. Judge Gary has far more influence over Deering than anyone else. Mr. Deering usually has some scheme up his sleeve. For instance, he very likely might already be negotiating to get hold of the Warder interests and might be planning to do the same with regard to the other companies. The men who represent the elder Mr. Deering, who has retired from the business, are Mr. Charles Deering and Mr. James Deer- ing, his oldest and youngest sons, and Mr. Richard Howe, his son-in-law. These three younger men constitute the present co- partnership. Mr. William Deering, however, keeps in close touch with the main matters of the business. The thing that would prevent an excessive demand on Mr. Deering's part would be the fact that he asked for only two average years' profits as the measure of good will of his company. The demand for control of any new company by the McCormicks has been the chief obstacle met in these negotiations with Deering. FORMATION OF COMPANY. 75 The Deerings have indicated that they would prefer not to sell for cash, but would take securities and keep an interest in the management of the new organization. Mr. Deering has urged that the whole trade be taken into the combination. Against this it has been suggested to him that if only 90 per cent were brought in it would be quite possible to deal with another of the minor companies if any one made ex- cessive demands ; that is, no minor company is probably essential to the combination, although the five named are undoubtedly the most desirable.^ The following facts seem to be well established by the foregoing statement : 1. The McCormick, Deering, Champion, and Piano interests had been in direct negotiations concerning a consolidation prior to the middle of June, 1902. 2. The question whether the McCormicks should control the proposed company had been under discussion, and Glessner and Jones were not opposed to it. 3. Jones is reported to have said that if the combination were not formed, the small companies would be able to meet the competition of the McCormick and Deering companies; and that the price of binders would have to be reduced from $100 to $75. 4. Deering had urged that the whole trade should be taken into the "combination." 5. The proposed consolidation was to include five companies, i. e., the McCormick, Deering, Champion, and Piano companies, and pre- sumably the Milwaukee company as the fifth, as that is the only other domestic company specifically mentioned in the statement, and was one of those actually included. 6. It was expected that the proposed consolidation would embrace 90 per cent of the trade in harvesting machines at the outset, and that it would be easier to get additional minor harvester companies afterwards under favorable terms if they were wanted, though such companies would not be " essential to the combination." Again, the record in the present Government suit shows that the McCormick interests cooperated with the bankers in securing the 1 In connection with the foregoing statement o£ Stanley McCormick and Cyrus Bentley to G. W. PerWns of June 27, 1902, It may l)e noted that a letter was found among the papers in J. P. Morgan & Co.'s office written by Stanley McCormick to G. W. Perkins, from which the following excerpts are made : July 3, 1902. My Dear Mb. Perkins : I acknowledge favor of the 28th ult., Inclosing a copy of the notes of our conversa- tion of June 27th; and also, a list of statements desired by you. * * • The statement giving the details of the negotiations with the Messrs. D's will be forwarded later. * « * Yours very truly, ^^^^^^ g^^^^^^ McCoemick. George W. Perkins, Esq., % J. P. Morgan & Co., Wall St., cor. Broad, New York, Otty, 76 KEPOKT ON THE INTERNATIONAL HAEVESTBK CO. Milwaukee Harvester Co. It appears that the option on this Mil- waukee concern was obtained on June 24, 1902, from Stephen Bull and his associates by P. D. Middlekauff, who was furnished $100,000 for this purpose by the McCormick Harvesting Machine Co. Follow- ing is a letter from H. F. McCormick to Mr. Middlekauff, and also one from C. H. McCormick to George W. Perkins introducing Mr. Middlekauff: Chicago, June 25, 1902. Mr. P. D. MlDDI^KATXTF. Dear Sie: We authorize you to assign to J. P. Morgan & Co., or to any person whom they may designate, the option you ob- tained from the Milwaukee Harvester Co. for us. We will see that you incur no damage on account of such action. Harold F. McCormick, Vice President. On the back in pencil : Explain failure to get 90 days and explain terms. Go to J. P. Morgan & Co. office at 10 o'clock Friday A. M., leave letter and package at W. A. [Waldorf-Astoria] on arrival in city. See that it is put in hands of reliable party in office, but do not see Mr. Stanley [Stanley McCormick]. Give Mr. Perkins all the information asked for that you would give us. Make no deal for any position at this meeting. Put yourself under Mr. Per- kins' orders, either to stay in New York or to return here. When will expert start on books ? Who shall he be ? .'^luill we manage that — through you — or otherwise? Be on guard regarding Judge Gary. He may be on train. June 25, 1902. Dear Mr. Perkins : It gives me pleasure to introduce to you Mr. P. D. Middlekauff, Avho will make a full explanation to you regarding the Milwaukee option. Any wishes you may have as to this matter Mr. M. will be glad to conform to. I am, very sincerely yours, Cyrus H. McCormick. Geo. W. Perkins, Esq. A representative of the McCormick interests stated to the Bureau that in arranging for the option on the Milwaukee concern they were acting for the bankers. However, the important fact here is that the acquisition of that concern was arranged with the joint knowl- edge and, indeed, the cooperation of the two interests. Section 4. legal and financial details of organization. On July 28, 1902, the preliminary terms of the merger having been settled, the principal parties were brought together in New York at the offices of the law firm of Guthrie, Cravath & Henderson, acting for J. P. Morgan & Co., and four separate original agreements pro- viding for the merger were then and there duly executed by the rep- resentatives of the McCormick, Deering, Piano, and Champion com- FOEMATION OF COMPANY. 77 panies,^ respectively, and William C. Lane, the go-between or agent of J. P. Morgan & Co. Each of them shows that a combination of harvesting-machine manufacturers was intended and that the stock- holders of the companies whose properties were to be merged were to become stockholders in the consolidation. The process by which the merger was accomplished involved a good many formal legal transactions, including several agreements subsequent to those of July 28, 1902. The essential features of the plan as evolved were that the McCormick, Deering, Champion, and Piano companies should convey their plants and other physical prop- erties to a new company in exchange for stock, and in addition should subscribe to large additional amounts of stock in cash, such subscrip- tion being allowed and made to a large extent in the form of as- signed guaranteed bills receivable. For the plants and physical property thus conveyed, together with the entire property of the Milwaukee company, which was put in by the bankers as a going concern, and also for the payment of the bankers' services and ex- penses, $60,000,000 in stock was to be issued. Working capital to the amount of $60,000,000 was to be subscribed in cash partly by the four manufacturing interests going into the consolidation, namely, in the amount of $41,000,000, and the remaining $19,000,000 by the bankers and their associates. As a matter of fact, about half of this latter amount also was subscribed by certain of the manufacturing interests entering the combination. The transactions by which the consolidation was accomplished may be divided into five groups: (1) Agreements by which four of the vendor companies to be consoli- dated, sold their plants and their physical property to one W. C. Lane, the intermediary in this affair, and undertook certain obli- gations with respect to the subscription of working capital, subject to the performance of certain promises in regard to the formation of the new company; (2) organization of the International Har- vester Co. by a group of " dummy " or temporary incorporators and sale by Lane of the properties above mentioned, and subscription contracts for cash capital, and also the Milwaukee concern to the International Harvester Co. in exchange for all its stock; (3) en- trance of the original stockholders or owners of the vendor com- panies and their associates into the control of the International Har- vester Co. as holders of the capital stock which they had acquired in the meantime from Lane; (4) execution of voting- trust agreement; and (5) execution of certain supplemental agreements in order to carry out better the original intentions of the several parties. In this roundabout way the original companies conveyed their several properties to a single new company, and their stockholders, 1 For the McCormick company, Cyrufs H. McCormick and Harold F. McCormick ; for tlie Deering company, Cliarles Deering, James Deering, and Eichard F. Howe ; for the Cliam- plon company, J. J. Glessner and G. B. Glessner ; and for tlie Piano company, William H. Jones, O. W. Jones, S. J. Llewellyn, and Archer Brown. 78 REPORT ON THE INTERNATIONAL HARVESTER 00. together with other subscribers to the working capital provided for, became the owners of all the capital stock of the new company. Each of these steps will now be considered in more detail. Original agreements between vendor companies and Lane. — On July 28, 1902, four separate agreements were entered into between the McCormick, Deering, Piano, and Warder, Bushnell & Glessner companies, respectively, called the " vendors," and Wil- liam C. Lane, called the " purchaser," in substantially the same gen- eral form, but differing in certain details. A brief description of the principal features of the contract between the McCormick com- pany and Lane is given below, together with a statement of the principal points of difference in the other contracts.^ The contract between the McCormick company and Lane set forth that the McCormick company, called the " vendor," was the owner of certain plants for the manufacture of harvesting machines, and that Lane, called the " purchaser," desired to acquire them for the purpose of selling them to a company to be subsequently formed, which was called the "purchasing company." The vendor agreed to convey such plants and certain movable property as a going concern, and also guaranteed bills and accounts receivable, or cash, to the amount of $20,000,000. It provided that the purchase price should equal the appraised value of tangible property, plus receivables and cash, if any, and should be payable in shares of stock of the purchasing company at par. Detailed provisions were made for the appraisal of the plant and other property than receivables so conveyed, in- cluding the good will, the latter to be valued at the aggregate profit for two years preceding plus 10 per cent.^ The purchaser agreed that a purchasing company should be or- ganized in a manner approved by J. P. Morgan & Co., and should have a working capital, in addition to inventories conveyed, of $60,000,000, represented by cash or receivables. The capital stock was to be determined by J. P. Morgan & Co. after appraisal, but if one class of stock was issued, it should not exceed $120,000,000; if both preferred and common stock should be issued the preferred stock should not exceed $120,000,000, and the vendor should have the same proportion of common as of preferred. The vendor agreed that it, or the persons who should receive the stock alloted to it, should deposit such stock with a voting trust, which should consist of J. P. Morgan or G. W. Perkins and two other persons, to be appointed by J. P. Morgan & Co. » Ct. Exhibit 3, p. 342. • A special feature ot the appraisal provisions was that for certain specified properties the value should be fixed by J. P. Morgan or G. W. Perkins. This provision related to the Industrial railroad of the McCormick company, the Iron, coal, and steel properties (Including ore) of the Deering company, and the Interests in the industrial railroad and malleable plant of the Piano company. FORMATION OP COMPANY. 79 The corresponding contracts made between the other vendor com- panies and Lane were similar to that just described, except with re- spect to the amounts to be furnished in receivables and cash ; in the case of the Deering company, the amount stipulated was $16,000,000; for the Piano company, $4,000,000; and for the Warder, Bushuell & Glessner Co., $1,000,000. Supplemental contracts, similar to each other, were entered into between the same parties on August 11, 1902, of which the principal provisions in each case were as follows : The conveyance of the prop- erty referred to in the contract of July 28, 1902, should be made at once without awaiting the completion of the appraisal; also the as- signment and transfer of the accounts and bills receivable (subject to option to substitute cash). In the case of the Champion company, however, it was stipulated that the $1,000,000 subscription for work- ing capital should be made in cash. The capital stock of the pur- chasing company was fixed at $120,000,000. The shares of stock should not be issued to an amount exceeding 62^ per cent of the appraisal before January 1, 1903, and subject to this condition J. P. Morgan & Co. might issue such stock as they thought proper before the full appraisal was completed.^ On August 12, 1902, the McCormick and Deering interests agreed to a written proposition from J. P. Morgan & Co. to take about $9,000,000 additional stock, payable in cash or guaranteed receiv- ables, the subscription of each interest to be in proportion to their original subscription for working capital, and the exact amounts to be fixed later. (See p. 84.) Organization or the International Harvester Co. — At this stage of the proceedings the International Harvester Co. was or- ganized by a group of dummy incorporators. The certificate of incorporation was filed in New Jersey on August 12, 1902. Besides the usual formalities this certificate stated that the objects for which the company was formed were to engage in the manufacture and sale of all kinds of agricultural machines and implements, and repair parts and materials used in making them, etc.; also to ac- quire patents, trade-marks, etc. The capital stock authorized was $120,000,000, of which $60,000 was subscribed by the incorporators. The first meeting of this company was held on August 12, 1902, at the principal office of the company in Hoboken, N. J. Various for- malities of organization were completed, including the election of certain of the incorporators as officers and directors of the company. Immediately after these formalities the board of directors took under consideration an offer from W. C. Lane, made in writing, sub- stantially to the following effect : ^ Lane offered to sell, first, the plants, good will, and other property, excluding receivables, of the » Ct. Exhibit 4, p. 349. » See Exhibit 5, p. 351. 80 EEPOET ON THE INTEBNATIONAL HABVESTEE CO. McCormick, Deering, Piano, and Warder, Bushnell & Glessner Cos., together with the Milwaukee Co., which was sold as a going concern, with all liabilities and assets — these being valued at $132,000,000; second, working capital of $60,000,000, represented by cash or by bills and accounts receivable of the first three companies mentioned, at the option of the vendor, valued at $60,000,000. In payment therefor Lane offered to accept the entire capital stock of the Inter- national Harvester Co., namely, $120,000,000 par value, with a pro- vision that if any additional stock were issued by the company prior to July 1, 1903, on account of the surplus of $60,000,000,^ so created, then the original $120,000,000 stock should become preferred stock and the additional stock issued should be common stock and be issued to the holders of the preferred stock in proportion to their holdings. A committee of directors of the newly formed International Har- vester Co. was appointed to consider this offer and report on the fol- lowing day (Aug. 13, 1902). On August 13, 1902, a second meeting of the board of directors of the International Harvester Co. was held at 40 Wall Street, New York City, and W. C. Lane and E. H. Gary (chairman of the execu- tive committee of the United States Steel Corporation) appeared and explained Lane's offer to the said board. The committee appointed to consider the offer made a report substantially as follows : ^ First, that the properties of the five companies " are the most important in their line of business in the United States, and that each of them have for several years enjoyed a prosperous, profitable, and growing business." Second, " that the properties offered by Mr. Lane are, in their opinion, worth to this company the sum of $132,000,000, the price mentioned in Mr. Lane's offer, and they recommend their acquisition by the company, together with the $60,000,000 of working capital, at the aggregate price of $192,000,000, payable upon the issue of $120,000,000 of the company's capital stock." The board of directors, after discussing this report of the com- mittee, adopted formal resolutions ^ to the effect that these properties and the working capital offered by Lane were " necessary and desir- able for the business and purposes of this company " and were worth the amount stated by Lane, and that Lane be paid therefor in the total capital stock of the company, less the amount subscribed by the incorporators (namely, $120,000,000 less $60,000, or $119,940,000 par value) . It was resolved, further, that the treasurer should enter the proper amounts in the books of account, including the surplus of $72,000,000. A comparison of the terms of the original contracts between the vendors and Lane makes it quite evident that these amounts were 1 So in the printed copy ; should be $72,000,000. • See Exhibit 7, p. 353 • See Exhibit 6, p. 352. FOEMATION OP COMPANY. 81 purely fictitious and that the surplus of $72,000,000 was wholly im- aginary. But these details are of considerable importance to a cor- rect understanding of the final settlement of the capitalization of the company. Apparently it was not definitely settled at first whether or not the company should be organized on a basis of a gross inflation of stock issues. This proposal of Lane's was accepted, therefore, and according to the terms of Lane's contracts with the vendors he transferred the capital stock of the International Harvester Co. to the voting trustees. EntEANCE or original PEOPEIETOES of the MBE6ED COMPANIES INTO CONTROL. — The day after the International Harvester Co. was organ- ized, and on the same day that it acquired the properties of the merged companies described above, namely, August 13, 1902, the new stockholders took control of the company. The temporary directors resigned and the new stockholders elected the following directors in place of them : Cyrus H. McCormick. George W. Perkins. Charles Steele. Leslie D. Ward. Charles Deering. James Peering. ISTorman B. Eeam, Elbert H. Gary. William Deering. Stanlej^ McCormick. George F. Baker. Richard F. Howe. Harold F. McCormick. Cyrus Bentley. William H. Jones. Paul D. Cravath. John J. Glessner. Eldridge M. Fowler. Of these 18 directors, 10 were largely interested in the 4 com- panies merged, namely: The three McCormicks and Fowler, of the McCormick Co.; the three Deerings and Richard F. Howe, of the Deering Co. ; Jones, of the Piano Co. ; J. J. Glessner, of the Warder, Bushnell & Glessner Co. Three more directors, namely: Gary, Bentley, and Cravath, had been connected with such concerns or individuals as counsel. Four of these directors either represented the bankers, J. P. Morgan & Co., or were men who subscribed cash for the working capital of the companies, namely, Steele and Perkins, of J. P. Morgan & Co., and Baker and Ream, who were New York financiers. Ward, the only remaining director, was put in to com- ply with the corporation laws of New Jersey requiring a resident director. On the same day the temporary officers of the company resigned and the principal officers elected in their places were as follows: Cyrus H. McCormick, president; James Deering, Harold F. Mc- Cormick, W. H. Jones, and J. J. Glessner, vice presidents ; Richard F. Howe, secretary and treasurer. An executive committee was 82 EEPOET OK THE INTEKNATIONAL HAEVESTEE CO. elected, including the principal representatives of four of the com- panies merged, and also G. W. Perkins. Charles Deering was elected chairman of this committee. A finance committee was also elected, of which G. W. Perkins was made chairman. With the conclusion of these transactions the plan of the mergel* was practically effected. Execution of voting-trust agreement. — The next step in carry- ing out the original contracts of July 28, 1902, with the principal companies entering the merger, namely, the establishment of a voting trust, was made by execution of the voting-trust agreement and the appointment of the following persons as members of the voting trust, namely, George W. Perkins, Charles Deering, and Cyrus H. McCormick. In fulfillment of this part of the original agreements, a contract ^ was made on August 13, 1902, between W. C. Lane and the above-named voting trustees, wherein it appears that Lane delivered the total capital stock (except shares necessary to qualify directors) to the voting trustees, while the voting trustees on their part agreed to the provisions established for the voting trust and to the issue of voting-trust certificates to the beneficial owners of the stock of the International Harvester Co. Another important feature of this agreement, which should be noted here, was the provision, substan- tially, to the effect that of the three voting trustees, one should represent the McCormick interests and another the Deering interests. The voting trust was established for five years, namely, until August 1, 1907, with a stipulation for its continuance until August 1, 1912, unless a majority of the board of directors decided to terminate it at an earlier date. Supplementary contracts of March 24, 1903, and August 17, 1903. — Subsequent to the formation of the International Harvester Co. certain contracts were made between the vendors, respectively, and W. C. Lane, modifying the contracts of July 28, 1902, and Au- gust 11, 1902. The first set of these contracts referred to the methods of appraising the properties conveyed under the original contracts, and were dated March 24, 1903.^ Each of these provided, substantially, that if the appraisal of the property conveyed by the vendors should in the aggregate exceed $53,000,000, then there should be an additional issue of preferred stock equal to such excess, and that the vendor in each case should receive an allotment of stock equal to the amount shown by the appraisal. These contracts apparently were intended to make provision for an oversight in the original contracts of August 11, 1902, which limited the total issue of capital stock to $120,000,000. If the appraisal of the property of the four vendor companies equaled 1 See Exhibit 8, p. 355. • Of. Exhibit 9, p. 360. FORMATION OF COMPANY. 83 $60,000,000, then, on the basis of the capitalization established, noth- ing would have been left for the bankers and promoters, either for the Milwauke Harvester Co. or for their services. If the appraisals exceeded $60,000,000, there would not have been enough stock to cover at par the cash subscription. These contracts furnish, therefore, some internal evidence that there were no collusive proceedings by the promoters to secure an overvaluation of the properties purchased; but they do not show, of course, that the appraisals which were made were reasonable or correct. The appraisals as they were being made showed, apparently, that the amount of $60,000,000 would be considerably exceeded, and there is again internal evidence to show that these appraisals were recog- nized by the promoters of the merger as being excessively high. Such a situation would of course be very disadvantageous to the outside financial interests who furnished cash for stocks at par. Consequently on August 15, 1903, G. W. Perkins made an award which practically settled the distribution of the plant stock, and still further modifications of the contracts between the vendors and W. C. Lane were found to be necessary. These were effected in a contract dated August 17, 1903.^ It was agreed in this con- tract between the vendors jointly and W. C. Lane that certain specified amounts of stock should be allotted to each of the vendor companies for the property conveyed in lieu of the amounts to be determined by appraisal. The amounts agreed on were as follows: McCormick company $26, 321, 656. 86 Deerlng company 21, 362, 554. 64 Warder, Bushnell & Glessner company 3, 372, 185. 91 Piano company 2, 193, 603. 09 These amounts were agreed to subject to certain minor modifica- tions not then determined. It was provided that the Piano company was to receive $100,000 additional in cash. All the obligations of the vendors in connection with the property transferred (amounting to about $900,000) were to be assumed by the International Harvester Co. This contract provided, further, that the International Har- vester Co. should assume all obligations of W. C. Lane. Summary and criticism or contracts with respect to capitali- zation. — The fact that the promoters of this company were uncertain as to what amount of capital stock the company should have is ex- plained apparently by two facts: First, they were uncertain how much real tangible value there was in the properties merged ; second, they were undecided at first as to whether they would capitalize the company at the actual value of such property or at a greater value. The company was organized on the basis of $120,000,000 capital stock. Hence, when the appraisals showed that the total value so > See Exhibit 11, p. S63. 84 EEPOET ON THE INTERNATIONAL HARVESTER CO. arrived at would leave little or nothing to the bankers for their contribution, namely, the Milwaukee Harvester Co., or for their serv- ices, or perhaps e\en exceed $60,000,000, in which case there would not be enough stock for those who subscribed cash capital, it was evidently necessary to provide for additional stock, or to adopt some other means of allotting it than the appraisal value of the property. The fact that the contract of March 24, 1903, provided for additional issue if the appraisal exceeded $53,000,000 shows that the promoters had decided that they must get about $7,000,000 for the Milwaukee company and their own services and expenses. It also indicates, perhaps, that they did not think an appraisal ought to exceed $53,- 000,000. The contracts of March 17, 1903, were defective, however, in still leaving open the possibility of overappraisal and therefore the issue of stock on inflated valuations for the properties conveyed. This would, of course, be prejudicial to the outside financial interests which subscribed cash for their stock. Hence, as a final settlement, the contracts of August 17, 1903, provided that the total amount to be allotted for the property of the four predecessor companies, so ac- quired, was limited to an amount originally stated tentatively at $53,250,000.50, but finally made $53,292,857.64. The several interests which got the stock apparently came to an agreement on this amount. Hence the elaborate appraisals made of the property never really controlled the question of capitalization. Subsequently, however, when they were completed, they were used in part for bookkeeping purposes. Section 5. Allotment of $120,000,000 of stock issued. From the description given above of the various agreements by which the International Harvester Co. was formed, the method of allotting the stock is shown in a broad way. The exact items are not shown, however, either for the "plant " stock or for " cash " stock. In particular, the amounts allotted to -the bankers for their services and expenses and for the Milwaukee company's business are not shown, even in round figures. Before coming to a final state- ment of the matter certain additional features of the arrangement not described above should be mentioned. The " cash " stock which the MeCormick and Deering interests agreed to take in addition to their original contributions of $20,- 000,000 and $16,000,000, respectively, as finally determined, amounted to $4,886,190.13 and $3,965,613.21, respectively. It appears, there- fore, that outside financial interests, including the bankers, sub- scribed only about $10,000,000 to the total capital stock of the com- pany. It is possible that the determination finally arrived at to keep down the capital stock to something approaching the value of the assets acquired made participation in this enterprise less attractive than was first expected to outside financial interests. FOEMATION OF COMPANY. 85 An outside arrangement was made between J. P. Morgan & Co. and the McCormick and Deering interests to give to the Champion and Piano interests in equal shares the amount of $150,000 of the " plant " stock, this obligation being assumed in the following amounts : J. P. Morgan & Co $42, 857. 14 McCormick interests 59, 142. 86 Deering interests 48, 000. OO The commission of J. P. Morgan & Co. was fixed apparently at $3,000,000 in stock, according to the contract between the said firm and William C. Lane, of August 13, 1902.^ This was regarded as payable out of the "plant" stock. To get the net commission for J. P. Morgan & Co., however, it is necessary to deduct the contribu- tion mentioned above, $42,857.14, made to the Champion and Piano interests by J. P. Morgan & Co. The net commission, therefore, was $2,957,142.86. For the Milwaukee company, which was put into the combination as a going concern, the bankers were to receive " plant " stock equal to the net assets. It was expected that this would be about $3,000,000. After the " plant " stock had been allotted to the other companies and provision made therefrom for the bankers' commission and ex- penses, there remained just $3,000,000 for the Milwaukee company. The Milwaukee appraisal, however, as finally determined, showed a valuation of $3,148,196.66, so that it became necessary to pay the difference, namely, $148,196.66, out of the " cash " stock. Account must also be taken of the $60,000 stock subscription of the original incorporators, which was not transferred to William C. Lane when the rest of the capital stock of the company was con- veyed to him, as described above (p. 80). It is stated that the money for this $60,000 stock subscription of the incorporators was provided by J. P. Morgan & Co. and the stock turned over to them later. J. P. Morgan & Co., however, did not acquire and distribute this stock as trustees. In the following statement it is reckoned as a part of the cash stock subscription, although the 600 shares thus subscribed to by the original incorporators were repurchased from them through Ihe expense fund. With these explanations the following statement of the allotment of stock will be intelligible. This is based substantially on a state- ment found in the office of J. P. Morgan & Co., described as follows: " International Harvester Co. — Statement of distribution of stock under final settlement, revised January 15, 1904, to provide for the 600 shares of stock taken by incorporators." ^ 1 See Exhibit 10^ p. 362. s Subsequently about $103,000 of expense stock was distributed among tbe four vendor companies. 86 REPORT ON THE INTERNATIONAL HARVESTER CO. Table 6.— DISPOSITION OF ORIGINAL $120,000,000 CAPITAL STOCK OF IIITEK- NATIONAL HARVESTER CO. PLANT STOCK. J. P. Morgan & Co. : Commission $3, 000, 000. 00 Less contribution to Champion and Piano companies 42, 857. 14 2, 957, 142. 86 Milwaukee Harvester Co 3,000,000.00 $5, 957, 142. 86 McCormick interests : Original allotment 26, 321, 656. 86 Less contribution to Champion and Piano companies 59, 142. 86 26, 262, 514. 00 Deering Interests : Original allotment 21, 362, 554. 64 Less contribution to Champion and Piano companies 48, 000. 00 21, 314, 554. 64 Piano interests : Original allotment 2, 193, 603. 09 Plus contributions from other interests 75, 000. 00 2, 268. 603. 09 Champion interests : Original allotment 3,372,185.91 Plus contributions from other interests 75, 000. 00 3,447,185.91 Organization expenses (excluding Milwaukee company and incorporators' stock) : Sold 611, 803. 34 On hand 138, 196. 16 749, 999. 50 60, 000, 000. 00 CASH STOCK. J. P. Morgan & Co. : Cash 9, 940, 000. OO Incorporators 60, 000. 00 Milwaukee excess 148, 196. 66 10, 148, 196. 66 McCormick Interests : Original subscription 20,000,000.00 Subsequent subscription 4,886,190.13 24, 886, 190. IS Deering interests: Original subscription 16,000,000.00 Subsequent subscription ;^, 905, 613. 21 19, 965, 613. 21 Piano interests 4, 000, 000. 00 Champion interests 1,000,000.00 60, 000, 000. 00 Of the $120,000,000 capital stock of the International Harvester Co., $103,144,660.98, or 86 per cent was received by the McCormick, FOKMATION OF COMPANY. 87 Deering, Champion, and Piano interests. The McCormick interests received $51,148,704.13, or 42.6 per cent, and the Deering interests $41,280,167.85, or 34.4 per cent. Together, the McCormick and Deer- ing interests received 77 per cent of the total capital stock. The voting trust technically gave to the McCormick, Deering, and J. P. Morgan & Co. interests equal voice in the management of the company, but the predominating influence in prsictice appears to have been the McCormick interests. Without the voting trust, the McCormick interests apparently would have had a working control of the company. Section 6. Description of the organization of the International Harvester Co. and the property acquired in 1902. The International Harvester Co. became the owner of the plants and other physical assets of the McCormick, Deering, Champion, Piano, and Milwaukee companies through the transactions described above, but it did not acquire therewith the capital stock of the Mc- Cormick, Champion, Piano, or Milwaukee companies, which, to- gether with the Deering partnership, were continued as nominal organizations. However, a few weeks after the merger was consum- mated the capital stock of the Milwaukee company was acquired, and with it the control of that corporation and its charter. The property of this company had already been conveyed, as stated above, to the International Harvester Co. Several of the companies whose properties were merged had, through full or partial stock ownership, the control of certain com- paratively unimportant subsidiary companies, which also came into the control of the International Harvester Co. Among these were the Illinois Northern Railway Co. and the Chicago, West Pullman & Southern Railway Co., industrial railroads, respectively, of the Mc- Cormick and Piano plants in Chicago; the South Chicago Furnace Co., a Deering property; the McCormick Harvesting Machine Co. m.b.H.,of Berlin, which was a McCormick marketing company in Ger- many; and the Compaiiia Industrial de Baja California, a fiber ranch property of the McCormick company in Lower California, in Mexico. Oeganization of the manufacturing branch of the bdsiness AND DESCRIPTION OF THE PKOPEKTY. — The International Harvester Co. became the owner of the manufacturing property acquired and sole manufacturer of the various lines of harvesting machines which were brought into the merger. At the beginning, however, namely, by a resolution of the board of directors of August 13, 1902, each of the manufacturing plants of the four original vendor companies, namely, the McCormick, Deering, Piano, and Warder, Bushnell & Glessner companies, were made separate divisions, and so far as the manufac- turing operations were concerned were conducted for a short time very largely as independent units. Harold F. McCormick was put in 88 BEPOKT ON THE INTEENATIONAL HAEVESTBE CO. charge of the McCormick plant, Richard F. Howe of the Deering plant, W. H. Jones of the Piano plant, and J. J. Glessner of the Champion plant (Warder, Bushnell & Glessner plant). The Mil- waukee plant apparently was not then expressly established as a separate division. The purpose of this arrangement is not clear, but may have been to keep the accounts of the business acquired from the several predecessor companies as distinct as possible until all ques- tions involved in the scheme of the merger were settled, and partic- ularly the appraisals. On the other hand, there may have been some question as to the permanency of the merger and a desire to facilitate its disintegration if such a proceeding were subsequently found to be necessary or desirable. All five of the plants which were merged into the International Harvester Co. made harvesting machines, while two of them, namely, the McCormick and Deering plants, also made binder twine. The properties of the McCormick, Deering, and Piano concerns, which were conveyed to the International Harvester Co., included some ad- ditional plants and property. The McCormick property included certain timber rights and also a fiber ranch in Mexico. The McCor- mick timber property was of small importance, and the fiber ranch was of no practical value at all. The property acquired from the Deer- ing concern, however, included raw-material plants, and other prop- erty of considerable importance. In the first place, there was a small blast-furnace plant and a small rolling mill in Chicago, together with an additional plant in the course of construction. Secondly, there were two iron-ore leases m the Mesabi Range, some undevelojied coking-coal lands in Kentucky, and timber property in the South, particularly in Missouri. The Piano jjroperty included an interest in a small iron works, the Chicago Malleable Castings Co. Two of the implement plants acquired, namely, the McCormick and Piano, had industrial railroads connecting them with the chief railroad lines terminating in Chicago. Another important class of fixed property acquired through the four vendor companies consisted of real estate, buildings, etc., used for general agencies and warehouses, most of which was transferred to the International Harvester Co. of America, which is described in the following paragraphs. Organization of a selling company. — Although the INIilwaukee company's charter was obtained through the subsequent acquisition of its capital stock, as already stated, it was not used for the purpose of manufacturing. The capital stock of this company was acquired by George W. Perkins or J. P. Morgan & Co. shortly before the merger, and the property of the company was conveyed to W. C. Lane. On September 5, 1902, the name of this company was changed to the International Harvester Co. of America (hereafter generally called the America company) , and on September 18, 1902, new articles of association were adopted. About September 30 the whole amount FORMATION OF COMPANY. 89 of the capital stock (exclusive of nine directors' shares) was acquired by the International Harvester Co. in the interest of the stockholders of the said company as a class. The acquisition of the Milwaukee company as a corporate entity was a very important feature in the organization of the International Harvester Co. The purpose was to use it as a selling organization for the International Harvester Co. As already explained (see p. 55), under the conditions prevailing in the harvesting-machine trade it was necessary for the manufacturers to have general agencies and warehouses near the chief agricultural sections of the country. The laws of the several States, while generally admitting foreign corpo- rations to do business therein, often established rules regarding the obtaining of licenses, and also subjected such foreign corporations to taxation on their business. Sometimes these laws (e. g., in Missouri) were very stringent in their prohibitions to granting licenses to " trusts " or other combinations in restraint of trade. The International Harvester Co., being a newly organized company, was not in a position to do business immediately in many States for the lack of such licenses, and to get them would involve some delay. Moreover, it was quite possible that difficulties may have been antici- pated in getting such licenses in some cases on account of the anti- trust laws just referred to. Furthermore, the International Harvester Co. was capitalized at a very large amount, and under the tax laws of some States this would subject the company doing business therein to higher taxation than for a company of small capital. Hence, on commercial, legal, and financial grounds there were considerable advantages in transferring the sale of the products of the Interna- tional Harvester Co. to a distinct selling company which already had licenses to do business in the several States. The Milwaukee com- pany apparently met all these conditions satisfactorily; at any rate, it was acquired and used for this purpose.^ ^ Cyrus H. McCormick, In his testimony In the Missouri case, stated that this use of the Milwaukee company was an alterthought, and that the motive in using it was that that company already had licenses to do business in many States, while to get licenses for a new company will involve difficulties and considerable delay : Q. The suggestion to use the Milwaukee company was not the original suggestion, that was an afterthought 7 — A. The first idea was as I said this morning, was to form a new company, either in Illinois or New York, but the time required to form that company and the details to go through impressed the lawyers that the autumn was passing away, and it was necessary that something should be done soon, and one of the greatest obstructions was that in some of the States, as the answer shows, that it could not do business in some States, but the Milwaukee company was qualifled to do business in nearly all of the States. Q. It was your idea that the Milwaukee company was to be used as a medium to do business in the States where your company was prohibited? — A. It was the idea for the Milwaukee company to be the company to do business, and it was qualified where others were not qualified. Q. It would be in some States where your company could not get in? — A. Yes, sir; for instance, Missouri. We could not get in at all. Q. It was the idea to have your new company to own all the stock and do the business for the Milwaukee company? — ^A. Yes, sir; in Colorado it was very difficult to get in and get a license, but the fact that the Milwaukee company was ready to do business, was the chief factor that decided that at the last moment in talking that company for the selling company. Q. That and the other consideration that your new company could not get into gome States? — A. Yes, sir. 77854°— 13 8 90 EEPOBT ON THE INTEBNATIONAL HAB.VESTER CO. The International Harvester Co., therefore, conveyed to the America company (formerly the Milwaukee company) practically all its warehouses and other facilities for the sale of harvesting ma- chinery, and this company was thenceforth the selling agency of the combination for harvesting machines, twine, and similar products. As the International held substantially all the stock of the America company the interests of the two companies were practically iden- tical. At the beginning, and indeed down to 1910, the America com- pany's directors were all directors in the International Harvester Co., while its principal officers held the corresponding offices in the New Jersey company. The officers of the America company in 1902, were as follows : Cyrus H. McCormick, president; H. F. McCormick, vice president; James Deering, vice president ; J. J. Glessner, vice president ; W. H. Jones, vice president; E. F. Howe, secretary and treasurer; Charles Deering, chairman of executive committee ; G. W. Perkins, chairman of finance committee. All of these, and Stanley McCormick also, were directors in the company. As shown already (p. 81), the New Jersey company had all these names on its board of directors and nine others in addition. Although in a formal legal sense these two companies were made independent and made contracts of purchase and sale with each other, the America company was obviously a mere alter ego of the International Harvester Co.^ The America company in buying the products of the International Harvester Co., conducted negotiations as to the quantity and prices on the basis of a contract which was intended to leave practically no margin of profit to the America company. The first contract was made on September 2, 1902, with the Milwaukee Harvester Co., this being before that company had changed its name to the Inter- national Harvester Co. of America. As first drafted, this provided that the profits of the Milwaukee company in excess of $250,000 should be paid over to the International Harvester Co., and that the International Harvester Co. should guarantee to the Milwaukee company a minimum profit of $100,000. The International Har- vester Co., moreover, was to furnish the Milwaukee company requi- site working capital, on which interest should be paid at 4 per cent. > The board of directors of the America company, In 1910, was changed by replacins all those directors who were directors in the International Harvester Co. (except one) with directors chosen from the executive officials of these two companies, namely, E. A. Bancroft, William Browning, C. S. Funk, C. H. Haney, R. C. Haskins, C. 11. Laufman, Alex. Legge, W. R. Morgan, and W. M. Reay. E. C. Haskins was elected presi dent at a meeting of this board on Apr. 16, 1910. POKMATION OF COMPANY. 91 It is not clear, however, that this proposed agreement was ever exe- cuted, but another agreement of the same date was made which pro- vided that the Milwaukee company should take over the products of the International Harvester Co. for sale in the United States or else- where, on the basis of a schedule of prices, and should change its name to the International Harvester Co. of America. This contract was to continue in force from year to year unless terminated by either party at the end of the business year (October 1). The practical result of this arrangement was to leave little or no profit to the America company. Consequently, the America company was unable to accumulate any considerable surplus or to pay any dividends. The particular terms of the sales contracts between the America company and the International Harvester Co. were negoti- ated from time to time as necessary by subordinate officers of each company, and the final agreement was authorized and sanctioned by Cyrus H. McCormick, who was the president of each of the two companies.^ Section 7. Production of chief kinds of harvesting machines by the Inter- national Harvester Co. in 1903. The chief business of the companies which originally went into the International Harvester Co. was the manufacture of harvesting ma- chines. The only other important product was binder twine, which was produced by the McCormick and Deering companies only. The production of harvesting machines for the year 1902 for each of the five companies originally merged into the International Harvester Co. is shown in the table following. 1 The above facts are clearly brought out in the following testimony of Cyrus H. McCormick in the Missouri case : Q. Who are the men who decide for the International of America what machines they shall buy from the International of New Jersey? — A. The directors and Mr. Mayer as the head of the sales department for the America company. Q. That is, he furnishes the directors the amount they can probably sell? — A. Yes, sir. Q. And the International of America take up with the International of New Jersey the purchasing of these machines ? — A. Yes, sir ; the way it is handled, Mr. Mayer, on behalf of the America company sits down with Mr. Kennedy, who repre- sents the New Jersey manufacturinj;^ company and they two make out the program. 0- What do you mean by the "program"? — A. The machines that the America company would like to have manufactured, and the numbef of the machines, the method of transacting the business does not all come to the directors. Q. Who determines the prices that the International of New Jersey shall sell? — A. These two men. Q. Who determines the prices at which the International of America shall pay? — A. These two men with the recommendation of the board of directors. Q. Each were employees of the two respective boards of directors? — A. Yes, sir. Q. And the board of directors of the America company is the board of directors of the International of New Jersey? — A. Yes, sir; half of it. Q. Did the companies make contracts with each other? — A. Yes, sir; they did. Q. Who signs them? — A. By the various officers the business is transacted. The business is transacted just as separately as it is possible where two companies have the same stockholders. Q. And where the one company is owned by the other? — A. Where they have the same stockholders. Q. So you Mr. McCormick, as president of ihc America company, made a contract with yourself as president of the New Jersey company? — ^A. That Is IL 92 EEPOKT ON THE INTEENATIONAL HARVESTER CO. Table 7— PRODUCTION OF CHIEF KINDS OF HARVESTING MACHINES OF COMPANIES ORIGINALLY MERGED IN THE INTERNATIONAL HARVESTER CO. FOR 1902. Company. Binders. Reapers. Mowers. Rakes. Com binders. McCormick . 72,263 54,749 26,569 14,193 12,627 16,322 7,234 1,600 2,300 1,450 136,884 100,605 44,397 22,174 20,120 78,668 58,825 22,120 14,350 987 33,652 22,657 Champion 512 Piano 1,000 300 Total 180,401 28,906 324,180 174,950 68,121 The McCormick company had much the largest production for each class of harvesting machines, while the Deering was second in each case. The Champion line was third for binders and mowers, the two most important kinds of machines. The Milwaukee had the smallest output for each kind. The proportion of the total production of all kinds of harvesting machines in the United States which was acquired by the Inter- national Harvester Co. can not be stated with statistical exactness, because complete information is not available concerning the numbers produced or sold by all the other concerns for the year of the merger, 1902. However, it is possible to compare the binders, mowers, and rakes produced or sold by the International Harvester Co. — three of the most important machines — with the numbers produced or sold by the independents for the same year. In the following tabular comparison the figures are for sales in 1902, except as noted. The relative volume of business for the com- panies which went into the International Harvester Co. and for the independents, or those which remained outside, are shown with sub- stantial accuracy in the following table for binders, mowers, and rakes in 1902. Table 8.— NUMBERS OF BINDERS, MOWERS, AND RAKES SOLD BY THE COMPANIES MERGED IN THE INTERNATIONAL HARVESTER CO. AND BY INDEPENDENTS, SEASON OF 1902. International Har- vester Co. compa- nlos. Independent com- panies. Numbers soldi Per cent. Numbers sold.3 Per cent. 180,024 297,880 165,219 90.9 81.2 67.0 18,128 68,890 =81,376 Mowers 18 8 Rakes 33 1 Number produced in case of the Milwaukee company, 2 Number produced in case ol the Osborne company. >Number for Independents partly estimated. FOEMATION OF COMPANY. 93 From the above table it appears that the companies originally merged in the International Harvester Co. had over 90 per cent of the numbers of binders produced or sold in the United States. This figure, it may be noted, agrees very closely with the percentage indi- cated in the statement quoted on page 75. For mowers, the percentage of the combination, although dis- tinctly lower, was over 80 per cent. For rakes, the foregoing table indicates that the proportion of the combination was 67 per cent. Of the total production on which this figure is based, about 5 per cent was estimated. The rake business was of very much less importance, however, than either the binder or the mower business. Similar figures are not available for comparisons for certain other machines, such as reapers and corn binders. The proportions of these machines produced or sold by the companies originally included in the International Harvester Co., in 1902, were probably nearly as high as for binders. The foregoing figures give the total business of these companies, including export business. Inasmuch as the independent binder makers included in the foregoing statement (with the exception of the Acme, which had a small foreign business) were especially di- rected to the export trade, there is no doubt that the proportion of sales in the domestic market, on. the part of the companies originally merged in the International Harvester Co., was somewhat higher than the percentage shown above. In the case of mowers, two of the independent concerns had but little foreign business, but even for mowers the percentage obtained by the combination was un- doubtedly higher than the figure given above. CHAPTEE III. COMPARISON OF CAPITALIZATION AND INVESTMENT IN 1902. Section 1. Methods employed by company in making valuations. Inasmuch as the principal owners of the stock of the International Harvester Co. have from the beginning been exclusively the persons who promoted and organized the company, the question whether the capitalization was greater than the value of the net assets acquired, or, in other words, whether the stock was " watered " or not, is of public interest chiefly from the point of view of the reasonableness of the profits on the investment. Some light has already been thrown on the question of the reason- ableness of the capitalization in the discussion of the formation of the company (see pp. 79-84). The indirect evidence there considered tended to show that while a greatly excessive capitalization was apparently contemplated as a possibility (see p. 80), it was not carried into effect in any conspicuous degree, and certainly not on the enormous scale often practiced at that time. The question of the reasonableness or unreasonableness of the capitalization is capable, however, of a more definite demonstration by a detailed analysis of the values of the properties acquired. While the original contracts on which the merger was based pro- vided that stock should be issued for property and good will con- veyed on the basis of appraised values, it has been shown above (p. 83) that this plan was not carried out in the manner originally planned, but that instead certain amounts were fixed by George W. Perkins more or less independently of the appraisals. Appraisals, however, were made for certain classes of property at the time of the merger, and at a later date the values of certain other classes of prop- erty were appraised and used in the accounts as the book values of such properties. In the early years of the operations of the Internationl Harvester Co., the books were kept in an extraordinarily loose manner, and complete general accounts of assets and liabilities and of profit and loss were not made up, according to the statements of the officials of the company, until after the end of 1906. Combined balance sheets and profit and loss statements- for the earlier years were subsequently made up by the International Harvester Co. at the request of the Bureau. Combined balance sheets and profit and loss statements for 94 CAPITALIZATION AND INVESTMENT IN 1902. 95 1907 were the first to be made public and were shown in the annual report for that year. This report of 1907 showed a siirplus of a lit- tle more than $12,000,000, respecting which the company made the following statement: The above surplus is composed solely of the balance of net earnings of the business during the five years of operations, after deducting dividend payments, the board of directors having de- cided to charge off surplus of $7,076,229.65 existing at organiza- tion, October 1, 1902, by reason of the excess of the appraised value of the physical property (including inventories) then acquired ($67,076,229.65) over the par values of the capital stock issued therefor ($60,000,000). Apparently this book value of $67,076,229.65 was established in 1907 with a view to showing the conservative valuation of the assets as compared with the capitalization.^ The opening entries in 1907 for certain items of property entering into this book value, e. g., timber properties and ore leases, were finally decided apparently as late as 1905. On the other hand, the appraisals for a large part of the property, e. g., plants, inventories, etc., were completed shortly after the merger. Some of these items were appraised at values greatly in excess of their costs or their book values as shown by the accounts of the companies merged, and also in some cases in excess of any reasonable valuation, as will be shown more particularly below. The whole discussion of the value of the property acquired and the amount of stock issued is naturally divided into two parts: (1) Physical property, etc., for which (and for promoters' services and expenses) " plant stock " in the amount of $60,000,000 was issued (the good will being conveyed likewise) ; and (2) working capital, for which an additional amount of $60,000,000 of " cash stock " was is- sued, paid for either in cash or in net cash receipts from bills re- ceivable assigned by the vendor companies to the International Harvester Co. Comparison or appraisal and of true value or physical property ACQUIRED. — As stated above, the total appraisal of the physical prop- erty acquired was $67,076,229.65. For certain items, such as ore leases, the net appraised value was used, i. e., the total value less the amount of obligations assumed in connection therewith. The amount of these obligations, however, was comparatively small, aggregating $916,753.40. The total appraisal of the physical property also in- cluded some other net working capital, particularly that acquired from the Milwaukee company, amounting to $495,327.96. The appraisal as given above did not include any allowance for good wiU, patents, trade-marks, etc., which were claimed by the » Compare treatment of good will in making up the first balance sheet of the Inter- national Harvester Co., p. 129. 96 SEPOET ON THE INTEE2SrATI0NAL HAEVESTEE CO. International Harvester Co. to have a large value. The original con- tracts provided for the appraisal of the good will (the method and results of which will be shown below), but according to the official statements of the company it was never included in the book value of the property of the International Harvester Co. in its statements of assets.^ Hence, although this kind of property ought to be con- sidered in discussing the question whether the stock issued was ex- cessive or not, it is not proper to consider it in making a comparison of the value of the physical property and the stock which was claimed to be issued against such physical property. The basis for criticizing the appraisal of the several items of property is partly found in the different valuations put on such property by the predecessor companies, but also in data as to the actual cost or current market values of such property or from other valuations subsequently made by the International Harvester Co. Furthermore, in the books of the International Harvester Co. itself certain readj.ustments were made with respect to the appraised values which are of importance in this connection. The Bureau made repeated efforts to secure access to the books and accounts of the predecessor companies, but was only jDartially success- ful in doing so, on account of difficulties and delays interposed by the parties who had possession of such material. Although these parties were officers or directors of the International Harvester Co., the company claimed that it had no power to produce such data. Nevertheless, for three of the five predecessor concerns, namely, the McCormick, Deering, and Milwaukee companies, considerable infor- mation was obtained in the form of balance sheets and other account- ing statements, substantially for the year 1902, which make possible a fairly comprehensive criticism of the total value of the property acquired. The total appraisal of $67,076,229.65 for the property of the five companies for which the $60,000,000 plant stock was issued was made up among these five companies as follows : Champion $3, 824, 251. 45 Deering 28, 081, 514. 69 McCormiclc 20,461,481.03 Milwaukee 3,148,196.66 Piano 2,708,982.48 Total 07,224,426.31 Less amoimt for Milwaukee adjustment (explained below) 148, 196. 66 Total 67,076,229.65 » For a slight modiflcatlon of this statement, see p. 198. CAPITALIZATION AND INVESTMENT IN 1902. 97 Of this total amount— $67,076,229.65— the appraisals of the Mc- Cormick and Deering properties constituted $57,542,995.72, or over 85 per cent. If to this amount be added the appraisal of the Mil- waukee company, which was taken over at a book value of $3,148,196.66, the total appraised value for which the figures of the predecessor companies are available becomes $60,691,192.38, or slightly over 90 per cent of the total appraisal. For this part of the property the Bureau, as stated above, obtained suiScient data to make a fairly complete criticism of the appraisal. It is evident, therefore, that although the appraisals of the Piano and Champion (Warder, Bushnell & Glessner Co.) properties were undoubtedly excessive, yet inasmuch as the appraisal of these properties amounted to less than 10 per cent of the total appraisal, the overvaluation on their account was comparatively small. Moreover, for the appraised value of the inventories of these two concerns, aggregating $3,460,513.27, the Bureau obtained data which enabled it to revise them also. The appraisals which were used in the property account of the International Harvester Co. were provided for in great detail in the contracts of July 28, 1902, and subsequent contracts relating to the plan of the merger which have been described above (p. 82). For several important classes of property it was provided that three appraisers should assess valuations for the same item of prop- erty, two of them to be appointed by J. P. Morgan & Co. and the third by the respective vendors. For certain other classes of prop- erty, the whole problem consisted in getting at the values as shown by the books of the predecessor companies, which involved, of course, no original appraisal. For certain items of property, however, the appraisal was left to J. P. Morgan or George W. Perkins; among these were the McCormick railroad, and the Deering ore, coal and iron properties. The plant properties of the Champion and Piano companies were appraised by one set of appraisers only and their valuations were accepted for the purpose of determining the book value. Inasmuch as the contracts of August 17, 1903, finally fixed the amount of stock to be allotted independently to some extent of the original agreement as to appraisals, there was apparently little reason for conflict of opinion or interest after that date as to the valuations which should go on the books, but much dispute nevertheless appears to have occurred. In comparing the book values adopted by the International Har- vester Co. with the book values of the same property on the books of the predecessor companies, it should be noted that considerable differences might naturally occur for several reasons. A higher 98 BEPOBT ON THE INTERNATIONAL HABVESTER 00. value in the former case would not always necessarily indicate an intent to overvalue the property acquired. For example, the real estate might be booked by a certain predecessor company at its original cost, while the appraisers might attempt to give its current market value. Again, it is possible that some plants were enlarged and improved by expenditures from earnings which were not charged to property accounts. The refusal of the parties repre- senting the predecessor companies to give access to their accounts made it impossible to ascertain precisely to what extent this had ever occurred. At any rate, it is certain that for some items of property the appraised values were put at figures which are demon- strably greatly in excess of any reasonable valuation. Section 2. Appraisal of McGormick properties. The total appraisal of the physical properties conveyed by the Mc- Gormick company was $29,461,481.03, as shown on page 96. The following table summarizes and compares the book values of such property as shown by the balance sheets of the McCormick Harvest- ing Machine Co. for October 1, 1902, with the appraised values adopted by the International Harvester Co. on its books : Table 9.— BOOK VALUATIONS OF PHYSICAL PROPERTIES OF McCORMICK HARVEST- ING MACHINE CO. TRANSFERRED TO THE INTERNATIONAL HARVESTER CO. IN 1902, AND VALUATIONS OF THESE PROPERTIES ADOPTED BY INTERNATIONAL HARVESTER CO. Item. McCormick book value. International Harvester Co. book value. Increase of Harvester Co. book value. Factory real estate Factory buildings and machinery Illinois Nortiiem Railway Agency property Timber Miscellaneous plant and property. Inventory Total 81,341,149.12 5, 845, 858. 10 (>) 1,176,306.11 314, 950. 65 620,764.23 5 10,502,793.69 14,993,909.00 7,401,692.92 2,563,944.31 1,571,905.85 314,363.86 886,842.39 11,738,822.70 $3,652,759.88 1,555,834.82 2,553,944.31 395,899.74 '586.79 366,078.16 1,176,029.11 19,761,821.80 29,461,481.03 9,699,659.23 > Leasehold and equipment not separately booked by McCormick Co.; equipment included apparently in item of factory buildings and machinery (appraised at 153,944.31); see p. 101. ' Decrease. 8 Includes on hand freight and duty (8231,504.16) as shown by appraisal- not shown in McCormick bal- ance sheet, but added by the Bureau. The appraisal of the McCormick company property was made by two different appraisers for most of the items, but in almost every case the book figure finally adopted by the International Harvester Co. was the higher appraisal. These differences in the appraisals will be compared more particularly below in connection with the figures adopted by the Bureau as the proper values for the several items of property. CAPITALIZATION AND INVESTMENT IN 1902. -99 In determining what was the book value of the McCormick com- pany in a given case, it was generally possible to find the exact item to be compared with the appraisal either from the balance sheet or from other data obtained from the accounts of the McCormick com- pany, but in one case, that of the Illinois Northern Railway equip- ment, no such item could be found, and it was apparently included among the items of factory buildings and machinery. In respect to another group of items, namely, agency property, the particular items of real estate, buildings and equipment were not grouped in the same way in the balance sheet or in other data obtainable, as they were'in the appraised book values adopted by the International Harvester Co., so that only a comparison of the totals given in the above table is practicable in this case. (See p. 104.) Before going into the determinations of the Bureau regarding the fair market value of the properties of the McCormick company, cer- tain comparisons may be made between the values shown in the fore- going table. In the first place, the total book value of the McCormick company as carried on that company's books for the property included in the table was $19,761,821.80, as compared with the Toook value adopted by the International Harvester Co. of $29,- 461,481.03, a difference of no less than $9,699,659.23. The greatest discrepancy appears in the case of factory real estate (land) , namely, $3,652,759.88, and the next in the valuation of the Illinois Northern Railway, namely, $2,553,944.31. Large differences also appear in the values of buildings and machinery, and in inventories. More detailed comparisons will show that several items were booked by the International Harvester Co. at the same amounts as they ap- peared on the McCormick company's books, but these were compara- tively unimportant. The Bureau does not regard the comparison shown in the fore- going table as a safe criterion of the extent of overvaluation in- volved in the book values adopted by the International Harvester Co. The determination of the amount of overvaluation which ex- isted, according to the opinion of the Bureau, requires a more par- ticular analysis, which will now be taken up. Factory real estate. — The factory real estate in Chicago (by which is meant land only) as shown by the books of the McCormick company for October, 1902, amounted to $1,279,858.49; including other real estate of $61,290.63, the total is $1,341,149.12. The book value used by the International Harvester Co. for this same land was $4,993,909.00, an increase of no less than $3,652,759.88 over the McCormick book figures. The value used by the International Harvester Co. was that reported by one of the appraisal companies which appraised the value of the property at the time of the merger. 100 EEPOBT ON THE INTERNATIONAL HAEVBSTEE CO. However, another appraisal was made at the same time, according to which this same property was valued at only $2,550,156.60. The old book value itself was $650,661.41 greater than the value of the corresponding items as shown on the balance sheet of the com- pany for the preceding year. During 1902, however, the company made considerable additions to its real estate holdings; and it is to be presumed that these in a large measure at least explained the increase in book values. In view of the evidence that the higher appraisals, particularly of natural resources, were frequently excessive, the Bureau is satis- fied that the appraisal of $4,993,909.00 for this McCormick land was altogether too high. One of the officials of the International Harves- ter Co., when questioned on this point, said: The higher valuation was adopted in the books for two rea- sons: first, because it was considered a reasonable valuation at that time, and, second, because there being no good will in the capitalization of the Internationa] Harvester Co. it was consid- ered only fair and proper that the higher valuation of the appraisal should be used. This statement clearly indicates that the valuation placed upon this real estate was excessive in that one reason why the International Harvester Co. felt justified in adopting it was that the company did not take account of good will in computing its assets. The Bureau is inclined to the opinion that the lower appraisal may have been sufficiently high. However, a considerable amount of the real estate of the McCormick interests, approximately one-ninth of the total owned outright, had been bought as early as 1879, and sev- eral additional purchases had been made prior to 1900; there had been a considerable appreciation in the value of this, which may not have been taken account of on the company's books. On account of the great changes which have taken place since this property was appraised for the purposes of the International Harvester Co., it is impracticable to attempt to establish the 1902 valuations by investi- gation. Therefore, the Bureau decided to use the average of the two appraisal figures, namely, $3,772,032.20; this mean figure is $1,221,- 876.20 less than the value adopted by the International Harvester Co. Factory buildings and machinery. — This property, as shown by the McCormick company's books for October 1, 1902, was valued at $5,845,858.10. This valuation was $1,549,217.83 higher than the value of the corresponding item on the balance sheet for the preced- ing year. A considerable part of this increase is accounted for by new construction. The booli: value accepted for this property by the International Harvester Co., however, was even greater, and amounted to no less than $7,401,692.92, exceeding the McCormick company book value by CAPITALIZATION AND INVESTMENT IN 1902. 101 $1,555,834.82. The International Harvester Co. in this case again took the higher appraisal value. The lower appraisals for these items aggregated $6,895,942.99. For this property the Bureau adopted a somewhat different standpoint than for the real estate. There is abundant evidence that the book values adopted by the International Harvester Co. were generally excessive. There is no convincing evidence that the McCormick company's book values were too low. Hence the Bureau regarded the lower appraisal of the McCormick company's property as probably liberal in this case, and adopted it as the maximum value of this property. As this value was $6,895,942.99 as compared with the International Harvester Co.'s book figures of $7,401,692.92, there was an overvaluation in this item of $505,749.93. This lower appraisal value, it should be noted, was $1,050,084.89 in excess of the former book value. Illinois Northern Railway. — ^This railroad property was simply a leasehold of a short industrial line in Chicago, connecting the Mc- Cormick plant and a considerable number of industrial establish- ments with some of the main railway lines entering Chicago. Apart from the leasehold, the McCormick company property was limited to the equipment. The Bureau's data of the book value of the McCor- mick company contained no specific item for this property, and the equipment may have been included in other items, such as buildings and machinery, of the McCormick company plant, or possibly in some other items on the balance sheet not included in the foregoing table. This equipment was appraised at $53,944.31. The McCormick company's books in 1902 apparently contained nothing whatever for leasehold values. The Illinois Northern Railway was incorporated in 1901 and had a capital stock of $500,000.00. Its net book assets in 1903, as shown by a balance sheet, were $490,874.50, in which the book value of the leasehold (exclusive of depreciation) was put at $431,320.40.^ The basis of this valuation of the leasehold is not known. Accepting the value given for the leasehold therein — namely, $431,320.40 — and adding to this the appraised value of the equipment in 1902 — namely, $53,944.31 — the total value as indicated by the books and the ap- praisal would be $485,264.71. The valuation adopted by the International Harvester Co. for its book value of this property was no less than $2,553,944.31, of which $2,500,000.00 was for franchise value, and the rest for the value of the equipment. Another appraisal was made of this property by the American Appraisal Co. which placed the value of this railroad prop- erty at $1,553,944.31, but this appraisal was not used. This is a strik- ing example of the overvaluation of property adopted by the Inter- 1 Earliest data available being for June 1, 1903. 102 BEPOBT ON THE INTERNATIONAL HABVESTEE CO. national Harvester Co. The above-mentioned franchise valuation of $2,500,000 was based on the letter of a railroad man, one J. E. Gor- man, general freight agent of the Atchison, Topeka & Santa Fe Kail- road, in which it is apparent, though not expressly stated, that the main basis of this valuation was the possibility of the International Harvester Co. using this industrial railroad to obtain exorbitant freight divisions through its control of the routing of the traffic of the McCormick plant or other industrial establishments located thereon. Excerpts from his letter to the accountants in charge of the appraisals are given below. Chicago, III,., February 2^, 1903. Keport on Illinois Northern Raihvay. Messrs. Jones, Caesar & Company, Tribune Building, Chicago. Gentlemen : In accordance with request of your Mr. Reay, I have made an examination of the Illinois Northern Railway, with a view of advising you of my conclusions as to its value. Understanding, as I do, you already have full description of the property, with estimates as to its value, as determined by an engineer, I will not undertake to deal with it from that stand- point, because I do not deem it the proper one, and also because if it were to be measured that way, I would not, on account of being purely a traffic man, be able to form an intelligent opinion. ^ ^ ^ :il :^ ^ 4: My idea of the true measure of the value of the property is its earning power, present and prospective. The Illinois Northern Railway has now direct actual track connection with thirteen other Chicago railroads, and through some of these thirteen, with every railroad entering Chicago. Its traffic relations with each and every railroad entering Chi- cago are of the most friendly character. It is understood by all the roads that the Illinois Northern dictates the routing of the immense freight business of the McCormick Harvester Works. All of the roads are anxious to secure the very largest possible share of this heavy traffic. The control of the routing of the McCormick traffic, which is secured to the Illinois North- ern Railway by a long time contract, is the present real life and strength of the Illinois Northern Railway, and that will, in my opinion, continue to be its principal strength ; though when the plans now being worked out are completed, the McCormick busi- ness will constitute a considerably smaller proportion of the total business done by the road than it does now. I have gone into its present and future traffic prospects with particular care, and while I am, I may say, thoroughly posted on that subject, I will, on account of reasons explained to your Mr. Reay, refrain from giving here in writing, in detail, the method of figuring by which I reached my conclusions. I have satisfied myself, however, the property should earn at this time about CAPITALIZATION AND INVESTMENT IN 1902. 103 $125,000.00 per year, or five per cent (5%) net on a capitaliza- tion of Two and One-Half Million Dollars, and I am well satis- fied that the plans which the management have in mind, and which are perfectly feasible and they will be able to carry out, will put it in a position by the year 1905 to show a net increase of in the neighborhood of fifty per cent over present earnings. :{c :{c 4i H! )|e 4i ^ In closing I want to say that the road as it was, under the Atchison ownership, did not, would not, and could not ever have the value, or anything approaching it, I now place on it. Under Atchison ownership it was simply a branch line through a por- tion of the city; under its present ownership, and its contract with the McCormick Company it is a power, and a big earner for its owners. :{: :}: :Ii 4: 4i 4e 4: Yours truly, (Signed) J. E. Gorman. It will be noted that Mr. Gorman specifically stated that the valua- tion he ascribed to the property would not attach to it if it were a part of an ordinary railroad system. He based his conclusions on the anticipated earning power of the property, and this undoubtedly depended on the expectation that very large freight divisions would be obtained from other railroads. As a matter of fact the Inter- national Harvester Co. did adopt this policy and was receiving freight divisions of $12 per car when the Interstate Commerce Commission intervened in 1904 and declared that such divisions were unlawful and prescribed a maximum division of $3.50 per car. (See p. 155.) The earnings predicted by Mr. Gorman were never approached Dy the company even prior to the ruling of the Interstate Commerce Commission on its freight divisions, which were obviously unreason- able and therefore not a proper basis for valuation. Subsequent to that ruling the profit and loss accounts of the railroad company (disregarding intercompany rentals) showed a deficit in two years, while in several other years the earnings were comparatively small. For example, according to the company's own accounts there was a deficit (disregarding intercompany rentals) of $15,338.24 in 1906 and of $24,700.61 in 1907. These deficits appear before certain so- called " adjustments for prior years " are made, which would convert the deficit in 1906 to a small surplus. In 1908, 1910, and 1911 the net earnings were only $31,254.49, $32,543.87, and $18,238.89, respectively. In view of these facts, and furthermore in view of the emphatic statement in Mr. Gorman's letter that as a part of an ordinary rail- road this Illinois Northern would not have had the value " or any- thing approaching " the value which he placed upon it, it is apparent that the valuation adopted by the International Harvester Co. was grossly excessive. In the opinion of the Bureau, the value of this leasehold as shown by the balance sheet of 1903, and the appraised value of the equipment, which together aggregate $485,264.71, repre- 104 EEPORT ON THE INTERNATIONAL HAEVESTEE CO. sent a fair valuation of this property at the time of its acquisition. The difference between this value and that adopted by the Inter- national Harvester Co. — namely, $2,068,679.60— may be taken, there- fore, as the overvaluation in this case. Agency property. — The agency property, including real estate (land), buildings and equipment, stood on the McCormick company's books at $1,176,306.11, while the book value adopted by the Interna- tional Harvester Co. was $1,571,905.85. Another appraisal put the value at $1,549,557.71. The items are differently grouped in the ap- praisal adopted from the entries on the McCormick company's books, so that a satisfactory detailed comparison is not practicable. This agency property included a considerable amount of land in small parcels at various points at which the company had its ware- houses and agencies. In many of these localities there had undoubt- edly been some appreciation in this land. The Bureau is unable to state how far this appreciation may have been allowed for on the books of the McCormick company. In view of these facts, the Bu- reau has used the lower appraisal of $1,549,557.71, which is only $22,348.14 lower than the International Harvester Co.'s valuation. Timber. — The timber property acquired from the McCormick Co. consisted of timberlands and rights. These were appraised by the International Harvester Co. at $314,363.86. The book figures of the McCormick Co. were $314,950.65. Of the McCormick timber properties the principal one was the Pole Stock Lumber Co., which was appraised at $242,720, or about 77 per cent of the total appraised values of the McCormick timber proper- ties. The appraisal on this tract is stated to be its book value. It comprised 23,672 acres of timberlands and also the right to cut timber only on 600 acres of land. The values do not appear to be exces- sive and may be accepted at the appraisal figures. All the remaining items of the McCormick timber properties except one, namely, a con- tract with Scatchard & Sons, valued at $55,102.86, Avere of very small amounts. It is stated in connection with the appraisals that the contract with Scatchard & Sons covered : " The right to cut cotton- wood timber only on 22,678 acres in Poinsett County, Ark., at a stumpage of $2 per thousand feet. This acreage was estimated to contain 35,000,000 feet of cottonwood timber on which a sum of $70,000 was advanced. Up to September 30, 1902, there had been cut 7,448,566 feet of this timber, leaving 27,551,434 feet still to be de- livered." The value of the contract was appraised by multiplying the remaining quantity of timber by the price per thousand feet paid for it in advance, giving $55,102.86, as stated. This appears to have been a paid-up right. Miscellaneous plants and property. — Four items are included under this head for which there were two widely different appraisals for the first while the appraisals for the other three were alike except CAPITALIZATION AND INVESTMENT IN 1902. 105 for a small difference in the sawmill item. The items and the ap- praisals adopted were as follows : Powers Building, Chicago $651, 446. 15 Interest in H. W. Peabody & Co :. 75, 000. 00 Sawmill at Mosher, Ark 49, 373. 11 Compania Industrial de Baja California 111,023.13 Total 886, 842. 39 The Powers Building consisted of a leasehold in the city of Chi- cago and office-building improvements thereon, valued on the Mc- Cormick company's books at $20,000 and $279,872.08, respectively. The book value adopted by the International Harvester Co. was $400,000.00 for the leasehold and $251,446.15 for the improvements, the total amount being $651,446.15. Another appraisal was made of this leasehold interest of $206,250, and also a second appraisal of the improvements, namely, $175,859.23, the total amount being $382,109.23. Some years later the lease of the Powers office-building property was disposed of by the International Harvester Co. at very much more than the higher appraisal. However, during the meantime there had been a very remarkable advance in real estate values in that part of the city of Chicago where this building was located, and this great subsequent increase in value can not be used as indicating the value at the time the company was organized. In this case, the Bureau adopted the mean of the two appraisals — namely, $516,777.69 — as fairly representing the value of this property at the time the company was organized. The difference between the appraisal and the Bureau's valuation in this case was $134,668.46. For the other miscellaneous property the values as shown by the McCormick company's books, with one important exception, were very nearly the same as the values adopted by the International Harvester Co. The investment in H. W. Peabody & Co., appraised at $75,000, was a oile-fourth interest in the hemp business of that firm. H. W. Peabody & Co. gave potice of dissolution of partnership in August, 1902, and paid $75,000 to the McCormick company for its interest; the dissolution took effect February 28, 1903. In this case the Bureau accepted the appraised value. The appraisal of the sawmill property was $49,373.11, while it stood on the books of the McCormick company at $34,869.02. In this case also the Bureau adopted the appraised value. In the case of the Compania Industrial de Baja California, which has a fiber ranch in Mexico, however, the property was evidently over- valued in the McCormicls; company's books as well as in the appraisals. This fiber ranch was owned by the Mexican company above named, which was organized in 1900. It had a capital stock of $100,000, of 77854°— 13 106 KEPORT OK THE INTERNATIONAL HARVESTEK 00. which three-fifths was originally held by the McCormick company. In 1901 the McCormick company bought one-half of the balance of the stock for $3,500. On this basis the total valuation of the property would be only $17,500; and the four-fifths interest of the McCormick company would be $14,000. The McCormick company spent apparently about $111,023.13 on this speculation, and this figure was used as the appraised value. This company had some property, including a large tract of land in Lower California (113,217 acres) for the cultivation of sisal, and also some machinery, etc., valued at $35,664.28; also Mexican bonds booked at $16,942.50. Apparently the only valuable assets were the Mexican bonds, because nothing was ever made from this venture, and the fixed property and machinery were afterwards almost completely written off the International Har- vester Co.'s books. The proper valuation of the McCormick com- pany interests for this item, therefore, would apparently be the valuation given above, based on the price paid for one-fifth of the stock in 1901 by the McCormick company, namely, $14,000. This would indicate an overvaluation of $97,023.13 for this item. For this group of miscellaneous properties the appraised value was $886,842.39, while the valuation adopted by the Bureau was $655,150.80, showing a difference of $231,691.59. Inventory. — The inventory, which includes not only finished ma- chines, but also raw materials and work in progress, was booked by the McCormick company for October 1, 1902, at $10,562,793.59. This amount includes the sawmill inventory of $39,465.39 and $231,504.15 for freight and duty paid on machines, as shown in the appraisal of the inventory, but which was not embraced in the book value of in- ventory as kept by the McCormick company. This latter amount was added by the Bureau in order to make the two inventories compar- able. The appraisal of the inventory for the same date which was adopted by the International Harvester Co. was $11,738,822.70. Another appraisal of the McCormick inventory for September 30, 1902, was made by Jones, Caesar & Co. at the time of the merger for the purpose of determining profits, which, though it does not cover all the items, yet so far as it goes agrees substantially with the McCormick book values. Jones, Caesar & Co. describe the method of making this inventory as follows : As instructed the basis of valuation of inventories for deter- mining profits has been cost throughout. Repair parts at the Works and in the Country have been val- ued at 20% of the List Price. Finished Machines inventoried at the close of a season are valued at that Season's Cost, irrespective of the years make of the machines. No allowance has been made for damaged or depreciated machines carried over from season to season, this question being left for determination by the Final Board of Appraisers. CAPITALIZATION AND INVESTMENT IN 1902. 107 This appraisal by Jones, Caesar & Co. indicates that the McCor- mick book values were not figured on an unduly low basis. In fact it appears that they were probably too high, inasmuch as no allow- ance was made apparently for depreciated machines or old models. The Bureau arrived at similar values for the Deering, Champion and Piano inventories without allowance for depreciation, giving inven- tories aggregating $21,286,883.64 for the four vendor companies, or together with the Milwaukee inventory, $22,730,650.31. The Inter- national Harvester Co. appraised these inventories at $25,548,162.42, but subsequently wrote them down to $18,155,353.52 as a " fair trading value." The Bureau regarded this reduction as excessive and con- sidered that at the outside the depreciation which could be fairly allowed was $1,500,000. The positions of the Bureau and of the International Harvester Co. in respect to this matter are more fully discussed below (see p. 201). This depreciation of $1,500,000 was made with respect to the inventories of the four vendor companies only and was prorated over each company. The depreciation thus allocated to the McCormick Co. was $744,317.05. This gives a net value for the McCormick inventory of $9,818,476.54 or $1,920,346.16 less than the appraisal. Summary or the McCormick company valuation. — The value of the McCormick company's property conveyed to the International Harvester Co. has been examined above, and certain amounts deter- mined as the reasonable or maximum valuations in each case. It is probable that for some items these valuations are considerably too high. It is quite unlikely that any of the groups of items have been appreciably undervalued. It seems probable that if the Bureau had more complete information, a considerable reduction in the aggre- gate could be made. The results of this criticism are shown in the following table: Table 10.— VALUATIONS OF THE INTERNATIONAL HARVESTER CO. OF THE PHYSICAL PROPERTIES TRANSFERRED TO IT BY THE McCORMICK HARVESTING MACHINE CO. m 1902 AND VALUATIONS OP THESE PROPERTIES ADOPTED BY THE BUREAU. Item. Valuation adopted by the Inter- national Har- vester Co. Estimate of value by Bureau. Factory real estate Factory buildings and machinery Illinois Northern Railway Agency property Timber Miscellaneous plant and property. Inventory Total 14,993,909.00 7,401,692.92 2,653,944.31 1,671,905.85 314,303.86 886,842.39 11,738,822.70 $3,772,032.80 6,895,942.99 485, 264. 71 1,549,557.71 314,363.86 656, 150. 80 9, 818, 476. ,54 29,461,481.03 23,490,789.41 108 REPORT ON THE INTERNATIONAL HARVESTER CO. The book value adopted by the International Harvester Co., namely, $29,461,481.03, has therefore been reduced by the Bureau to $23,490,789.41, as the proper value of this property, indicating an overvaluation by the International Harvester Co. of $5,970,691.62. In this connection should be noted the value of this property on the books of the McCormick company, namely, $19,761,821.80, which is $3,728,967.61 lower than the value allowed by the Bureau. Section 3. Appraisal of Deering properties. The total appraisal of the physical property conveyed by the Deer- ing company was $28,081,514.69. The following table summarizes and compares the book values of such property as shown by the bal- ance sheet of the Deering Harvester Co. for January 31, 1903, with the appraisal adopted by the International Harvester Co. Table 11.— BOOK VALUATIONS OF PHYSICAL PROPERTIES OF DEERING HARVESTER CO., TRANSFERRED TO THE INTERNATIONAL HARVESTER CO. IN 1902, AND VALUATIONS OF THESE PROPERTIES ADOPTED BY THE INTERNATIONAL HAR- VESTER CO. Item. Deering book value. International Harvester Co. book value. Increase of Harvester Co. book value. Factory real estate Factory buildings and machinery Agency property Ore, coal, iron, and steel Timber property Miscellaneous properly Inventory Total $670,642.49 2,579,231.38 226,49S.26 11,589,093.31 275,567.88 2 356,773.01 '8,060,598.58 11,563,165.63 5,523,041.88 471,898.94 9,511,400.44 1,560,436.36 546,511.66 8,905,059.78 $892,623.18 2,943,810.60 246,403.68 7,922,307.13 1,284,868.48 189,738.65 844,461.20 13,768,401.87 28,081,514.1 14,323,112.82 • Without deduction of purchase-money obligations of $916,753.40, which are deducted in the Inter- national Harvester Co. valuations. ' Not including Mann property, appraised at $28,414.89 and at $34,632.68, respectively. • Includes $240,690.18 on hand, freight and duty, aa shown by appraisal, not shown in Deering data, but added by the Bureau. Some items were appraised by two appraisers and others by one appraiser only. For use in its property account, the International Harvester Co. almost invariably adopted the higher appraisal value. The total book value adopted was $28,081,514.69, while the total book value as shown by the books of the Deering company was only $13,758,401.87, showing a difference of no less than $14,323,112.82. Over one-half of this enormous discrepancy, namely, $7,922,307.13, is found in different valuations assigned to the iron and coal lands and iron and steel plants put in by the Deering company,^ the rest 1 To be strictly comparable this should be increased by ?916,753.40, the sum of the purchase money oljliffatlnns wliich are not deducted from the Deering book values but are deducted from the appraisal. CAPITALIZATION AND INVESTMENT IN 1902. 109 being found in the valuations of timber property, manufacturing plants, inventories, etc. In comparing the book values of the Deering company with the book values adopted by the International Harvester Co., it was generally possible to find corresponding items in each case. In some cases, however, the particular items were differently grouped, so that only totals of certain groups can be compared. This applies, for example, to the groups for agency property and miscellaneous property. The Bureau does not regard this comparison based on the book values of the Deering company conclusive as to the ques- tion of the degree of overvaluation adopted by the International Harvester Co., but this comparison does make it evident, however, that there was a very large overvaluation. It should be noted fur- ther that the Deering figures used are for a balance sheet of Jan- uary 31, 1903, and not for the date of the appraisal, October 1, 1902. This difference in time, however, was of very little importance, except in the case of inventories. In order to criticize these values intelligently, it is necessary to consider the several groups of property in more detail. Factory eeal estate. — The Deering company book value for fac- tory real estate in Chicago, by which is meant the site only, was $670,642.45, as shown by the balance sheet for January 31," 1903.^ The book value accepted by the International Harvester Co. was $1,563,165.63, showing an increase in valuation of $892,523.18. Ac- cording to another appraisal of this property, the value was $958,- 386.09." Inasmuch as it is impracticable for the Bureau to attempt a valua- tion of this real estate for 1902, and as it is quite conceivable that (here was an appreciation of this realty of which due account was not taken on the books of the Deering company, the Bureau instead of using that book value has taken the mean of the two appraisals made for the International Harvester Co. as the proper value of this property, or $1,260,775.86. This shows an overvaluation in the figures adopted by the International Harvester Co. of $302,389.77. Factoet buildings and machinery. — The value of the factory buildings in Chicago, as shown by the books of the Deering company, was $1,544,738.08. The book value adopted by the International Harvester Co. was $2,119,739.52, an increase of $575,001.44. 1 Corresponding book values of the Deering company for Feb. t, 1902, are not available for factory real estate separately, but between these two dates there was not any marlied Increase for land and Improvements combined. •This Is not quite exact, as this amount Is computed by subtracting from the total of the first appraisal, $1,197,155.71, the single known appraisal of other Chicago real estate, viz, |23£,769.62. 110 EEPOET ON THE INTERNATIONAL HAKVESTER CO. For machinery the Deering company balance .sheet shows a book vahie of $1,034,493.30, while the book A'alue adopted by the Inter- national Harvester Co. was no less than $3,403,302.36, an increase of $2,368,809.06. For these two items of factory buildings and machinery taken together the adopted appraisal was $5,523,041.88, while the lower appraisal amounted to $5,070,274.73. It will be noted that the disparity between the appraisal values nnd the book values was relatively much greater than in the case of the McCormick company for these items. One reason for this ap- pears to be that the Deering concern had written down its building and machinery valuations very sharply. A representative of the International Harvester Co. said on this point : * * * it had been the custom of the Deering Harvester Co. to reduce the book value of their buildings by 6 per cent per annum and the book value of their machinery by 10 per cent per annum, both of which were excessive rates of depreciation. The concern was a private partnership, and they naturally felt justi- fied in treating their accounts as rigorously as they chose. But at October 1, 1902, this had produced a low book valuation for their buildings, machinery and equipment. Q. An unduly low valuation ? — A. Presumably. While in this case the Bureau was unable to establish for how long a period the Deering interests had written off so large a percentage for the depreciation of buildings and machinery, it is apparent that so large an allowance might leave the result an unduly low book valuation. The Bureau in this case adopted the lower appraisal amounting to $5,070,274.73 for the factory buildings and machinery taken together. This, it will be observed, was $2,491,043.35 in excess of the Deering book value. Agency pbopehty. — The agency property of the Deering company was booked at $226,495.26, while it was appraised and entered on the books of the International Harvester Co. at $471,898.94. Another appraisal, hofwever, was made of this property, namely, $417,904.31, which was not adopted. The general indications of overvaluation were so strong that the Bureau adopted the lower appraisal of $417,904.31. Iron-oee and coal propertt and iron and steel plants. — The principal discrepancy between the original book values of the Deer- ing company and the accepted book values of the International Har- vester Co. is found with respect to this class of property. When the items are examined in detail, it appears that this discrepancy arises chiefly from differences in the valuation of certain leaseholds of iron- ore mines, as shown by the table following; CAPITALIZATION AND INVESTMENT IN 1902. Ill Table 12.— BOOK VALUATIONS OF ORE, COAL.IEON.AND STEEL PROPERTIES OF THE DEERINO HARVESTER CO., TRANSFERRED TO THE INTERNATIONAL HARVESTER CO. IN 1902, AND VALUATION OF THESE PROPERTIES ADOPTED BY THE INTER- NATIONAL HARVESTER CO. Item. Deering book value. Book value International Harvester Co. Increase of Harvester Co. book value. Iron-ore property Coal lands Soutb Chicago Furnace Co. Soutb Chicago steel plant. . Total J812,768.87 207,250.64 285,875.00 283,198.80 $8,191,851.55 139,121.60 682,000.00 495,427.29 $7,382,082.68 '68,129.04 396,125.00 212,228.49 « 1,689,093.31 9,511,400.44 7,922,307.13 > Decrease. 2 Without deduction of purchase-money obligations of $916,753.40, which are deducted in the Inter- national Harvester Co. valuation. Of the total discrepancy of $7,922,307.13 for the above-listed prop- erties, $7,382,082.68 is found in the valuation of iron-ore properties. The overvaluation of these iron-ore properties, as will be presently shown, relates almost entirely to two leaseholds (Hawkins and Ag- new) in the Mesabi Kange, the rest of the iron-ore property being valued at such small amounts that no correction was made by the Bureau. This constituted the clearest and also the greatest overvalu- ation in the entire appraisal of the International Harvester Co. The Hawkins leasehold, according to the statement of the Inter- national Harvester Co., was appraised as follows : Tonnage determined at 14,400,000 tons by joint ap- praisal of B. J. liOngyear and A. P. Silliman, and equity valued at 42.5 cents per ton $6, 120, 000 Less, obligations assumed at date of purchase, as fol- lows: Two notes for $175,000 each, dated Apr. 19, 1902, and due in one and two years, respectively, with interest at 5 per cent 350,000 Balance - 5,770,000 This estimate of tonnage was apparently reported to the Inter- national Harvester Co. in October, 1905. The royalty was 20 cents per ton. The total bonus paid for the transfer of this leasehold was $525,000, of which one-third, $175,000, was paid in cash, and two- thirds, or $350,000, in notes with interest at 5 per cent. An appraisal made by Jones, Caesar & Co. (which, however, was not adopted by the International Harvester Co.) showed that in ad- dition to this bonus payment, expenses had been incurred in connec- tion with the lease amounting to $7,757.67, advance royalties paid amounting to $4,000, and expenditures for surface improvements and equipment amounting to $35,238.90. Adding these items to the bonus gives a total cost to the Deerings of $571,996.57. 112 EEPOBT ON THE INTERNATIONAL HARVESTER CO. There is no doubt that the Hawkins mine was a desirable, although not an exceptional, property. Furthermore, there is no doubt that since its acquisition by the International Harvester Co. this lease- hold has very greatly increased in value. This increase has come about very largely because of the great increase in concentration of ore properties in the Lake Superior region in the hands of a few large owners, notably the United States Steel Corporation. The Bureau, however, is , simply concerned in estimating a fair market valuation for the property at the time it was acquired by the Inter- national Harvester Co., and takes the position that any subsequent increase in value should be disregarded in making a study of the valuation in 1902. Furthermore, the Bureau is not attempting to say whether this mining property should have been capitalized at the mere cost. The purpose of this study is to determine the validity or reliability of the valuations placed upon these physical properties at the time the International Harvester Co. was organized. The Hawkins leasehold was acquired by the Deering interests in January, 1902, or only about seven months before it was transferred to the International Harvester Co. When the mine was acquired it was known that the tonnage was large, the estimates ranging appar- ently from 9,000,000 to 12,000,000 tons of merchantable Bessemer ore, besides large quantities of low-grade ore. The Deerings, according to the contract of lease of January 27, 1902, made the lease on the representation that the mine contained 9,285,000 tons of merchantable ore that would average 58 per cent metallic iron and not exceeding .045 per cent phosphorus. It was known that large quantities of low-grade ore existed also. This property was apparently not re- garded as an open-pit mine when it was acquired by the International Harvester Co., and mining operations were conducted at first by means of a shaft. Production by this method is more expensive than open- pit mining, and tends to diminish the value of the deposit. Although it was subsequently converted to an open-pit mine, its costs are not very low for mines on the Mesabi Eange. The character of the ore was known, and for the merchantable ore it was not high in iron or very low in phosphorus — in other words, it was not of an unusually high Bessemer grade. The rate of royalty, however, was 20 cents a ton, which was less than the average rate of royalty for iron on the Mesabi Range. This low rate of royalty was undoubtedly a factor iri determining the bonus price which was above the average either in total amount or per ton of ore. Contemporary opinion in this ore district appears to have been that the price paid by the Deerings was a high one. Thus, Dwight E. Woodbridge, an expert mining engineer regularly reporting the news for the Lake ore districts to The Iron Age, in an article written for the issue of June 26, 1902, refers to the sale of the Hawkins " at a large price to the Deering Harvester Company." This statement CAPITALIZATION AND INATESTMENT IN 1902. 113 was based on an assumed tonnage of merchantable ore of 9,000,000 tons.^ In the absence of some evidence, therefore, that the price paid by the Deering interests for this mine was distinctly lower than the going price of similar property on the Mesabi Range, the Bureau contends that this price is the best indication of the value at that time. That this price was not exceptionally low is shown by the following table, compiled partly from a statement prepared by Mr. Woodbridge for the Bureau in connection with its investigation of tlie Steel Industry, and partly from data published in the trade journals at that time. TABLE 13.— BONUSES PAID FOR SPECIFIED ORB LEASEHOLDS ON THE MESABI RANGE IN 1902. Mine. Character of ore. Percent Iron. Per cent phos- pnorus. Estimated tonnage in deposit. Casli bonus. Bonus, cents per ton. Royalty per ton. Hawkins '., Agnew. . Albany Troy Crosby Elizabeth Prindle Utica Webb Susqueiianna . . . Sect. 27; 58-20 «. Kinney 68.00 to 60.00 61.60 58.67 67.10 56.00 56.63 59.48 60.00 68.08 0.043 to .050 .050 .071 .039 m .070 .068 .055 15, ,000,000 to 000,000 3,500,000 to 4,516,000 4,945,000 58.00 .079 490,000 800, 000 027,000 550,000 460,000 000,000 600,000 000,000 •$525, 000 150, 000 150,000 m 350,000 200,000 150,000 280,000 300,000 126,000 160,000 5.8 3.5 4.3 3.3 3.0 32.3 3.0 6.6 5.9 3.3 2.7 3.6 2.3 $0.20 .20 .25 .25 .25 .25 .25 .25 (') Average.. 6,477,200 to 7,178,800 239,000 i 3. 7-3. 3 • Estimate in table is as of time of purchase, and does not include a very large tonnage of the ore low in iron. < No limit stated. ' Additional royalty of 7 cents for ore as found; equivalent to bonus of about 2.3 cents per ton. ' No name given. ' Not stated. 8 Not counting Crosby leasehold for which bonus is estimated. ' Not counting Kinney leasehold for which royalty is not given. It will be seen from this table that the character of the ore on the Hawkins property was by no means exceptional. In fact, it was distinctly lower in iron content than many of the mines shown in this list. The percentage of phosphorus was rather low, this increasing the value of the ore. The bonus per ton amounted to about 5.8 cents, 1 Cf. The Iron Age, June 5, 1902. 114 EEPOBT ON THE INTEBNATIOITAL HABVESTEE 00. on the basis of a 9,000,000-ton deposit, whicli was distinctly higher than the average for the other mines in this group, namely, about 3^ cents per ton. As already noted, this was imdoubtedly due in part to the fact that the royalty on this mine was only 20 cents, whereas the average for the mines given in this group was 24 cents. Assuming that the deposit contained 15,000,000 tons of ore, the bonus averaged 3.5 cents per ton. These figures may be com- pared with the appraisal valuation of the equity adopted by the International Harvester Co. of 42^ cents per ton, a valuation many times higher than the average bonus value at that time. In the opinion of the Bureau, based on thorough study of ore values in connection with its investigation of the Steel Industry, the bonus payment of $525,000 represented a high valuation for the property under the conditions prevailing at the time it was acquired by the Deering interests. A former official of the International Harvester Co., who was in immediate charge of this property at that time, claimed, however, that before that company acquired the Hawkins it had been dis- covered that the deposit contained considerably more than 9,000,000 tons of ore. Evidently more ore could not have been developed than shown by the appraisal of Longyear and Silliman of 14,400,- 000 tons, which was made subsequently to its acquisition by the International Harvester Co. While the Bureau is disposed to re- gard the price paid by the Deerings as perhaps fully stating the value of the ore at the time it was acquired by the International Harvester Co., it arbitrarily added $400,000 to this valuation in order to be certain that it did not undervalue it. Adding this $400,000 to the price paid by the Deerings and also the cost of the improvements, etc., made by them as shown above, gives a total gi'oss value of $971,996.57. In the appraisal, however, the obligations due for unpaid bonus, namely, $350,000, are deducted, as these were outstanding, and were assumed by the International Harvester Co. This leaves a net value of $621,996.57. Comparing this with the appraised value of $5,770,- 000, it appears that there was an overvaluation of $5,148,003.43. The appraisal of the Agnew mine, according to the statement of the International Harvester Co., was made in a similar manner: Tonnage determined at 6,250,000 tons by joint appraisal of E. J. Longyear and A. P. Silliman, and equity valued at 37.5 cents per ton $2, 343, 750 Less obligations assumed at date of purchase, as fol- lows : One note dated Apr. 21, 1902, time one year, at 5 per cent, $30,000; four notes for $30,000 each, dated Apr. 21, 1902, and due in two, three, four, and five years, respectively, with interest at 5 per cent, $120,000 150, 000 Balance 2, 193, 750 Capitalization and investment in 1902. 115 Apparently this estimate of the tonnage was made in October, 1905. In this case the leasehold was acquired under a royalty of 25 cents per ton, and the total bonus paid for the transfer of this leasehold was $150,000, all payable in notes with interest at 5 per cent. This leasehold was also acquired in January, 1902, or about seven months before it was transferred to the International Har- vester Co. As in the case of the Hawkins mine above, certain additional items shown in the appraisal of Jones, Caesar & Co. should also be considered. This appraisal showed that in addition to the bonus payment the following expenses had been incurred, namely, $1,953.52 in connection with the lease, $5,575 for advance royalties, and $46,755.66 for surface improvements and equipment. Adding these items to the bonus gives a total cost of $204,284.18. It will be noted that the Agnew mine is included in Table 13 and that the average rate of royalty and the average bonus per ton on the lower estimate are both higher than the average for all mines listed in that table. As in the case of the Hawkins mine, the Bureau is of the opinion that the price paid by the Deerings was at a fair valuation of the property in 1902 and that this price plus the expend- iture made by the Deering interests made a fair valuation of the property at the time it was acquired by the International Harvester Co. A similar claim was made by a former representative of the International Harvester Co. of the discovery of additional ore be- tween the time of its purchase by the Deerings and the formation of that company, who states that at the date of the merger the ore deposit could be taken at 5,000,000 tons. On this basis the bonus paid would average just 3 cents per ton. For this reason, again, it could not be properly assumed that the equity per ton of ore had suddenly increased to 37j cents per ton as given in the appraisal. The Bureau is of the opinion that the original cost to the Deering company was approximately a fair measure of its value at the time of the merger. However, in order to be certain that it did not under- value this ore, the Bureau arbitrarily added $100,000 to the cost of the ore to the Deerings. This gives a total gross value of $304,284.18. As in the case of the Hawkins, the purchase money obligations of $150,000 assumed by the International Harvester Co. are deducted. This gives a net value for the Agnew leasehold of $154,284.18, and indicates an overvaluation of $2,039,465.82. The total overvaluation in the case of these two leaseholds, there- fore, was $7,187,469.25. Inasmuch as this extraordinary overvaluation apparently is nowhere else even approached in connection with other items of the appraisal, it requires some explanation. These properties were originally valued by G. W. Perkins, of J. P. Morgan & Co., according to express stipu- lation in the contract of July 28, 1902, between the Deering Harvester IIG KEPOBT ON THE INTEBNATIONAL HAEVESTBK CO, Co. and W. C. Lane. (See p. 345.) The United States Steci Cor- poration, which was also organized hf J. P. Morgan & Co., had been compelled to give the valuation of its property in a civil suit in New Jersey in July, 1902, or about a month before the International Har- vester Co. was formed. In that proceeding the representatives of the Steel Corporation had tried to show that the value of Lake Superior ore was about $1 per ton in the ground for the total holdings of the Steel Corporation, including both fee and leasehold properties. Mr. Perkins, to whom was left the appraisal of these Deering ore properties, was also chairman of the finance committee of the Steel Corporation. Obviously, therefore, J. P. Morgan & Co. were in no position to oppose a very high valuation for this ore. It has been admitted by a representative of the Internationa] Harvester Co., indeed, that the McCormick company protested to J. P. Morgan & Co. against such a high valuation, but that they could get no abatement, although, as shown above, the valuation was many times as large as the actual cost to the Deering company only a few months before. The valuation finally used in the books of the International Harvester Co. was not adopted until after protracted disputes and after the stock had been entirely distributed. The appraisal of other ore property amounted to only $231,101.55, and while this was apparently considerably overvalued also, the amount in the aggregate was small, and the data with respect to it too indefinite to make it advisable to attempt a correction. Attention is called to the fact that the overvaluation for ore prop- erty shown above, $7,187,4&9.25, is not much less than the difference ($7,382,082.68) between the book value of the International Har- vester Co. and the original book value of the Deering company, but this is explained by the different treatment of the obligations ($500,000) connected with such property, which were deducted from the book value of the International Harvester Co. and from the Bureau's valuation, but not from the book value of the Deering company. The coal lands of the Deering company, on the other hand, do not appear to have been greatly overvalued, if at all. They were appraised by the International Harvester Co. as follows : 22,235 acres, at $25 per acre, as appraised by O. P. Perin_ $555, 875. 00 Less obligations assumed at date of purchase 416,753.40 Balance 139, 121. 60 The Bureau accepted this valuation. The South Chicago Furnace Co. property consisted of 1,705 shares of stock in that company. This block of stock stood on the Deering company's books at $285,875, which would be about $168 per share. This stock was acquired at different dates from November, 1900, to CAPITALIZATION AND INVESTMENT IN 1902. 117 February, 1902. At the latter date 250 shares were purchased, at $162.50 per share. The Deering company booked this stock at cost. The remaining 1,295 shares of this company were subsequently ac- quired in 1903 at $400 per share, and on this basis the appraisal of $682,000 was fixed. Inasmuch as the stock purchased only seven months before the merger cost less than the average value of the stock on the Deering company's books, it would appear that no in- crease over the Deering book value should be made. The valuation in this case, therefore, was placed at $285,875, and the overvaluation was $396,125. The South Chicago steel plant was appraised at $495,427.29, as of September 30, 1902, on the basis of the " approximate amount ex- pended at that date." The books of the Deering company, as of February 1, 1903, carried this same item apparently at $283,198.80. An appraisal of Jones, Caesar & Co., gives the book value of the Deering company for this property as of September 30, 1902, at $363,209.67, of which $225,000 was for real estate and the balance ($138,209.67) was for construction expenses. The Bureau accepts this appraisal as the value of this property and finds therefore in this case an overvaluation of $132,217.62. Summing up, therefore, the criticism of the appraisal of the iron and coal lands and iron and steel plants, the Bureau finds that these were overvalued by $7,715,811.87. The total appraised value of $9,511,400.44 is thereby reduced to $1,795,588.57, representing the Bureau's estimate of the value of this property. Timber peopeett. — A marked difference appears also between the appraisal of the Deering timber property on the International Har- vester Co.'s books, namely, $1,560,436.36, and the value of the same property on the books of the Deering company, namely, $275,567.88, a difference of $1,284,868. 48. Of this total appraised value of $1,560,- 436.36, all but a small portion, namely, $25,189.12, which was appraised at the value shown by the Deering company's books, re- lated to certain timberlands in Missouri, which were booked by the International Harvester Co. at $1,535,247.24. It is sufficient, there- fore, to examine this valuation alone. The basis on which this International Harvester Co. valuation Avas fixed was a report originally made sometime between 1905 and 1907. In connection with this report the appraiser wrote the following letter : Chicago, February 4^, 1907. Mr. F. K. Gadd, International Harvester Company, 166 Wabash Ave., Chicago, III. Dear Sie : Replying to your verbal request to furnish the approxi- mate value of the International Company's holdings in Southeast Missouri, I have consulted all the papers which you sent me, also liad 118 RBPOET ON THE INTEENATIONAL HABVBSTEK CO. my man Mr. Gilchrist come here and discussed the matter with him. The summing up of the estimates and values of 61,623.22 acres in Dunklin County, Missouri, is as per sheet enclosed, $1,644,264.45, or $26.68 per acre. As I had to establish the present value also I en- close that sheet as well, showing $2,146,908.52 or $34.48 per acre, which I think the lands are worui today. If not satisfactory and this is not just what you want, kindly indi- cate your wishes and I will attend to them promptly. Yours very truly, (Signed) J. P. Bbayton. In this report the total acreage of timber was assumed at 61,623.22 acres, while the area was actually only 57,543 acres. The stand of timber was reckoned at 612,687,696 board feet, mostly of hardwood, with an average value per thousand feet of about $2.68. The ap- praisal thus made gave a total value of $1,644,264.45 for 1902. In fixing its book value, however, the International Harvester Co. re- duced this amount proportionately to the actual acreage acquired, and entered it on its property account at $1,535,247.24, as stated above. In a subsequent estimate of the value of the timber on this same tract (1909) made to the Bureau in connection with its investi- gation of the lumber industry, it was stated that there was little change in its character since it had been acquired, except that it had matured rapidly, while the total quantity of merchantable timber was 285,000,000 board feet; and, furthermore, the values placed on the timber were at a distinctly lower scale per thousand feet. Tak- ing the stand of timber and values reported in 1909, gives an aggre- gate value for the timber on this tract of only $505,000. This may be compared with the book value adopted by the International Har- vester Co. of $1,535,247.24, and shows an excess book value of no less than $1,030,247.24. Only about 27,000,000 board feet had been cut since its acquisition, so that exhaustion was not an important factor in this case. This valuation, however, covers the larger-sized timber only, and there was a large stand of smaller size. The total quantity of timber not covered by the foregoing computation for 1909 amounted to only 180,000,000 board feet for trees between 10 and 16 inches in diameter, and was undoubtedly not worth more than one-half of the value of the much greater stand of the large timber at that time. The value of this same timber in 1902 was unques- tionably much lower, as there were very marked advances in the value of timberlands in that region between 1902 and 1909. While the land on which the timber stood was hot considered by the Inter- national Harvester Co. in computing the value of the timber in 1909, it was undoubtedly worth something in addition in 1909, especially on account of the improvements made in draining the land, etc. The data for 1909 show, howevej;, that the timber itself was greatly overvalued in the appraisals adopted for 1902. CAPITALIZATION AND INVESTMENT IN 1902. 119 In order to fix the proper value of this timber property in 1902, it is much better to take the Deering book values as a preliminary basis. This value was $250,378.76 for the Missouri property alone. The Deering interests acquired 39,566 acres, or 68.7 per cent of the total quantity, on August 17, 1899 ; and 14,935 acres, or 26 per cent, on November 17, 1899. The remainder, amounting to about 6 per cent, was acquired at various dates. The period between the pur- chase of the bulk of this timberland and its transfer to the Inter- national Harvester Co. was therefore about three years. The Bureau, in connection with its lumber investigation, had occa- sion to study the conditions of stand and market prices of timber in this precise locality, and it does not appear from any evidence avail- able that there was any extraordinary change in the values of such timber between 1899 and 1902. It is probable, on the other hand, that there was some increase, say, 25 to 50 per cent. In order to be on the safe side, however, the Bureau decided to allow an increase in value over the Deering book values of substantially 100 per cent, giving a maximum value to this timberland of $500,000. The over- valuation in the appraisal of this property, therefore, is estimated at $1,035,247.24. That this timber property was overvalued was, indeed, admitted. Thus, the comptroller of the company, in a statement to the Bureau, said: From subsequent developments in that region it must be ad- mitted that the valuation placed upon the timberlands as of October 1, 1902, was somewhat high. Furthermore, whereas in the case of other important properties several appraisers were usually employed, in the case of this timber property there was only one^a Mr. J. P. Brayton — who was himself extensively interested in Missouri timber properties. The other timber property of the Deering company mentioned above was booked by the International Harvester Co. at the same figure at which it stood on the books of the Deering company, namely, $25,189.12. All of the Deering company's timber taken together, therefore, instead of being worth $1,560,436.36, was overvalued by at least $1,035,247.24, and a fair valuation may be taken at not more than $525,189.12. MiscELi/ANEOUs PROPERTY. — For this group of items, which include certain additions to plants, construction at Hamilton, Ontario, some Chicago real estate, plant of J. W. Mann & Co. in Canada, and a sawmill, the total appraisal value adopted was $546,511.66. The corresponding properties were found on the Deering company books (excepting for J. W. Mann & Co., which was appraised at only $34,532.68), and were booked at an aggregate value of $356,773.01. 120 BEPORT ON THE INTEBNATIONAL HAEVESTEE 00. Adding the adopted appraised value of J. W. Mann & Co. to this amount would give only $391,305.69. Two appraisals were made of the Mann property and of the sawmill, and the lower appraisal, which was not adopted, aggregated $100,910.13, as against the adopted appraisal of $131,715.47. In view of the general effort to overvalue these properties, the Bureau felt warranted in assuming the lower appraisal for these two. This was apparently about $10,000 lower than the book values. The assumed overvaluation in this case is only a small amount, namely, $30,805.34, and the total valuation adopted by the Bureau, $515,706.32. Inventory. — The Deering company book value of inventory for February 1, 1903 (including raw materials, work in progress, and finished products), was $7,820,008.40 (instead of $8,060,598.58, as shown in Table 11, on p. 108). This, however, does not include apparently any allowance for freight and duty on finished products shipped to local agents in various markets, which, of course, added to the value of such products an amount corresponding to such freight and duty. No item for such freight and duty could be found in the Deering company balance sheet or other data of book values, but may have been included as a credit to the accounts payable of agents. The Bureau therefore added to the Deering company book value of the inventory the amount of such freight and duty as shown by the appraisals, namely, $240,590.18, giving the total shown in fable 11 of $8,060,598.58. ' The inventory was appraised at $8,905,059.78, which was the value adopted by the International Harvester Co. The value of inventories, as shown on the Deering company books, was for January 31, 1903, which was several months after the transfer and date of appraisal. As inventory amounts are liable to consider- able seasonal variations, a comparison should not be made between them for the determination of overvaluation in the appraisals. Complete inventory data were not furnished by the Deering com- pany for September 30, 1902, but certain items were, and these were considerably lower than the appraisals adopted for the same items. Thus for finished products the book values of the Deering company were $179,885.95 lower than the appraisal. Another basis for criticising the appraisal value adopted is found in a valuation of the inventories made by Jones, Caesar & Co. in connection with the determination of the profits of the Deemng com- pany. The total amount of this appraisal was $7,462,365.37, or $1,442,694.41 less than the valuation adopted, but this appraisal did not include all the items and so can not be compared without the addition of these items. It did not include apparently lart^e items for freight and duty paid, amounting to $240,590.18, nor a large amount for hemp at Progreso (Yucatan), amounting to $322,885.57, CAPITALIZATION AND INVESTMENT IN 1902. 121 besides several small items aggregating $130,879.27. On the other hand, it did include an item for Australian inventory amounting to $334,235.78, which apparently should be excluded to make it com- parable with the appraisal. The total inventory value after making these adjustments appears to have been $7,822,484.61. However, a comparison of the particular items shows that the appraisal adopted was invariably higher than this appraisal of Jones, Caesar & Co. Furthermore, the appraisal of Jones, Caesar & Co. was made appar- ently on a liberal basis, the terms being the same as those quoted above on page 106. Consequently, there was no proper allowance for the depreciation of finished machines. The Bureau made an allowance on this account in the manner described above, thereby reducing the value of this Deering inventory from $7,822,484.61 to $7,271,265.98. This differed from the appraised value adopted by the International Harvester Co. ($8,905,059.78) by $1,633,793.80, which was taken as the overvaluation in this case. Summary op Deering compant valuation. — The valuations of the chief classes of property conveyed by the Deering company have been examined above, and certain amounts determined in each case as overvaluation. It is quite likely that the overvaluations were actually greater for some items than those fixed on by the Bureau. If, therefore, the amounts determined on as overvaluations by the Bureau are subtracted from the amounts fixed in the appraisals for each class of property, the resultant figure may be regarded as the value of such property of the Deering company in 1902. This is shown in the following table : TABLE 14.— VALUATIONS BY THE INTERNATIONAL HARVESTER CO. OF THE PHYS- ICAL PROPERTIES TRANSFERRED TO IT BY THE DEERING HARVESTER CO. IN 1902, AND VALUATIONS ADOPTED BY THE BUREAU. Item. Valuation adopted by the Interna- tional Har- vester Co. Estimate of value by Bureau. Factory real estate Factory buiiaings and machinery Agency property Ore, coal, iron, and steel Timber property Miscellaneous property Inventory Total $1,563,165.63 5,623,041.88 471,898.94 9,511,400.44 1,660,436.36 546,511.66 8,905,059.78 $1,260,775.86 5,070,274.73 417,904.31 1,795,688.57 525, 189. 12 515,706.32 7,271,265.98 28,081,614.69 16,856,704.89 According to the Bureau's estimate, therefore, the book value adopted by the International Harvester Co. for the property con- veyed by the Deering Co., namely, $28,081,514.69, was an overvalua- tion to the extent of at least $11,224,809.80, and the proper value 7T854°— 13- -10 122 EEPOKT ON THE INTERNATIONAL HARVESTER CO. was $16,866,704.89. The Deering company book Aalue for these same properties, it should be remembered, was $13,758,401.87, or $3,098,- 303.02 lower than the value as estimated by the Bureau. Section 4. Appraisals of the Piano, Champion, and Milwaukee companies. Plano and Champion appraisals. — As has been already stated, the Bureau was unable to obtain from the representatives of the Piano and Champion companies any information as to the values of the properties conveyed by them as shown on the books of account prior to the merger. Appraised values as adopted by the Interna- tional Harvester Co. in its property account have already been given (p. 96), namely, $2,708,982.48 for the Piano company and $3,824,251.45 for the Champion company, the aggregate amount ($6,533,233.93) constituting less than 10 per cent of the total book value adopted by the International Harvester Co. for all the physical properties acquired. For these two companies only one appraisal was made of the value of plants and other fixed property. In regard to inventories, however, separate appraisals were made by Jones, Caesar & Co. to determine the profits of these companies for the purpose of com- puting good will, and these were markedly lower than the appraisals adopted. In regard to these inventory items only, therefore, is it possible for the Bureau to make any revision of the valuations of the properties conveyed by these two companies. The appraised values of the Champion and Piano companies were as follows : OIIAMPTON COMPANY. Factory plant $1,579,190.16 Chicago warehouse 23.3,340.35 Agency property 147,727.69 Inventory 1, 863, 987. 25 Total 3, 824, 251. 45 PLANO COMPANY. Factory plant $967,766.96 Agency property .56, 570. 64 Chicago Malleable Castings Co. (investment) 62,738.35 Chicago, West Pullman & Southern By. Co. (in- vestment) 25,380.51 Inventory 1, 596, .526. 02 Total 2, 708, 982.'48 As stated above, the only items which the Bureau is able to criti- cize in this case are those for inventories. The inventory made by Jones, Caesar & Co. for the purpose of determining good will was for the Champion company $1,539,995.28, and for the Piano company CAPITALIZATION AND INVES]^MENT IN 1902. 123 $1,361,610.16. These inventories were apparently the book values of the inventories as they stood on the books of these two companies. In both these cases, as also for the McCormick and Deering book inventories, discussed above, it appears that no depreciation was made for finished machines. Like the McCormick and Deering in- ventories, they were subsequently greatly reduced 'on the books of the International Harvester Co. in order to bring them down to a " fair trading value." The Bureau, however, regards the reductions so made as excessive, and for the aggregate inventories of the four companies ($22,730,650.31) allowed a depreciation of $1,500,000, this reduction being prorated over the inventories of the four vendor companies. The gross value of the Champion inventory was taken at $1,539,995.28, which became after application of depreciation (pro rata) $1,431,478.08 ; in the same way the Piano inventory was reduced from $1,361,610.16 to $1,265,663.04. In consequence of these changes the total value of the property conveyed was reduced to $2,378,119.50 for the Piano company and to $3,391,742.28 for the Champion company. It is possible that if fuller information had been obtained regarding the values of the properties other than in- ventories conveyed by these two companies, additional overvalua- tions would have been found in the appraisals, and that consequently the total value of the properties of each of these concerns would have been considerably reduced. Milwaukee appraisal. — This company's business was turned over to the International Harvester Co. as a going concern at the book value of its net assets, namely, $3,148,196.66. This valuation was determined from a balance sheet made up for this purpose, as follows : Plant property fl, 211, 292. 15 Agency warehouse prop- erty 1, 779. 21 Inventories 1, 479, 013. 59 Agents' accounts 1, 928, 271. 7S Bills receivable 1,302,618.52 Contingent accounts— 18,681.32 Sundry asset accounts- 16, 845. 47 Cash 95, 480. 47 6, 053, 982. 51 LIABILITIES. Bills payable $2,694,172.63 Audited vouchers Unpaid commissions Sundry liability ac- counts Travelers Bills receivable contin- gent Asgents 95, 203. 82 5, 477. 09 4, 383. 61 2, 990. 29 95, 843. 52 7, 714. 89 2, 905, 785. 85 Balance 3, 148, 196. 66 6, 053, 982. 51 The Bureau has verified these figures from the original books of the Milwaukee Harvester Co., and is satisfied of their correctness. There does not appear to be any good reason to reduce this value. Of this amount, however, $148,196.66 was not included in the 124 REPORT ON THE INTEBNATIONAL HARVESTER CO. appraisal of $67,076,229.65 of property acquired for stock, but was paid for out of stock issued for working capital. This amount of $148,196.66 therefore should not be considered in the comparison with appraised values adopted by the International Harvester Co. It should be noted further that this valuation is based on net assets and includes items of working capital not conveyed by the other com- panies (i. e., cash and receivables, from which payables must be deducted) . Certain classes of property therefore were acquired from the Milwaukee company which were not comprised in those conveyed by the other companies originally taken into the combination. Section 5. Total appraisal. Although it does not affect the discussion of valuations here adopted, special reference is made to the fact that only after the International Harvester Co. had been doing business several years did it make up complete and authentic balance sheets, and in doing so made certain remarkable changes in the valuations of the inven- tories, wherein the values of the inventories, as of September 30, 1902, were reduced in the aggregate by more than seven million dollars, or considerably more than the reduction made above by the Bureau. These subsequent changes in the accounts are described in detail later. (See p. 199.) As already stated, the Bureau did not think that these changes made in the inventory were a proper basis for fixing the proper values in 1902, but a comparison of the ap- praisal of these inventories, the values to which they were subse- quently reduced, and the values adopted by the Bureau is of interest. TABLE 15.— COMPARISON OF APPRAISAL VALUES OF INVENTORIES OF FOUR VENDOR COMPANIES, AND VALUATIONS OF SAME INVENTORIES AS OF 1902 SUBSEQUENT- LY USED BY THE INTERNATIONAL HARVESTER CO., WITH THE VALUATIONS ADOPTED BY THE BUREAU. Company. Appraisal. Harvester Co. Bureau. McCormlck Deering Champion Piano Four companies MSiwsakee Total ill, 738, 822.^0 8,905,059.78 1,863,987.25 1,696,626.02 J8, 137, 915. 36 6,173,414.89 1,293,468.13 1,106,788.47 24,104,395.76 1,443,766.67 16,711,686.86 1,443,766.67 26,648,162.42 18,155,353.62 19,818,476.64 7,271,266.98 1,431,478.08 1,265,663.04 19,786,883.64 1,443,766.67 21,230,650.31 The total value of the tangible properties for all these five com- panies, which was adopted by the International Harvester Co. in its property account, may be compared finally with the valuations which have been assigned to these properties by the Bureau, as described in the foregoing discussion. This comparison is given first according to the chief classes of property in the table following. OAPITAUZATION AND INVESTMENT IN 1902. 125 Table 16.— VALUATIONS OF THE INTERNATIONAL HARVESTER CO. OF THE PHYSICAL PROPERTIES TRANSFERRED TO IT BY THE FIVE PREDECESSOR COMPANIES IN 1902, AND VALUATIONS ADOPTED BY THE BUREAU, BY CHIEF CLASSES OF PROPERTY.' Item. Harvester Co. Bureau. Excess of Harvester Co. Factory real estate, buildings, and machinery. $23,270,218.14 2,249,882.33 2,679,324.82 9,674,138.79 1,874,800.22 1,979,702.93 25,548,162.42 $20,787,435.09 2,173,639.56 510,645.22 1,858,326.92 839,552.98 1,717,206.00 21,230,650.31 $2, 482, 783. 05 Agency property 76,342.77 2,068,679.60 7,715,811.87 Railroads Ore, coal, iron, and steel Timber 1,036,247.24 262, 496. 93 Miscellaneous 2 Inventories 4,317,512.11 Total 67,076,229.65 49,117,366.08 17,968,873.57 ^ No book values being available for the Champion and Piano companies, book values are not shown in this table. " For Milwaukee company Includes net working capital other than inventory after de- ducting $148,196.66 for plant stock excess. The total difference between the book value adopted by the Inter- national Harvester Co. and the proper value found by the Bureau was, therefore, $17,958,873.57. Nearly half of this difference was due to overvaluation ($7,187,469.25) of the Deering ore leaseholds in the Mesabi Kange. The next largest item of difference was in the inventories of the four predecessor companies, namely, $4,317,512.11. Other especially important items were the McCormick real estate, the McCormick railroad, and the Deering timber. A comparison of the valuations of the International Harvester Co. with those adopted by the Bureau, grouped by companies, is also of interest; this is shown in the following table: TABtE 17.— VALUATIONS OF THE INTERNATIONAL HARVESTER CO. OF THE PHYSICAL PROPERTIES TRANSFERRED TO IT BY THE FIVE PREDECESSOR COMPANIES IN 1902 AND VALUATIONS ADOPTED BY THE BUREAU, BY COMPANIES. Company. Valuation adopted by tlie International Harvester Co. Estimate of value by Bureau. Excess of Har- vester Co. McCormick. Deering Piano Champion. . Milwaukee ' Total. 829,461,481.03 28,081,514.69 2,708,982.48 3,824,251.46 3,000,000.00 $23,490,789.41 16,856,704.89 2,378,119.60 3,391,742.28 3,000,000.00 $6,970,691.62 11,224,809.80 330,862.98 432,509.17 67,076,229.65 49,117,356.08 17,958,873.67 I Excluding $148,196.66 Milwaukee excess paid for In "cash stock." It appears, therefore, that the International Harvester Co. was not justified in claiming that the $60,000,000 capital stock issued for property conveyed by the predecessor companies was fully paid up and more than paid up by the tangible property acquired (exclusive 126 REPOBT ON THE INTERNATIONAL HARVESTER CO. of patents, good will, etc.), which was alleged to have been worth $67,076,229.65, but that on the contrary stock was issued in ex- cess of the value of such property, which was not worth more than $49,117,356.08, or $10,882,643.92 less than the stock issued against it. As a matter of fact, however, these companies conveyed other prop- erty than the tangible assets covered by the foregoing valuation, par- ticularly good will, and it is desirable to consider the value of this good will also before coming to any conclusion as to the extent to which stock was issued in excess of the property acquired. (See pp. 128-133.) Section 6. Distribution of " plant stock " issued for property. Against the appraisal of $67,076,229.65 for tangible property con- veyed to it, and for promoters' services, the International Harvester Co. issued $60,000,000 of stock, as already stated. The distribution of this stock to the several interests which formed the combination is of considerable interest in connection with the question of the rela- tive values of the property, and also, perhaps, in connection with the broader purposes of the combination. As some stock went to the bankers for their expenses and services in promoting the combina- tion, the amount of stock received by the predecessor companies was less than their respective appraised values on this account, as well as for the reason that the appraisals were greater than the total stock issued for property. The allotment of the $60,000,000 of stock which was stated in the reports of the company to have been issued for the property conveyed to it, but which, as has just been stated, was also issued in part to promoters, is shown in the following table : Table 18.— COMPARISON OF THE APPRAISED VALUES ADOPTED BY THE INTERNA- TIONAL HARVESTER CO. FOR THE PHYSICAL PROPERTY ACQUIRED IN 1902, WITH THE VALUES ESTIMATED BY THE BUREAU AND THE STOCK ISSUED THEREFOR, BY COMPANIES. Company. Appraisal adopted by the International Harvester Co. Value as esti- mated by Bureau. Stock issued lor property and services. Excess of Har- vester Co. ap- praisal over stock issued. Excess of stock issued over Bureau's valuation. $28,081,514.69 29,461,481.03 2,708,982.48 3,824,251.46 3, 000, 000. 00 $16,856,704.89 23,490,789.41 2,378,119.60 3,391,742.28 3,000,000.00 $21,314,554.64 26,262,614.00 2,268,603.09 3,447,185.91 3,000,000.00 $6,766,960.05 3,198,967.03 440,379.39 377,065.64 $4,457,849.75 2,771,724.69 1 109,116.41 65,443.63 Piano Milwaukee 2 Total 67,076,229.65 49,117,356.08 66,292,857.64 2,967,142.86 749,999.60 10,783,372.01 >t,9S7, I4e.se '749,999.10 7,175,501.66 2,957,142.86 749,999.50 J P Morgan & Co. Total 67,076,229.65 49,117,356.08 60,000,000.00 7,076,229.65 10,882,643.92 1 stock issue less than estimated value. < Excluding $148496.66 Milwaukee excess paid for in " cash stock," > Deduotion. CAPITALIZATION AND INVESTMENT IN 1902. 127 The foregoing table shows that the International Harvester Co. issued stock for the property to an amount less than the appraised value, both for the property as a whole and also for the properties conveyed by the several predecessor companies (except the Milwau- kee company). On the other hand, it issued stock in excess of the Bureau's estimated value of the property conveyed to the company as a whole and also, in particular, for the McCormick and Deering com- panies severally. That the stock issued for the Piano company was less than the value of the property estimated by the Bureau is prob- ably due to the fact, already explained, that the Bureau did not have adequate data for revising the values for this company except with respect to the inventories. While the stock issued for the Champion properties was greater than the Bureau's estimate, the latter was also very likely too high for the same reasons as for the Piano company. While the McCormick and Deering interests were, perhaps, willing to treat these small companies on substantially the same basis in this respect in order to get them into the combination, yet these large companies were so much more powerful and profitable that it is probable the small companies had, at least, quite as strong a motive to enter the combination as the large companies. Stock was issued for property and to the promoters up to 89.5 per cent of the total appraisal, and for the four predecessor com- panies which organized the combination the percentages were as follows : Deering 75. 9 McCormick 89. 1 Piano 83. 7 CMmpIon ^ 90. 1 For the Milwaukee company's property, stock was issued up to the full appraised value, which also appears to have been the real value. The bankers who promoted the combination received par value in stock for the appraised value of the Milwaukee company, namely, $3,000,000, which seems, as already stated, to have been the correct value of the property transferred. They also received $2,957,142.86 of stock for their services as promoters, all expenses incident to the formation of the combination being covered by another specific allot- ment of $749,999.50. These large promotion expenses appear to have been allowed to a considerable extent for the very elaborate appraisals which were made, and also, undoubtedly, for fees for legal counsel. The amount 1 allowed to the promoters — $2,957,142.86 — which did not correspond to any property conveyed or expenses incurred, would be justified from a commercial standpoint only on two grounds: (1) that the mere merger of these companies increased their value, 1 See p. 85. 128 BEPOKT ON THR INTEKNATIONAL HABVESTEB CO. or (2) that a close alliance with this powerful banking interest was of immense value to the combination. So far as " merger value " is concerned, it might arise either from increased economy and efficiency produced by a combination, or by commercial advantages resulting from the establishment of a " near monopoly." The economy and efficiency produced by combination, if any was really expected, did not materialize in the early years of the combination. Some might have been reasonably expected, perhaps, particularly from a centralization of the selling organization, but this was not the result. The commercial advantages to be obtained from the elimination of competition and the establishment of a " near monopoly " were, in the opinion of the Bureau, not only the pre- dominant motive for the combination, but also the factor from which the greatest " merger value " might reasonably be expected. Disre- garding the question of the propriety or legality of the combination, the Bureau is of the opinion that this fee of $2,957,142.86 was exces- sive, even from a commercial standpoint. Section 7. Value of good will and other intangible property acquired. The original contracts of July 28, 1902, described above (p. 78), provide not only that certain tangible property should be conveyed, but also all trade-marks, patents, licenses, good will, and similar intangible property collectively referred to as " Patents, good will, etc." The following provision was made for the appraisal of such property : The value of the patents and good will shall, for the purpose of this contract, be a sum equal to the net profits of the vendor during the two years ending November 30, 1902, as ascertained in the manner hereinafter provided, plus 10 per cent, thereof; and to such amount shall be added the value of the name, stand- ing in the trade, stability of business, organization, trade, cus- tom, etc., of the vendor as a going concern, which value shall be fixed by J. P. Morgan or George W. Perkins in his sole discretion. These values were to be determined in the first place by appraisal of the net earnings in the manner stated, which was purely a ques- tion for accountants to determine. In addition thereto, J. P. Morgan (or George W. Perkins) was empowered to add such additional amounts thereto as he saw fit, apparently with the intention of valu- ing not something additional, but rather to give a more complete and correct value than could be obtained simply by an abstract rule. The appraisal of patents, good will, etc., was made by the accountants in the manner prescribed, but there is no information as to any further value of these items having been ascertained by J. P. Mor- gan or George W. Perkins. Furthermore, the value of the patents and good will so appraised was never adopted by the International CAPITALIZATION AND INVESTMENT IN 1902. 129 Harvester Co. in its accounts, nor any value assigned therefor in its statements of assets as originally acquired. Since, however, it has been shown that the tangible property ac- quired was not equal to the value at which it was booked by the International Harvester Co., and that the " plant stock " issued there- for was in excess of its real value, it is proper to consider the real value of the patents, good will, etc., in order to determine whether such value existed, after all, in an amount equal to the capital stock actually issued in excess of tangible property acquired. The Bureau, however, does not thereby intend to commit itself to the theory that it is necessarily proper to issue stock for good will. The directors of the International Harvester Co. themselves did not include good will among their assets, as shown in their general books of account, according to a resolution made on December 22, 1906, namely : that in the jBrst balance sheet of the company there be excluded from the aggregate value of the assets all allowance for good will.^ The Bureau takes the position that for at least two of the com- panies merged in the International Harvester Co. there was un- doubtedly good-will value of large amount. The McCormick and Deering companies especially were very successful and very profit- able concerns, and they had enjoyed generally an expanding trade. These facts alone, however, while necessary to the existence of good will (at least in the case of long-established concerns) , would not be sufficient to indicate that there was good will in an important amount. There are great differences in respect to good will between different kinds of business. The most important difference, prob- ably, is that between companies, on the one hand, which sell a staple product which is bought and sold under its staple name without re- spect to the producer, and companies, on the other hand, which sell an article imder a trade name which is always bought with the knowledge either of the name of the particular producer or of the brand name under which the article is sold. The latter kind of ar- ticle is generally advertised under its trade name, and if the business is successful and expanding it has a wide custom, of which -the con- cern making it can not be quickly deprived in the ordinary course of trade, even by more efficient competitors. The harvesting-machine industry belongs preeminently to this latter class. The binder, for example, is rarely, if ever, sold without reference to the maker or trade name, such as " McCormick " or " Deering." It is an article which requires the frequent replacement of broken or worn-out parts, and these must be bought with reference to the particular brand of binder used and generally from the company making it. Further- more, each machine has its peculiarities, and persons accustomed to » Bee p. 197 for further reference to the first balance sheets of the company. 130 KEPOET ON THE INTERNATIONAL HARVESTER CO. operating one brand of binder can generally handle it better than a different brand to which they are not accustomed. In fact, it is fre- quently found that the practice of using a particular brand of binder is more or less a fixed tradition in certain families and to some degree tends to be more or less prevalent in particular localities through long use there. Consequently, there is no doubt th'at the successful and long-established makers of harvesting machines tend to have a valuable custom. On the other hand, it should be considered that general conditions of trade may undergo such changes that a business once profitable may become comparatively unprofitable. The opportunities for suc- cessful business operation may in time be pretty well exhausted, either because the needs of consumers are so well supplied for a long time ahead that demand slackens or because of other changes in the trade. Again, good will based on trade name and custom may be lost to some extent if for any special reason the article of a certain maker acquires suddenly an unfavorable notoriety. In this class of conditions there is no doubt that the so-called antitrust sentiment is an important example. Taking the evidence as a whole, however, the Bureau, as stated above, is of the opinion that there was a large value in the good, will of the McCormick and Deering companies, and probably some good- will value also for each of the other three concerns. So far as patents, licenses, etc., are concerned, it is not believed that the rights and properties of this sort which were conveyed had a large value. In the first place, the basic patents for binders, mowers, and rakes, which were the chief kinds of machines then made, had all expired before 1902. Consequently, the McCormick or Deering binder, for example, could be very closely imitated by anyone who wished to enter that business without infringing any patent rights. In the second place, the book value of such patents, as shown by the accounts of the McCormick and Deering companies, was comparatively small. Thus, the McCormick balance sheet for September 30, 1902, showed an item of " patents " among its assets which was set down at $354,249.39, while for the Deering company's balance sheet for the year ending January 31, 1903, the same item of assets was booked at only $250,000. The method provided for the appraisal of patents, good will, etc., contemplated that the value of all these items should be measured together on the basis of past earning capacity. A separate considera- tion of the value of the patents, therefore, is unnecessary. While it is not necessarily diiRcult to decide whether good-will value exists or not, there is no question that the determination of the amount of good will is something upon which a very wide variation of opinion is possible. Although, as already stated, past earning CAPITALIZATION AND INVESTMENT IN 1902. 131 capacity does not necessarily indicate the existence of good will, yet where good will is conceded to exist such earning power may be a convenient method of determining the relative amount for different companies in the same line of business. Where good will is regarded as having a high value, it would seem that the net earnings ought to show a high rate on the investment, at least for concerns which have a well-established trade. It is im- portant, therefore, to consider what the rates of earnings were just prior to the merger on the investment in these companies. Unfor- tunately no data are available as to the net assets of the Piano and Champion concerns. The following statement, therefore, gives for the McCormick, Deering, and Milwaukee concerns only the necessary data, namely, the net assets, net earnings, and rate of net profit for 1902. This statement is based on the balance sheets and profit and loss statements of the McCormick, Deering, and Milwaukee companies at the end of the 1902 season and not on the statements of net profit made by the accountants for the purpose of the appraisal of good will (cf. Table 19 and p. 132). Company. Net assets. Net earnings. Per cent profit. McCormick. Deering Milwaukee.. S43,805,203.34 23,420,259.16 3,229,366.46 $5,125,565.25 4,183,940.93 355,674.56 11.7 17.9 11.0 The net assets shown in the above statement include much prop- erty besides the physical property shown in Table 18. Considering that the harvesting-machine industry was a distinctly competitive one before the merger in 1902, the rate of profit earned by the McCormick and Milwaukee companies in 1902, namely, 11.7 and 11.0 per cent, respectively, must be regarded as distinctly high, while the rate earned by the Deering company in the same year, namely, 17.9 per cent, was extremely large. The question remains whether the same rule for measuring good will should be applied to each of these concerns, irrespective of the marked differences shown in the rate of earnings. This question, however, would involve a general consideration of the whole problem of good-will value, and as it would not lead to any definite results it can not be taken up here. The provisions of the contracts of July 28, 1902, respecting the appraisal of the good will of the companies here under consideration provided that such good will should be computed as equal to the sum of the net profits for the two years ending September 30, 1902, plus 10 per cent thereof. This method of determining the value of good will from earning capacity is a common one, especially among Eng- lish companies. From such information as the Bureau possesses 132 BEPOET ON THE INTERNATIONAL HABVESTEK CO. regarding this practice, it appears that for various lines of business which are less conspicuous probably for good-will value than the harvesting-machine industry it is often the practice to fix it at an amount equal to several years' profit. However, the method of determining the net profits was specifically prescribed in such a manner as to give a much larger amount of profit than that shown by the companies' profit and loss accounts. That is, certain kinds of income and expenditure were not included in the computation, as, for example, interest on accounts and bills receivable and interest on certain accounts payable, and cost of collecting receiv- ables. Furthermore, although the above-mentioned contracts pro- vided that depreciation should be deducted from profit, whether on account of plant, materials of manufacture, or of bills and accounts receivable, yet in the computation made of good-will value by the accountants such depreciation was not deducted. The final net profit as fixed by the accounts (which has been shown above on p. 131) was not used, therefore, in this appraisal of good will, but instead a considerably higher amount of profit, with a corresponding enhance- ment of the estimated value of good will. The amount of the net profits for 1901 and 1902, respectively, together with 10 per cent of the total for these two years, and the aggregate of these amounts for each company as determined by the accountants employed for this purpose, are shown in the following table: Table 19.— VALUE OF THE GOOD WILL OF THE FOUR VENDOR COMPANIES IN 1902 BASED ON PROFITS AS COMPUTED BY THE ACCOUNTANTS. Company. 1901 1902 10 per cent. Total. champion.. Deering McCormick PlaDo Total $299,183.80 3,130,269.22 5,185,191.71 69,430.86 1370,617.40 4,401,678.03 6,401,270.61 110,329.39 $66,970.12 763,184.72 1,068,646.23 16,976.02 8,674,075.69 10,283,695.43 1,895,777.09 $736,671.32 8,285,031.97 11,645,108.66 186,736.27 20,863,648.11 It will be seen from the foregoing table that the profits of the McCormick and Deering companies, thus computed, were very large for both 1901 and 1902, while the profits of the Piano and Champion companies were comparatively small. Corresponding differences occurred, of course, in the computed value of the good will, that for the McCormick company being $11,645,108.55 and that for the Deer- ing company $8,285,031.97. The total amount of the good will so ascertained for these four companies was $20,853,548.11. If, instead of the profits used in the foregoing table, the net profits as shown above on p. 131, had been used, the aggregate value of the good will on the basis of two years' profit plus 10 per cent would have amounted to CAPITALIZATION AND INVESTMENT IN 1902. 133 $18,192,457.07. The whole question of the true value of good will is, however, a question of judgment, and not of a rule of computation. It should be considered, further, that no account is taken here of the good wiU of the Milwaukee company, which on the same basis of com- putation of the last two years' profit plus 10 per cent would be $485,490.31. Adding this to that computed above for the four com- panies ($20,853,548.11) would give a grand total for good will of $21,339,038.42. As shown above, the physical property conveyed (exclusive of patents, good will, etc.) was estimated by the Bureau as not worth more than $49,117,356.08 at the time of the merger in 1902, or $10,882,643.92 less than the $60,000,000 stock which was issued for such property and for promoters' services. If, however, the good will is assumed to have had something even approaching its com- I)uted value, it appears that the deficiency in tangible property was fully made up by the value of the good will. The Bureau is not inclined to set a definite value on the good will, nor even to admit that stock should be issued for good will. How- ever, as the foregoing data tend to show that the tangible property plus the estimated value of the good will may have been equal to the $60,000,000 issued for the property conveyed (including promoters' services), it will be of interest to show what rate the net earnings would indicate, assuming that the capital stock issued was fully paid for. The rates of earnings of the International Harvester Co. are, therefore, stated in two ways: (1) As shown in the company's own accounts, and (2) as revised by the Bureau. (See pp. 211 and 238.) Section 8. Cash stock subscription. According to the plan of the combination already described, the capital stock of the International Harvester Co. was fixed at a total of $120,000,000, of which one-half, or $60,000,000, was to be subscribed for in cash or cash equivalent. Each of the several vendor companies agreed to furnish a stipulated portion of this amount, while the bal- ance was to be found by William C. Lane. It has also been shown that the plan contemplated the acceptance of guaranteed bills receiv- able in lieu of cash, at the option of the vendor companies, for such stipulated amounts. The companies selling harvesting machines did a large part of their business on long terms of credit, accepting pay- ment in agents' bills or accounts receivable or in farmers' notes. Each of the vendor companies had large quantities of such obliga- tions, most of which bore interest. Where such receivables were used in lieu of cash, they were assigned to the International Harvester Co., and the amount realized thereon, including interest paid, was credited to their stock subscriptions. On the other hand, the com- panies assigning them were charged with the cost of collection and 134 KEPOET ON THE INTERNATIONAL HAEVESTEB 00. also with interest on stock subscriptions due and not paid. The date of payment for the cash stock subscription was fixed at August 15, 1902, and interest at the rate of 6 per cent was charged against sub- scriptions paid thereafter. The advantage of this arrangement, both to the vendor companies and to the International Harvester Co., is obvious. The vendor companies procured the collection of these receivables by a highly organized collection agency, while the International Harvester Co. had the advantage of a creditor in dealing with agents and farmers in the sale of its products. The total $60,000,000 cash stock subscription of the International Harvester Co. is accounted for by the company as follows : Champion interests $1,000,000.00 Deering interests 19. 965, 613. 21 McCormick interests 24,886,190.13 Piano interests 4,000,000.00 W. C. Lane, vendor 10,000,000.00 Total issued for cash 59,851,803.34 Add amount issued to discharge additional purchase price of assets of Milwaukee Harvester Co 148, 196. 66 Total 60, 000, 000. 00 The circumstances of the subscriptions of individual companies, whether in cash or receivables, varied considerably, as well as the amounts charged for collection and interest. The amounts which would be realized and the collection and interest charges could not be foretold exactly; hence there was sometimes a balance repayable to the vendor companies. The Champion company paid wholly in cash. The general results of these, transactions are summarized as follows : ' Table 20.— METHOD OF PAYMENT OF CASH STOCK SUBSCRIPTION, INCLUDING INTEREST ON UNPAID SUBSCRIPTIONS FROM AUG. 15, 1902, AS SHOWN BY THE STATEMENTS OF THE INTERNATIONAL HARVESTER CO. Item. Deering. McCormick. Piano. Champion. Cash paid in Collected from receivables Gross amount received by International Harvester Co Charges for collection and interest i Net amount credited by International Harvester Co Amount credited to stoclc subscription. Balance repaid $1,300,000.00 22,339,132.27 23,639,132.27 3,483,426.08 20,155,706.19 19,965,613.21 190,092.98 16,375,000.00 25,125,034.01 31,500,034.01 6,505,145.62 24,994,888.49 24,886,190.13 108,698.36 15,095,628.33 1,923,231.47 7,018,857.80 3,018,857.80 4,000,000.00 4,000,000.00 11,027,500.00 1,027,600.00 27,500.00 1,000,000.00 1,000,000.00 * Including In some cases obligations liquidated by the International Harvester Co. The original contracts of the vendor companies with William C. Lane contemplated that the said companies should furnish only CAPITALIZATION AND INVESTMENT IN 1902. 135 $41,000,000 of the cash or working capital of the International Har- vester Co., whereas, as a matter of fact, as shown by the foregoing statement, they furnished nearly $9,000,000 more (see p. 84), namely, a total of $49,851,803. The subscriptions originally stipulated and the subscriptions actually made on this account were therefore as follows : Table 21.— COMPARISON OF ORIGINAL AND ULTIMATE DISTRIBUTION OF CASH STOCK SUBSCRIPTIONS. Company. Originally stipulated. Actually subscribed. Deering McCormick Piano Champion William C. Lane Total $16,000,000 20,000,000 4,000,000 1,000,000 '19,000,000 $19,965,613.21 24,886,190.13 4,000,000.00 1,000,000.00 2 10,148,196.66 $3,965,613.21 4,886,190.13 8, 851, SOS. S4 60,000,000 60,000,000.00 > Lane in selling the properties agreed to furnish $60,000,000 cash capital (see p. with the balance. > Including Milwaukee excess appraisal of $148,196.66. ) and is therefore charged The actual cash subscription was less than the $60,000,000 required, by $148,196.66. The reason for this is the one already noted else- where (p. 85), namely, that the Milwaukee Harvester Co. showed a valuation as ultimately determined in excess of the $3,000,000 origi- nally computed by the amount of $148,196.66. This excess valuation was covered by the issue of an equal amount of stock at par from the $60,000,000 of stock issued for working capital. The methods by which these payments of cash stock subscriptions were made were complicated, and the methods of accounting for them were extraordinarily loose and unbusinesslike. However, after a careful examination of the books and a careful checking up of the total receipts and disbursements for the two years following the merger, during which time the cash stock subscription was completed, the Bureau came to the conclusion that the total amount subscribed had been actually paid in in the amounts stated above. This conclu- sion was confirmed also by an examination of papers and correspond- ence left by G. W. Perkins in the office of J. P. Morgan & Co., to which the Bureau obtained access. CHAPTEE IV. STTBSEaUENT DEVELOPMENT OF THE INTERNATIONAL HAE- VESTER CO. Section 1. Introductory. The organization of the International Harvester Co. as it existed at the beginning has been described already. It consisted essentially of a combination of five of the largest competing producers of har- vesting machines in the United States. The products of these com- panies, moreover, were almost exclusively harvesting machines and twine. These companies were merged into a single corporation — the International Harvester Co. (New Jersey) — which sold its prod- ucts to a subsidiary, the International Harvester Co. of America. Besides the America company, there were at first only a few unim- portant subsidiary companies. From the time when the International Harvester Co. was first organized, in 1902, to the present time (1913), there has occurred a large development in its business in several important ways, and particularly in (1) the acquisition of competing companies; (2) the acquisition of companies making noncompeting lines; (3) the manu- facture of new lines at old plants; (4) the construction of new factories for both old and new lines at home and abroad; and (5) the development of production and manufacture of raw materials. With this extension of its business, there grew up a more elaborate organization, particularly in respect to the establishment of numerous subsidiary companies, at home and abroad, to manufacture and sell its various products. In spite of the development of new competition, especially at the end of this period, the International Harvester Co. has continued to maintain a monopolistic position in the harvesting-machine industry. Its domination of the agricultural-implement trade, as a whole, was greatly increased by the acquisition of new lines of manufacture. In these new lines, however, it has not attained the practically monopolistic control that it has always had in the manufacture of harvesting machines. 136 SUBSEQUENT DEVELOPMENT. 137 Section 2. Acquisition of competing concerns. The most marked feature of the development of the International Harvester Co. in the first few years of its existence was its secret acquisition of certain companies which were competitors in the manu- facture of harvesting machines. D. M. Osborne & Co. — Chief among the competing companies acquired by the International Harvester Co. was D. M. Osborne & Co., the most important competitor not included in the original combination. This company was an old family concern. Although harvesting machines were its chief product, it had also an important line of tillage implements, and a binder twine and cordage works operated by a subcompany (Columbian Cordage Co.). Its location at Auburn, in central New York, was a favorable one for the export trade, and it enjoyed a large business in foreign markets. The Os- borne company had an outstanding capital stock of $300,000, and stock scrip of $690,000. The Columbian Cordage Co. had a capital stock of $300,000. Neither company had mortgage encumbrances or bonded debt, but the Osborne company had a floating debt of $2,500,000. Almost immediately after its organization, the International Har- vester Co. took steps looking to the acquisition of this company. B. A. Kennedy, one of the experts of the International Harvester Co., was sent to Auburn to examine the plant and business. He made a report by letter to Charles Deering under date of September 18, 1902, giving a long description of the works, the rates of wages in effect, the production of machines, the character of the agents, etc., and a second report, under date of September 20, 1902, giving an estimate of the value of the plant. A few months afterwards ar- rangements were made to acquire this business. The Osborne company was acquired by virtue of a contract dated January 15, 1903, between Thomas M. Osborne and Edwin D. Met- calf , vendors (two of the chief stockholders) , and the International Harvester Co. The chief features of this agreement were substan- tially as follows : Osborne and Metcalf agreed to turn over the stock and stock scrip of the Osborne company and the stock of the Colum- bian Cordage Co. to the International Harvester Co. at a price of $3,200,000 plus the actual cost of the inventory on hand (including materials and finished products). The vendors were allowed to retain the following property, namely, (1) all receivables and cash; (2) all realty not used in the manufacturing business, and certain warehouses; and (3) the cordage-making plant, as distinguished from the binder-twine plant, of the Columbian Cordage Co. It was contemplated that the International Harvester Co. would be put in possession of at least 95 per cent of the securities above mentioned before January 31, 1903, and it was agreed that imme- 7T854°— 13 H 138 EEPOET ON THE INTERNATIONAL HABVESTEB CO. diately after , acquiring such securities it was to have appointed on the board of directors such persons as it might designate. The International Harvester Co. undertook to collect the Osborne re- ceivables and to turn over the proceeds, less cost of collection, to the vendors. It was also agreed that the vendors should manage the Osborne company until certain payments were made, and, on the other hand, that the International Harvester Co. would furnish the necessary working capital for carrying on its regular business op- erations. Fiaally, a very important feature of the agreement was the provision that neither Thomas M. Osborne nor Edwin D. Met- calf , the two chief active stockholders of the company, should other- wise engage or become interested in the manufacture of agricultural implements or binder twine for a period of ten years in the United States (except Arizona and New Mexico) , Australia, South America, or Europe (except Holland and Belgium). The price ultimately paid for the Osborne company's plant prop- erty and warehouses was apparently $3,365,000.^ None of the stockholders of the Osborne company received any stock in the International Harvester Co. under the terms of the agreement. For nearly two years after the date of this contract the direction of the business of the Osborne company remained in the hands of Thomas M. Osborne and Edwin D. Metcalf , and down to December, 1904, it claimed to be entirely independent of the International Har- vester Co. (See p. 296.) The reason for this arrangement alleged by the International Harvester Co. was that it was to enable the vendors to collect their bills receivable more conveniently. It may be noted that after the International Harvester Co.'s control was openly admitted, Edwin D. Metcalf continued as a local representative of the International Harvester Co. In acquiring this company, the International Harvester Co. ab- sorbed its largest competitor, and one which was especially well located to compete with it in Eastern and foreign markets in the sale of harvesting machines and binder twine. The output of harvesting machines and other implements of the Osborne plant for the year 1903 was as follows : Binders — 10, 495 Mowers 19, 955 Reapers 4, 486 Rakes 21, 303 Tedders 9, 065 Com binders 2, 033 Harrows ' 52, 371 Cultivators u, 122 1 The value of the Osborne company's Investment Is partly Indicated by the following data : According to a balance sheet of December 31, 1903, the plant was booked at ?3,453,589.20 and the Inventory at $3,609,662.10. When the International Harvester Co. formally transferred the Osborne property In 1905, the plant was entered at $3,389,905.04, with the following statement : " To transfer from Auburn company's Suspense account the value of the flred property of the D. M. Osborne & Co. and the Columbian Cordage Co., acquired by purchase Jan. 3, 1905." > Inclndine harrow sections. SUBSBQTJEHT DEVELOPMENT. 139 For harvesting machines, the production of this company in 1903 compares favorably with the production of either the Piano or Mil- waukee companies in 1902, as shown above (p. 92). Besides these harvesting machines and tillage implements, there was a considerable production of binder twine. Although its production of tillage implements was an important feature of its business, it was quite subordinate to that of harvesting machines. The factory cost of the harvesting machines in 1903 was $1,669,617.96, compared with $412,137.75 for tillage implements, and this may be regarded as a fair measure of the relative importance of these two groups of products. The International Harvester Co. claimed that it acquired the Osborne company largely in order to get its line of tillage implements and because of the foreign busi- ness, but it is evident that the important feature of this acquisition was the absorption of a competitor in the production of harvesting machines and binder twine. Minnie Harvester Co. — This company had a plant for the manu- facture of harvesting machines and binder twine at St. Paul, Minn., and was controlled through stock ownership by the American Grass Twine Co. The Minnie Harvester Co. was a successor to the Walter A. Wood Harvester Co. (see p. 48), of St. Paul, having bought its properties at a receiver's sale, the Wood company, in turn, being a successor of the Minneapolis Harvester Co. The Minnie Harvester Co. became financially embarrassed in 1903, and on November 30, 1903, certain stockholders of the International Harvester Co. ac- quired control of its stock by purchase from the American Grass Twine Co. This stock was apparently purchased for these parties by E. M. Cravath, for $945,000. The net assets of the Minnie Har- vester Co. on September 30, 1905, are reported at $842,900.71. The Minnie Harvester Co. was not a large manufacturer of har- vesting machines at the time it was acquired. It was operated as an independent during 1904, for the alleged purpose of enabling the American Grass Twine Co. to collect its own receivables and those of the Minnie Harvester Co. As the property was held by stock control it is not clear what interest the American Grass Twine Co. had in the collection of the Minnie Harvester Co.'s receivables. On September 30, 1905, the property of the Minnie Harvester Co. was conveyed to a newly organized subsidiary company of the Inter- national Harvester Co., namely, the International Flax Twine Co., which wound up the production of harvesting machines and repair parts, and used the plant for making flax twine.^ The AuLTMAN-MiLi.ER Co. — The Aultman-Miller Co. was a long- established concern, having a plant for the manufacture of harvest- 1 In connection with the Minnie Harvester Co. the International Harvester Co. acquired the Northern Malleable Iron Co. This was sold in 1906 to one F. J. Ottie for $207,000. 140 KEPOKT ON THE INTEENATIONAL HABVESTER CO. ing machines and twine at Akron, Ohio; its machines, moreover, had a considerable reputation. This company became banfeupt in 1903, and was bought from the trustees in bankruptcy in July, 1903, by one Judge Vincent, who had business relations with some of the chief stockholders of the International Harvester Co., who financed this purchase. Judge Vincent reorganized this concern as The Aultman & Miller Buckeye Co., and some of the principal stock- holders in the International Harvester Co. became the controlling factors in the new company. It was operated as an independent concern under the management of a former employee of the International Harvester Co., but its business consisted chiefly in furnishing repair parts for the machines of the old Aultman-Miller Co., and in the manufacture of binder twine. The plant and property of this company was conveyed to the International Harvester Co. in the autumn of 1905, and while the manufacture of binder twine was continued, the manufacture of har- vesting machines was dropped and autovehicles made instead. In a letter prepared by C. S. Funk (now general manager of the International Harvester Co.) for Harold F. McCormick, dated Oc- tober 15, 1903, the value of the plant property was estimated at $555,9-28, of which $91,061 was for the twine mill. This company was recognized as having a valuable trade and good will, the following statements in relation thereto appearing in the above-mentioned letter : The Buckeye selling organization will market a certain number of Buckeye machines each season by reason of the prestige of the Buckeye machines and on account of the standing that a good many of the dealers have in the country. They have always been able to hold some strong dealers and for this reason there is some natural demand for Buckeye machines; and their local selling organization is so generally scattered over the trade that there is a local influence and prestige connected with the sale of the Buckeye machines which is almost entirely lacking in the Acme line. After the plant of this company was acquired by the International Harvester Co., the manufactixre of these Buckeye machines was dropped entirely. Keystone Co. — This company was organized March 14, 1903, with a capital stock of $300,000, and had a plant for the manufacture of harvesting machines and hay tools at Sterling, 111. The harvesting machines of this company are alleged by the International Harvester Co. to have been failures, but some authorities assert that the ma- chines made were excellent, and the company was in the hands of two of the most expert men in the business, so that it is at least an open question whether they might not have made a success of these SUBSEQUENT DEVELOPMENT. 141 machines. The hay-tool line was admitted to have been a very good one. At any rate, in the autumn of 1904, certain stockholders of the International Harvester Co. acquired control of the stock of the Keystone Co., and continued to operate it as an independent company until the following year. On September 6, 1905, the property of this company was transferred to the International Harvester Co. Some of the features of the Keystone harvesting machines were used by the International Harvester Co. in its other machines. The plant was used for a time for the manufacture of binders, mowers, hay tools, etc., although ultimately the manufacture of binders and mowers was discontinued. The cost of the properties thus taken over by the International Harvester Co. was apparently $510,546.63, of which $350,000 was for the plant and fixed property. General chakactee of these ACQxnsiTiONs. — These four com- panies, namely, D. M. Osborne & Co., the Minnie Harvester Co., the Aultman-Miller Co., and the Keystone Co., were all real competitors of the International Harvester Co. in the manufacture of harvesting machines or binder twine, and in the opinion of the Bureau were acquired largely, if not almost wholly, for the purpose of eliminat- ing such competition. A policy of secret control was adopted in each case, and there is little doubt that one motive was to obtain an advantage in competition through the operation of these companies as bogus independents, a method of unfair competition frequently employed by other monopolistic combinations both before and after this time. (See p. 296.) Ultimately, however, all of the plants so acquired were transferred directly to the International Harvester Co. except that of the Minnie Harvester Co., which was transferred to an acknowledged subsidiary company of the International Harvester Co. (The International Flax Twine Co.). These changes were all made in 1905 and seemed to indicate a change in the general policy of the company in this re- spect. In this connection it is proper to point out that antimonopoly proceedings were threatened in several States at this time. It may be noted, also, that the International Harvester Co. has sometimes placed large orders for twine with outside manufacturers. Section 3. Acquisition of noneompeting lines. The acquisitions by the International Harvester Co. of noncompet- ing lines of farm implements were of much less significance from the standpoint of the intrinsic importance of the companies. These acquisitions were of two kinds — (1) companies or plants producing 142 EEPORT ON THE INTERNATIONAL HAEVBSTER CO. noncompeting lines; (2) contracts for the marketing of noncompet- ing lines made by other manufacturers. In 190i certain stockholders of the International Harvester Co. acquired control of the capital stock of the Weber Wagon Co., of Chicago, and in 1905 the property of this company was conveyed to the International Harvester Co. This concern was of considerable importance in the manufacture of farm wagons. In 1905 the International Harvester Co. made a contract to sell the output of steel wagon gears (i. e., frame and wheels, but not the box) made by the Bettendorf Axle Co., of Davenport, Iowa. In this manner the International Harvester Co. became a factor in the farm-wagon trade, and through a rapid expansion of opera- tions has become one of the most important producers in this line at the present time. In 1906 the International Harvester Co. purchased from the J. S. Kemp Manufacturing Co. its plant for the manufacture of manure spreaders located at Newark Valley, N. Y., and leased for a period of years another manure-spreader plant of the Kemp concern at Waterloo, Iowa. The cost of the real estate, buildings, equipment, patents, etc., of the Newark Valley plant, as shown by the property account of the International Harvester Co. was $104,127.26. The lease of the Waterloo plant expired in 1908 and was not renewed. The International Harvester Co. thereby became a larger factor in this branch of the farm-implement business, and now occupies a com- manding position therein. About 1909 the International Harvester Co. made a contract with the Parlin & Orendorff Co., of Canton, 111., manufacturers of plows, etc., to sell its plows in Canadian markets, in order to give it a more complete line of goods for that market. In 1910 it still further strengthened its position in the same markets by making a contract for the marketing of the plows of the Oliver Chilled Plow Co., of South Bend, Ind. It also has a one-fifth interest in the Canadian subsidiary of this company, the Oliver Chilled Plow Works of Canada (Ltd.), at Hamilton, Ontario. The International Harvester Co. does not sell these plows, however, in the markets of the United States where each of these plow com- panies has already a well- developed selling organization. In 1912 the International Harvester Co. made an arrangement with the American Seeding Machine Co. for the sale of the output of seeding machines from its Richmond, Ind., plant. This is one of the largest seeding-machine factories in the United States. The Inter- national Harvester Co. already had a small, but apparently unde- veloped, line of seeding machines of its own manufacture. The American Seeding Machine Co., with which this arrangement was made, is itself a combination of the chief producers of seeding ma- SUBSEQUENT DEVELOPMEITT. 143 chines in the United States. (See p. 52.) Already in 1904 the International Harvester Co. had negotiated with the American Seeding Machine Co. for the sale of its total output, and a 10-year selling contract was proposed by the former, but nothing further was done at that time. Prior to this, namely, in 1903, G. W. Perkins made an examination of the affairs of the then pending seeding- machine combination of seven leading companies (the American Seeding Machine Co.). The finance committee of the International Harvester Co. decided, on his recommendation, that it was not de- sirable for it to take an interest therein, because the stock issues proposed, namely, $10,000,000 common and $10,000,000 preferred, were regarded as excessive. Section 4, Refusal of the International Harvester Co. to acquire other competing concerns. While, as above shown, the International Harvester Co. during 1903 and 1904 pursued the tactics of acquiring secret control of cer- tain competing companies, it is important to note that the acquisition of several other competing concerns was considered by the Interna- tional Harvester Co., but not consummated, while certain other con- cerns made overtures to the International Harvester Co. to sell out, which were declined by that company. Among these were several of the principal independent makers of harvesting machines, besides other companies engaged in the manufacture of various kinds of farm implements. Almost immediately after the organization of the International Harvester Co., namely, on August 19, 1902, negotiations were entered into with the Massey-Harris Co. (Ltd.), of Toronto, Canada, evi- dently for the purpose of bringing that concern into the combination. The Massey-Harris company was probably the largest manufacturer of harvesting machines in North America not included in the original combination ; it appears that the desirability of including it was con- sidered by the promoters before the merger was organized. (See p. 73.) After protracted negotiations, the International Harvester Co. decided not to take it into the combination, due, apparently, to disagreement as to terms. Even before the negotiations were dropped, the International Harvester Co. took steps for the enlarge- ment of a plant already commenced for manufacturing harvesting machines at Hamilton, Canada, where it now has a large factory. The acquisition of the Acme Harvester Co., of Peoria, 111., was also seriously considered by the International Harvester Co., and a care- ful examination made of its property and business as early as 1903. The production of this company was small as compared with any of the companies which originally went into the International Harvester Co., but it had besides the ordinary harvesting machines a well-known 144 KEPOET ON THE INTEBNATIONAL HAEVESTEK CO. line of haaders and a line of hay tools, including stackers and sweep rakes. On December 22, 1904, the executive committee of the Inter- national Harvester Co. recorded the decision "that further negoti- ations between this Company and the Acme Harvester Company be discontinued for the present, as this Company does not care to pur- chase either the assets of the Acme company or any interest therein." In spite of this decision, however, it appears that one of the directors of the International Harvester Co. (W. H. Jones) suggested later that it might be desirable to purchase a small block of Acme stock, and accordingly Alex. Legge (now assistant general manager of the International Harvester Co.) was directed on August 21, 1905, to see what could be done about it. The Bureau has no information, how- ever, that the International Harvester Co. ever acquired any of the Acme company's stock, and it is explicitly denied by the officers of the company that it has done so. Some negotiations appear to have been had with the Walter A. Wood Mowing & Reaping Machine Co., of Hoosick Falls, N. Y., which progressed, apparently, far enough at least to ascertain the terms on which it could be obtained, but the combination finally de- cided not to acquire it. The International Harvester Co. also considered the advisability of acquiring the Adriance-Platt company, of Poughkeepsie, N. Y., an offer having been made, apparently, by that company, but this offer was finally declined. Certain parties, namely, C. H. Kirkham and Henry E. Marble, claiming to have an option on the Johnston Harvester Co., of Ba- tavia, N. Y., made an offer in 1905 to sell their option to the Inter- national Harvester Co. for $1,500,000, but this offer was declined by the combination. These five companies — the Massey-Harris Co., the Acme Harvester Co., the Walter A. Wood company, the Adriance-Platt company, and the Johnston Harvester Co. — were all competitors of the Interna- tional Harvester Co. in the manufacture of harvesting machines. None of them, except the Massey-Harris company, which was a Canadian concern doing business chiefly in Canada and other foreign countries, was equal in importance to the Osborne company, the first of the independent harvester companies acquired by the International Harvester Co. The total sales of the four of these companies which were located in the United States were very small, however, in com- parison to those of the International Harvester Co. In 1911 they amounted to less than one-sixth of the harvesting machine sales of the International Harvester Co. Outside of the concerns above mentioned, the most important propositions apparently considered or declined related to the follow- ing companies. SUBSEQUENT DEVELOPMENT. 145 In 1903 a proposition to take over the thrasher business of the O. S. Kelley Co., of Springfield, Oliio, was declined, and in 1905 a similar attitude was taken with respect to a proposition to acquire an interest in the Northwestern Thresher Co., of Stillwater, Minn. In 1904, and again in 1906, suggestions looking to the acquisition of P. P. Mast & Co., of Springfield, Ohio, manufacturers of seeders, were disapproved. Suggestions looking to the acquisition of the Studebaker Bros. Manufacturing Co., of South Bend, Ind., which was undoubtedly the largest manufacturer of farm wagons in the United States, were turned down in 1905, and a proposition looking to the acquisition of the WoodhuU Carriage Works, of Dayton, Ohio, was declined in the same year, and also one with respect to the Winona Wagon Co., of Winona, Minn., in 1906. In 1906, the executive committee of the International Harvester Co. voted to drop negotiations for the purchase of the plant of Whitman & Barnes at West Pullman, 111. In 1906 the International Harvester Co. declined a suggestion made by Edwin D. Metcalf looking to the acquisition of the Stand- ard Harrow Co., of Utica, N. Y. Section 5. Development of new lines of manufacture at old and new plants in the United States. In addition to the new lines acquired by purchases of the con- cerns referred to in section 3 the International Harvester Co. began to develop the manufacture of several new lines of machines. Some of these it arranged to produce at the existing plants originally or subsequently acquired by the combination, while in other cases it constructed new plants especially for that purpose. Thus, at the Milwaukee plant the manufacture of harvesting ma- chines was discontinued after a short time, the Milwaukee machines being made at the McCormick plant instead. The Milwaukee plant was then turned into a factory for gasoline engines, tractors, and cream separators, three very important new lines of the International . Harvester Co. The gasoline engines were first produced in 1904, cream separators in 1905, and tractors in 1909. The manufacture of harvesting machines was discontinued, like- wise, at the Piano plant, the Piano brands being thenceforward made at the Deering plant. The Piano plant was used thereafter for the manufacture of manure spreaders and wagons. The manufacture of spreaders was begun at this plant in 1905, and of wagons in J.906. The Champion plant was continued as a harvesting-machine fac- tory, but to these products were added manure spreaders and a small 146 BEPORT ON THE INTEBNATIONAL HARVESTER CO. output of seeders and hay tools. The hay tools were first produced in 1903, seeders in 1906, and spreaders in 1908. The manufacture of harvesting machines was also discontinued at the St. Paul plant (Minnie Harvester Co.), as already stated, this plant being turned over to the International Flax Twine Co., for the manufacture of flax twine, in 1906. Recently the manufacture of flax twine was also discontinued, as it proved to be a commercial failure, and ordinary binder twine from manila or sisal was sub- stituted. The McCormiclc and Deering plants were continued as factories for harvesting machines (including corn-harvesting machines) and also binder twine. As indicated above, these plants also took over the manufacture of several other brands of harvesting machines. The Osborne plant continued to manufacture the same lines it jiroduced at the time it was acquired, namely, harvesting machines (including corn-harvesting machines), tillage implements, and twine. At the Akron plant (acquired from The Aultman-Miller Co.) the manufacture of Buckeye harvesting machines was discontinued, and the plant was used for the manufacture of autowagons, which were first produced in 1907 or 1908. The twine plant at Akron continued to be used for the manufacture of twine for some time, but after 1910 the twine production was discontinued at that place. The Keystone plant was used, as already stated, for the manufac- ture of hay tools, although some binders, mowers, corn shellers, and tillage implements were also made there. The only important new plant for the manufacture of agricultural implements which was constructed by the International Harvester Co. in the United States was the tractor works near the McCormick plant, in Chicago, where a very large factory was erected, and pro- duction commenced in 1910. At the other plants acquired by the International Harvester Co. subsequent to its organization, the same machines were produced as at the time of acquisition, i. e., wagons at the Weber plant and manure spreaders at the Newark Valley and Waterloo works. Section 6. Acquisition and construction of manufacturing plants in for- eign countries. The International Harvester Co. has acquire^ several factories in foreign countries, in some cases by purchase and remodeling of old plants and in others by the construction of new ones. As already stated, when negotiations to acquire the Massey-Harris Co. (Ltd.), failed, the International Harvester Co., in February, 1903, proceeded with the organization of a Canadian company and the erection of a large factory at Hamilton, in Canada. The com- SUBSEQUENT DEVELOPMENT. 147 pany was called the International Harvester Co. of Canada, and ■was organized under the laws of Ontario, Canada, September 21, 1903, with a capital stock of $1,000,000. The factory was constructed to produce harvesting machines, to which tillage implements, seeders, manure spreaders, etc., were also added. Quite recently several addi- tional small plants were also acquired near Hamilton, in Canada, namely, at Paris (Paris Plow Co.) in 1911, for the manufacture of tillage implements and manure spreaders; at Chatham (Chatham Wagon Co.) in 1910, for the manufacture of wagons; and at Peter- boro a factory was leased for the manufacture of twine. In 1904 the International Harvester Co. purchased a factory of moderate size at Norrkoping, Sweden, where it undertook the manu- facture of grass-harvesting machines. In 1908 the board of directors of the International Harvester Co. approved plans to establish fac- tories in France, Germany, and Russia, and these plans were later put into effect. By 1910 two new factories of considerable size had been partially completed, one at Croix, in France, and the other at Neuss, in Germany, also for the manufacture of grass-harvesting machines. About the beginning of 1910 the International Harvester Co. acquired an old air-brake plant at Lubertzy, near Moscow, and converted it into a factory of considerable capacity for the manufac- ture of reapers, lobogreikas (a Russian style of reaper), grass-har- vesting machines, and gasoline engines. These plants are operated by foreign companies organized in the countries in which the factories are located (see p. 165), except the Russian factory, which is operated by a company organized in the State of Maine and authorized to do business in Russia by special decree. The construction of these foreign plants for the manufacture of agricultural implements is a very important feature of the policy of the International Harvester Co. The principal reason for this is found, of course, in the protective commercial policy of foreign countries, which makes it in some cases more profitable to manu- facture such machines in the country of sale than to export them thereto from the United States. In Russia this was done in the expectation that high protective duties would be levied. The Russian Government, however, finally decided not to levy protective duties on such implements, but instead to pay bounties to the local manu- facturers. The International Harvester Co., therefore, receives bounties on the machines it produces in Russia, but pays no duties on those manufactured in the United States which are exported to Russia. The manufacture of agricultural implements by the Inter- national Harvester Co. in foreign countries tends, of course, to di- minish their exportation from the United States, although the total 148 EEPOKT ON THE INTEENATIONAL HAEVESTEE CO. exports of the International Harvester Co. have greatly increased to almost all foreign countries, including apparently those in which -it has factories, although in most cases these factories have been in operation only a short time. The American competitors of the Inter- national Harvester Co. who do not have foreign factories, but make all of their implements in the United States, are in this respect doubt- less at a considerable disadvantage as compared with the Interna- tional Harvester Co. in such foreign countries. The International Harvester Co. claims, however, that it does not engage in foreign manufacture except as it is impelled thereto by commercial condi- tions. In particular, it may be noted that it has not yet attempted to make binders in foreign countries except in Canada. Section 7. Development of raw-material properties and plants. The iron-ore leasehold properties acquired by the International Harvester Co., particularly the Hawkins and Agnew mines, on the Mesabi Eange, were developed and operated for the production of ore, and also, to some extent, the Illinois mine, on the Baraboo Eange. The iron and steel plants at Chicago acquired with other Deering properties (South Chicago Furnace Co.^ and South Chicago Steel Works) were enlarged and improved for the production of iron castings, steel bars, etc. These ore properties and iron and steel plants were conveyed in 1907 to the Wisconsin Steel Co., a subsidiary of the Inter- national Harvester Co. This company was organized August 18, 1905, under the laws of Wisconsin with a capital stock of $1,000,000 to operate these properties. Some of the less valuable iron-ore lease- holds of the Wisconsin Steel Co. were subsequently given up, namely, the Victoria and Lot 3 mines. In 1911 the Wisconsin Steel Co. acquired a vessel of 10,000 tons for carrying its ore down the Lakes. To this company, also, were conveyed certain coal lands in Kentucky acquired through the Deerings, which remained un- developed until about 1911, when a coke plant was built there. The timberlands, timber rights, and sawmills acquired through the Deerings and McCormicks were conveyed, in 1907, to another newly organized subsidiary company of the International Harvester Co., the Wisconsin Lumber Co., which operates them for the production of pole stock and various other wood materials used in the manu- facture of the machines and implements produced by the Inter- national Harvester Co. This company was organized August 18, 1905, under the laws of Wisconsin with a capital of $250,000. Con- siderable additional timber property, especially in Mississippi and 1 stock of the South Chicago Furnace Co., not acquired at the time of the merger, namely, 1,295 shares, was purchased In 1903 at a price of $400 per share. SUBSEQUENT DEVELOPMENT. 149 Arkansas, which was subsequently acquired by the International Harvester Co., is owned and operated by the Wisconsin Lumber Co. The development of these raw-material properties is an important feature of the operations of the International Harvester Co., con- stituting what is now generally known in the manufacturing busi- ness as " integration of industry." The International Harvester Co. was thus able to furnish itself with supplies of its chief raw mate- rials at production cost, instead of buying such materials in the open market. The advantage of this arrangement and its relation to the cost of production will be more particularly noted later (p. 267) . A very important raw material used by the International Har- vester Co. in the manufacture of binder twine is fiber— both manila and sisal. Although the International Harvester Co. does not en- gage in the production of such raw material, it has special facilities for obtaining it in the chief regions of production, namely, the Philippine Islands and Yucatan. AVhen the International Harvester Co. took over the McCormick plant and property the McCormicks had an interest in the firm of H. W. Peabody & Co., dealers in manila fiber, but this was sold at that time. Later, in 1904, the business of a firm called Macleod & Co. was purchased for $190,000 to handle this business in the Philip- pines. In this connection the following resolution of the executive committee of the International Harvester Co. of September 28, 1905, may be noted : Resolved^ That this Company decline to give its consent to Macleod & Company entering into an agreement with any other dealers or exporters at Manila and elsewhere to regulate the pur- chase and sale of manila fiber. Sisal fiber, the product of the henequen plant, which grows almost exclusively in Yucatan, is used to an even greater extent than manila fiber. Shortly after the organization of the International Harvester Co., namely, in 1903, a proposition was made by one R. G. Ward look- ing to the purchase and consolidation of the railroads in Yucatan by the International Harvester Co., with a view to obtaining a control of the sisal-fiber trade. In connection with this proposition, the following excerpts from a letter from C. H. McCormick to G. W. Perkins, under date of October 29, 1903, are of interest : The whole proposition may be divided into two parts and should be investigated and considered independently from both standpoints, first, the railway proposition; second, the hemp proposition. Railway. — It seems to us that if Mr. Ward's statements are true, simply from the railway standpoint this proposition should 150 EEPOET our THE nrTEBNATIONAL HAEVESTEE 00. be attractive to a syndicate of investors who would be satisfied with from seven to ten per cent for their investment. To put together a lot of incomplete and poorly equipped railways which are now earning five and one-half per cent, and to control the trade of the country by the monopoly of the railways combined, would appear to be a good railway syndicate proposition. To demonstrate this fact a railway expert should go to make this investigation and report to the managers of the syndicate. The first question on this point occurs as to whether the Government would look favorably upon these railways being owned and managed by American capital. The amount involved for a railway plan of this kind is comparatively small, being about $6,500,000 for the control of the present system, with one other line still to be secured. Eenvp. — From the hemp standpoint the proposition is very attractive to us, provided always that Mr. Ward's statements can be verified. If the control of this railway is in friendly hands working with us, we can obtain our hemp at a much less figure than we are now paying, and we can practically control the production of sisal hemp. This will be worth a large sum to this Company. In a postscript to this letter Mr. McCormick writes : It is needless for me to say that if the railway syndicate is organized to work with the I. H. Co. on this matter, such a syndi- cate should be at least dominated by the influence of the I. H. Co. Although the International Harvester Co. went to some expense to investigate this proposition, nothing further seems to have been done to accomplish it. The International Harvester Co. has, however, very close relations apparently with the concern of Avelino Montes, S. en C.,^ which is the " dominant factor " in the sisal trade. The International Harvester Co. also invested some money in 1910 in an enterprise called the Salango Export Co., which is interested in the development of the fiber trade in Ecuador. Section 8. Capacity and output of the International Harvester Co. plants in 1911. Implement plants. — The annual reports of the International Har- vester Co. furnish statements of the capacities of the various manu- facturing plants which show the widespread activities of the com- pany. This information for the year 1911 is tabulated below. ' Socledad en comandlta. SUBSEQUENT DEVELOPMENT. 151 Table 22.— IMPLEMENT MANUFAOTUEING PLANTS OF THE INTERNATIONAL HAR- VESTER CO. AND BATED CAPACITY IN 1911 FOR MACHINES SPECIFIED. Domestic. Factory. Location. Employ- ees. Capacity.i ATttoti . . . Akron, Ohio 1,250 1,800 6,600 600 8,500 5,000 170 2,700 1,300 1,250 700 200 4,000 autowagons and commercial cars. 85,000 harvesting machines, seeding ma- chines, hay presses, and manure spreaders, poo, 000 binders, reapers, mowers, rakes, ciinTTipioTi Springfield, Ohio ■R.n<.lf Falls, Til [ 31,000 tons twine. 92,500 com shellers, harrows, hay loaders, and side-deUvery rakes. (■376,000 binders, reapers, mowers, rakes, McCormick Chicago 111 Milwaukee MilwanVee, Wis [ 33,000 tonstwme. 75,000 gasoline engines, cream separators, and tractors. 7,000 manure spreaders, f 275, 000 harvesting machines and tillage 1 implements. [ 15,000 tons twhie. 60,000 mamire spreaders and wagons. 3,000 tractors and kerosene engines. 45,000 wagons. 2,600 tons twine. Newark Valley Osborne Newark Valley, N. Y Auburn, N. Y.. Piano West Pullman, 111 Chicago, 111-. . . Weber Auburn Park, 111 St. Paul St. Paul, Minn Foreign. Chatham, Canada 300 2,500 18,000 wagons. 150,000 harvesting machines, seeding ma- chines, tillage implements, and Tf^mmrtT) manure spreaders. Paris Paris, Canada 250 20,000 tillage implements and manure spreaders. Peterboro Peterboro, Can ada 150 700 2,000 3,000 tons twine. 47,500 mowers, rakes, and tedders. and reapers. Neuss Neuss, Germany 700 J 45,000 mowers, rakes, and tedders. 1 3,600 tons twine. Norrkoping Norrkoping, Sweden 300 30, 000 mowers and rakes. * The figures of capacity are given as in the company's reports. Where several kinds of machines are grouped, these figures obviously have Uttle significance. Some of the plants in foreign countries have been so recently estab- lished that their production in 1911 was very much less than their rated capacity. For this reason and also because the rated capacity does not distinguish between different kinds of machines, it is im- portant to give the actual production of the chief kinds of machines made. This is shown for the year 1911 in the tables following. 152 BEPORT ON THE INTEKNATIONAL HAEVBSTER CO. Table 23.— PRODUCTION OF CHIEF KliSTDS OF MACHINES AT DOMESTIC IMPLE MENT MANUFACTUEING PLANTS OF THE INTERNATIONAL HARVESTER CO. IN 1911. Machines, etc. Cham- pion. Deer- ing. Key- stone. McCor- mick. Osborne. Milwau- kee. Piano. Other plants. Total. 4,411 2,446 500 62,884 29,607 4,704 1,099 89,255 60,902 71,070 26,813 4,370 8,616 5,246 146,981 64,112 9,674 Strippers 1,099 Mowers . . . 12,672 15,039 10,993 5,075 112,344 69,175 27,014 24,055 4,426 241,285 Rakes 164,246 Tedders 15,419 1,824 1,824 Hay pressors 5,533 744 6,277 11,258 10,216 11,258 18,414 659 23,780 1,080 1,543 43,737 Shredders . 1,739 10,216 1,803 200 2,003 1,567 41 129 143 1,696 Shockers 184 Cultivators 42,629 51,803 59,139 48,188 42,629 Harrows: Disk 31,530 41,280 83,333 Peg tooth . . 100,419 48,188 Seeders 1,234 1,234 Drills 3,227 3,227 Gasoline engines 35,155 1,883 35,155 Tractors 1537 •3,158 i 42, 698 «5,431 2,420 Autovehicles . 3,158 23,762 22,683 66,460 12,989 41,103 26,977 26,977 ' Produced at the Tractor plant. •All produced at the Akron plant. 5 Produced at the Weber plant. < Produced at the Newark Valley plant. Table 24.— PRODUCTION OF CHIEF KINDS OF MACHINES AT FOREIGN IMPLEMENT MANUFACTURING PLANTS OF THE INTERNATIONAL HARVESTER CO. IN 1911. Machines, etc. Chat- ham, Canada. Hamil- ton, Can- ada. Paris, Canada. Croix, France. Neuss, Ger- many. Lubert- zy, Rus- sia. Norr- koping, Sweden. Total. 17,099 18,273 14,039 460 4,095 14 40,459 1,320 7,122 261 16,645 17,099 53,216 38,102 3 569 9,763 2,595 2,109 11,901 8,577 1,000 13,279 12,891 Rakes Tedders 4,095 13 188 Harrows: Disk 13,174 Peg tooth 40,459 1,320 7,122 261 Spring tooth Land rollers and pack- ers Seeders Drills 16,645 7,544 2 993 Wagons 7,644 Manure spreaders 2,993 Engines 241 241 SUBSEQUENT DEVELOPMENT. 153 The foregoing tables do not show the production of twine. Twine was produced at four domestic factories of the International Har- vester Co., while a considerable quantity was also produced under a conversion contract at an outside factory at Portland, Oreg. A small quantity of twine was produced at one foreign plant, namely, Neuss, in Germany. The production of binder twine in 1911 was as fol- lows: Pounds. McCormlck plant 65, 338, 316 Deerlng plant 60,173,414 Osbome plant 33, 869, 156 St. Paul plant "2,102,855 Portland plant 2,025,300 Neuss plant 359,791 Total 163, 868, 832 The actual production of twine from the McCormick,, Deering, and Osborne plants was nearly the same as the rated capacity. The twine was all made from manila, sisal, or other standard binder-twine fiber, except at the St. Paul factory, which made flax twine. The production of flax twine has since then been abandoned at the St. Paul plant. In addition to the above data for the implement factories, the fol- lowing facts as to the capacity of the chief raw-material companies are of interest. Ore mines. — There are three iron-ore mines (leaseholds) , the loca- tion and rated capacities of which are as follows: Location. Term of Annual capacity. Agnew. . Hawkins. Illinois... Hibbing, Minn Nashwauk, Minn North Freedom, Wis. Years . 50 30 60 40 160 240 Tom. 200,000 600,000 100,000 These figures of capacity are probably quite arbitrary. The actual production of iron ore in 1911 aggregated about 400,000 tons. Coal and coke property. — The coal lands embrace 6,555 acres, located at Benham, in Harlan County, Ky. There is one mine with a stated capacity of 300,000 tons per annum. The coke plant is at same place, and has 300 beehive ovens, with a stated capacity of 150,000 tons of coke per annum. Iron and steel works. — The iron and steel works are located at South Chicago, and occupy 118.4 acres. The average number of employees was reported as 1,500. The iron and steel plant had a 77854°— 13- 1 Excluding 1,455,672 pounds of flax rope, -13 154 EEPOET ON THE INTEKNATIOKAL HABVESTEE 00. stated capacity of 360,000 tons of pig iron, 300,000 tons of crude steel, and 260,000 tons of finished rolled products (bars) . TiMBEELANDS AND SAWMILLS. — The timber properties consist of three tracts of hardwood timber, as follows : 59,000 acres of timber- land at Deering, Mo., with a sawmill of 15,000,000 feet b. m. annual capacity; 22,000 acres of timberland at Valley Park, Miss., not yet under exploitation; and timber rights on a considerable tract near Huttig, Ark., with a sawmill of 18,000,000 feet b. m. annual capacity. The actual production of lumber in 1911 was about 15,650,000 feet b. m., or less than half the stated capacity of the two sawmills. Section 9. Industrial railways of the International Harvester Co. With the manufacturing property acquired through the original merger in 1902, the International Harvester Co. obtained three in- dustrial railroads connected with the manufacturing plants. The McCormick plant, as already shown, included the Illinois Northern Railway, a short line which connected the McCormick plant and certain other industrial concerns with several railroad lines entering Chicago. This railroad company was incorporated April 1, 1901, in Illinois, and had a capital stock of $500,000, owned entirely by the McCormick interests. The Piano Manufacturing Co. had a three-fourths interest in a, short industrial railroad known as the Chicago, West Pullman & Southern Railway Co., one-half directly and one-fourth through a subsidiary, the Chicago Malleable Castings Co. In 1904 the Inter- national Harvester Co. bought the remaining one-fourth from the Whitman & Barnes Manufacturing Co. This industrial road ap- parently served other manufacturing plants besides the Piano plant. It was incorporated in Illinois on February 5, 1900, and had a capital stock of $50,000. The Deerings also had an industrial railroad, connected with the steel works which, just after the merger, namely, on December 12, 1902, was incorporated in Illinois under the name of the Calumet & Southeastern Railroad Co. On October 28, 1909, this railroad was consolidated with the Piano railroad, mentioned above, under the title of the Chicago, West Pullman & Southern Railroad Co., the capital stock being fixed at $400,000. With the acquisition of the Osborne plant in 1903, the Inter- national Harvester Co. obtained an industrial railroad serving that plant, known as the Owasco River Railway, which was incorporated in New York on June 2, 1881, and which had a capital stock of $30,000. The Deerings had commenced the construction of a logging rail- road in connection with timber property in Missouri. This was in- corporated under the laws of Missouri on June 24, 1903, with a SUBSEQTJBNT DEVELOPMENT. 155 capital stock of $100,000. This railroad was developed to do a local freight and passenger business as a common carrier. At the Champion works the International Harvester Co. had a few feet of track inside the yard of the plant which, on February 16, 1904, was incorporated under the laws of Ohio as the Lagonda & Western Railway Co. This was simply a spur track and was without any motive-power equipment. Apart from the timber railroad mentioned above (Deering South- western Eailway), these were simply industrial railroads which, although of slight importance as transportation agencies, could be, and sometimes were in fact, used to considerable advantage in ob- taining exorbitant divisions of freight charges with regular railroad lines which exchanged freight with them. This was particularly the case with two of the Chicago railroads mentioned above, as is shown by the following excerpt from the Eighteenth Annual Report of the Interstate Commerce Commission (p. 43) : The International Harvester Co. owns the capital stock of the Illinois Northern Railroad Co. and a controlling interest in the Chicago, West Pullman & Southern Railway Co., operating as terminal connecting roads in and about the city of Chicago be- tween the plant of the Harvester company and various other in- dustries and connecting roads leading to the Missouri River and other sections of the country. Until recently the charge received for services by these terminal roads was a switching charge amount- ing to from $1 to $3.50 per car for the Illinois Northern and $3 per car for the Chicago, West Pullman & Southern. These lines now receive in many instances a division of the rate, which on lines reaching the Missouri River is 20 per cent, with the Mis- souri River division as a maximum. This amounts on farm ma- chinery to $12 per car of 20,000 pounds as against the former maximum of $3.50 per car. A charge of $3.50 per car by the Illinois Northern and of $3 per car by the Chicago, West Pull- man & Southern would be reasonable for these switching services, and charges for such service in excess of those sums amounted to unlawful preference in favor of the International Har- vester Co. A decision to this effect was handed down by the Interstate Com- merce Commission (No. 735), in the matter of divisions of joint rates and other allowances to terminal railroads, decided November 3, 1904. The Owasco River Railway seems never to have been used illegiti- mately for this purpose. The case of the Lagonda & Western Railway Co., however, fur- nishes a flagrant instance of this practice. This so-called railroad, as stated above, was merely a little yard track, without motive power, yet it charged and received freight divisions with connecting roads. Two switching tariffs were issued by this so-called railroad, one, effective September 12, 1906, making a tariff of $2.50 per car on aU 156 KBPOET ON THE INTEENATION'AL HABVESTEB 00. commodities, and another, effective November 15, 1907, making a tariff of $1 per car on coal, coke, sand, scrap iron, and stone, and of $2 per car on all other commodities. Before the beginning of 1909 the Interstate Commerce Commission started an investigation of these and other industrial railroads which, in the case of the International Harvester Co., resulted in the com- plete abolition of the Lagonda & Western Railway Co., and appar- ently, also, in the consolidation of the Calumet & Southeastern Rail- road Co., and the Chicago, West Pullman & Southern Railway Co. Section 10. Internal organization and administration of the Interna- tional Harvester Co. (of New Jersey) and the International Har- vester Co. of America. One of the chief problems of the officers and directors of the Inter- national Harvester Co. was the general organization and adminis- tration of the company, certain features in the development of which may be considered here. Some of these facts had an important bear- ing on the financial results of the enterprise. General administration of the International Harvester Co. — The general organization of the International Harvester Co. consisted of a board of directors and certain officers provided by the by-laws, namely, a president, one or more vice presidents, general counsel, treasurer, secretary, and comptroller. The board of directors was at first composed of 6 members, but was increased to 18 on August 13, 1902. Four vice presidents were elected at the same meeting. There were also established by the by-laws an executive committee of 7 members, and a finance committee of 5 members, these being consti- tuted from members of the board of directors. The executive com- mittee exercised the powers of the board of directors between the meetings of the board, except as to certain duties assigned by the board of directors to the finance committee. Immediately after the organization of the International Harvester Co., namely, at a meeting of the board of directors on August 13, 1902, it was resolved to leave the conduct of the manufacturing busi- ness of the company in the hands of representatives of the interests which controlled the several plants prior to the merger. (See p. 87.) Thus, as shown on page 88, Harold F. McCormick was to have charge of the McCormick division; Richard F. Howe, of the Deer- ing division; J. J. Glessner, of the Champion division; and W. H. Jones, of the Piano division. G. H. Schulte was put in charge of the Milwaukee plant. No specific provision was made at the time for a Milwaukee division, but such a division appears to have been established later. This extraordinarily decentralized method of ad- ministration, which obviously prevented to a large degree the realiza- tion of any economy and efficiency which might be expected from such SUBSEQUENT DEVELOPMENT. 157 a merger, was apparently intended merely as a temporary makeshift. The heads of the " divisions " were authorised to conduct the business of the several divisions along their " own lines," subject to conferences with each other and subject to the supervision of the executive com- mittee. The extent of their manufacturing operations was restricted, but only in a very broad way, by the rules laid down by the execu- tive committee as to the amount of raw material to be purchased and the number and kinds of machines to be manufactured. A proposition tending toward a centralization of the business was made later in the same year. A committee laiown as the " manufac- turing committee" recommended that the production of machines be concentrated in a few standardized makes. This proposition, however, was opposed by the "sales committee," which advocated retaining the individuality of the different brands. No action ap- pears to have been taken on these recommendations. In order better to coordinate the business of the company, certain general committees were established soon after the organization of the company by a resolution of the board of directors of December 19, 1902. These committees and their chairmen were designated as follows : Manufacturing committee, James Deering. Twine-mill committee, Charles Deering. Twine and fiber committee, Charles Deering. Purchasing committee, R. F. Howe. Traffic committee, H. F. McCormick. Foreign-sales committee, H. F. McCormick. Collection committee, J. J. Glessner. Experimental committee, W. H. Jones. Advertising committee, W. H. Jones. Patent committee, C. H. McCormick. Sales committee, C. H. McCormick. Although these general committees were established, the conduct of the manufacturing business by divisions was continued. The neces- sity of a more centralized control was apparent to the board of directors, which passed the following resolution on May 30, 1903 : That we proceed to form an organization for the Interna- tional Harvester Company for the years 1903 and 1904, with a view of centralizing the business, and particularly to effect sav- ings through economy in the several departments of the com- pany's business while at the same time extending and broadening the business as much and as far as possible. Apparently as a result of this resolution provision was made a few months later for the establishment of several departments to super- vise the business of the company. According to a resolution of the 158 REPOET ON THE INTEENATIONrAI, HAEVESTEE CO. executive committee of September 30, 1903, the following depart- ments and divisions were established : 6. Patent department. 7. Purchasing department. 8. Security department. 9. Traffic department. 10. Utility division. 1. Accounting department. 2. Experimental department. 3. Fiber division. 4. Law department. 5. Manufacturing department. The security department included, apparently, questions of surety of employees, taxation, legislation, and insurance. Just how far these various departments and divisions intervened directly in the conduct of business is not clear, but the manufactur- ing business at any rate still continued to be conducted by separate divisions. This decentralization of management was finally abol- ished, however, by a resolution of the board of directors of February 29, 1904, which abrogated the resolution of August 13, 1902, for sep- arate administration by divisions. This appears to mark the begin- ning of an eifective centralization of business, which for about one and a half years had been conducted as if the companies were simply an alliance of rivals, rather than a complete consolidation. The ex- tremely poor financial results of the first year's business (see p. 233) probably convinced the directors of the company that radical changes were necessary. Just before abolishing the divisions the board of directors provided for a more centralized control. By a resolution of January 20, 1904, it was declared that Cyrus H. McCormick should have the " supreme l^ower in the executive business." Various other changes were made at the same time in the personnel of the chief offices, apparently with a view to getting a more effective organization. The company labored continually, however, under the disadvantage of being obliged to consider the different personal and family interests among the chief •stockholders. The result for the company, largely on this account, apparently, was for several years large expense and low profits. Finally an agreement was made on October 29, 1906, among the chief stockholders of the company, which was intended to settle these disputes and jealousies and bring about an efficient management of the business. At the same time provision was made for changing the capital stock of the company by arranging to divide the total issue of $120,000,000 into two equal parts, half of which was to be pre- ferred and the other half common. So far as the organization of the business was concerned, the purpose and effect of this agreement was to make a specific distribution of offices and managerial positions, v/hich the chief stockholders agreed to maintain. This was done, ap- parently, with a view to preventing cabals. Although the McCor- rnicks were thus established apparently in supreme authority, definite positions (including some of a purely honorary nature) were allotted STJBSBQIJENT DEVELOPMENT. 159 to other chief stockholders and to managing officers and employees of the company who had been identified to a greater or less extent with particular interests. This arrangement seems to have settled finally the form and per- sonnel of the management of the company and to have resulted in the avoidance of further jealousies and disputes. Quite closely cor- responding with this change of its management came a change in the financial prosperity of the company. Relations or the International Harvester Co. with the Amer- ica Company. — As already shown, the Milwaukee company's char- ter was used as a basis for a selling company, the name being changed to the International Harvester Co. of America. The America com- pany, as it is called, was intrusted with the sale of all the implements and machines of the International Harvester Co., paying for them at a schedule of prices which left practically no profit to the selling com- pany. (See p. 90.) Until 1910 all of the officers and directors of the America company were also officers and directors of the International Harvester Co. Furthermore, a large part of its administrative work at the main office in Chicago was conducted by the same staff. The office expenses and salaries for the work thus done in common was divided between the two companies interested, according to a resolution of the execu- tive committee of January 22, 1904, in the following proportions : Item tional America ^-— '-"*— company. General executive and administrative ofEces 50 60 Accounting department 50 60 Law department 60 60 Patent department 90 10 Purchasing department 90 10 Security department 60 60 Traffic department 35 66 Although by subsequent agreements (e. g., July 1, 1907) different proportions of liability were established the principle remained the same. Like the International Harvester Co., the America company was organized in departments. Thus, according to a resolution of the executive committee of the America company of September 30, 1903, the following departments were established : 1. Accounting department. 2. Collection department. 3. Law department. 4. Purchasing department. 5. Sales department. 6. Security department. 7. Traffic department. 8. Utility department. 9. Patent department. 160 EEPOET OK THE INTEBNATlONAL HAEVESTEE CO. Several foreign marketing companies were organized and also some foreign manufacturing companies, which at first remained sub- sidiary to the America company. Of the foreign companies organ- ized, the only exception to this rule was the International Harvester Co. of Canada, which was established as a direct subsidiary of the International Harvester Co. (of New Jersey). This system pre- vailed down to the end of 1910, when by a resolution of the board of directors of the International Harvester Co. of December 31, 1910, the stock of most of them was transferred from the America com- pany to the International Harvester Co., the purchase price being the cost of the respective investments as they stood on the books December 31, 1910. The companies so transferred were the fol- lowing : International Harvester Co. of Great Britain (Ltd.) (Eng- land). Aktiebolaget 'International Harvester Co. (Sweden). Aktieselskabet International Harvester Co. (Denmark). Aktieselskabet International Harvester Co. (Norway). Deutsche International Harvester Co. m. b. H. (Germany). Osborne & Co. m. b. H. (Germany). Compagnie Internationale des Machines Agricoles (France — Croix works). Compagnie Internationale des Machines Agricoles de France (France — Paris) . International Harvester Co., Gesellschaft m. b. H. (Austria). Columbian Shipping Co. (New Jersey, U. S. A.). The general supervision of the foreign business, irrespective of local company organization, so far as most of the markets of the Eastern Hemisphere were concerned, was divided in 1904 between two general foreign offices as follows: (1) Hamburg: Including Scandinavia, Holland, Germany, Aus- tria-Hungary, Eoumania, Bulgaria, Greece, Turkey, Eussia (includ- ing Siberia) , and the Orient. (2) Paris: Including the United Kingdom, France, Belgium, Switzerland, Spain, Portugal, Italy, and north Africa. In 1911 a change was made in the organization of the foreign trade. Under the present arrangement the financial operations of the company, i. e., such matters as loans, etc., are managed from the London office. Instead of two main commercial offices at Ham- burg and Paris, a single office has been established at Brussels, Bel- gium, to take over the general commercial management. This office is called a statistical bureau. The reason for this change, it is under- stood, arose in coimection with questions of the taxation of the business of the International Harvester Co. in Germany. SUBSEQTJENT DEVELOPMENT. 161 Section 11. Profit-sharing system of the International Harvester Co, and welfare work. A striking feature of the management of this company is its so- called " profit-sharing system," established with a view to improving the relations of the company with its employees. This project was initiated in February, 1906, and a plan was sub- mitted to the board of directors and approved on December 22, 1906. The system was inaugurated in 1909. The details of this profit-sharing scheme are not of special sig- nificance for the purposes of this report. The principal feature is a plan to facilitate the acquisition of the stock of the International Harvester Co. by its officers and employees under favorable condi- tions as to price and terms. A secondary feature is the payment of bonuses to employees on the basis of work done or economies made. In this connection it may be noted that the International Har- vester Co. has organized a pension system for employees, the expense of which is borne entirely by the company, and that it has also organ- ized " welfare " projects of various sorts. The character and results of these projects have been described by the chairman of the finance committee of the International Har- vester Co. as follows: The company has been criticised by managers of other com- panies for making the plan above outlined too liberal and at- tractive. It has been said that the plans will be too expensive to the Harvester company and that their cost will be very large. There is no doubt of the truth of this criticism in so far as Sie cost goes. No concern has ever put out plans that involved the application of so large a percentage of its profits to such plans. But the Harvester company did not do this out of pure philan- thropy. It had no intention of passing around a hat full of money, that employees might help themselves. It went into these enterprises in a purely business spirit, believing that the plans would so knit its vast organization together, would so stimulate individual initiative, would so strengthen and de- velop the esprit de corps of the organization as to make it possible for the company to increase its business and its earn- ings, and with the spirit of being willing to share this increased success with its organization. So far the company has every reason to congratulate itself on the result. In all parts of the company's business, at home and abroad, in the office force, in the factories, in the sales department, everywhere, the average iuterest of the individual in the business is greater than for- merly. The saving of the waste here, there, and everywhere, is noticeable. The employees throughout the organization are vying with one another more and more to improve their re- spective branches of the business. This means profits for the stockholders, means extra compensation in various ways for the 162 BEPOET ON THE INTEBNaTIONAL HAEVESTEB 00. employees — in short, means cooperation that is real, that is beneficial to one and all.^ The company has also devoted considerable attention to the pro- motion of improved agricultural methods. Section 12. Important financial changes. The International Harvester Co. originally issued capital stock, all common, in the amount of $120,000^000. The possibility of a preferred-stock issue was contemplated at the beginning, and provi- sions relating thereto were embodied in the original contracts for the formation of the merger of July 28, 1902. This plan of issuing pre- ferred stock was later adopted, according to a resolution of the board of directors of December 22, 1906, which arranged for the division of the total capital stock into two equal parts, namely, $60,000,000 preferred and $60,000,000 common. The preferred stock was to pay dividends at 7 per cent, which were to be cumulative. As a part of this plan, the stocks of the company were listed on the New York Stock Exchange. In order to accomplish this purpose, it was necessary to get the assent of the stockholders and to amend the certificate of incorporation and the by-laws of the company. The amended certificate of incorporation was filed January 8, 1907, and provided for the proposed change in stock issue and also certain other matters. On the same day the voting trustees took appropriate action and provided for the exchange of the old trust certificates covering the original stock issue in their possession ($119,998,200) for new trust certificates covering the same total number of shares, one-half common stock and one-half preferred. In 1910, a considerable surplus having been accumulated, the board of directors of the International Harvester Co. decided to make a stock dividend of $20,000,000, according to a resolution of January 14, 1910, which stated in part as follows : Whereas the total net earnings of this company during the 7i years of its operations have averaged 6.5 per cent per annum, and its dividends paid therefrom have averaged only 3.4 per cent per annum on its total capital stock, all of which was fully paid for at organization in cash and conservatively valued tangible properties; and Whereas, the balance of such net earnings, averaging 3.1 per cent per annum during the said period, has been required by the company for the extension and protection of its business, and for increased working capital made especially necessary by changing trade conditions abroad, and no dividends have been paid on the common stock since 1906 ; and > " The Underlying Principle of The Profit-Sharing, Benefit and Pension Plans of The International Harvester Company." Paper by George W. Perkins before The National Civic Federation, Not. 2Z, 1909, p. 7. SXTBSBQUENT DEVELOPMENT. 163 WhereaSj such accumulated net earnings (in excess .of the specified dividends on the preferred stock) now amount to up- wards of $20,000,000 and are represented by tangible assets and working capital of the company and belong exclusively to the common stock, but have not become available for the payment of cash dividends thereon; I. Resolved, that the board of directors of the International Harvester Co. deem and declare it to be advisable : 1. That the total authorized capital stock of the corporation be increased from $120,000,000, par value, to $140,000,000, par value, by increasing the amount of the authorized common stock from $60,000,000, par value, to $80,000,000, par value, such in- crease consisting of 200,000 additional shares of common stock, of the par value of $100 each. * * * In this manner the common stock was increased from $60,000,000 to $80,000,000, and the total capital stock of the company raised from $120,000,000 to $140,000,000. The International Harvester Co. has never issued any bonds. The company, however, has always been a large borrower. Its loans have always been in the form of notes and have been placed with a considerable number of financial concerns in Chicago, New York, and elsewhere. Certain very significant individual loans are specifically discussed in the following section. According to a reso- lution of December 28, 1911, the board of directors voted to make an unusually large loan, namely, to issue three-year notes to the amount of $20,000,000, at 5 per cent interest. Section 13. Financial support of the International Harvester Co. by John D. Rockefeller. An important feature of the operations of the International Har- vester Co. is found in extensive loans by John D. Rockefeller to the company. Mr. Rockefeller is father-in-law of Harold F. McCormick. In the minutes of the finance committee under date of December 15, 1905, the statement appears that the president (C. H. McCor- mick) and treasurer (H. F. McCormick) " wished to confer with the Finance Committee in reference to a time loan for the benefit of the Company, which had been suggested to them by Mr. John D. Rocke- feller." At the next meeting of the finance committee (December 19, 1905) the following statement appears: Mr. Howe reported that an agreement had been reached with Mr Rockefeller's representatives for a loan of $7,000,000, to be taken: $5,000,000 on January 2, 1906; $1,000,000 on May 1, 1906; $1,000,000 on June 1, 1906 ; and to be payable : $1,000,000 on Jan- uary 2, 1910; $2,000,000 January 2, 1911; $2,000,000 January 2, 1912; $1,000,000 on May 1, 1913, and $1,000,000 on June 1, 1913; with interest at the rate of 5 per cent per annum, payable semi- 164 BEPOKT ON THE INTBBNATIONAL HABVESTEE 00. annually. He stated that under the terms of the agreement the loan could be paid at any interest date after 3 years in lots o± not less than $500,000, on 60 days' notice, at par. This loan was unanimously approved by the finance committee. At a meeting of the finance committee on February 8, 1911, a reso- lution was passed recommending the board of directors to arrange another loan from John D. Eockefeller in the amount of $10,000,000, and this was authorized at a meeting of the board of directors on February 16, 1911. Accordingly, a contract was entered into on the same day between John D. Eockefeller and the International Har- vester Co. for the sale of notes of the International Harvester Co. to John D. Eockefeller, aggregating $10,000,000, face value, and bearing 5 per cent interest, at a price of 98.5 per cent of their face value. Temporary notes were to be issued on the following dates : Feb. 20, 1911 $1, 000, 000 Mar. 1, 1911 1,500,000 Apr. 1, 1911 1, 500, 000 May 1, 1911 1,500,000 June 1, 1911 $1, 500, 000 July 1, 1911 1,500,000 Aug. 1, 1931 1,500,000 On August 1, 1911, the interest on these notes was to be paid, and new notes, maturing on August 1, 1921, in denominations of $100,000, issued instead, to the same aggregate amount ($10,000,000), in a form prescribed in the contract. The International Harvester Co. was to have the option to prepay such notes at 102 per cent of their face value at any time after August 1, 1912, provided six months' notice of such intention and the amount intended to be so paid was given, such notice being irrevocable. Section 14. Company organization of the International Harvester Co. This development and reorganization of the manufacturing proper- ties of the International Harvester Co. was accompanied by an ex- tensive remodeling and development of its company organization. Furthermore, for the purpose of extending its export trade and fol- lowing the rapid development therein, a more elaborate company organization was established for the marketing business. Between the time of its foundation and the present (1913), the International Harvester Co. included several other companies which were either acquired at the time of its formation or established subsequently to the merger, but which now are either defunct or practically so. Company organization in 1912. — ^The company organization of the International Harvester Co. in July, 1912,^ and the business of the several companies as reported to the bureau are shown in the table following. 1 For recent changes In company organization see pp. 169-178. SUBSEQUENT DEVELOPMENT. 165 Table 26.— SUBSIDIARY COMPANIES OF THE INTERNATIONAL HARVESTER CO. IN JULY, 1912.1 Domestic comjmnfes. Company. Date of organi- zation. Legal domicile. Location of plants or busi- ness ofBces. Capital stock issued. Business. International Harvester Co. «1902 1905 1905 1905 '1909 1901 1903 1881 »1905 Wisconsin .... do Chicago tl, 000, 000 1,000,000 250,000 250,000 400,000 600,000 400,000 30,000 24,000 Marketing. of America. Wisconsin Steel Co do' Wisconsin Lumber Co do . do< steel manufac- turing. Lumber International Flax Twine Co. Ctiipago, Wfi^t "Pnllman ^ Minnesota Tllinnis St. Paul Chicago manufac- turing. Twine manufac_ turing. Transpor- tation. Do Soutbern R. R. Co. do . do Deering Southwestern Ry . . . Missouri Auburn, N. Y . . New York Do. The Owasoo River Hy Columbian Shipping Co New York New Jersey Do. Shipp i n g brokerage. Foreign companiet. Compagnie Internationale 1905 France Croix, France. Ft. 6,000,000 des Macbines Agricoles. turing. Compagnie Internationale 1910 do Paris, France.... Fr. 2,500,000 Marketing. des Machines Agricoles do France. '1910 Berlin, Germany M. 1,000,000 Do. vester Co. m. b. H. 1908 do Neuss, Germany M. 1,000,000 m. b. H. turing. International Harvester Co. 1910 Maine, U.S. A.... Moscow, Russia. $4,000,000 Manufac- in Russia. turing and mar- keting. Aktiebolaget International 1904 Sweden Norrkoping, Kr. 3,000,000 Do. Harvester Co. Sweden. Aktieselskabet International 1910 Norway Chris tiania. Kr. 100,000 Marketing. Harvester Co. Norway. Do 1906 Kr. 50,000 Do. Denmark. 1 The domestic implement and twine plants, except the St. Paul twine plant, are operated directly by the International Harvester Co. of New Jersey. 2 Successor to Milwaukee Harvester Co., which was successor to Parker-Dennett Harvesting Machine Co., organized in 1881. 8 Ore mines in Minnesota and Wisconsin and coal mines in Kentucky. * Timberlands and sawmills in Missouri, Arkansas, and Mississippi. 6 Merger of Chicago, West Pullman & Southern Ry. (1900), and Calumet & Southeastern R. R. (1902); ndustrial railroads connecting the Piano plant and steel works with trunk lines, • Successor to Street Steamship Co., organized in 1904. ' Successor to MoCormlok Harvesting Machine Co., m. b. H., organized in 1900. 166 BEPOET ON THE INTERNATIONAL HAKVESTEB CO. Table 25.— SUBSIDIAEY COMPANIES OF THE INTERNATIONAL HARVESTER CO. IN JULY, 1912— Continued. Foreign componiej— Continued. Company. Date of organi- zation. Legal domicile. Location of plants or busi- ness offices. Capital stocli issued. Business. International Harvester Co. 1906 Great Britain London, Eng- £60,000 Marketing. of Great Britain (Ltd.). land. International Harvester Co., 1908 Austria Vienna, Austria. Kr. 200,000 Do. GeseUschaft m. b. H. International Harvester Co. 1911 Switzerland Zurich, Switzer- Fr. 160,000 Do. A. G. land. International Harvester Co. 1903 Ontario, Canada. . Hamilton, Can- SI, 000, 000 Manufac- of Canada (Ltd.). ada. turing. Oliver Chilled Plow Works 1910 Canada do tl, 000, 000 Do. of Canada (Ltd.)." Eastern Building Co. (Ltd.) . 1903 Ontario, Canada.. do $80,000 Building dwell- ings. International Harvester Co. 1912 Victoria, Austra- Melbourne, £500,000 Marketing. of Australia, Pty. (Ltd.).2 lia. Victoria. International Harvester Co. 1912 New Zealand Christchurch, £65,000 Do. of New Zealand (Ltd.).' New Zealand. Macleod & Co 1911 Philippine Islands. Manila, P. I ri, 000, 000 Purchase of fiber. Salango Export Co.' 1907 New Jersey,U.S.A. Ecuador »200,000 Fiber pro- duction. .LjuiAtavAUA ........ 1 International Harvester Co. owned a one-fourth interest in July, 1912, but subsequently the capital stock was increased to $2,500,000 and the International Harvester Co.'s interest was increased to 8500,000. ' Subcompany of the International Harvester Co. of America. •International Harvester Co. acquired 1,020 shares in 1910, out of a total ot 2,000 shares. All of the companies listed in the foregoing table were, in 1912. direct subsidiaries of the International Harvester Co. (New Jersey) , except two of the foreign marketing companies, namely, the Interna- tional Harvester Co. of Australia, Proprietary (Ltd.), and the Inter- national Harvester Co. of New Zealand (Ltd.), which were sub- sidiaries of the International Harvester Co. of America. As noted in connection with the table, the domestic manufacturing plants used for the manufacture of implements and twine, with the exception of the St. Paul twine plant (International Flax Twine Co.), are all operated directly by the New Jersey company. In each case, the capital stock noted indicates the amount of capital stock issued, which was also identical with the capital stock authorized, except in the case of the International Harvester Co. in Kussia, which then had an authorized capital stock of $8,000,000. Except for the Oliver Chilled Plow Works, of Canada, and the Salango Export Co. the entire capital stock issued is held by the International Harvester Co. or the International Harvester Co. of America, respectively, as indicated, except directors' shares. Formerly the stock of the Inter- SUBSEQUENT DEVELOPMENT. 167 national Harvester Co. of America was held by the same voting trustees as that of the International Harvester Co. (New Jersey) , for the benefit of stockholders of the International Harvester Co., but as this voting trust has been dissolved, it is understood that the shares are now held directly by the International Harvester Co. (New Jersey). Some of the shares of the capital stock of the International Har- vester Co. are held by the company itself or by the America com- pany, either for insurance reserves or in connection with the em- ployees' stock subscription plan. The quantities so held in 1912 were as follows: Preferred stock, 26,605 shares; common stock, 12,635 shares. Defunct suBsroiAEY companies. — Certain companies which for- merly were embraced within the organization of the International Harvester Co. have been dissolved, combined with other companies, or otherwise become practically defunct. These companies and the details of their organization and relations to the International Har- vester Co. are as follows: South Chicago Furna.ce Co. — This company was organized under the laws of Illinois on March 25, 1899, with a capital stock of $200,000. The control of this company was acquired with the Deering proper- ties at the time of the merger. The property of this company was transferred to the Wisconsin Steel Co. in 1907. Illinois Iron Mining Go. — This company was organized under the laws of Illinois on May 28, 1901, with a capital stock of $20,000. Seven-eighths of the stock was acquired with the Deering properties at the time of the merger, and the balance in 1911. The iron-mining property was transferred to the Wisconsin Steel Co. in March, 1912. Weber Wagon Co. — This company was organized under the laws of Illinois March 10, 1883, with a capital stock of $5(50,00(5. The stock was acquired by the International Harvester Co. in 1904 and 1905 and the plant and property transferred to that company in 1905. It has now a nominal existence. D. M. Osborne & Go. and Columbian Cordage Co. — ^The capital stock of these two companies was acquired by the International Har- vester Co. in connection with the purchase of their properties on January 15, 1903. The properties were transferred to the Interna- tional Harvester Co. December 19, 1904. Both of these companies are practically defunct. Minnie Harvester Co. — The capital stock of this company was acquired in connection with the purchase of certain property from the American Grass Twine Co. It was transferred to the Interna- tional Flax Twine Co. in 1905. This company is defunct. 168 EEPOET ON THE INTERNATIONAL HAEVESTEB 00. The Keystone Go, — This company was acquired through stock con- trol October 13, 1904, and the property transferred to the Interna- tional Harvester Co. on September 6, 1905. The Aultman d; Miller Buckeye Go. — ^This company was organ- ized under the laws of Ohio on July 8, 1903, with a capital stock of $750,000. Its property was transferred to the International Har- vester Co. on November 2, 1905. It has now only a nominal existence. Lagonda Western Railroad Go. — This company was organized un- der the laws of Ohio on February 16, 1904, with a capital stock of $25,000, and was dissolved in 1909. Galwnet c& Southeastern Railroad. — This company was organized under the laws of Illinois December 12, 1902, with a capital stock of $100,000. It was merged with the Chicago, West Pullman & South- em Kailroad Co. on October 28, 1909. Chicago, West Pullman c& Southern Railway Go. — This company was organized under the laws of Illinois February 5, 1900, with a capital stock of $50,000. Control was obtained by the International Harvester Co. through the acquisition of one-half of the capital stock from the Piano interests. It was reorganized in 1909, with a slight change in name. Chatham Wagon Go. — This company was organized under the laws of Ontario, Canada, June 7, 1882. The International Harvester Co. of Canada acquired the capital stock ($79,400) in 1910 and this company was dissolved in 1911. Macleod & Go. — This partnership was organized by the Interna- tional Harvester Co. in the Philippine Islands in 1904, succeeding to another firm of the same name. It was changed to a corporation in 1911. McCormick Harvesting Machine Go. m. h. H. {Berlin). — This company was organized under the laws of Germany September 7, 1900, with a capital stock of 200,000 marks, and was acquired by the International Harvester Co. at the time of the merger. In 1910 its name was changed to Deutsche International Harvester Co. m. b. H. Oshome c& Go. m. h. H. — This company was organized under the laws of Germany September 17, 1903, with a capital stock of 200,000 marks. It is apparently defunct. Deering Harvester Go. {Ltd.), McCormick Harvesting Machine Go. {Ltd.), and slorne-Plano Go. {Ltd.). — These three companies were organized under the laws of England in 1904, each with a capital stock of £20,000. They were liquidated in 1906, and their business taken over by the International Harvester Co. of Great Britain (Ltd.). SUBSEQUENT DEVELOPMENT. 169 Section 15. Separation of the International Harvester Co. into two com- panies on January 27, 1913. On account of the pending suit of the United States Government for the dissolution of the International Harvester Co., the board of directors on January 27, 1913, organized a company under the laws of New Jersey, called the International Harvester Corporation, to which were transferred all the foreign plants and business of the International Harvester Co., together with all the domestic plants exclusively engaged in the manufacture of so-called "new lines." The articles of incorporation provided for a capital stock of $70,- 000,000, of which $30,000,000 was preferred and ^0,000,000 common. The total amount of this stock, it may be noted, was exactly one-half of the amount issued by the International Harvester Co., and it was divided in the same proportion of preferred and common. As a part of this plan it was arranged to submit to the stockholders of the International Harvester Co. a proposition for reducing the stock issues of that company to a total of $70,000,000 divided into $30,000,000 preferred and $40,000,000 common, and to change the title of the company from International Harvester Co. to International Har- vester Co. of New Jersey. This proposition was accepted by the stockholders at a meeting held on February 10, 1913. The plan pro- vided further that the stockholders in the International Harvester Co. should turn in their stock for cancellation and receive in ex- change therefor new stock certificates of one-half the amounts of preferred and common so turned in, together with equal amounts of preferred and common stock in the International Harvester Cor- poration, or, in lieu of the latter, cash at par. Some of the particulars of this plan are shown in the foUomng letter dated January 29, 1913, from the company to the stockholders of the International Harvester Co. : International Harvester Company, Harvester Building, Chicago, January £9, 1913. To the Stockholders of the International Harvester Go7ni)any : In view of the suit of the United States against this Company, which may be pending and undetermined for a considerable time, it is deemed by your Directors necessary for the advantageous carrying on of the Company's business in foreign countries and in its so-called " New Lines " in the United States, that the same should be owned and carried on separately from its domestic business in the harvester lines. Accordingly, this Company has caused to be organized, under the laws of New Jersey, the Inter- national Harvester Corporation (hereinafter called the "New Corporation"), and has transferred to it the following assets : (a) All of the foreign plants and all of the foreign business of the Company, including the stock of all foreign subsidiary com- 77854°— 13 ^13 170 EEPOBT ON THE INTERNATIONAL HABVESTEK CO. panies organized in connection with the foreign business, includ- ing the International Harvester Company of Canada, Limited ; (b) The following plants in the United States which are de- voted to the manufacture of the so-called "new lines" (which include gas engines, tractors, auto-wagons, cream separators, wagons, manure spreaders, and tillage and planting implements which have been added since the organization of this Company) : Akron Works, Akron, Ohio; Milwaukee Works, Milwaukee, Wis.; Newark Valley Works, Newark Valley, N. Y. ; Piano Works, West Pullman, 111. ; Tractor' Works, Chicago, 111. ; Weber Works, Chicago, 111. (c) All manufactured products, work in progress, and ma- terials which are appurtenant to the foreign business or to the manufacture of the new lines." (d) The new Corporation is also to acquire such a portion of the quick assets (including materials, accounts and bills receiv- able and cash) and to assume such a portion of the debt of the present Company as shall result in the net assets and surplus of the two corporations being substantially equal. The new Corporation has issued to the present Company, for the assets acquired as above stated, all of its capital stock as follows : Seven per cent, cumulative preferred stock having substan- tially the same rights and priorities as the preferred stock of the present Company $30,000,000 Common Stock 40, 000, 000 Total 70, 000, 000 Thus the new Corporation has one-half as much preferred and common stock as the present Company. It has approxi- mately one-half in value of the present Company's assets and an earning capacity also estimated to be about one-half that of the present Company. It is proposed to reduce each class of capital stock of the present Company by one-half, so that, after the reduction it will have outstanding the same amount of preferred and common stock as the new Corporation, and so that the present holdings of each stockholder in the present company will be reduced one- half. Upon such reduction being made, each stockholder will be paid One hundred dollars ($100) in cash for each share of his stock, preferred or common, cancelled by such reduction; or at his option he will receive, in lieu of such cash payment, shares of stock of the new Corporation of the same par value and class, preferred or common, as his cancelled shares of stock. It is expected that the new Corporation will at once begin to pay dividends upon its stock, preferred and common, at the same rates and dates as in the case of the present Company, so that stockholders electing to take stock of the new Corporation, in- stead of cash, will receive the same aggregate amounts of divi- dends, at the same dates, as they would have received had no change been made. The two corporations, the present and the new, will together own all the properties now held by the present Company, and have the same aggregate number of shares of stock of tlae same SUBSEQUENT DEVELOPMENT. 171 par value and of the same classes, preferred and common, as the present Company now has ; and each stockholder taking the new stock will hold the same number of shares and kind of stock issued in two equal parts by the two corporations instead of all being issued by the present Company. The number of shares, par \'alue, and class of stock of each stockholder will be un- affected. To avoid confusion in the names of the two companies, it is also proposed to change the name of the present Company by adding thereto the words " of New Jersey." The stock books of the present Company will be closed at the close of business on February 8, 1913, and the usual quarterly dividend of one and three-fourths per cent will be paid on March first, 1913, upon all of the existing preferred stock of the present Company to holders of record at the end' of business, February 8, 1913. If the decrease in capital stock outlined above is adopted by the stockholders at the special meeting called for Monday, February 10, 1913, (notice of which is herewith enclosed), the stock books for the present stock will remain closed and the stockholders of record on February 8, 1913, will be immediately notified of the reduction of stock and called upon to surrender for cancellation their outstanding certificates of stock in ex- change for new certificates of stock of the present Company of the same class and par value for one-half the number of shares represented by the certificates surrendered and for the other half either cash, or at the option of the stockholder, certificates of stock of the new Corporation of the same class and par value for one-half the number of shares represented by the certificates surrendered. You are requested to sign and return to the Secretary of the Company the enclosed proxy authorizing your stock to be voted at the meeting called for the purpose of authorizing the proposed reduction of the capital stock of this Company and the change in its corporate name. You should also fill out and mail to the Secretary of the Com- pany the enclosed letter, stating whether, upon the decrease of capital stock, you wish to take cash or stock in the new Cor- poration for one-half the amount of your present holdings. All stockholders eletting to take cash for their surrendered stock must file written notice of such election with the Secretary of the Company not later than March 15, 1913, and failure to file such written notice will operate as an election to receive stock of the new Corporation instead of cash for their cancelled shares. Application will be made to list both the new stock of the present Company and the stock of the new Corporation on the New York Stock Exchange. By order of the Board of Directors. Cyrus H. McCormick, President. W. M. Gale, Actiiig Secretary. It will be noted that the stockholders of the International Har- \ ester Co. have the privilege of electing between taking the preferred or common stock, respectively, of the International Harvester Cor- 172 BEPOKT ON" THE INTEBNATIOlirAL HAKVESTEE CO. poration, or cash at par for one-half of the preferred or common stock certificates, respectively, of the International Harvester Co. surrendered for cancellation, but that this privilege of election termi- nates on March 15, 1913, and failure to make election before that time operates as an acceptance of the stock in the new corporation instead of cash. Further details were given concerning this plan of dividing the International Harvester Co. in official statements to the New York Stock Exchange in connection with listing the 7 per cent cumulative preferred stock and common stock of the reorganized International Harvester Co. of New Jersey and of the new company, the Inter- national Harvester Corporation. After reciting various facts regarding the history of the Inter- national Harvester Co. and the provisions of its amended certificate of incorporation of February 10, 1913, the following statements are made regarding the transfer of certain of the plants of the Inter- national Harvester Co. to the new corporation, the method of dis- tributing the stock of the new corporation, and the division of its unsecured long-time obligations between the two new companies: The Company has recently entered into an agreement with International Harvester Corporation, a corporation of the State of New Jersey, whereby it has sold to that Corporation its plants in the United States, six in number, used for the manufacture of gasoline and oil engines, tractors, auto-wagons, cream sepa- rators, wagons, manure spreaders, tillage and planting imple- ments. Said plants are the Akron plant at Akron, Ohio; the Milwaukee plant at Milwaukee, Wisconsin; the Newark Valley plant at Newark Valley, New York, and the Piano, Tractor and Weber plants at Chicago, Illinois. By said agreement the Com- pany also sold to said International Harvester Corporation the Capital Stocks of the subsidiary companies which owned the for- eign plants and business of the Company in all lines, together with working capital in the shaj^e of cash, receivables, inventories and its beneficial interest in certain real estate in Chicago. Said agreement provides for a settlement of the account thereunder prior to July 1, 1913, and such a division of the assets and liabili- ties of the Company as of December 31, 1912, that the net assets of the two Companies after such division shall be equal. By the terms of said agreement with said International Har- vester Corporation the Company received for said one-half of its net assets 300,000 shares of the Seven Per Cent Cumulative Preferred Stock and 399,964 shares of Common Stock of said International Harvester Corporation, all of the par value of $100 each. The Company has offered said Preferred Stock for pro rata distribution among the holders of its own Preferred Stock, and said Common Stock for pro rata distribution among the holders of its own Common Stock, each stockholder being given the privilege of taking cash to the amount of the par value of the stock so offered. SUBSEQUENT DEVELOPMENT. 173 The Old Company has no mortgage indebtedness except cer- tain small real estate purchase money obligations. Its long-time obligations are as follows : $10,000,000 unsecured loan due in 1921, and $20,000,000 unsecured Three- Year Five Per Cent Gold Notes issued under the indenture dated February 15, 1912, made be- tween the Company and the Bankers Trust Company as Trustees. By the agreement between the Old Company and the New Cor- poration mentioned above, the New Corporation assumed the payment of said $10,000,000 unsecured loan, due 1921, and $5,000,000 of said Three-Year Five Per Cent Gold Notes, the Company remaining liable upon the purchase money obligations mentioned. In the event of default upon either of the long-time obliga- tions, the Old Company is directly liable for the payment of the full amounts. The domestic manufacturing plants which are taken over by the new company, the International Harvester Corporation, are stated in the excerpt given above, together with the various kinds of farm machinery which they manufacture. It should be noted, however, that some of the plants which are not transferred to this new com- pany also manufacture some of these new lines, as, for example, tillage implements at the Osborne and Keystone plants and manure spreaders at the Champion plant. As nothing is stated regarding the discontinuance of these lines at the plants retained by the Inter- national Harvester Co. of New Jersey, it may be assumed that they will continue to be manufactured there. Inasmuch as tillage imple- ments and manure spreaders are manufactured at the Piano plant, and manure spreaders at the Newark Valley works also, and as both of these plants are transferred to the International Harvester Cor- poration, it appears that both of the two new companies will have these two lines of farm implements. Moreover, nothing appears as to which company will handle certain outside lines which hitherto have been marketed by the International Harvester Co. of America. At the present time seeding machines and drills are manufactured at the Deering and Champion plants, while the America company sells even more important brands of these machines as a jobber. Furthermore, nothing is stated as to the International Har- vester Co. of America — ^whether it will be continued, and, if con- tinued, whether the property and organization will be attached to either one of these companies or to be divided between them. This, of course, is a very important feature in the organization of the old company. While the physical property of the America company in warehouses, etc., is by no means inconsiderable, the selling organiza- tion is much more significant. The only light thrown on this aspect of the divison is found in the transfer of all the foreign marketing 174 REPOET ON THE INTERNATIONAL HARVESTER CO. companies to the new International Harvester Corporation, together with the foreign manufacturing companies. The following table is given in the official statements above referred to as to the foreign companies which are thus transferred to the International Harvester Corporation : Table 26— SUBSIDIABY COMPANIES OF THE INTERNATIONAL HARVESTER CO. DOING BUSINESS IN FOREIGN COUNTRIES AND TRANSFERRED TO THE INTERNATIONAL HARVESTER CORPORATION ABOUT FEBRUARY, 1913. Name. Place of or- ganization. Place of business. Amount of capital. Amount owned. International Harvester Cor- poration. Aktiebolaget Interaational Har- Sweden Norrkoping, Sweden. . Kr. 3,000,000 Kr. 3,000,000 vester Co. Aktieselskabet International Denmark . . . Copenhagen,Denmark. Kr. 100,000 Kr. 100,000 Harvester Co. Aktieselskabet International Norway Christianla, Norway . . Kr. 100,000 Kr. 99,000 Harvester Co. Compagnie Internationale des Machines Agricoles de France S. A. Compagnie Internationale des Machines Agricoles S. A. France Paris, France . , Fr. 2,500,000 Fr. 2,496,000 do Croix, France Fr, 5,000,000 Fr. 4,997,000 Deutsche International Harves- Germany... Berlin, Germany M. 1,000,000 M. 1,000,000 ter Co. m. b. H. Eastern Building Co. (Ltd.) Ontario, Canada. Hamilton, Ontario $50,000 $50,600 International Harvester Co., A. G. Switzerland. Zurich, Switzerland. . . Fr. 160,000 Fr. 160,000 International Harvester Co., G. Austria Vieima, Austria Kr. 50,000 Kr. 50,000 m. b. H. International Harvester Co. in Maine Lubertzy , Russia $6,500,000 $6,600,000 Russia. International Harvester Co. m. b. H. International Harvestsr Co. of Germany . . , Neuss, Germany M. 4,000,000 M. 4,000,000 Australia Melbourne, Australia.. £500,000 £500,000 Australia, Proprietary (Ltd.). International Harvester Co. of Ontario , Hamilton, Ontario 11,000,000 $1,000,000 Canada (Ltd.). Canada. International Harvester Co. of Great Brit> London, England £60,000 £47,000 Great Britain (Ltd.). ain. International Harvester Co. of New Zear Christchurch, New £60,000 • £60,000 New Zealand (Ltd.). land. Zealand. To the International Harvester Corporation has also been trans- ferred the interest of the old International Harvester Co. in the Oliver Chilled Plow Works of Canada (Ltd.), namely, a one-fifth interest in the capital stock of $2,500,000. A very remarkable feature of this division is found in the transfer of all the transportation comijanies formerly controlled by the Inter- national Harvester Co. to the new International Harvester Corpora- tion. These, together with a small shipping company, located in New SUBSEQUENT DEVELOPMENT. 175 York, are shown in the following table which is also contained in the official statements above referred to : Table 27.— SUBSIDIARY COMPANIES OF THE INTERNATIONAL HARVESTER CO. ENGAGED IN TRANSPORTATION, ETC., IN THE UNITED STATES, AND TRANS- FERRED TO THE INTERNATIONAL HARVESTER CORPORATION ABOUT FEBRU- ARY, 1913. Name. Place of organization. Place of business. Amount of capital. Amount owned. Interna- tional Harvester Corpora- tion. CnliiTnViiaTi .=!liijipiTig C.n New York City Deering, Mo $24,000 400,000 600,000 30,000 400,000 524,000 Deering Southwestern Ry. . . Missouri 400,000 600,000 The Owasco River Ry . . . New Yori: Auburn, N.Y Ch'cago, 111 30,000 400,000 Chicago, West PuUman & South- em R. R. Co TlliTloifa Of the four railroads given in the above statement the first, namely, the Deering Southwestern Railway, is, as has already been shown, largely used in serving the timber properties in Missouri. As these timber properties are retained by the International Harvester Co. of New Jersey, it is remarkable that the railroad should be trans- ferred to the International Harvester Corporation. The three re- maining railroads given in the foregoing statement, namely, the Illinois Northern, the Owasco River, and Chicago, West Pullman & Southern, are purely industrial railroads, serving chiefly the McCor- mick, the Osborne, and Wisconsin Steel Co. plants, respectively. However, the Illinois Northern Railway also serves the Tractor plant, which is transferred to this new company, while the Chicago, West Pullman & Southern Railroad is connected with the Piano works, which are likewise transferred. Nevertheless, their principal business comes from the McCormick plant and the steel plant, as stated above. As these plants and the Osborne plant are retained by the International Harvester Co. of New Jersey, the transfer of the railroads to the International Harvester Corporation is equally re- markable. Inasmuch as the old International Harvester Co. was not at the date of the foregoing statements able to finally establish its balance sheets for the year 1912, it was not possible to make more than a pre- liminary statement as to the effect of this division of its assets and liabilities. Preliminary or tentative statements were made, however, of the assets and liabilities of the old International Harvester Co. as of December 31, 1912, and of the two new companies as of Febru- ary 1, 1913. These are given in the tables following. 176 EEPOKT ON THE iNTERNAtlONAL HAEVESTER CO. Table 28.— INTERNATIONAL HARVESTER COMPANY (NOW INTERNATIONAL HARVESTER COMPANY OP NEW JERSEY) AND AFFILIATED COMPANIES, PRELIMINARY COMBINED BALANCE SHEET, DECEMBER 31, 1912. Preliminary Combined Balance Sheet ot the Company as of December 31, 1912 (the close of Its last fiscal year). Subject, as stated above, to revision when the final Bal- ance Sheet Is prepared. ASSBTS. Property account $79,150,000 Deferred charges to operations 200,000 Fire Insurance fund assets 1,450,000 Current assets : Inventories (at cost) $72,750,000 Receivables (net) 82,200,000 Cash 5, 500, 000 160, 450, 000 $241, 250, 000 LIABILITIES. Capital Stock : Preferred $60, 000, 000 Common 80, 000, 000 $140, 000, 000 Purchase money obligations 300,000 Current liabilities : Bills payable $35, 300, 000 Accounts payable 13, 150, 000 48, 450, 000 Reserves 21, 750, 000 Surplus • 30, 750, 000 $241, 250, 000 • In this surplus are included the estimated net earnings for the year ended December 31, 1912, after deducting the full dividends for the Preferred and Common Stock for the year. The earnings for the year as finally ascertained will appe.ir in the Income Ac- count, which, together with the definitive Balance Sheet, will be issued to shareholders and furnished the New York Stock Exchange about May 1, 1913. Note. — Both i the foregoing balance sheets are of dates prior to the recent decrease by one-half of the Preferred and Common Stock of the Company ; the sale by It to Inter- national Harvester Corporation of one-half its net assets as of December 31, 1912, and the distribution by it among its stockholders of the Capital Stock of International Har- vester Corporation. Table 29.— INTERNATIONAL HARVESTER COMPANY OF NEW JERSEY (FOR- MERLY INTERNATIONAL HARVESTER COMPANY, THE OLD COMPANY), PRE- LIMINARY COMBINED BALANCE SHEET FEBRUARY 1, 1913. Preliminary Combined Balance Sheet (including the assets and liabilities of Its affiliated companies) as of February 1, 1913, subject to revision when the final Balance Sheet of the Company has been completed. Property account : Real estate and plant property (less depreciation re- serve) $43, 800, 000 Fire Insurance fund assets 725, 000 Current assets : Inventories (at cost) $39,450,000 Receivables (net) 32,000,000 Cash 3, 000, 000 74, 450, 000 $118, 975, 000 1 The other balance sheet referred to in this note is the Combined Balance Sheet of the International Harvester Co. for December 31, 1911. SUBSEQUENT DEVELOPMENT. 177 „ LIABILITIES. Capital Stock: Preferred $30, 000, 000 Common 40,000,000 $70, 000, 000 Purchase money obligations 300, 000 Current liabilities : Bills payable » $20, 300, 000 Accounts payable 8,425,000 28, 725, 000 Reserves (miscellaneous) 4, 575, 000 Surplus ^ 15, 375, 000 $118, 975, 000 • This does not Include the $10,000,000 unsecured loan due In 1921 or the $5,000,000 Three-Year Five Per Cent Gold Notes, payment of which has been assumed by the New Corporation. This indebtedness remains, however, a contingent liability of the Old Company. Note. — The above preliminary balance sheet is based upon the following assumptions : (1) that the Capital Stock of the Old Company has been decreased to $30,000,000 Pre- ferred Stoclj and $40,000,000 Common Stock; (2) that the Capital Stock, Preferred and Common, of International Harvester Corporation (the New Corporation) has been dis- tributed among the stockholders of the Old Company, and (3) that the agreement be- tween Old Company and the New Corporation in respect of the division of assets and the assumption by the New Corporation of the Old Company's $10,000,000 unsecured loan, due 1921, and of $5,000,000 of the Old Company's Three-Tear Five Per Cent Gold Notes has been performed. Table 30.— INTERNATIONAL HARVESTER CORPORATION, PRELIMINARY COM- BINED BALANCE SHEET, FEBRUARY 1, 1913. The following is a Preliminary Combined Balance Sheet of this Corporation (including the assets and liabilities of its affiliated companies) as of February 1, 1913, based upon the International Harvester Company's (the old Company's) preliminary balance sheet of December 31, 1912, and also upon the assumption that the agreement between the Corporation and the old Company in respect of the division of assets and the assump- tion of the $15,000,000 of indebtedness of the old Company by the new Corporation has been performed. While this balance sheet gives with close approximation the condition of the corporation, it will be subject to revision when the definitive balance sheet of the old company as of December 31, 1912, and the final balance sheet of the Corporation has been completed. ASSETS. Property account : Real estate and plant property (less depreciation re- serve) $20, 750, 000 Fire Insurance fund assets 725, 000 Current assets : Inventories (at cost) 35,500.000 Receivable (net) 50,200,000 Cash 2, 500, 000 88, 200, 000 $109, 675, 000 LIABILITIES. Capital Stock: Preferred $30, 000, 000 Common 40, 000, 000 — $70, 000, 000 Current liabilities : Bills payable 1$15, 000, 000 Accounts payable 4, 725, 000 $19, 725, 000 Reserves (miscellaneous) 4, 575, 000 Surplus 15, 375, 000 $109, 675, 000 1 Indebtedness of Old Company assumed by New Corporation as follows ; Unsecured Loan, due 1921 $10, 000, 000 Three-year Five Per Cent Gold Notes 5, 000, 000 $15, 000, 000 1*78 BEPOET ON THE INTERNATIONAL HAEVESTEE CO. The foregoing statements of assets and liabilities are too condensed to make it possible to discuss the divisions in a satisfactory manner. Moreover, one of the statements is for December 31, 1912, and the other two are for February 1, 1913, and therefore the first may not be strictly comparable with the other two. It will be noted that there is a considerable decrease in the aggregate property accounts of the two new companies ($64,550,000) as compared with the old International Harvester Co. ($79,350,000, including deferred charges to operations), namely, $14,800,000. An increase, however, is found in the, aggregate inventories of the two new companies as compared with the old company, namely, $2,200,000. The decrease in the property and inventory accounts of the two new companies taken together, as compared with the old company, is therefore $12,600,000. Corresponding to this figure there is a decrease in aggregate reserves of the two new companies as compared with the old company of an equal amount ($12,600,000). The effect of this division of the company with respect to a continu- ation of control substantially by the same interests, can not be antici- pated. This plan is expressly stated to have been adopted in view of the pending dissolution suit. If intended as a part of a pro- posed plan of disintegration, the Bureau regards this method of division as very unsatisfactory. Obviously, it does not touch the most essential feature of the company as a combination of competi- tors, namely, the consolidation of the chief harvesting-machine plants of the country, and especially of the McCormick, Ueering, Champion, and Osborne works. Section 16. Proportion of business obtained by the International Har- vester Co. from 1903 to 1911. As has already been shown, the International Harvester Co. was at its organization almost exclusively engaged in the production of grain and grass harvesting machines and at the outset possessed a monopolistic position in such lines. Subsequently, it acquired certain other harvesting-machine companies, and thereafter branched out into new lines of manufacture, by absorbing existing companies or by expanding its own manufacturing activities. It is important to consider, therefore, how far the International Harvester Co. has maintained its monopolistic position in the production of harvesting machines and what position it has attained in the new lines. For harvesting machines the data for such comparisons are prac- tically complete, and for certain of the new lines are sufficient to give an approximately correct statement of the facts. For the Inter- national Harvester Co. the numbers of each kind of machine pro- duced or sold in each year were reported by that company. The Bureau did not obtain statistics of the numbers produced or sold SUBSEQUENT DEVELOPMENT. 179 by all the independent implement manufacturers competing with the International Harvester Co., but it did obtain the figures for a con- siderable number of the more important ones, which, for some kinds of machines, gave nearly complete information of the amount of business of the independent companies. Important additional infor- mation was also submitted in the pending suit of the Government. The Bureau also obtained a considerable amount of other informa- tion concerning the importance and output of independent concerns, and in some cases trade statistics and trade estimates of the total output. The censuses of 1905 and 1910 give statistics for the years 1904 and 1909 for the total production of the United States for certain kinds of farm machinery, with which the production of the International Harvester Co. for these years may also be compared. Harvesting machines. — In considering the proportion of the business controlled by the International Harvester Co. during this period, it is convenient to take up, first, the data for harvesting machines, and, subsequently, those for other agricultural implements which it manufactures. The census data for the production of harvesting machines for the years 1904 and 1909 may be considered first ; these are compared with the production of the International Harvester Co. for the same years in the following table : Table 31.— TOTAL PRODUCTION OF SPECIFIED HARVESTING MACHINES MADE IN UNITED STATES, ACCORDING TO THE CENSUS, COMPARED WITH THE DOMESTIC PRODUCTION OF THE INTERNATIONAL HARVESTER CO.i IN 1904 AND 1909. 1904 1909 Machine. United States. Inter- national Harvester Co. Per cent Inter- national Harvester Co. United States. Inter- national Harvester Co. Per cent Inter- national Harvester Co. 108,810 267,692 ■ 60,996 236,297 35,745 6,924 94,552 221, 186 45,685 3 167,667 18,815 4,853 86.7 82.6 74.9 71.0 52.6 70.1 129,274 2 359,264 68,294 266,260 34,396 19,693 111,094 279,589 44,980 3183,996 25,184 14,874 85.9 77.8 Reapers . . 77.2 Rakes 69.1 Tedders 73.2 75.5 ^ The foreign production of International Harvester Co., which is excluded from this table, was chiefly id Canada. 2 Includes combined mowers and reapers. 3 Includes side delivery and sweep rakes. The foregoing table indicates some decrease in the proportion of harvesting machines in the hands of the International Harvester Co. in 1904 as compared with the situation at the time of the merger in 1902. (See p. 92.) This is the case at least for the three lines 180 BEPOET ON THE INTEBNATIONAL HAEVESTEE CO. previously compared — binders, mowers, and rakes. Comparing 1904 and 1909, there was, on tlie whole, very little change, the percentages falling slightly for binders and rakes and a little more for mowers, but increasing a little for reapers and corn harvesters, and consider- ably for tedders. The Bureau's information as to the numbers of each kind of har- vesting machine produced or sold by the International Harvester Co. is, as .stated above, practically complete for the whole period 1903 to 1911, inclusive. For the independent manufacturers, extensive information as to the numbers produced or sold was obtained for certain lines of machines, especially the chief harvesting machines, and this information generally covered the same period, 1903 to 1911, though in some cases it was impracticable to get data from a few companies for rakes for some of the earlier years. For binders and mowers practically all the independent output of the United States was reported, though returns for one company are lacking for one j^ear. The data obtained are sufficient to show the position of the International Harvester Co. with substantial accuracy. For rakes, the data are similar to those for binders and mowers, except that a few of the independents are not included. In the case of rakes, therefore, the information is not complete enough to show fully the extent of independent production without the use of estimates. Binders. — The following table shows the numbers of binders pro- duced by the International Harvester Co. in the United States and the numbers produced or sold by the independents for the years 1902 to 1911, inclusive. Table 32.— PKODUCTION OF BINDEKS OF THE INTERNATIONAL HARVESTER CO. IN THE UNITED STATES COMPARED WITH THAT OF INDEPENDENT COMPANIES, 1902-1911.1 Year. International Har- vester Co.» Independent com- panies. Year. International Har- vester Co.> Independent com- panies. Number. Per cent. Number. Per cent. Number. Per cent. Number. Per cent. 1902 1903 1904 1905 1906 180,401 184,817 87,371 102,832 108,666 90.9 94.2 89.1 90.0 87.0 18,128 11,448 10,649 11,469 16,233 9.1 6.8 10.9 10.0 13.0 1907 1908 1909 1910 1911 117,854 104, 547 100,201 125,382 146,981 88.5 89.7 87.1 87.0 87.0 16,264 12,054 14,848 18,701 21,923 11.6 10.3 12.9 13.0 13.0 ' For independents the numbers sold were used where production was lacking, but as a rule where both sales and production were reported by independents the diflerences in the figures were unimportant. ' For 1902 comprises the five companies originally consolidated as the International Harvester Co. An examination of the above table shows a marked increase in the International Harvester Co.'s proportion of the production of binders in 1903, namely, 94.2 per cent, as compared with the business of the companies merged in 1902, namely, 90.9 per cent. This was due SUBSEQUENT DEVELOPMENT. 181 chiefly to the acquisition of the Osborne company's business. There- after there was a distinct and almost uninterrupted decrease, namely, from 94.2 per cent in 1903 to 87.0 per cent in 1911. Compared with 1902, however, the decrease was only about half as much. The in- dependent companies showed an increase from 5.8 per cent in 1903 to 13.0 per cent in 1911 ; but it is apparent that the original monopo- listic position of the International Harvester Co. in the binder busi- ness of the United States was not seriously affected by this increase of independent production. For certain purposes it is important also to consider the relation of the domestic sales of binders for the International Harvester Co. and the independents. Very extensive data were obtained on this matter by the Bureau, particularly from the record in the present suit of the Government against the International Harvester Co. Data are not available for 1902, but the facts from 1903 to 1911 are shown in the following table : Table 33.— NUMBER OF BINDERS SOLD IN THE UNITED STATES BY THE INTERNA- TIONAL HARVESTER CO. COMPARED WITH DOMESTIC SALES OF INDEPENDENT COMPANIES, 1903-1911.1 Year. International Harvester Co. Independent companies. Year. International Harvester Co. Independent companies. Number. Per cent. Number. Per cent. Number. Per cent. Number. Per cent. 1903 1904 1905 1906 1907 104,273 86,382 89,699 92,574 89,627 96.3 94.7 93.2 90.7 92.2 4,042 4,834 6,545 9,511 7,688 3.7 6.3 6.8 9.3 7.8 1908 1909 1910 1911 64,368 86,006 92,937 97,335 91.2 90.5 88.4 87.2 6,214 9,038 12,158 14,315 8.8 9.5 11.6 12.8 ' For independents, production was used where numbers sold were lacking, but only for companies wliich had little or no export business. (See note 1, Table 32.) The International Harvester Co.'s proportion of the number of binders sold in the United States corresponds very closely with its proportion of the number produced in the United States. From 1903 to 1911 there was an almost uninterrupted decrease, namely, from 96.3 per cent to 87.2 per cent. While the number sold by the inde- pendent companies increased from 3.7 per cent in 1903 to 12.8 per cent in 1911, they still had only a small fraction of the total. The International Harvester Co., therefore, substantially maintained its highly monopolistic position in this branch of the business. Mowers. — The same comparison may be made for mowers as for binders. The table following shows the number of mowers produced by the International Harvester Co. in the United States and the number produced or sold by the independent companies for the years 1902 to 1911, inclusive. 182 EEPOKT ON THE INTERNATIONAL HAKVESTEE CO. Table 34.— PRODUCTION OF MOWERS OF THE INTERNATIONAL HARVESTER CO. IN THE UNITED STATES COMPARED WITH THAT OF INDEPENDENT COMPANIES, 1902-1911.' Year. International Harvester Co.^ Independent companies. Year. International Harvester Co.' Independent companies. Number. Per cent. Number. Per cent. Number. Per cent. Number. Per cent. 1902 1903 1904 1905 1906 324,180 318,505 221,186 260,677 213,269 82.5 87.7 82.1 84.1 79.0 68,913 44, 765 48,309 47,468 56,860 17.5 12.3 17.9 15.9 21.0 1907 1908 1909 1910 1911 260,764 276,349 279,689 260,526 241,285 81.6 82.1 80.7 77.7 76.6 58,730 60,467 66,970 74,630 73,886 18.4 17.9 19.3 22.3 23.4 ' For independents, the numbers sold were used where production was lacking. (See note 1, Table 32.) 2 For 1902, comprises the five. companies originally consolidated in the International Harvester Co. As in the case of binders there was a marked increase in the per- centage in 1903, namely, 87.7 per cent, as compared with the busi- ness of the companies merged in 1902, namely, 82. .5 per cent, due to the acquisition of the Osborne comjaany's business. Thereafter the proportion of the International Harvester Co. varied somewhat but showed generally a declining tendency; the proportion in 1911 was onh' 76.6 per cent, as compared with 87.7 per cent in 1903. The independents show a corresponding increase, namely, from 12.3 per cent in 1903 to 23.4 per cent in 1911. In spite of this large increase in independent production, the International Harvester Co. retained a substantially monopolistic position in this line of harvesting ma- chines also. The domestic sales of mowers by the International Harvester Co. and the independents for the years 1903 to 1911 (data for 1902 not being available) are compared in the following table: Table 36.— NUMBER OF MOWERS SOLD IN THE UNITED STATES BY THE INTERNA- TIONAL HARVESTER CO. COMPARED WITH DOMESTIC SALES BY INDEPENDENT COMPANIES, 1903-1911.1 Year. International Har- vester Co. Independent com- panies. Year. International Har- vester Co. Independent com- panies. Number. Per cent. Number. Per cent. Number. Per cent. Number. Per cent. 1903 208,318 91.0 20,731 9.0 1908 155,584 82.6 32,719 17.4 1904 187,985 89.0 23,148 11.0 1909 162,549 79.3 42,533 20.7 1905 166, 677 86.5 26, 009 13.6 1910 166,386 76.6 60,432 23.4 1906 161, 917 82.8 33,576 17.2 1911 141,330 74.6 48, 121 25.4 1907 181,721 84.7 32, 896 15.3 I For independents, production was used where the number sold was lacking, but only tor companies which had little or no export business. (See note 1, Table 32.) While on the whole the proportion of the International Harvester Co. was not greatly ditferent for domestic sales than for production in the United States, there were decided variations from year to SUBSEQUENT DEVELOPMENT. 183 year, and there was a greater decline during the whole period with respect to domestic sales. From 1903 to 1911 the proportion of domestic sales decreased from 91 per cent to 74.6 per cent, the inde- pendent companies showing a corresponding increase, namely, from 9 per cent to 25.4 per cent. In spite of the large increase in the num- ber of independent mowers sold in the domestic market, the Interna- tional Harvester Co. had in 1911 three-quarters of the domestic business, so that its position was still distinctly monopolistic. Rakes- — While the Bureau had data as to the number of rakes pro- duced by the International Harvester Co., and also a large propor- tion of the total number produced or sold by the independent rake manufacturers, a statement of the total production for the years 1902 to 1911, inclusive, would involve estimating a small fraction of the output for each year.^ Specific estimates have been made by the Bureau, however, for the unreported production for 1902 and 1911, namely, 13,000 rakes in 1902 and 14,400 rakes in 1911. These esti- mates added to the total reported production would indicate that the proportion of the five companies originally merged in the Interna- tional Harvester Co. in 1902 was 67.8 per cent of the total production of rakes, and that in 1911 the International Harvester Co. had about 72 per cent. In the opinion of the Bureau, the above estimates of the production of independent makers of rakes are liberal and the pro- portion of the International Harvester Co. is not overstated. Atten- tion should be called to the fact that in 1903 the proportion of the International Harvester Co. was much higher than for the five com- panies originally merged in 1902, because the large production of rakes of the Osborne plant were included in that year. The propor- tion of the International Harvester Co.'s output of rakes in 1903 probably exceeded 80 per cent of the total production in that year. It was for this reason that the International Harvester Co. had a larger proportion of the production in 1911 than the five companies 1 The number of raises produced by the International Harvester Co. (in 1902 the figures are for the five companies originally merged in the International Harvester Co.) and the number produced or sold by independent manufacturers for which data were obtained by the Bureau were as follows: Year. Interna^ tional Harvester Co. Independ- ent companies reporting. Year. Interna- tional Harvester Co. Independ- ent companies reporting. 1902 174,950 239, 406 167,667 135, 169 143,056 69, 960 37,576 35,232 37,242 38,814 1907 174,482 185,136 183,996 192,329 164,246 41,982 45,097 51,780 67,836 49,625 1903 1908 1904 1909 1905 1910 1906 1911 Note. — Tlie foregoing figures include sulky, side delivery and sweep rakes. Where numbers produced by independent companies were lacking, the numbers sold have been used instead. In general, the fore- going data are estimated to comprise about 95 per cent, more or less, of the total output. In 1903 the large filing off of the reported Independent production was due to the acquisition of the Osborne Company by the International Harvester Co. 184 EEPOKT ON THE INTEBNATIONAL HAKVESTER 00. originally merged in 1902, although as between 1903 and 1911 there was a decided decrease in its proportion of the total output. The International Harvester Co. clearly still retains, however, a substantially monopolistic control of this branch of the trade. A comparison of the domestic sales of the International Harvester Co. and the independents would show similar proportions, the per- centage of the International Harvester Co. being a little lower than for production in the United States, as shown above. This appeared for the tabulation of domestic sales reported, and although the Bureau did not make estimates of the unreported domestic sales for each year, would unquestionably apply to them also. The Bureau made, however, an estimate of the unreported domestic sales for 1911, returns being had for about 93 per cent of the total domestic business, and on this basis the proportion of the International Harvester Co. was 68 per cent. Binder twine. — For binder twine, the Bureau had the figures for the quantity produced and sold by the International Harvester Co. in the United States, and also some data of a similar character in respect to the independents, besides the various State prisons which produce twine. The Bureau also obtained estimates from experts in the twine business for the years 1909 and 1911 with regard to the output of the independent manufacturers. On the basis of these data, the Bureau estimates that in 1909 the total production of twine in the United States was 116,000 tons, of which the International Harvester Co. produced about 64,000 tons, or about 55.1 per cent of the total. Similarly for 1911, the Bureau estimates that the total production of twine in the United States was 128,700 tons, of which the International Harvester Co. produced 80,700 tons, or about 62.7 per cent. The data with respect to twine were inadequate, however, for making an estimate for the proportion of the quantities sold by the International Harvester Co. in the United S,tates New lines. — The International Harvester Co., which established a monopolistic position in harvesting machinery through combina- tion, and subsequently consolidated its control therein by the acqui- sition of competing concerns, greatly expanded its business by enter- ing into. new lines, as described above. In establishing its new lines it was greatly aided by its monopolistic position in the harvesting- machine business, because the system of marketing agricultural im- plements is such that it was in a position to force the sale of its new lines, as will be described in more detail in Chapter VII. Con- sequently, the International Harvester Co. has been able to develop its trade in new lines more rapidly than would have been practicable for an ordinary concern. STJBSEQUENT DEVELOPMENT. 185 It is not possible to make a statement which will show fully the extent of its development in the new lines, as complete statistical data are not available. For the years 1904 and 1909 census data are obtainable, but the machines enumerated by the census do not comprise all of the important new lines manufactured by the Inter- national Harvester Co., and in some cases when such machines are enumerated the description is not precisely the same as that of the International Harvester Co. However, the census data for 1904 are of no particular interest, inasmuch as the International Harvester Co. had not then extended its business in an important degree to any of the new lines, except for harrows. For harrows, an important line then manufactured by the International Harvester Co. was disk harrows, of which it manufactured 11,302 in 1904, as compared with the total production in the United States, according to the census, of 104,323. The pro- portion of the International Harvester Co., therefore, to the total production was about 10.8 per cent. Before 1909 the International Harvester Co. had already begun the production of several important new lines, but the census does not furnish data for some of the most impcwtant, namely, manure spreaders, cream separators, gasoline engines, and tractors. The only farm machinery which the International Harvester Co. made in considerable quantities for which a comparison with the census data is possible are farm wagons, wheeled cultivators, disk harrows, spring-tooth harrows, hay stackers, hay loaders, and com shredders. This comparison is shown in the following table : Table 36.— TOTAL PRODUCTION OF CERTAIN KINDS OF FARM MACHINERY IN THE UNITED STATES, ACCORDESfa TO THE CENSUS, COMPARED WITH THE PRODUC- TION OF THE INTERNATIONAL HARVESTER CO. IN THE UNITED STATES, IN 1909. Machine. United states. Interna- tional Harvester Co. 193,000 50,010 112,832 '55,369 435,429 2 50,180 429, 952 3 55,917 17,212 4,169 34,705 7,217 < 1,240 691 Per cent of Interna- tional Harvester Co. Disk harrows Spring-tooth Narrows Wheeled cultivators . Farm wagons Hay stacliers Hay loaders Com shredders 25.9 49.1 11.5 13.0 24.2 20.8 55.7 ' Number not spectflcaUy reported; assumed equal to aU harrows other than peg-tooth and disk harrows. 2 One and two horse cultivators. 3 Including wagon gears. ^ Com husl^ers and shredders. 77854°— 13- -14 186 EEPOET ON THE INTERNATIONAL HAEVESTEE CO. Of the new lines made by the International Harvester Co. which are included in the above table, one of the most important are the till- age implements, particularly harrows. In disk harrows and spring- tooth harrows the International Harvester Co. had no less than 25.9 per cent and 49.1 per cent, respectively, of the total production in the United States in 1909. The International Harvester Co.'s propor- tion of cultivators was much smaller. Comparing the one and two horse cultivators of the International Harvester Co. with the wheeled cultivators reported by the census, its proportion was only 11.5 per cent. For the tillage lines taken together, however, the International Harvester Co. had acquired in 1909 a very important part of the total production in the United States. In farm wagons the proportion produced by the International Harvester Co. of the total production of the country in 1909 was 13.0 per cent, although it entered this branch of the industry only about four years before the date of the census. In hay stackers and hay loaders, which are the only lines of " hay tools " for which comparative data are available, the production of the International Harvester Co. was 24.2 per cent and 20.8 per cent, respectively, of the total production of the United States. Although the number produced in the United States is not large, the figures for corn shredders illustrate the strong position of the International Harvester Co. in corn machines, other than com binders. The International Harvester Co.'s total proportion of the corn-shredder output in 1909 was 55.7 per cent. While the International Harvester Co. makes some other new lines for which comparison might be possible, such as seeders, com planters, corn shellers, and drills, it is sufficient to note here that its output in 1909 was not a large proportion of the total, although if the particular kinds could be segregated and compared, its propor- tion in some cases might be considerable. For the new lines, as in the case of the harvesting machines, the Bureau obtained most of its information directly from the pro- ducers, the data in most cases covering a period of nine years. Simi- lar information was also produced in the Government's suit with respect to the domestic sales of certain companies. These data, how- ever, were not sufficiently complete to make it possible to compare the production of the International Harvester Co. with that of inde- pendents year by year. For the year 1911, however, the Bureau is able to make an approximately correct statement of the proportion of production controlled by the International Harvester Co. for disk harrows and spreaders. These percentages are obtained by adding to the reported output of the International Harvester Co. and the principal independents, estimates of the output of a com- paratively few independents not reported. The results are shown in the table following. SUBSEQUENT DEVELOPMENT. 187 Table 37.— DOMESTIC PRODUCTION OF DISK HAEROWS AND MANURE SPREADERS BY THE INTERNATIONAL HARVESTER CO. IN 1911 COMPARED WITH THE TOTAL PRODUCTION IN THE UNITED STATES. Item. Disk harrows. Manure spreaders. Production of International Harvester Co 83,333 82,124 28,000 41,103 23,033 10,600 Reported production of independents 1 Estimated production of independents not reported Total production in the United States, partly estimated 193,467 74,636 Per cent of International Harvester Co. to total 43.1 56.1 • Includes number sold for independents not reporting production. (See note 1, Table32.) According to the foregoing table, the International Harvester Co. had about 43 per cent of the total production of disk harrows in the United States in 1911, and about 55 per cent of the production of manure spreaders. There was a striking increase in its propor- tion of disk harrows in 1911 as compared with 1909 (see Table 36), due to a great increase in its own production. Its position in respect to domestic sales was not quite so strong on account of the fact that it has developed its export trade to a relatively greater extent than the independent manufacturers in these lines. On a similar basis of reports and estimates, the Bureau finds that the International Harvester Co. sold at least 50 per cent of the total number of manure spreaders sold in the United States, and at least 37 per cent of the number of disk harrows. For farm wagons, the Bureau had not only the numbers produced and sold by the International Harvester Co. in the United States, but also for a considerable number of the chief independent manufac- turers. In addition to these figures the Bureau obtained statistics, compiled by a concern in the wagon trade, a large proportion of which was based on reports from the wagon makers. These trade statistics were most complete for the year 1910, so that the figures will be first presented for that year. Table 38.— DOMESTIC PRODUCTION OF FARM WAGONS BY THE INTERNATIONAL HARVESTER CO. DST 1910 COMPARED WITH THE TOTAL PRODUCTION IN THE UNITED STATES. Item. Farm wagons. 1 Production of the International Harvester Co Reported production of independents ' Estimated production of independents not reported Total production in the United States, partly estimated Per cent of International Harvester Co. to total 69,686 294,650 93, 900 448,036 Including wagon gears. ' Includes number sold for independents not reporting prodnction. (See note 1, Table 32.) 188 EEPOKT ON THE INTEBNATIONAL HAKVBSTEE CO. This table, which, including estimates, is practically complete, indicates that the International Harvester Co. had in 1910 about 13.3 per cent of the total production of farm wagons of the United States. This may be compared with the census figure of 1909 of 13.0 per cent. The reports for 1911 were not quite so complete as for 1910, as already stated, but a comparison of the detailed figures indicates a considerable falling off in independent production in 1911 as com- pared with 1910, and a distinct increase in the production of the International Harvester Ck)., namely, from 59,586 in 1910 to 66,460 in 1911. The Bureau, therefore, estimates that in 1911 the Inter- national Harvester Co. had about 15 per cent of the number manu- factured in the United States and over 13 per cent of the number sold in the domestic market. Section 17, Recent development of full-line concerns. A noteworthy recent development of the farm-machinery business has been the expansion of several old concerns not previously engaged in the harvesting-machine business into that line of manufacture. This development has occurred particularly with respect to certain large concerns making plows and a variety of other lines, such as Deere & Co., the Emerson-Brantingham Co., and the Moline Plow Co., while certain other important concerns, such as the J. I. Case Threshing Machine Co. and M. Eumely Co., according to reports, have contemplated an expansion into the harvester business. Deere & Co., as already shown (p. 51), developed from a plow manufacturer into a full-line concern, making, in addition to plows, tillage implements, drills, planters, wagons, manure spreaders, etc., besides jobbing some other lines of implements. It was recently re- organized and has an authorized capital stock of $65,000,000, of which $58,007,100 is issued. It entered the harvesting-machine line of business several years ago through the acquisition of the Dain mowers, rakes, and hay tools. Very recently it developed a binder and has constructed a new factory for the production of harvesting machines. Its binders were first marketed in 1912, but it is already one of the largest of the independent binder makers. It is also at the present time one of the largest of the independent mower con- cerns. Its importance in the harvesting-machine trade is measured more by the great strength of its selling organization than by its present volume of production. The Moline Plow Co. (see p. 51) , like Deere & Co., developed from a plow manufacturer into a full-line concern. Among its principal products are plows, tillage implements, drills, spreaders, wagons, and rakes. In 1913 the company is reported to have arranged for an in- crease of its capital stock from $9,000,000 to $30,000,000. Eecently it entered into an arrangement with Adriance, Piatt & Co., inde- STrBSEQUENT DEVELOPMENT. 189 pendent manufaaturers of harvesting machinery, for selling the goods of both companies in eastern markets, and in 1913, according to pub- lished reports, it acquired this concern. (See p. 49.) The factory of the latter concern, which is located at Poughkeepsie, N. Y., although well located for the export trade, is not so well situated for the sale of harvesting machines in the United States. The Moline Plow Co. has a well-developed selling organization which is an important factor in enabling it to enter the harvesting-machine business. The Emerson-Brantingham Co. (see p. 52), which for a long time has been a manufacturer of plows, tillage implements, planters, seeders, mowers, and rakes, in 1912 took over the business of certain companies producing chiefly thrashing machinery, traction engines, gas engines, wagons, and hay tools. On this account it reorganized its business and increased its authorized capitalization to $50,000,000, of which about $22,000,000 has been issued. Although it has not en- tered the binder trade, it has undoubtedly become a more important factor in the mower business on account of these important additions, which give it a fairly full line of farm machinery. The expansion of these various concerns is one of the most signifi- cant features of the farm-machinery industry to-day, and one involv- ing possibilities of great importance. It should be noted that these new developments have been made on the principle of carrying a full line of farm machinery, although no company, not even the Interna- tional Hai^ester Co., has a really complete line. CHAPTEE V. PROFITS AND PRICES OF THE INTERNATIONA! HARVESTER CO. Section 1. Character of the accounts of the International Harvester Co. A correct determination of the profits of the International Har- vester Co. is peculiarly difficult because of the unsatisfactory char- acter of its accounts during the first years of its existence. The appraisal of its property as finally adopted, and upon which its first formal balance sheet was based — namely, that for the year ended December 31, 1906 — was not completed until several years after the organization of the company. The present comptroller of the Inter- national Harvester Co., who first assumed his duties with the com- pany as assistant comptroller in the beginning of 1904, informed the Bureau that this 1906 balance sheet was the first authentic and official balance sheet made up by the company. He stated explicitly that there were no authentic or official balance sheets for the years 1903. 1904, and 1905, although he had made some private statements for his own use based on arbitrary figures for the opening entries. On the other hand, all necessary books of original entry were kept to show the business done from the beginning of operations, and although no opening entries were made of assets and liabilities, it was possible, according to the comptroller of the company, to make statements of current profit and loss. It would seem, however, that the company lacked a complete basis for its depreciation accounts. Again, for the determination of manufacturing costs, it is obviously necessary to have the inventory at the beginning of business. Apparently for this purpose the inventories of the predecessor companies were used, while subsequently in making the final statement of profit and loss for 1903 a radical adjustment was made in these figures to suit the policy of the company. This is such an extraordinary situation for a large corporation that it is important to give in some detail the statements of the comp- troller of the company to the Bureau. The essential features of his statements are given in the following excerpts : Q. I understand that you came to the company some time in 1904? — ^A. In the beginning of 1904. I was engaged in the mid- dle of December, 1903, but I really came in 1904. Q. What time in 1904 ? — A. Right at the beginning. Q. Were you then assistant comptroller? — ^A, Yes. * ♦ * 190 peofitS. 191 Q. And anything that the comptroller would know had to come through you ?— A. Yes ; about the accounts. Q. Now, as I understand it, there was no combined balance sheet made up for that year ? — A. No, sir ; there was no balance sheet made up. I had some preliminary figures which were never consummated into a balance sheet. Q. I understood from some previous files of the Bureau — for example, conversations with you — that there were approximate statements of profit and loss made up, but no combined balance sheet made up for 1904, taking one year at a time. — A. We went back and made them up. Q. I am not speaking about those made up subsequently, but made up at that time in 1904. — A. No, sir; not until December 31, 1906, was any balance sheet compiled which was authentic. Q. A combined balance sheet of the companies? — ^A. Yes, sir. Q. You say " authentic." Was there an approximate one ?— A. Not that I remember that was ever submitted to anybody. Q. Did you have profit and loss accounts combined made up ? — A. Yes, sir ; we have a statement of profit and loss. Q. That was the condition in 1904 — was it the same condition in 1905 ?— A. Yes, sir. Q. But in 1906 you got up a combined balance sheet and com- bined profit and loss account that you considered authentic? — A. And it was submitted to the board, and that was the first balance sheet, as I recollect, that the board ever considered. Q. Now, in making up that you used for property paid for by plant stock a total figure of $67,026,000 odd^— A. That is right; yes. Q. That was a statement of the appraisal of the plant, was it not — of the plant property conveyed as of the beginning of business in 1902? — A. Yes, sir; that was a summary of the ap- praisals as of October 1, 1902. Q. That figure was not made up, however, until that time, was it? — A. Well, the information had never been collected in that form until that time. Q. I understand, then, that the value of the property paid for by plant stock and appraised at $67,000,000 odd was not established until the beginning of 1907, when you made up your balance sheet for the calendar year 1906, and that all the items for making up that statement for the appraised value of the property were not available until that time, and hence any bal- ance sheet made up for the year 1906 would not agree with previous unaccepted or unauthentic balance sheets made up for previous years. That is correct, is it? — A. I will say this. The International Harvester Co. in the spring of 1904 was furnished details of all the appraisals which were made under the super- vision of Jones, Caesar & Co. The latter company was in- structed to disregard book values, for the reason that owing to systems of bookkeeping prevailing with the vendor companies the book values were meaningless, and was instructed to see that an independent appraisal was made of each piece of prop- erty which the International Harvester Co. purchased, and that 192 EEPOET ON THE INTEKNATIONAL HAEVESTEE CO, a fair value and no more was given to each piece of property. In the spring of 1904 the details of all appraisals made under the supervision of Jones, Caesar & Co. were turned over to the International Harvester Co. for their information in connec- tion with their accounts, but inasmuch as Mr. Perkins himself made the ap]3raisal of the steel group of properties and timber- lands, no details of these appraisals were available. Therefore, the company employed competent engineers and valuers to ap- praise the steel group of properties and the timberlands. These appraisals were commenced some time in the year 1905 and were completed in 1906, and the total of all appraisals was then collected and given effect to in the books and in the combined balance sheets of December 31, 1906. H< If: :]: :f: :i: :|c :{c Q. Up to the establishment of your 1906 balance sheet you did not attempt to establish a combined plant account, or any propertjf account on the basis of the appraisals. You kept no property account on that basis. Is that right? — A. I think so. Q. You kept no property account up to that time on the basis of the appraisals; whatever property account you had came down from the prior companies? — A. Not from the prior com- panies; no, sir. The property account from October 1, 1902, to December 31, 1906, would include all capital expenditures during that period. Q. But nothing as to what you started with — that is, no figure that you use to-day in your books — it did not include any figure that you use to-day as coming down from prior to 1902? — A. As I recollect it, the book entry of the valuation of the physical property acquired was not actually made until the fiscal year 1906, for the reason that certain items of appraisal had not been definitely determined. Q. You did keep, however, general books of account suffi- cient to determine all other items going into the balance sheet, such as cash, bills receivable and payable, and inventories and the like? — A. Every book of account necessary to the proper conduct of the business was kept from October 1, 1902. The only exception to this statement is the condition respecting the opening entry regarding the valuation of the property. * * * Q. * * * During this period prior to the making up of the 1906 balance sheet, on what were the unaccepted or unau- thentic balance sheets, before referred to, based, in respect to plant property? Were they based on the book values of the old companies? — ^A. No, sir; we never knew what the book values of the old companies were. We never had access to their books in any way, and had no idea of the book values. Q. Did you have any balance sheets for the divisions? — A. The balance sheets of the divisions contain operating accounts only and did not deal with capital accounts. * * * * * il! I), There never had been prior to 1906 any capital stock entry in the books and the equivalent property item on the asset side of the balance sheet No balance sheet was submitted to the PEOFITB. 193 board of directors prior to the balance sheet of December 31, 1906. Q. Or to the finance committee? — A. Or to the finance com- mittee — for the reason that the appraisals were not finally con- cluded until that time. Q. In the tentative balance sheets that you made up, as I understand for your own use, did you enter an arbitrary or hypothetical figure for the plant account as of the date when you started, or did you simply make no entry whatever? — A. As stated, any balance sheet prepared was solely for the private use of the comptroller and myself. I had understood from the out- set that no additional stock other than that covered by the award of Mr. Perkins in August, 1903, would be issued for good will or patents, etc., but we did think that it might be advisable for the company to commence business with a small surplus, and I recollect that in one tentative balance sheet we showed $120,000,000 capital stock and $12,000,000 surplus. :{: 4: Hi :{: 4: :!: :f: This tentative figure of surplus, $12,000,000, was subsequently replaced by the surplus of $7,076,229, being the excess of the valuation of the physical property acquired, $67,076,229, in excess of the $60,000,000 capital stock issued therefor. Q. Do I understand that you made up this tentative balance sheet to give you personally, as an officer of the company, an idea of where the company stood at the end of each year, or as often as you made it up— some idea of the relative position of the company at one time as against its position at a prior date? That is to say, you wanted to know whether the company had made money during a given period or lost money ; or do I under- stand that it was not necessary for this purpose? — A. No, sir. The fact that the opening entries were not really entered in the books until the fiscal year 1906 had no effect upon the determina- tion of profits annually from 1903 to 1906. Q. Except as it made it possible to determine your depreci- ation ; is not that true ? — -A. v7ell, the difference in depreciation actually used in the books in 1903 to 1906 from the depreciation used after the appraisal values were entered in the books would not be a figure of great moment. Q. Do you not need changes in inventories to determine satis- factorily the profits of the year? — ^A. The trading inven- tories? * * * Yes, ar. Q. In the first year, though, did you have inventories to start with? — A. Yes, sir. Q. Where did you get those inventories ; that is, as of October 1, 1902? You had the trading inventories as of October 1, 1902? — A. Yes. I do not remember whether the inventories as of October 1, 1902, were entered on the division books or not. I doubt if they were. ******* 194 KEPOET ON THE INTBENATIONAL HARVESTER CO. Q. But whether you carried inventories on the division books or not, you had certain figures of inventories in the general office books from the day the company commenced business? — A. Yes — well, not exactly from the day the company commenced business, but for the year 1903 the inventory at the beginning of that season was entered on the books before the profit and loss was ascertained for that year. Q. And then you entered the appraisal inventory? — ^A. And then the appraisal inventory was entered at the figure $18,155,000- Q. Your appraisal inventory was $25,000,000 odd? — A. That is correct. Q. You apparently made a change in your inventory to $18,000,000 as of December, 1902?— A. As of October 1, 1902; yes. Q. You made it in December, 1902, as of October 1, 1902; is that correct? Was that change actually resolved on in De- cember, 1902, or subsequently? — A. It was resolved on in the spring of 1904 for use in 1903 accounts. I do not recollect the exact date at which that figure was determined upon, but it was around that time. Q. How did you get the cost of production for 1903 if they did not have the inventory until 1904 some time ? How did they know what to charge up for the production? — A. I could not tell you. I will have to find out. Q. Of course you have to have that now? — A. Yes; the cost of production is determined from the factory books. Under these circumstances it is not strange that the accounting officers of the company were very reticent about the real conditions of the accounts and the financial condition of the company prior to 1906. Nevertheless, at the request of the Bureau and before the real facts above given as to the situation had been fully developed, they prepared balance sheets and profit and loss statements for the years 1903, 1904, and 1905 which were admittedly derived by working backward from the established balance sheet of 1906. These state- ments included not only the combined balance sheets for the Inter- national Harvester Co. but also balance sheets for each of the sub- sidiary companies. Although the International Harvester Co., therefore, did not have complete and proper accounts for the years prior to 1906, so far as the Bureau could ascertain, yet they did have necessary books of original entry for current business, from which the conditions of the business could be determined approximately, at least if the value of the inventories were properly established. A verification of the balance sheets which they submitted to the Bureau regarding the first three years of their business was made, in so far as necessary to reconcile them with the general books of account, but to have carried such verification further would have been an enormous task and one PEOFITS. 195 which would have been practically impossible with respect to the inventories.^ It is expressly denied by the comptroller that the dif- ferent works or " divisions " (formerly operated by the several pred- ecessor companies) continued to keep their accounts on the same basis as the predecessor companies. If such accounts had been kept, it is clear that they could not have agreed with the appraised valuation of plant and property acquired by the International Harvester Co. The officials of the International Harvester Co., furthermore, for a long time refused to submit any balance sheets or similar data as to the situation of the predecessor companies and, finally, when they did do so they submitted such data for only three companies — the McCormick, Deering, and Milwaukee companies. The reasons given and repeatedly insisted on with great emphasis and appearance of sincerity, were (1) that the merger was originally formed without knowledge of the book values of the predecessor companies, at least as regards some of the most important items, such as plant and fixed property, and that, furthermore, the balance sheets and other ac- counts of such predecessor companies were not in the possession of or accessible to the International Harvester Co.; and (2) that the dif- ferent interests which went into the combination were so jealous of each other, and there had been so much friction in establishing the original valuation, that these several interests were unwilling to show their original balance sheets and book values of property for fear of reviving old animosities. The Bureau, however, did not consider it practicable to dispense with such important data for the determi- nation of the original value of the investment. As the stock of the International Harvester Co. was very closely held by the parties forming the original merger, it was not necessary at first to publish any formal statement of the business condition of the company, while the extremely unfavorable showing which it made in the beginning was something which the parties interested could have had no motive for publishing. This would be the case especially if they hoped later on to list their stock and put it on the market, which was the course actually adopted in 1908. As the companies which originally went into the merger made for the most part large profits in 1902 and for several years preceding (see p. 63), it is somewhat surprising that the combination itself made a very bad showing in the first year of its existence. The gen- eral character of this showing, as well as the difficulty of establish- 1 In this connection may be noted the following excerpt from a. letter written by the comptroller of the company, W. M. Eeay, to an agent of this Bureau, dated May 15, 1908 ; It is not possible for us to compile a balance sheet of the industrial railroads at December 31. 1903, as the books and records of the railroads at that time were not kept in such shape as to permit a balance sheet now being withdrawn from them. If it will serve any good purpose of the Commissioner of Corporations we could in time estimate the approximate financial condition of our industrial railroads at that date, but will not proceed in the matter except upon special request from yourself after further consideration. 196 EEPOKT ON THE INTEBNATIONAL HAEVBSTEB CO. ing with certainty the exact financial status and results of the Inter- national Harvester Co. in 1903, is taken up in the following section. Section 2. Financial results of 1903. The financial results of 1903 were so remarkable and the manner in which they were accounted for by the company was so peculiar that the difficulty of correctly determining the true results can not be shown without a detailed discussion. This necessitates the use of statements of assets and liabilities in summary form, first, on the basis of the appraisal values, and, second, as reconstructed by the Bureau on the basis of its revised valuations of the property and assets acquired. The kernel of the whole problem is practically suggested by a letter of the assistant comptroller of the International Harvester Co. to the finance committee of the company in 1907, which is given below. This letter was written in connection with the preparation of the first combined balance sheet of the company for the year 1906. The valuations of property referred to in the letter are the same as those used in the final appraisal and, as already noted, some of the items which went into the determination of the total amount were not fixed until a few months before this letter was written. Before considering this letter it is desirable, however, to state what was the apparent financial position of the International Harvester Co. at the outset, October 1, 1902, on the basis of the ap- praised values of its property, etc. This is shown in the following statement : Assets. Liabilities. Property accoxint $42, 097, 689. 33 Inventories 26, 648, 162. 42 Bills receivable 1, 206, 775. 00 Accounts receivable 1, 996, 299. 93 Stock subscription unpaid 69, 851, 803. 34 Cash. 95,480.47 130,796,210.49 Capital stock J120, 000, 000. 00 Purchase-money obligations 916, 753. 40 Bills payable 2, 694, 172. 61 Accounts payable 108, 064. 83 Surplus 7,076,229.65 130,795,210.49 The property-account item of $42,097,689.33 is derived by deduct- ing from the total appraised value of property acquired, $67,076, 229.65, the appraised value of the inventories ($26,548,162.42) , the net receivables of the Milwaukee company ($450,111.71), and the Piano receivables ($39,216.25), and the adding to the remainder the ex- cess valuation of the Milwaukee company ($148,196.66) and the Deering purchase-money obligations ($916,753.40) assumed by the International Harvester Co., but which in the appraisal were de- PKOFITS. 197 ducted from the appraised value of the tangible property. The in- ventories are shown at their appraised values. The items of biUs and accounts receivable and cash are from assets acquired from the Milwaukee company, except $39,216.25 of Piano receivables. The un- paid stock subscription is $59,851,803.34, or $148,196.66 less than the $60,000,000 capital stock on account of the excess value of the Mil- waukee property, as already explained (p. 85). The capital stock requires no explanation. The purchase-money obligations were acquired with Deering ore and coal properties. The bills and accounts payable were taken over from the Milwaukee com- pany. This balance sheet shows a surplus of $7,076,229.65 on the basis of the appraisal adopted by the International Harvester Co. With this balance sheet in mind, the following letter of the assistant comptroller of the International Harvester Co., referred to above, may now be considered : May 14, 1907. To the Finance Committee of the International Harvester Com- pany. Deab Sirs: In response to your request for information con- cerning the valuation of the property acquired by this Company as of September 30, 1902, and the treatment of such values on the books and records of the Company, I beg to report as follows : Utilizing the best information obtainable, I found the follow- ing to be the valuation of the assets of the Company other than cash working capital which were acquired as of September 30, 1902: Real Estate, Plant and other fixed prop- erty $41, 036, 708. 60 Inventories of raw materials and supplies. Work in Process of Manufacture, and Finished Product 25, 548, 162. 42 Net Receivables of Milwaukee Company 491, 358. 63 $67, 076, 229. 65 In the above total there is no value included for the patents acquired by this Company as of September 30, 1902, and there is no value included for the good will of the businesses acquired at that date. For the physical assets enumerated above, the Company issued $60,000,000 par value of capital stock, and the difference between the par value of this capital stock and the valuation of those assets, viz: $7,076,229.65, was carried to an account entitled " Surplus Created at Organization." From this amount of Surplus Created at Organization there was then deducted the territorial and preliminary expenses in- curred on the territory in the fall of 1902, principally in closing up the business transacted during the season 1902 by the com- panies which sold their plant and physical inventories to W. C. Lane, who, in turn, sold them to the International Harvester Company, for the reason that these expenditures so incurred in 198 EEPOET ON THE IKTEBNATIONAL HAEVESTEE CO. settling up the business of the season 1902 did not contribute to the future earnings of the International Harvester Company, and were therefore a fair deduction from Surplus at Organiza- tion. These expenditures amounted to $1,780,235.89, leaving a balance in Surplus at Organization of $5,295,993.76. _ In the above statement of valuations, the Inventories of Raw Materials, Work in Process of Manufacture, and Finished Prod- uct acquired are stated at their appraised value at the time of acquisition, which naturally included some profit to the vendors. Considering, however, that it would be unfair if the current earn- ings of the Company were based upon that valuation of inven- tories, which is in excess of the value upon which current inven- tories of a manufacturing company should be carried, and are, in fact, now being carried by this Company, I placed the Inven- tories of Raw Materials, Work in Process, and Finished Product acquired as of the beginning of the Company's existence on the books at a total of $18,155,353.52, which figure represents only a fair trading value of such inventories to a going concern, and which would be the value adopted in accordance with sound and conservative methods of accounting in the determination of profits of a going concern. This left a difference of $7,392,808.90 between the price paid for the inventories and the value at which they were finally placed in the books, against which, according to your instructions, the entire remaining balance in the Surplus Created at Organization Account, amounting to $5,295,993.76, was applied, thus leaving a balance in our profit account of $2,096,815.14 in excess of the real estate, plant and other physical assets above enumerated. This sum of $2,096,815.14 represents the total amount now standing in our accounts in respect of: (1) The permanent equi- ties in the inventories (representing the excess of the actual values over the valuations placed on the inventories in current trading practice). (2) The patents acquired by the Company. This figure is less than one-third of the equities in the inven- tories at September 30, 1902, as determined by the appraisers, and at no subsequent date have the equities in the inventories been less than this figure. It is also undoubtedly much less than the actual cash market value of the patents acquired. It is clear from the above recital that the capital stock of this Company was issued only for cash and physical properties fairly appraised, and that the entire present surplus of the Company has been the result of earnings. Yours very truly, (Signed) W. M. Reay, Assistant Comptroller. As stated in the above letter, the appraised value of the property for which " plant stock " was issued was $67,076,229.65, showing a surplus over plant stock of $7,076,229.65. These figures were as" of September 30, 1902. During the last three months of the year a good deal of expense was incurred in the harvester trade in clean- ing up the business " on the territory," particularly in settling ac- PROFITS. 199 counts with local agents, etc., while the sales during this period were practically negligible. Inasmuch as the International Harvester Co. adopted the calendar year for its fiscal year, its earnings for its first season (1903) cover a period of 15 months, and would be charged for two of such periods of large expense and small sales. This would tend to make a bad showing for that year, even if con- ditions were otherwise prosperous. Since the business results for that year were very bad, there was an even greater reason not to charge such expense to the earnings of the first business year (1903). At any rate the International Harvester Co. decided to deduct these expenses from surplus rather than to charge them against 1903 gross earnings. It appears that this decision was made after 1903. The accounts could not have been made up, of course, before the beginning of 1903. Deducting these expenses of $1,780,235.89 from the book surplus of $7,076,229.65 left $5,295,993.76 in the surplus. The final results of the year 1903 were so bad, however, that even this would not have enabled the company to show a profit, on the basis of the original inventory values, as will be made clear presently. On this account, apparently, the company decided to reduce the original appraisal values of the inventories. In so far as this reduction corresponded to the excess valuation of the inventories in the appraisal it was evi- dently a very proper step. The appraisal valuations of the inven- tories, as shown in the letter, aggregated $25,548,162.42. This ap- praisal valuation was reduced, however, to $18,155,353.52, making a cut of no less than $7,392,808.90. According to the entries in the property account the reduction of the inventories in this way was made in December, 1902. According to the comptroller of the Inter- national Harvester Co., however, this decision was made some time during the first half of 1904 by a committee comprising Cyrus Bent- ley, Richard F. Howe, and himself. The effect of this change in the inventory valuation, taken together with the other reduction of surplus just described, was to wipe out the entire book surplus, and to leave $2,096,815.14 of the plant stock without anything back of it except intangible considerations. The International Harvester Co. wrote down the inventory and thus wiped out the surplus, and this enabled it to show a favorable profit and loss balance for the operations of the first year's business.^ An opening statement of assets and liabilities for the business October 1, 1902, made on the basis of these changes, assuming that the fall expenses of $1,780,235.89 were accruing charges which could be predetermined, would appear, therefore, in the table following. > Fifteen months ending December 31, 1903. 200 EEPOKT ON THE INTEENATIONAL HAEVESTEE CO. Assets. Plant account $42,097,689.33 Inventory 18,165,353.62 Bills receivable 1, 206, 775. 00 Accounts receivable 1, 995, 299. 93 Unpaid stock sabscriptions 69,861,803.34 Cash 96,480.47 Deficiency of tangible assets 2, 096, 815. 14 125,499,216.73 Liabilities. Capital stock $120,000,000.00 Porchase-money obligations 916, 763. 40 BUls payable 2,694,172.63 Accounts payable 108, 064. 81 Fall expenses li ^80, 235. 89 125,499,216.73 The International Harvester Co., however, did not treat this deficiency between tangible assets and liabilities as such, but arbi- trarily added the amount of this deficiency to the plant account of the company. The appraised valuation of the plant, already greatly in excess of its real value, as shown above (see Chapter III), was thus increased by $2,096,815.14. The plant account was thereby raised to $44,194,504.47 as of October 1, 1902. That these changes were for the purpose of making a showing of profit in 1903 is indi- cated by a consideration of the following summary of assets and liabilities on December 31, 1903, as reported by the Company : Property account $54,630,362.41 Dftf erred Dip rioiation charge 442,067.06 Inventory 42, 891,391. 20 Bills receivable 12, 712, 968. 62 Accounts receivable 8, 968, 808. 62 Unpaid stock subscriptions 3, 220, 336. 10 Cash 8, 319, 745. 78 131,185,668.78 Liabilities. Capital stock $120,000,000.00 Purcbase-money obligations 5, 084, 678. 89 Bills payable 300, 346. 13 Accounts payable 2,796,037. 27 Plant depreciation and extinguish- ment 488,227.09 Contingent losses 476, 198. 79 Surplus 2,041,180.61 131,185,668.78 Dividends amounting to $3,600,000 had been paid, which are not included, therefore, in the surplus, so that the net earnings for the year, according to the statement of the company, were $5,641,180.61. If, however, the company had not made the two changes noted above — namely, charging the fall expenses of $1,780,235.89 to sur- plus, and reducing the inventory by $7,392,808.90 — which wiped out the remainder of the surplus (and, in reality, something more), it would not have shown any profit. Instead, as an offset against the earnings, as stated above ($5,641,180.61), there would have been the sum of these two amounts ($1,780,235.89 and $7,392,808.90), or $9,173,044.79, and a net loss in the balance of $3,531,864.18. The International Harvester Co., therefore, wiped out its surplus and PROFITS. 201 $2,096,815.14 more than its surplus, and thus made the showing of earnings which it claimed. It is evident, as already noted, that this form of statement was an afterthought, as the Company's comp- troller expressly stated that no combined balance sheet was made at that time for 1903. The showing of loss indicated above is not, however, a fair state- ment of the year's business, and should not be compared with the results of other years, for several reasons. In the first place, the appraisal inventories of $25,548,162.42 were undoubtedly exces- sive. The Bureau has placed the value of these inventories at $21,230,650.31. This value is based on the book figures of the predecessor companies as nearly as could be determined, with a liberal allowance for depreciation. (See Chapter III.) While it is quite possible that the book values of the predecessor companies were too high, it is not likely that the figure adopted by the Bureau is too high; in fact the depreciation allowed is so liberal that it should offset any tendency toward high valuations in the book figures. The available evidence, however, makes it impossible for the Bureau to accept any such low figure as that which the International Har- TOSter Co. finally adopted, namely, $18,155,353.52. The International Harvester Co., moreover, was given every opportunity to justify its own figures through its comptroller. The position of the comptroller of the International Harvester Co. was practically that the company was warranted in reducing the inventory at the opening of the business in October, 1902, to $18,155,000 for purposes of determining profits in 1903, while insist- ing that the appraised valuation of the inventory of $25,500,000 was correct and proper for a statement of its assets and surplus at the same date. The Bureau regards this proposition as absolutely un- tenable in theory, and is convinced that, as a matter of fact, the proper value of the inventory was about the amount fixed above (Chapter III, p. 124), namely, $21,230,650.31. As both the theory and the facts are of considerable importance here, full excerpts of the statements of the comptroller in this connection are given below. Q. Your appraisal inventory was $25,000,000 odd?— A. That is correct. Q. You apparently made a change in your inventory to $18,000,000 as of December, 1902?— A. As of October 1, 1902; yes. Q. You made it in December, 1902, as of October 1, 1902; is that correct? Was that change actually resolved on in Decem- ber, 1902, or subsequently ? — A. It was resolved on in the spring of 1904 for use in 1903 accounts. I do not recollect the exact date at which that figure was determined upon, but it was around that time. ij! 4: * « 4! * « * 77854°— 13 15 202 BEPOBT ON THE IKTEENATIONAL HAKVESTEK 00.- Q. It was after you became associated with the company that the figure of $18,000,000 was adopted ?— A. Yes, sir. The act- ing comptroller probably had no knowledge of what that figure was going to be. Q. And that figure was determined upon in order to let you determine what the profits were for the year, or for the fifteen months ending December, 1903 ? — A. Yes, sir. Q. Then you adopted an opening entry for inventory of $18,000,000 odd ?— A. Yes, sir. Q. The reason I ask that is this: As a proposition of book- keeping you agree that you have to have your changes in inven- tory established before you really can determine what your profit or loss for the year has been? — A. The determination of the inventory at the beginning and end of each season is a most important factor in determining profits. Q. What is your principle for valuing inventories to-day? It is the usual accounting principle, is it not, taking the cost unless the market price is lower? — A. Yes, sir; except for fin- ished machines carried over on the territory we follow the well- established principle of valuing inventories at cost or market value, whichever is the lower. Q. Has that rule been consistently followed in the inventories that have been used in determining the annual profits of the company from the beginning? — A. Except in respect to the valuation of finished machines carried over from season to season. Q. What difference is adopted then ? — ^A. It has been the cus- tom in the harvester business where large stocks of machines are carried over on the territory, many of which are improperly housed and suffer depreciation from the weather and other causes during the winter, to make some depreciation from the original cost value of those finished machines to provide for the shrinkage in selling value which will be allowed in the succeed- ing year. ******* Q. Was the inventory that you established and used as of Oc- tober 1, 1902, namely, $18,000,000, in round numbers, on the same basis as it should be according to the general rule that you have adopted for determining the value of inventory? — A. I think the value of that inventory for trading purposes was determined by Mr. R. F. Howe, Cyrus Bentley, and myself. Q. And on a different principle ? — A. Yes ; on a different principle. Q. What principle?— A. In the award of August, 1903, the vendors submitted to a shrinkage of approximately 30 per cent in the value of their assets and good will sold to the International Harvester Co. Q. Based on stock issued? — A. Yes; based on stock issued. So in taking up the inventories in the trading accounts for the year 1903 it was natural that consideration would be given to this shrinkage, and by the deduction of this 30 per cent shrinkage the inventory value of $18,000,000 was arrived at. PROFITS. 203 Q. Why should you not shrink also the property that was acquired — the plant? — A. The shrinkage might have been ap- plied to anything, so far as that goes. Q. It was not, to plant? — A. No; it was not necessary to apply it to the plant, for the reason that if the vendors had re- ceived full stock consideration for their trading inventories then they might have been taken up — not necessarily — in the trading accounts at the appraised valuation. But you could not shrink their inventories in making the sale, and then say, "Well, you must also suffer a reduction of profits in the new company." You can see the point there. I do not know whether that is what happened or not, mind you. Q. Was not one motive in shrinking the inventory from the appraised value of $25,000,000 to the adopted value of $18,000,000 to make a showing of profit in 1903 ? — A. Not necessarily ; no. Q. Would you have made a showing of profit in 1903 if yon had not shrunk your inventory? — A. The answer to that is that it seems to me that no concei'n would have started its trading ac- counts with the value of the inventory acquired on a particular date, like the International Harvester Co. acquired its inventories on October 1, 1902, so the inventories were placed in the trad- ing accounts at the shrinkage value. At the same time, sub- sequent history proved that that value was a fair and reasonable value at which to take those inventories up in the trading ac- counts, irrespective of the valuation which was placed upon them for sale to the International Harvester Co. Q. Then the appraisal was wrong by that amount? — A. Not at all; no. Q. The appraisal can not be one thing for assets and another thing for the determination of cost of manufacture or profit? — A. Yes, sir; it may very easily. The price which you pay for a certain article is the actual price that you pay on the acquisi- tion of it; but [in] the determination of the profits of a going concern that is not necessarily the figure at which you should take it up in your trading accounts. Q. But you did not pay money for it; you issued stock? — A. Stock or money; I do not see that it makes any difference. It does not to my mind. If there ever was anything real, it is the capital stock of the International Harvester Co. I wish that all concerns in the world were on the same basis of valuation, and we would not be in the difficulties that we are in to-day in the business world. Q. If you had not shrunk your inventories in this way, do I understand that in starting your books you would necessarily have done one of two things, either shown a bigger surplus nominally on your books or handled it in some other way? — A. The effect of taking up the inventories in the trading ac- counts at $25,000,000 would have been to reduce earnings fon this nine-year period by $7,000,000. Q. And would have made a loss for 1903 ? — A. No, sir. Q. What were your earnings for 1903; $5,641,000, were they not? — A. Something like that; yes. Q. According to your statement that change in inventories could only affect that first year ; I mean your statement must be 204 KEPOKT ON THE INTERNATIONAL HARVESTEE CO. understood that way. You said .that if you had not made that change in the inventories you would have decreased your earn- ings by $7,000,000. That decrease would have come out in the year 1903?— A. No; because that would depend upon how the inventories were valued at the close of 1903. Q. But you say they were valued correctly at the close of 1903 ? — A. And at the beginning, too. Q. At wiiich figure?— A. At $18,000,000 at the beginning, and whatever was taken up on the books at the end. Q. Then they were not worth but $18,000,000?— A. No; they were worth $25,000,000, because they were appraised at $25,000,000. Q. But the reduction in inventory in 1902 from $25,500,000 to $18,000,000 odd, was it not due to the necessity of doing that in order to show a profit in the year 1903? — A. No. As i remem- ber, one of the first things that I was confronted with in deter- mining the profits for 1903 was the value at which the inven- tory at the beginning of that season should be taken into the trading accounts. That question had not been settled when I first went with the International Harvester Co.; but my recol- lection is that the officials of the company insisted from the outset that the correct value to take that inventory into the trading accounts was $25,500,000, less the percentage of shrink- age that they submitted to in the award of August, 1903. That is my earliest recollection. Q. The percentage of shrinkage on the whole appraisal of assets transferred for plant stock? — A. That was the shrinkage including the good will. Q. What has that got to do with the real value of the in- ventory ? — A. I do not know what the motive was. Q. I mean, what relation was there between that fact and any real valuation or proper valuation of the inventory? — A. Be- cause the vendors doubtless felt that inasmuch as they had re- ceived only $18,000,000 for their inventories, therefore they should be taken up in the trading accounts at the same figure — the trading accounts of the International Harvester Co. ******* Q. I understand, Mr. Reay, that you take the position that it is entirely proper to enter inventories at one valuation for the purpose of showing the investment, but to take them at a dif- ferent valuation in figuring the year's profit. I would like to have you make as full a statement as you will, at least so far as the actual entries on the book are concerned. — A. That is the only claim I made ; that the fact that you pay a certain sum for cuirent inventories, or raw materials, work in progress, and finished products at the time of their original acquisition is not necessarily the figure at which those inventories should be car- ried into the trading accounts of the company as a going con- cern. I might say that in that point of principle we have already PROFITS. 205 the certificate of Haskins & Sells, and Price, Waterhouse & Co. — perhaps the two most reliable firms of public accountants in the world — whose point of view could not ever be swayed by any- thing except their own well-formed conceptions of the principle involved. Messrs. Price, Waterhouse & Co. in their certificate, stated, " as we understand that the sum of $18,155,000 represents a fair and proper valuation of the inventories on a basis similar to that used in current practice by your company and its pre- decessors, we approve of the principle and methods adopted in dealing therewith."^ This question of appraisal was also referred to Mr. W. J. Filbert,^ who, in his letter of May 14, 1907, addressed to Mr. Cyrus H. McCormick, president, states : " The foregoing principle in my opinion is sound and correct from every point of view — accounting, operating, and financial. The fact that the inventory was appraised on a certain basis for the Lane settlement and accordingly showed a total value in excess of what it was taken up at, has no bearing necessarily on the value of the inventory for bookkeeping purposes. The Lane settlement was something the Harvester Company per se was not concerned in. Moreover, had it been, that would not alter the principle to be observed in determining the valuation to be taken onto the books. The book valuation of a working inventory to a going concern should be what it is worth to a company for trading and operating purposes. The same principle should be followed in respect of establishing on the books of a new com- pany an inventory acquired, no matter what it actually cost. If it acquires an inventory en Hoc under conditions other than through the regular routine of operations, an adjustment should be made accordingly. Unless this be done a company would not, until the original inventory was finally disposed of, show results from operating and trading which would be indicative of either the real cost of operation or the real profitableness of the business. " In submitting the above opinion it will be understood I am endorsing only the principle involved. The question whether the inventory as actually adjusted really put it only on the basis named, or above or below that, is a separate question and one on which I understand my opinion is not solicited." 1 Following is the full statement of Price, Waterhouse & Co. : New Yoek^ May II,, 1907. C. H. McCOEMICK, Esq., President, International Harvester Company, Chicago, III. Dear Sik : We have considered the method adopted by your company in valuing, for the purpose of its Profit and Loss Account, the Inventories of Raw Materials, Work in Progress and Finished Products acquired as of September 30, 1902, We have not made a detailed examination of the figures, but, assuming as we understand to be the case that the sum of $18, 155, .353. 52 represents a fair and proper valuation of the Inventories on a basis similar to that used in current prac- tice by your company and its predecessors, we approve of the principle and methods adopted in dealing therewith, as set forth in the report of the Assistant Comptroller dated May 14, 1907, a copy of which Is annexed hereto. Yours, very truly, „ „ (Signed) Peicb, Watbbhoosb & CoMPiNr. 'Mr. Filbert is comptroUfer of the United States Steel Corporation. The report referred to in this statement is the letter given on pp 197-198. 206 BEPORT ON THE INTERNATIONAL HARVESTER CO. The Bureau is convinced that the differences of opinion, indi- cated above, arise chiefly from different cojjceptions of what aproperty account should be. As a result of long established and loose business practices, the property account has come to include much that is not tangible property at all — as, for example, good will, or even water. The Bureau takes the position that it ought not to be made to include any intangible values or to conceal any deficiencies in tan- gible assets as compared with capital stock and other liabilities. So far as the particular valuation of the inventory in this case is con- cerned, the Bureau is confident that while it was quite proper to make a considerable reduction from the appraised valuation, the valuation which was adopted was unduly low and was made in order to show a larger profit in 1903. With respect to the company's claim that the higher inventory val- uation should be used in reckoning assets while the lower valuation should be used in the trading accounts, the Bureau's position is that a valuation which is proper for the one purpose is proper for the other. Having set forth the peculiar character of the statements of assets and liabilities in 1902 and 1903 which enabled the International Harvester Co. to show a favorable balance of profit at the end of the latter year, it is important to consider what the result would be if the values of the property acquired as determined by the Bureau (see Chapter III) were used instead. The opening statement of assets and liabilities as of October 1, 1902, and the statement as of December 31, 1903, would be as follows : Table 39.— STATEMENT OF ASSETS AND LIABILITIES OF INTERNATIONAL HARVES- TER CO. ON OCT. 1, 1902, AND DEC. 31, 1903, BASED ON BUREAU'S VALUATIONS. Oct. 1, 1902. Dec. 31, 1903. LiabUities. Oct. 1, 1902. Dec. 31, 1903. Property account- Deferred charges. . Inventory Eills receivable... Accounts receiv- able T'npaid stock sub- scriptions Cash Deficiency of tan- gible assets Total . $28,456,327.87 21,230,650.31 1,206,775.00 1,995,299.93 59,851,803.34 95,480.47 10,882,643.92 $38,892,185.81 442,007.05 42,891,391.20 12,712,958.62 8,968,808.62 3,220,335.10 8,319,745.78 13,685,821.00 123,718,980.84 129,133,313.18 Capital stock Purchase - money obligations Bills payable Accounts payable. Plant deprecia- tion and extin- guishment Contingent losses . $120,000,000.00 916,753.40 2,694,172.63 108,054.81 $120,000,000.00 5,084,678.89 300,346.13 2,796,037.27 477,052.10 475,198.79 123,718,980.84 129,133,313.18 The item of property in this statement, namely, $28,456,327.87, is determined as follows : From the total value as fixed by the Bureau for the property conveyed for plant stock, namely, $49,117,356.08, PROFITS. 207 deduction is made of the amount of inventory ($21,230,650.31), the net working capital ($456,111.71) of the Milwaukee company, and Piano receivables ($39,216.25), and to the remainder is added the Milwaukee excess ($148,196.66) and the Deering purchase-money obligations ($916,753.40). The inventory is put in at the figure adopted by the Bureau (p. 124). The other items are the same as for the statement of the International Harvester Co. given above (p. 196), except that now the surplus of $7,076,229.65 disappear? and in its place there is an item on the asset side of the balance sheet of $10,882,643.92, which may be regarded as deficiency of tangible assets or good-will value. In the statement of assets and liabilities for December 31, 1903, the property account stands at $38,892,185.81. The difference be- tween this amount and the property account for October 1, 1902, namely, $10,435,857.94, being additions to property made during this period. The property account does not include the $2,096,- 815.14, which was put in or left in the property account by the Inter- national Harvester Co. on account of equity in inventory, patents, etc., as explained above (p. 198). The other items for this state- ment of assets and liabilities are identical with those of the Inter- national Harvester Co., except that the surplus there shown of $2,041,180.61 becomes in this statement a deficiency in tangible assets amounting to $13,685,821. The International Harvester Co.'s statement of assets and liabili- ties for December 31, 1903, showed a surplus of $2,041,180.61 after the payment of $3,600,000 in dividends, indicating net earnings for the year of $5,641,180.61. A comparison of the deficiency of tan- gible assets in the Bureau's statements for October 1, 1902 ($10,882,- 643.92) and December 31, 1903 ($13,685,821) shows an increase in such deficiency of $2,803,177.08. This figure, taken in connection with the dividends paid out meantime, namely, $3,600,000, indicates net earnings for this period of 15 months of $796,822.92, instead of $5,641,180.61. Before considering in detail the reasons for the extraordinarily low earnings of the International Harvester Co. in 1903, it should be considered that this period includes 15 months and involved two fall periods of large expenditure when practically no earnings were made. In order, therefore, to put this year on a comparable basis with other years, there should be deducted from the expenditures and added to the earnings of 1903 the $1,780,235.89 of expenditures which were incurred in the last 3 months of 1902. Making this adjustment, the net earnings for the 12 calendar months of 1903 would be $2,577,058.81. The foregoing comparison of earn- ings is made on the basis of the depreciation and reserves made by the International Harvester Co. The Bureau has made some modi- 208 EEPOET ON THE INTERNATIONAL HARVESTEE CO. fications in these figures, but their total eilect for the year 1903 would amount to an addition to earnings of only $11,174.99. The small profit of the International Harvester Co. in 1903, es- pecially in view of an inventory which in total amount showed a very large increase over 1902, is quite extraordinary, so that it is desirable that the facts should be examined in some detail, particularly the changes in inventory and the circumstances as to cost and selling ex- pens§, all of which necessarily had a large influence with respect to the amount of profit for that year. The value of the inventory in 1902, according to the appraisal, was $25,500,000, and according to the adjustment made for the trad- ing accounts of the company, was $18,000,000. The inventory at the end of 1903, as finally adjusted, was nearly $43,000,000. These ex- traordinary differences demand explanation. It should be remembered in the first place, therefore, that according to the Bureau's opinion, a fair valuation of the inventory in 1902 was approximately $21,- 000,000, which might possibly be a little low, but which is almost certainly not too high. This Bureau valuation contains a liberal allowance for deprecia- tion of finished machines carried over, namely, $1,500,000, or about 15 per cent on such inventory. The inventory of the Inter- national Harvester Co. for December 31, 1903, was, as stated above, $43,000,000. Eliminating from consideration items of intercompany profit, the original amount of this inventory as it stood on the oper- ating accounts of the company, was $47,000,000. A depreciation adjustment was made, however, of $2,000,000 on account of the sudden decline in the market prices of many of the raw materials of manufacture below the figures at which they were inventoried in the books of the company. This depreciation was chargeable against raw materials and work in progress. A further depreciation of $2,100,000 was made in the profit and loss accounts as a general de- preciation for finished machines. This depreciation was made on account of the very large quantity of finished machines then on hand, and is stated by the comptroller of the company to have been due to actual physical depreciation. This depreciation amounted to about 13 per cent on the finished machines in the inventories. The great increase in the amount of the inventory between October 1, 1902, and December 31, 1903, is explained by the company as follows : The inventories of October 1, 1902 and December 31, 1903, are not comparative owing to the differences in the inventory dates. The inventory at December 31, 1903, not only includes the works inventory at October 1, 1903, and the country inventory at the close of 1903 season, but also the material, purchases and manu- facture at Works between October 1, 1903, and December 31, PROFITS. 209 1903, on account of production for 1904 season. The inventory at December 31, 1903 also includes the Osborne inventory, the steel mill inventory, and Hamilton Works inventory, whereas the inventory of October 1, 1902, did not include any of these items. This accounts for $15,837,000 of the increase in the state- ment of Comparative Summary of Inventories, October 1, 1902, and December 31, 1903. The remainder of the 1903 inventory increase at Works and on the territory was occasioned by over- purchasing and overproduction in that season, and a large fall- ing off in the sales of that year both from the 1902 volume and the 1903 estimate. The $15,837,000 increase in the two inventories referred to above accounts for nearly all the difference taking the opening entry for inventory at $25,500,000, as given in the appraisal ; but, if instead of this the reduced valuation of inventory for " trading purposes," namely, $18,155,000, is taken, there is a very large gap unaccounted for. In the opinion of the Bureau this tends to confirm the view that the reduction of the inventory valuation to $18,155,000 in 1902 was unwarranted. While the Bureau is not in a position to determine satisfactorily the exactness or adequacy of this explanation, there is no doubt that the inventories in 1903 were much higher than in 1902. In the first place, an inventory taken at the end of the calendar year would naturally show a considerably larger amount than one taken on October 1, inasmuch as a large quantity of machinery is in the process of manufacture, while practically no shipments are being made. Sec- ondly, the output in the first 15 months of the International Harvester Co.'s business was undoubtedly very large and greatly in excess of the market demand. Finally, the International Harvester Co. had acquired, through the purchase of the Osborne, the Minnie, and the Aultman-Miller companies, large additions to its inventories. There seems to be no good ground for believing, therefore, that there was any overvaluation in the inventory of $43,000,000 on December 31, 1903. On the other hand, the heavy depreciation made at that time, while it may have been entirely warranted by market condi- tions and the actual physical depreciation of the finished machines, tended, of course, in so far as it may have been in any degree exces- sive, to reduce the profit in 1903, although it did, of course, in a corresponding degree, have the effect of increasing the profit in 1904. Some light is thrown on the low profits in the year 1903 by the relative costs of manufacture in that year. For this purpose a com- parison may be made between the fix'st two years of the company's operations, namely, 1903 and 1904, as reported by the company itself. The sales of the International Harvester Co. (exclusive of outside 210 EEPORT ON THE INTEENATIONAL HAEVBSTEK CO. goods), the works costs of such sales and the per cent of the latter to the former, were as follows: Year. Sales. Works cost. Per cent of coat to sales. 1903 $52,027,079.62 49,547,503.40 $33,237,858.60 30,257,.713.83 63.89 1904 61.07 From the above data it appears that the per cent of works cost in 1903 was nearly three points higher than in 1904. If the same per cent had prevailed in 1903 as in 1904 the profits of the International Harvester Co. on this account would have been apparently about $1,500,000 higher. The high cost of production in 1903 appears, therefore, to be another partial explanation of the low profits in that year. Of course if the Bureau's inventory valuation of $21,230,000 had been used, instead of the $18,155,000 used by the company, the ratio of cost to sales in 1903 would have been much higher. A similar situation is found with respect to the changes in selling expense. The following data show the relation of selling expense to sales (excluding steel products and fiber, but including outside goods) : Year. Sales. Selling expense. Per cent of .selling expense to sales. 1903 S.")2,035,929.10 49,717,019.73 $13,335,845.77 11,901,103.45 25.61 1904 23.94 The per cent of selling expense to sales was 2.J.61 in 1903, and 23.91 in 1904j or more than a point and a half higher in the former year. If the selling expense had been in the same ratio to sales in 1903 as in 1904, the selling expense would have been nearly $900,000 lower in 1903, and the profit of that year would have been increased to the same extent. In 1905 the ratio of selling expense was reduced to 20.41, and in 1907 to 18.50. It is quite plain, therefore, that the selling expense in 1903 was extraordinarily high, and had a considerable effect in diminishing profits. It may also be noted that the selling expense of the same companies for the three years prior to 1903 was in each year considerably lower than in 1903, and ranged fr®m 23.14 to 23.34 per cent. One reason, apparently, for this high selling expense was that, as Cyrus H. McCormick expressed it in an interview with former officials of the Bureau, " the selling agents went to sleep." A similar lack of energy probably explains in part the advance in manufactur- ing costs noted above. PROFITS. 211 Section 3. Earnings as reported by the International Harvester Co. Before presenting the results of the Bureau's analysis of the finan- cial operations of the International Harvester Co., it is important that the principal results as shown by the accounts of the company should be stated. As the details of many parts of its financial state- ments will be considered particularly in connection with the re- visiohs made by the Bureau, it is necessary in this place to show only the broadest results, such as the net earnings from operations and summary statements of assets and liabilities. Eaknings. — In the preceding section certain criticisms have al- ready been made of the statements of earnings of the International Harvester Co. for the year 1903. It is not necessary to repeat them here. The purpose of the present discussion is simply to show in a compact general statement the results as shown by the company's own books. The following table shows the reported net earnings of the Inter- national Harvester Co. for the years 1903 to 1911, inclusive, the div- idends paid, the additions to surplus, and the aggregate amount of capital stock and surplus at the end of each fiscal year ; also, the rate of net earnings to capital stock and surplus, and the rate of dividends on the capital stock for each year : Table 40.— NET EARNINGS, DIVIDENDS, ADDITIONS TO SURPLUS, AND CAPITAL STOCK AND SURPLUS OF THE INTERNATIONAL HARVESTER CO., AS REPORTED BY THE COMPANY, AND RATE OF NET EARNINGS ON CAPITAL STOCK AND SURPLUS, AND RATE OF DIVIDENDS ON CAPITAL STOCK, 1903-1911. Year. Net earnings. Dividends. Additions to surplus. Capital slock and surplus. Rate of net earnings on capital stock and surplus at beginning of year. Kate of dividend on capital stock. 1902 $120,000,000.00 122,041,180.61 122,899,716.29 125,578,902.65 128,125,849.97 132,006,307.48 136,691,989.61 147,384,729.82 n66,069,549.01 1903 $6,641,180.61 5,658,534.68 7,479,187.36 7,346,947.32 8,080,457.51 8,886,682.13 14,892,740.21 16,084,819.19 15,621,397.89 $3,600,000.00 4,800,000.00 4,800,000.00 4,800,000.00 4,200,000.00 4,200,000.00 4,200,000.00 2 27,400,000.00 8,200,000.00 $2,041,180.61 858,634.68 2,679,187.36 2,646,947.32 3,880,457.61 4,685,682.13 10,692,740.21 ' 11, SIB, 180.81 7,321,397.89 14.70 4.64 6.08 5.86 6.31 6.73 10.89 10.91 9.95 1904 4 GO 1905 1906 4 00 1907 1908 1909 3 50 1910 1911 5 86 Total 89, 690, 946. 90 9,964,649.66 66,200,000.00 7,366,665.56 23,390,946.90 Average. . . 132,310,913.83 7.62 5 91 1 Computed on capital stock, $120,000,000, Oct. 1, 1902. 2 Includes stock dividend of $20,000,000 from surplus. 8 Decrease due to stock dividend from surplus. < Includes $20,000,000 capital stock dividend from surplus. » Rate based on cash dividend and also stock dividend of $20,000,000. 212 REPORT ON THE INTERNATIONAL HARVESTER CO. According to the financial statements of the company, therefore, the net earnings ranged from $5,641,180.61 in 1903, to $16,084,819.19 in 1910. The earnings for 1911 were slightly below the maximum earnings in 1910. With the exception of 1906 and 1911, the earnings as stated by the company showed an increase in each year. The most marked change was in 1909, when the earnings increased from $8,885,682.13 to $14,892,740.21. The extraordinary increase in this year is partlj' explained by a great increase in sales of new lines and an increase in the foreign trade, and also partly by an increase in prices. The comparatively low earnings in 1903 and 1904 are chiefly explained, undoubtedly, by the very imperfect organization of the combination during that period. This lack of effective internal or- ganization had a marked influence on earnings until the end of the year 1906. The rate of these net earnings to the capital stock and surplus of the company, according to its own financial statements, ranged from 4.64 per cent in 1904 to 10.91 per cent in 1910. The rate in 1903 was a trifle higher than in 1904, according to the company's own finan- cial statements, while in 1911 it was about 1 per cent lower than in 1910. Although the earnings showed an almost uninterrupted in- crease from year to year, this tendency was not quite so fully realized in the changes in the rate of net earnings, on account of the fact that a considerable part of the net earnings was left in the surplus of the company and not divided among the stockholders. The average rate of net earnings to capital stock and surplus for the nine-year period shown in the foregoing table, was 7.52 per cent, according to the financial statements of the company. This com- paratively moderate rate of return was due especially to the low average rate in the first four years of the company's operations. For the last three years, namely, 1909 to 1911, inclusive, the average rate of return on capital stock and surplus was 10.56 per cent. While the company's accounts did not show extraordinarily high earnings for the period under consideration, nevertheless its capital fctock and surplus, or net investment, showed a considerable increase. According to the company's own statements, it wrote off its original surplus of $7,076,229.65. The capital stock and surplus at the end of the year 1911 was $163,390,946.90. This increase of $43,390,946.90 was made entirely through the net earnings of this period. The balance of the net earnings, namely, $46,200,000, or a little OA^er one- half of the net earnings of the company, was paid out in cash divi- dends. The annual amounts of dividend (exclusive of stock divi- dend) ranged from $3,600,000 in 1903 to $8,200,000 in 1911, or from a rate of 3 per cent in 1903 to 5.86 per cent in 1911. Including the capital stock dividend of $20,000,000 in 1910, the average dividend PROFITS. 213 for the nine years was 5.91 per cent. Excluding the stock dividend, the average vras 4.13 per cent. Assets and liabilities, 1903 to 1911. — A general view of the re- sults of the financial operations of the International Harvester Co., according to its own statements, requires also a comparison, in a summary form at least, of its statements of assets and liabilities. Such a statement is desirable also in order to make more intelligible the discussion of the Bureau's method of revising the financial ac- counts of this company. The form of the International Harvester Co.'s balance sheet, as given in the annual report for 1911, is shown below. Table 41.— INTERNATIONAL HARVESTER CO. COMBINED BALANCE SHEET, DECEMBER 31, 1911. Property account: Keal estate and plant property, ore mines, coal and timber lands at December 31, 1910 $70, 936, 328. 05 Net capital additions during 1911 4, 590, 769. 16 75, 527, 097. 21 Expenditures for stripping and develop- ment at ore mines 1, 057, 903. 49 $76, 585, 000. 70 Deferred cbarges to operations 206, 888. 08 Fire insurance fund assets 1, 514, 312. 50 Current assets : Inventories — Finished products, raw materials, etc., at close of 1911 season 49, IBS, 601. 18 Subsequent material purchases and manufacture for 1912 season 20, 424, 179. 68 69, 592, 780. 86 Receivables — Farmers' and agents' notes .$52, 910, 943. 11 Accounts receivable 19, 977, 644. 65 72, 888, 587. 76 Deduct — Accumulated reserves for contingent losses 3, 137, 166. 22 69, 751, 421. 54 Cash 6, 074, 151. 86 145. 418. 354. 26 223, 724, 555. 54 214 EEPOET ON THE INTEKNATIONAL HAKVESTEE CO. LIABILITIES. Capital stock: Preferred $60, 000, 000. 00 Common 80, 000, 000. 00 $140, 000, 000. 00 Purchase money obligations 879,500.00 Current liabilities : Bills payable 30,918,341.68 Accounts payable — Current invoices, pay- rolls, accrued interest and taxes, etc $8, 334, 729. 84 Preferred stock divi- dend (payable March 1, 1912) 1,050,000.00 Common stock dividend (payable January 15, 1912) 1, 000, 000. 00 — 10, 384, 729. 84 41, 303, 071. 52 Reserves : Plant depreciation and extinguishment 9, 708, 607. 37 Special maintenance 1, 340, 810. 66 Collection expenses on receivables 1, 000, 000. 00 Fire insurance fund 2,061,399.82 Pension fund 1,027,719.27 Industrial accident fund 512, 500. 00 Contingent 2, 500, 000. 00 18, 151, 037. 12 Surplus 23, 390, 946. 90 223, 724, 555. 54 The table following shows in summary form the statement of assets and liabilities at the date of opening business and for the close of each fiscal year subsequent thereto from December 31, 1903, to Decem- ber 31, 1911, inclusive. PROFITS. 215 S3 So o ■* .H M o) r* lo ■* ?-i r- CO w a ^ ^ :i Ft ^ CO CO 1-1 C3 (0 °0 U3 O W Ol 0> °0 ^ :3f d" J5 "=" §" 8 Tt< N o ^- "* i-H 0> tH I> tj ia ^ Oi oi o S 85 lO 00 rH 10(0 CO r- 1-1 (^ oi r- O) lO iH s e g rH iH O) 00 ■* a .a I? ■3 00 00 CO lO »0 iH a ^ s jQ CO oi Oi R S ' cT CO (cT CO 0> OS lO s « 00 tH o> S8 § s i s 1 i S CD O i>^ o CO O) ig f O t^ Tjt CM O 00 OS CO O CO 00 t-^ CO i-T co" 00 oiO r-l I^ 01 lO lO »o O co" ^ CO CO OJ t- o t-" o" o" o" 0> 00 00 M T-j (N -*' CD CO to (M 00 I-< (N .-H lf3 (n" CO of r^ 59 th lo CO O "* O) (J> co" od" <»■ ■«*!" CO oi oo r- T-T c^" od" oi" Cl i-l CO i-l CO t- CTi CO 9 a N lO Oi O CO CD lO US TJH O Ol 0> liS CJ OS 11 (It •«! n .9 „ Pi (U .-IB .a p. o § 1 8 ^ W 0) W O a m ■a S £ o b ■43 3 216 BEPOKT ON THE INTEENATIONAL HAEVESTEE CO. S % S 3 8 s a s s a t- ■^ CO ? a s s 3 •-H e>4 S 3 cf to 8 8 S S i OS 00 3* t- iH 00 00 OJ M »0 CO C>f CO 8 g 5 S Q lO i-H 8 3 3 8 S 3 <-H t- t^ O O o P4 p > .a ^ S " I ^; I w I Z 3 & M o — in 1^ W >4 m o CO Q a; o S to" e s S3 ■W^ 00 9 S" S S !3 7i SS S S S to m s s 9 S f: g? s s s g S R 55 E3 53 ^ 1 g ess •n lO (N §11 to (» S t- S s s s fS §1 --« sT o.- w- D) O CO i-H S S3 3 s a g 3 oT q" t-^ o' rn" Tf oT 00 O 00 to ^ CO m PROFITS. 237 s ^§ S « i3 S » S3 8 s^ s:; S3 i 1 1 i CO - § ! p <» oi 1 §3 i i fc" 3" «=" ? S s oo" < S 1 1 s i a B'i" 1 s~ s s~ 00- ih" »-r cf " S 3 8 8 S 3 « S3 8 S S g a S5 s i i S S i S 1 i s i 1 E! ^- i sT *^ :a" t- rH 00 00 at n S" = 1 f i i s's" 00- •-T ^-T (n" " s 1 a~ 1 1 (N I 8 8 S S 3 53 g 5 S 8 3 S 1 S 1 1 O uj i-I oi to c i 1-i ci i ^ cS d S s S s 3 < I s s J i s 1 s 1 n •> 1 S s s' i iH t- t^ i § 1 f S 3 » i> to i SilS 1 S i-T CO oT i>r i-T " * 1 ss 1 1 rH 8 g g 8 to S 8 S S W CO I o3 1 O O i-J CO O -^ iH • ic c a ^ q^ O lO CO S t- lO S ft g s s : s ;2; 1 g 1 8 l§"f i 1 § 1 1 i 3 S 1 § a C4 lO CO *o eq~ -* 1 o 1 .-H 1 CO 1 1 : g S g ft g 8 ?3 . S a 3 a : 3 £3 . to CO g 8 8 S 00 O o o 1 oi 01 1 s 1 cq i of o r- CO S i'tl ffi" 8" s" S~ ^ »o C4 o t* i -*■ tc '*' w" " «- s S 8 « a OC s S3 8 fe S S CO lO o 1 i g ^ od" -^ oo" iO r- »o o CO ^ W C- lO Oi o (N u3 lo i-H '^ 2 o go CO o> OS a> '=i ofi §8 00 CO ^ CO s £" g § 5 e" O t-. 1-4 o CO t~ G o> 00 00 .-H (N !>• S ^ g5 s 00 03 CO •C CO o tH CO 1 ^ O OT t* JO CO ■* ■* O (M uf IN s a 8 5 S 53 ^ g s e ^ o !>: ,-H o 8 (O gg 00 00 S CD S r- § (n" sf • >> : : i 238 EEPOBT ON THE INTEENATIONAL HAEVESTEB CO. As stated above, the net result of the Bureau's revision of assets and liabilities is to show a surplus of $13,028,443.23 at the end of 1911, instead of a surplus of $23,390,946.90, as shown by the company's accounts. The difference is the net result of the Bureau's reduction of the assets on the one hand and its reduction of the reserves on the other. The Bureau has added nothing for subsequent appreciation, which doubtless would be necessary if a fair appraisal were made at the present time. Rate of profit. — For the purpose of computing the profits on the investment of the company the net assets are taken. The net assets for each year are computed by taking the gross assets and deducting therefrom all liabilities except capital stock and surplus. The rate of profit of the company is computed by comparing the net earnings, as computed by the Bureau, for each year with the net assets at the beginning of the same year, which is the method used by the company. The net assets and net earnings, as computed by the Bureau, and the per cent of profit on such net assets, are shown in the following table : TABLE 62.— RATE OF NET EARNINGS OF THE INTERNATIONAL HARVESTER CO. ON NET ASSETS, EXCLUSIVE OF GOOD WILL, AS COMPUTED BY THE BUREAU, BY YEARS, 1903-1911. Year ending Deo. 31— Net assets, ex- clusive of good wiU. Net earnings. Profit on assets at begin- ning of year. Year ending Dec. 31— Net assets, ex- clusive of good wiU. Net earnings. Profit on assets at begin- ning of year. 1902 > $109,117,356.08 106,314,179.00 107,196,624.97 109,907,909.12 112,514,856.99 116,642,672.83 122,622,298.85 Per cent. 1909 1910 1911 $134,781,142.61 144,589,739.95 $16,468,843.76 17,208,597.34 16,638,703.28 Per cent. 13.43 1903 1904 1796,822.92 6,682,445.97 7,611,284.15 7,406,946.87 8,227,716.84 10,179,726.02 20.73 6.34 7.01 6.74 7.31 a73 12.77 11.61 1905 1906 Total.. 90,111,087.15 10,012,343.02 1907 1908 Average. 118,165,186.60 8.47 1 Oct. 1. ' This covers 16 months, but no change has been made for this period nor for the average of all the years on that account. This is in harmony with the company's method of treatment. For an explanation of the exceptionally low earnings of 1903, see pp. 207-210. From the foregoing computation of the Bureau it appears that the average net earnings on the net investment of the company for the nine years and three months ended December 31, 1911, was 8.5 per cent. The rate of earnings for 1903 (really 15 months) was less than 1 per cent, and only in this year does the Bureau's percentage differ very markedly from that of the company ; the reasons for this differ- ence have been already fully explained, and relate chiefly to the different method of handling the 1902 inventory. Leaving this excep- tional period out of consideration the rate of earnings ranged from 5.3 per cent in 1904 to 13.4 per cent in 1909. The average rate of PKOFITS, 239 earnings for the last three years, namely, 1909 to 1911, inclusive, was 12.5 per cent. It will be noted that the rate of profit for 1911 was 11.5 per cent as against a maximum of 13.4 per cent in 1909. Final figures for 1912 have not yet been determined, but so far as indicated point to about the same amount as in 1911. In the foregoing computations of profit the net assets of the com- pany as revised by the Bureau have been used without any allowance for good will. In view of the difficulty of establishing a fair valu- ation for the good will, which might change from year to year, and furthermore in view of the fact that the company makes no entry for good will on its books, any attempt to compute a rate of earnings which would include this would be more or less problematical. Had any considerable allowance been made in the net assets for good will, the rate of profit would necessarily have been lower. Hence, while the profits of the International Harvester Co. on the average for the earlier period of its operations were not excessive, the profits for the three-year period, 1909 to 1911, inclusive, have been distinctly high. In judging of the reasonableness of this rate of profit it is proper to consider the fact that the risk of the company's business is comparatively small, owing to its world-wide character, which to a large degree is an insurance against the effects of local disturbances of business prosperity. It is also important to bear in mind the fact that the business rests in part on a monopolistic basis, which not only tends to reduce the element of risk, but also makes it desirable from a public standpoint that the rate of profit should not be higher than a reasonable return to the capital invested. Section 10. Proits and prices in particular lines. The best test of the general price policy of a company which has such a large part of the total business in its field as that possessed by the International Harvester Co. is found in its profits. If the aver- age profits are unduly high, the prices in general may be presumed to be excessive, and vice versa. Where, however, the business relates to a great many different kinds of commodities, as in the case of the International Harvester Co., general conclusions of this sort based on average profits may not be valid for particular branches of the business. Prices may be very high in some lines, and very low in others, so that the general average profit does not show the real con- ditions with respect to the prices of the particular kinds of machines. Hence, it is important to consider the chief kinds of machines sepa- rately. The best test as to whether the prices are high or low, dis- regarding temporary aberrations, is also found in the determination of the profits obtained for such particular lines. If, for example, it is found that the profits made on grain harvesting machines are unduly high, then it can be safely assumed that the prices of such 240 EEPOET ON THE INTEENATIONAL HAEVESTEK 00. machines are excessive, or if the profits made on twine are abnor- mally low, it may be concluded that the prices of twine are unduly depressed.^ A noteworthy feature of the business of the International Har- vester Co. is that the rate of profit, whether on sales or on investment, for the highly monopolistic lines— that is, for grain, grass, and com harvesting machines — is very much higher than the corresponding rates for several of the important new lines, such as wagons and spreaders, where the company encounters a greater degree of compe- tition. In recent years its twine business also has on the average returned a low rate of profit. On wagons, in which the company's percentage of the business is comparatively small, the rate of return is admittedly much less than on the monopolistic lines. Even in manure spreaders, where the company apparently does about half the busi- ness of the United States, the profits are comparatively low. This is probably due to the aggressive sales policy which the company has followed in its wagon and manure spreader business. One explana- tion of the low rate of profit on twine is the competition of State prison factories in some of the Northwestern States, notably Minne- sota ; the abnormal condition of the fiber market in 1909 also affected the twine profits in 1910. Prices in relation to cost of production. — ^The marked difference between the profit realized by the company on its monopolistic lines and on other lines is suggested by the following table, which shows for different machines the cost of production at the factory in 1910 and 1911 and the average net price received by the company, after deducting discounts, but not freight and duty. Table 63— COMPARISON OP FACTORY COSTS ' AND AVERAGE NET PRICES FOR SPECI- FIED MACHINES AND TWINE FOR THE TOTAL BUSINESS OF THE INTERNA- TIONAL HARVESTER CO. IN 1910 AND 1911. Item. 1910 Factory cost. Average net price." Factory cost. Average net price.' Grain binders, S-foot, Moot, 7-foot < Reapers Mowers Rakes... i Com binders Manure spreaders Wagons, 2-liorse Twine, per pound 166.09 33. OS 19.90 10.91 48.17 63.84 46.09 .067 S110.46 67.43 39.12 19.93 101.02 90.09 69.68 .077 t56.54 32.89 21.32 11.54 47.22 65.91 48.17 .063 $111.52 68.63 40.03 20.24 101.82 88.09 61.21 .069 1 As noted below, temporary aberrations occurred in the fiber market in 1909. 2 A large part oJ the indicated difference between factory cost and average net price consists of selling expense, freights, and other expenses. ' Deducting discounts, but not freight and duty. < The company reduced the domestic price of binders J5 in 1912 and gave as Its reason for doing so the decreased cost of materials. PROFITS. 241 It should be remembered in connection with the above table that besides the large selling expense proper the company incurs more or less expense in the collection of its bills and accounts receivable, and that there are general expenses connected with the business of manu- facturing that are not included in the above costs. It follows that no estimate of the net profits per machine can be based on this table. The table is of interest, however, as it shows that the above-mentioned selling and general expenses, together with the profit of the manufac- turer, are greater than the cost of producing the machines in the case of corn binders and reapers, substantially equal to the cost of grain binders, and not much less for mowers and rakes. In marked con- trast to the large gross margin on the above machines is the difference between the cost of manufacturing wagons and the average price received for them. As will be noted from the table, the cost of pro- ducing a wagon is more than 75 per cent of the price received by the company. In the case of twine, selling expenses are relatively much smaller, and the average margin is naturally lower. In 1910 the cost of manufacture of twine was 87 per cent of the selling price and in 1911 it was 77 per cent. The conditions in 1910, however, were exceptional. The prices and costs shown above are for the entire business of the company in the lines covered. A table contrasting prices received in the United States and in foreign countries will be found on page 244. The higher prices shown by that table for the foreign sales of the company do not indicate correspondingly higher net profits on sales, for in this business there are heavy additional expenses incurred in the cost of producing and packing the goods, and in higher freights and in duties, while the selling expenses are often higher. Net earnings on sales. — Although the fact has been emphasized above that the large gross margin between cost of production and price received by the company should not be taken as a measure of the net earnings of the company, it is nevertheless true that on the monopolistic lines, such as the grain, grass, and com machines, the net earnings of the company on proceeds of sales, as will be shown pres- ently, are much higher than on spreaders and wagons, in which the stress of competition seems to be most severe. This is probably in part because the large-scale manufacturer enjoys no such advantage over small manufacturers in the production of wagons as in the manufacture of complicated machines, such as the grain binder, and probably also in part because there are a number of manufac- turers of wagons located in different sections of the country, who enjoy advantages in regard to freight in their localities, both on raw mate- rials and finished product. A more important fact is that the Inter- national Harvester Co. has carried on an aggressive competitive cam- paign in the wagon business, which has resulted in increasing its pro- 242 EEPOKT ON THE INTEENATIONAL HAEVESTEK CO. portion of the entire wagon business of the country from about 4 per cent in 1905 to about 15 per cent in 1911. The proportion of net earnings to net proceeds of sales for different lines of the company's business in the United States, As computed by the company, is shown in the following table : Table 54.— PERCENTAGES OF NET EAENINQS TO NET PROCEEDS OF THE INTER NATIONAL HARVESTER CO. ON SALES IN THE UNITED STATES, BY SPECIFIED LINES, 1910 AND 1911. Item. Net proceeds. 1911 Per cent of net earnings to net proceeds. 1910 1911 Grain machines Grass madiines Com machines Tillage implements Seeding machines Engines and motors ' Manure spreaders and wagons Cream separators Miscellaneous machines, attachments, and repairs Twine .' »10,992,306.84 9,992,897.49 3,395,798.69 1,927,169.71 29,003.41 6,545,746.33 7,074,715.59 1,023,431.09 6,715,433.78 7,616,630.28 111,166, 8,611, 4,922, 2,014, 204, 7, 766, 6,894, 767, 5,674, 7,260, 696. 18 026. 73 782.88 516.75 938.89 797. 98 761.62 876. 06 767.67 799.22 22.01 18.25 26.62 23.87 12.76 22.09 12.27 27.34 37.40 21.84 19.54 15.06 22.53 17.17 4.15 13.09 7.18 22.54 20.20 12.53 1 Motors include motor vehicles and tractors. ' The rate on twine for 1910 was exceptionally low, due to unusual circumstances. According to the company's own statement its profit on grain machines in the United States in the years 1910 and 1911 averaged over 20 per cent on net proceeds of sales. In marked contrast to this, the profit on farm wagons and manure spreaders in this country were slightly less than 10 per cent on the net proceeds of sales, and that on twine but little above 7 per cent. In the year 1910 the profit shown for the twine business of the company in the United States was less than 2 per cent. This return was, however, exceptionally low. In the preceding year the company had made large purchases of fiber in Yucatan. The high prices of 1909 were not maintained, however, and as a result the company had to meet competition in 1910 based on lower costs of fiber, and even at the end of that year was obliged to write off $250,000 from the cost value of fiber on hand. The rate of profit on wagons is admittedly much lower than on manure spreaders, with which they are combined in the above table. This is, of course, suggested by the narrow margin for wagons be- tween cost of manufacture and price shown on page 240. Eetuen on INVESTMENT. — The following table, presenting figures furnished by the company itself, shows domestic trading profits compared with investment in the United States. The results shown depend on more or less arbitrary allocations of selling expense ; a dif- PROFITS. 243 ferent distribution would modify the results here shown. The figures given below indicate only in a very broad way the actual relation to each other of the rate of net earnings in the different lines. Table 55.— INTERNATIONAL HARVESTER CO.'S PERCENTAGE OF DOMESTIC TRADING PROFIT TO INVESTMENT IN THE UNITED STATES, BY SPECIFIED LINES, 1910 AND 1911, BASED ON COMPANY'S STATEMENTS. Item. Investment. 1910 1911 Per cent of proflt. 1910 1911 Aver- Grain machines. .. , Grass machines Com machines Tillage implements Seeding machines Engines and motors ' Manure spreaders and wagons Cream separators Miscellaneous machines, attachments and re- pairs Twine $15,692,137.47 16,693,134.98 3,603,590.17 3,418,611.72 56, 838. 19 9,678,848.50 11,591,256.43 1,401,361.30 10,407,356.65 10,169,695.57 $16,277, 13,917, 6,674, 2,962, 329, 10,029, 10,933, 1,235, 10,774, 9,092, 273. 99 028.51 034.00 387.21 599.34 131.56 570.30 340.86 488.02 874.59 15.4 11.6 25.1 13.5 6.6 14.9 7.5 20.0 20.6 n.4 13.8 14.4 10.6 19.6 12.6 3.2 12.6 5.7 17.1 15.4 5.4 1 Motors include motor vehicles and tractors. * The rate of profit in this year was exceptionally low, due to unusual circumstances. The foregoing statement is based on the company's figures for net assets and net earnings, which give a lower average rate of profit than the revised statement of net assets and net earnings as computed by the Bureau. Consequently, the rates of profit on particular lines are lower than would result by using the Bureau's figures. The above table may be accepted as showing that even on the basis of the company's own statements the rate of return on investment in the monopolistic lines is at least from two to three times as great as on some lines in which it meets active competition. In com binders, in which business there is little effective competition, the rate shown by the table is over three times as great as on manure spreaders and wagons. In this connection it should be noted that as shown by the company's own statement the rate of return on the investment in manure spreaders and wagons fell to less than 4 per cent in 1911. The high rate of return shown on the engine and motor business is probably due in part to the novelty of these machines. However, the rate of return on investn- ' nt in the engine and motor business in the United States fell from 15 per cent in 1910 to 10 per cent in 1911. This decline in the rate was apparently due to an aggressive sales policy on the part of the International Harvester Co. However, a declin- ing rate of profit was characteristic of the business on all lines except twine. The International Harvester Co. lowered its domestic price on 244 BEPOBT ON THE INTERNATIONAL HABVBSTBE CO. binders by $5 in the season of 1912, giving as its reason the decreased cost of materials. The above figures would indicate that competitive conditions, as well as decreased cost of materials, may have influenced the company in this reduction of price. Section 11. Frices and profits in export trade. Prices in UNiTEaj States and in foreign countries. — Comparing the foreign business of the International Harvester Co. with the do- mestic business, there are comparatively few exceptions, apparently, to the statement that the prices to the retail dealer or to the farmer are higher abroad than in the domestic market. The difference be- tween domestic and foreign prices is due largely to the fact that the business in foreign markets must bear a large expense for freight and generally for duty, while the selling expenses likewise are often high. A comparison of domestic and foreign prices for certain harvesting machines is given below. It should be noted, however, that a much larger part of the foreign business than of the domestic is done with jobbers. This tends to lower the foreign price as compared with the domestic. Of course, the figures take no account of any differences between prices of machines to the farmer in the United States and in foreign countries due to variations in the expenses or in the profits of the retail dealer. Table 56.— AVERAGE NET PRICES OF SPECIFIED LINES OP THE INTERNATIONAL HARVESTER CO. IN THE UNITED STATES AND IN FOREIGN COUNTRIES, EXCLUD- ING CANADA, IN 1910.1 Item. Domestic. Foreign. Grain binders, 6-foot, 6-foot, 7-foot.. Reapers Mowers Rakes Twine $102.64 53.83 37.11 18.17 .074 $125.27 68.28 41.09 21.71 .083 > Frices in Canada also are iiiglier ttian in tlie United States. The average proceeds of sales given above include all sales of machines to dealers and jobbers (less discounts). In the United States the business done with jobbers is very small as compared with that in foreign countries. It should also be remembered, as just stated, that the prices for machines sold in foreign countries include heavy freight and duty charges, amounting, according to an average of these expenses on the monopolistic lines for 1910 and 1911j to over five times as much in proportion to sales as the freight paid on correspond- ing lines in the United States. From the figures in the above table, it can be easily seen that the farmer in the United States enjoys a marked advantage over the farmers in foreign countries generally, even if the retailer's mar^n PBOFITS. 245 were very much lower abroad, on an average, than in the United States. The foreign price shown by the table on grain binders is about 22 per cent greater than the domestic; on reapers, about 27 per cent ; on mowers, about 11 per cent ; on rakes, about 20 per cent ; and on twine, about 12 per cent. While the above table indicates that in general the advantage to the farmer in the United States is very considerable, it is not to be inferred from this that so great a contrast would be found in all cases if comparisons were made with particular countries. In some countries the International Harvester Co. meets very aggressive com- petition, and because of that competition it is compelled to lower its prices considerably. The areas of low prices are comparatively un- important and have little effect on the average price. Because of frequent reports that the International Harvester Co. has sold its machines at much lower prices abroad than in the United States, emphasis should be placed upon the fact that the Bureau's agents made an extensive investigation in Europe and found no note- worthy instances of what is usually termed " dvmaping " with respect to the International Harvester Co. In some instances sales below actual cost were found. These were apparently due, however, to pecu- liar conditions, such as the accumulation of stock that had dete- riorated in value because of exposure or other circumstances, or to other conditions justifying the reductions made. In some cases it has been found that the International Harvester Co. realized a lower (net at factory) average price for some of its principal machines in par- ticular foreign countries in certain years, as compared with the United States, but such prices were apparently due to aggressive competition, or to abnormally high selling expenses. Profit on sales in the export trade. — The International Har- vester Co. has claimed, however, that its percentage of profit on net proceeds of sales is greater in foreign countries than in the United States. Copies of the annual reports of its branch offices in different countries show that this statement is not correct for important machines in particular countries. Moreover, its own statement of profits by lines furnished to the Bureau shows that the ratio of profit to sales was less in 1911 on grass machines for the entire for- eign trade, excluding Canada, than for the domestic trade. There were several other, though less important, instances. The difficulty of determining without careful investigation the reasonableness of the company's allocation of selling expense makes comparison of net profits by lines impracticable without extended study. It does not appear probable that differences in allocation of selling expenses or miscellaneous earnings between the different countries would seriously affect these figures given by the company itself. The statement of the proportion of trading profit to net sale proceeds 246 EEPOBT ON THE INTEENATIONAL HAEVESTBB CO. given in the table below for the entire business in the United States and in foreign countries is probably reasonably accurate. Table 57.— COMPAHISON OF INTERNATIOlSfAL HARVESTER CO.'S DOMESTIC NET SALE PROCEEDS AND TRADING PROFIT IN THE UNITED STATES AND IN FOR- EIGN COUNTRIES FOR THE YEARS 1910 AND 1911, ACCORDING TO THE COMPANY'S STATEMENT. Net sale pro- ceeds.' Trading profit. Amount. Per cent of sales. United States: 1910 $55,225,924.03 65,611,343.98 30,510,365.46 37,298,906.99 $10,359,975.78 8,589,578.33 6,705,969. 77 7,960,018.23 18.8 1911 16.5 Foreign (InoIurtiTiB Canada): 1910 .... 22.0 1911 , 21.3 ' Excluding freight and duty. It will be seen from the above table that the rate of profit on total sales, according to the company's own statements, is somewhat larger abroad than in the United States. In 1910 the rate shown for foreign countries was 22 per cent, and that for the United States only 18.8 per cent. In 1911 the contrast was more striking, as the rate for foreign countries was 21.3 per cent, while that for the United States fell to 15.5 per cent. It should be noted in this connection that the company has invested large sums in the erection and purchase of factories, both in Europe and Canada, within the last few years, and that up to the present time these investments have earned little, if any, net return. In addi- tion to this it has been found necessary in the undeveloped sections of some countries, such as Siberia and Canada, in which the company now does a large amount of business, to extend much longer and larger credits than are now needed in the United States. The relation of trading profit to proceeds of sales is therefore no index to the rates of profit on total investment in the domestic and in the foreign business of the company. Section 12. Movement of prices, 1903 to 1911. As pointed out in section 10, the best test of the reasonableness of prices is found generally in the relation of profits to investment, because a high rate of profit is in general an indication of high prices relatively to cost of production. It does not hold true, how- ever, that a statement of the course of profits is any. certain indica- tion of the trend of prices. Profits are, of course, influenced by various factors, such as changes in cost of production and selling PROFITS. 247 expense depending largely on quantity of production, prices of pur- chased materials, wages, volume of sales, changes in the value of in- ventories, etc. For instance, in 1908, when prices were generally ad- vanced, particularly on the harvesting-machine lines, there was only a moderate increase in the rate of profit, namely, from 7.31 per cent in 1907 to 8.73 per cent in 1908. However, in 1909, with no further conspicuous change in prices, there was a very marked increase in profits, namely, to 13.43 per cent. Nevertheless, the price policy of the International Harvester Co. was a factor of great importance, and the higher prices charged for harvesting machines in the years 1908 to 1911, inclusive, contributed very largely to bring about the higher profits of those years as compared with earlier years. For the purpose of indicating in some measure the character of the company's price policy, a brief discussion of the movement of prices for certain important classes of machines is therefore given. This discussion is limited to the course of prices in the United States, because these are of especial interest. Owing to the numerous kinds of machines sold by the Inter- national Harvester Co., and especially to the variety in the sizes, etc., of particular kinds of machines, it is difficult to present con- cisely a complete and satisfactory view of its price policy. For some of its machines the International Harvester Co. furnished statements to the Bureau of the average annual prices for particular sizes, while for others it gave the average for all sizes. Obviously, if there were great variations in the proportions of different sizes sold from year to year, such annual averages would not be strictly comparable. Where, however, the different sizes which are grouped together do not vary much in price, such a grouping does not seri- ously affect the comparability of the average annual prices if only the broader changes of price policy are under examination and the exact differences from year to year are not sought. The following table shows the average net proceeds (i. e. the average prices realized by the company after deduction of concessions or allowances made from the regular prices, but without deduction of freight) in the United States for most of the chief classes of machines sold by the International Harvester Co. from 1903 to 1911 : * * Figures for 1912 not available. 248 BEPOBT ON THE INTERNATIONAL HARVESTEE CO. Table 58.— AVERAGE NET PRICES IN THE UNITED STATES OF THE INTERNA. TIONAL HARVESTER CO. FOR SPECIFIED KINDS OF FARM MACHINERY, ETC., BY years; 1903-1911. [Deducting discounts but not freight.] Machines, etc. 1906 1908 1909 1910 1911 Grain binders, 6, 6, and 7 foot Grain binders, 8-foot Mowers "• Raises ' Tedders' , Com binders Disk harrows ' Wagons, two-horse ' Manure spreaders ' Cream separators ' Binder twine, per pound ' . I $98. 42 'J97.73 1J97.67 36.11 17.30 29.65 96.29 34.63 17.67 29.12 94.25 34.68 17.18 28.67 94.33 19.92 $95.79 109.49 34.48 17.11 28.72 93.19 19.71 .1081 .1040 98.74 70.02 .0972 98.04 64.37 .1006 S96.34 1115.63 34.69 17.05 28.22 94.89 19.91 65.73 96.22 58.98 .0962 2 $102. 65 •122.70 «37.21 18.11 30.96 100.02 20.87 68.08 97.39 61.60 .0822 $102. 49 122.50 37.10 18.18 30.00 99.65 20.18 58.66 95.79 51.35 .0748 $102. 64 122. 98 37.11 18.17 29.74 100.19 20.25 68.97 89.01 44.87 .0743 $102.39 123.74 37.06 18.20 29.77 101. 28 20.20 58.16 86.29 44.51 .0647 ' Includes a number of 8-foot binders. 2 Prices of 5, 6 and 7 foot binders advanced $7.60. ' Prices of 8-foot binders advanced $5. * Prices of 8-foot binders advanced $10. * All sizes. * Prices of mowers generally advanced $2.60. ' All kinds. The unusually large variations in the price of twine were chiefly due to changes In the price of fiber. The above average prices are, as already stated, the net proceeds in the domestic market after deduction of any concessions or allowances made from the regular prices, which accounts in part for minor variations between one year and another. Another cause of varia- tion as above indicated is found in the different proportions of machines of various sizes which differ more or less in price. There are also some general differences in prices according to the region of sale. For example, prices of binders in the Eastern States include freight, and in the Western States do not. Hence, variations in the proportions sold in different regions affect the average. Where marked variations in average prices occur, however, the prin- cipal reason is found in changes in the prices themselves. In the case of harvesting machines, for which list prices are established and generally maintained over wide regions of the country, the changes have been made in the form of definite advances. In the case of some of the new lines for which regular wholesale list prices are not made, and, consequently, not printed, but written in the contract, the changes shown are largely the result of a very irregular policy of price reduction, which is not uniform either for localities or for particular purchasers in the same locality. Allowing for the various factors of uncertainty already pointed out, Table 68 nevertheless clearly indicates on its face a striking PBOFITS. 249 difference in price policy between the old and highly monopolized lines and some of the newer lines in which the company encounters much more active competition. Thus, these average prices show that there has been a general and rather substantial advance in prices of harvesting machines, taking the period 1903-1911 as a whole. On the other hand, in the new lines in which the company admittedly encounters more active competition, these average proceeds do not indicate a uniform price policy. For two of these lines, namely, disk harrows and two-horse wagons, advances were made in 1908 which were similar in relative amount to those for harvesting machines (although for harrows prices declined again after 1908), while for two other new lines, namely, manure spreaders and cream separators, there were marked declines. Prices of binder twine likewise show a substantial reduction, due chiefly, however, to changes in the prices of fiber. In this branch of the business, it will be recalled, the company meets extensive competition, not only from ordinary com- petitors, but also from some State penitentiaries, which have a con- siderable output. Before conclusions are drawn from these average net proceeds, various circumstances affecting the price movements, particularly the relations of price to cost, should be considered. Taking 5, 6, and 7 foot grain binders, it will be noted that the average net proceeds declined from $98.42 iu 1903, to $95.79 in 1906.^ In 1908, however, there was a decided advance, namely, to $102.65 from $96.34 in the previous year. From 1908 to 1911, inclusive, the average annual net proceeds of these binders remained practically constant, varying only $0.26. This increase in binder prices in 1908 was characteristic of harvesting machines in general. In this connection may be noted the following statement of the International Harvester Co. in its answer to the Government biU in equity in the suit now being tried : They deny that the defendants have advanced the prices of harvesting implements in interstate commerce to the injury of the farmer or of the general public. On the contrary they aver that the prices of harvesting machinery have increased but slightly, although the International Harvester Company has greatly improved their quality, durability, and efficiency, and the materials and labor entering into their manufacture have increased in cost on the average fully twenty-five per cent. ; that no increase was made in the prices of the harvesting machines manufactured by the International Harvester Company until 1908, and then the increase in such prices was only seven per cent. ; and for 1912 the prices were reduced five per cent. ^ It may be noted that the prices for 1903, 1904, and 1905 are not comparable, as they Include an Indefinite but comparatively small number of 8-foot grain binders ; if these were eliminated, the average net proceeds. It is estimated, would be about $95 instead of $97.67 in 1905, and somewhat lower also In 1903 and 1904. 77854°— 13 ^18 250 KEPOET OlfT THE INTEBNATIONAL HABVBSTEB CO. It is important to note that, according to the company's figures of the average cost of 5, 6, and 1 foot binders produced in the United States, the margins between these costs and domestic prices were considerably greater after the advance in prices than before. Thus, for the five years 1903 to 1907, inclusive, the average margin between price and cost was less than $40.55, and for the four years 1908 to 1911, inclusive, the average margin was $46.52, giving an increase in the average margin of $5.97, or more. This figure, however, really understates the increase in the margin, for several reasons : First, in the figure of cost, export machines can not be separated, and these constituted a larger proportion of the sales in the later years as compared with the earlier years, with a corresponding enhancement of the average cost in the later years. If they could be excluded the margin in these later years would be higher. Second, because the average prices in 1903, 1904, and 1905 include some 8-foot grain binders, which, if they could be excluded, would result in lower average prices for those years, and consequently lower margins also in the earlier period. Third, because there was a change in the company's policy in 1908 and subsequent years in regard to selling attachments with binders. Thus, prior to 1908 transports were gen- erally included with the binders without extra charge, while in 1908 and subsequent years additional payment was usually required. This resulted in an increase in the average price of binders and trans- ports taken together of probably more than $1.50 per machine. Similarly, there appear to have been in 1908 and thereafter fewer tongue trucks included gratis with the binders than in previous years. If account were taken of these facts, the average margin would be higher in the latter period. Furthermore, in judging of the increase in margin shown above, it should be considered that this was in spite of the fact that the International Harvester Co.'s average domestic selling expense for machines was considerably higher for the period 1903 to 1907, inclu- sive, than for the period 1908 to 1911, inclusive, the ratios of selling expense to sales being 29.5 per cent and 20.7 per cent, respectively. Comparatively few 8-foot grain binders were made before 1905. The average prices from 1906 to 1911 only are shown in the above table. For these machines a general advance of $5 was made in 1907 from a nominal contract price generally fixed at $115, and of $10 additional in 1908. The average net proceeds shown in the above table, which are affected by the deductions for price concessions, etc., show an average price of $109.49 in 1906, an advance to $115.63 in 1907, and a further advance to $122.70 in 1908. From 1908 to 1911, inclusive, the average net proceeds made a further gradual advance of $1.04. PBOFITS. 251 Next to binders, mowers are the most important kind of machines sold by the company. From 1903 to 1907, inclusive, the average annual net proceeds ranged from $34.48 in 1906 to $35.11 in 1903, giving a maximum difference of only $0.63. In 1908 there -was an advance in the list price of most mowers of $2.50. A corresponding advance is found in the average annual net proceeds, which increased from $34.69 in 1907 to $37.21 in 1908. From 1908 to 1911, inclusive, the net proceeds of mowers showed an extreme variation of only $0.15. This advance in prices resulted in a corresponding increase in the margin between costs and prices, namely, from a margin of $14.17 in the five-year period 1903 to 1907 to a margin of $17.24 in the four- year period 1908 to 1911. In this connection, also, should be consid- ered the fact that there was a marked decline in the average selling expense for machines in the more recent period. The situation as to rakes was practically the same as for mowers. From 1903 to 1907 the average annual net proceeds ranged from $17.05 in 1907, to $17.67 in 1904, and from 1908 to 1911 they showed a range from $18.11 in the former year to $18.20 in the latter. The increase in the margin between costs and prices was quite as marked for rakes as for mowers, namely, from $5.58 for the five-year period 1903 to 1907 to $7.13 for the four-year period 1908 to 1911.^ Further- more, as already noted, there was a decrease in selling expense in the latter period. The price movement for tedders was similar to that for mowers and rakes, the average net proceeds advancing in 1908, and being higher in that year and the succeeding years than for previous years. For corn binders the list prices have been the same as for 6-foot grain binders, and the movement of average annual net proceeds has been very similar to that for the 5, 6, and 7 foot grain binders. From 1903 to 1907 they ranged from $93.19 in 1906 to $96.29 in 1903 ; from 1908 to 1911 they ranged from $99.65 in 1909 to $101.28 in 1911. The margin between costs and prices increased from $42.51 in the five- year period 1903 to 1907 to $52.89 in the four-year period 1908 to 1911. The selling expense was lower in the latter period, as repeat- edly stated. When the new lines are considered, however, different and more variable tendencies appear. Data for disk harrows are not available prior to 1905. In 1908 there was an advance in the price of $1.12 over the average price for the three preceding years, but the average price in the three years after 1908 was only $0.36 higher than for the three years preceding it. There are a good many sizes of disk harrows, and it is possible that more detailed data as to the proceeds for specific sizes would show 1 Compare statement on p. 250, as to cost of export machines. 252 BBPOET ON THE INTEKNATIONAL HABVESTEE 00. wider variations. Data are not available to make satisfactory com- parisons of the margins betvreen the prices and costs of disk harrows. Average net proceeds for two-horse wagons are not available prior to 1907; in that year the average price was $55.73, while in 1908 it advanced to $58.08. From 1908 to 1911 the maximum variation was only $0.89. In this case again, owing to the numerous sizes and speci- fications of two-horse wagons, it is quite possible that if the average net proceeds for particular kinds of two-horse wagons were available, the results of such a comparison might be somewhat different. The data available are insufficient to make a satisfactory comparison of the margins between costs and prices, but the indications are that the margin increased at first and then declined in 1911. For manure spreaders the average annual net proceeds are avail- able from 1905 on. The table shows an almost continuous decrease in the average net proceeds from year to year; they ranged from $98.74 in 1905 to $86.29 in 1911. There are several sizes of spreaders sold by the International Harvester Co., but most of them are of sizes which do not differ greatly in price. Actual reductions in the price of the same kind of spreader have been undoubtedly the chief factor in the decline in net proceeds which is shown above. In spite of the decline in prices the margin between prices and costs has in- creased on the whole in recent years. Thus for the three-year period 1905 to 1907 the average margin was only $30.86, while for the four- year period 1908 to 1911 the average margin was $36.48. The low margins in the earlier years were apparently due in part to the fact that the International Harvester Co. was developing a new line of machines and had high costs. However, it is noteworthy that in 1911 the margin dropped from $35.21 to $31.25, chiefly on account of price reductions. A much more marked decline is shown in the average net proceeds of cream separators, which ranged from $70.02 in 1905, the first year for which data are available, to $44.51 in 1911. Several sizes of cream separators are made, and the very marked decline in average pro- ceeds is probably only partly due to decreases in the prices of the same types of cream separators. Excluding the first year, in which the average cost was greater than the average price, as abnormal, a com- parison of the years 1906 and 1907 with subsequent years shows, nevertheless, a slight increase in the margin in spite of very large reductions in the average price, namely, from $21.65 for 1906 and 1907 to $23.15 for the four years 1908 to 1911. The most marked decrease in average net proceeds shown in the fore- going table is for binder twine, the average being $0.1081 per pound in 1903 and only $0.0647 per pound in 1911. The net proceeds of twine shown in the table are for all kinds of binder twine, but they cor- PB0PIT8. 253 respond yery closely to the movement of prices for particular kinds, as appears from the following statement of the prices of various sorts as reported by the company. TABLE 59.— AVERAGE WHOLESALE PEICES OF BINDER TWINE, IN CENTS PEE POUND, AS REPORTED BY THE INfTERNATIONAL HARVESTER CO.. BY YEARS, 1902-1911. Year. Sisal. standard sisal. Standard manlla. Manila. Pare manila. 1902 11 101 lOi 10 10 9J n 6} • 11 lOi lOi 10 10 91 8i Vi Vi 6i 12} 11} Hi 11 11 13J 12 12} 12 12 12} Hi 8J 8} n 15 1903 13 1904 13} 1905 13i 1906 13 1907 14 1908 13 1909 10 1910 9 1911 H The grades which are used in the largest quantities are sisal and standard sisal, and the prices for these naturally coincide very closely with the average net proceeds for all kinds of twine which are given above. As repeatedly stated, the marked reductions in the prices of twine were chiefly due to changes in the prices of fiber. However, the margin between the cost of twine (which includes changes in fiber cost) and the net proceeds was higher in the five-year period 1903 to 1907 than in the four-year period 1908 to 1911 ; these margins were 1.30 cents and 1.10 cents, respectively. Moreover, there was an increase in the rate of selling expense for twine in the domestic market in the latter period, namely, from 2.5 per cent for the five- year period 1903 to 1907 to 3.4 per cent for the four-year period 1908 to 1911. Another method of showing the changes in prices from year to year is to take the wholesale price for specific sizes of particular kinds of machines as shown in the contracts with the dealers. "A representative figure for the prices of certain machines can be ob- tained in this way for certain harvesting machines — for example, binders, mowers, and corn binders. These machines are sold to the dealers on the basis of printed contracts which show the wholesale prices. These contracts are uniform for large sections of the country, and the prices shown on the contract are only occasionally changed in any considerable degree by special concessions. In respect to these machines, the method of quoting prices differs markedly from the method of quoting the prices of rakes and the various new lines which are classed as " sales " goods and not generally sold under a commission contract. 254 EEPOBT ON THE INTEBNATIOSTAL HAKVESTEE CO. The following table shows the general contract wholesale prices for specified grain binders, mowers, and corn binders in the chief grain States of the West from 1903 to 1911 : Table 3.— CONTRACT LIST PRICES, F. O. B., CHICAGO, FOR TWO FALL PAYMENTS OP SPECIFIED DEERING HARVESTING MACHINES, BY YEARS, 1903-1911. Machine. 1903 1904 1905 1906 1908 1910 1911 Grain binder: 6-Ioot 7-foot 8-foot Mower: 5-foot regular. 5-foot vertical. 6-foot Corn binder $100.00 103.00 115. 00 36.00 37.00 39.00 100. 00 JIOO.OO 103.00 115.00 36.00 37.00 39.00 100.00 JIOO.OO 103.00 116.00 36.00 37.00 39.00 100.00 $100.00 103.00 lis. 00 36.00 37.00 39.00 100.00 $100.00 103.00 120.00 36.00 37.00 39.00 100.00 $107.50 110.50 130.00 38.50 39.50 42.00 107.60 $107.50 110.60 130.00 38.50 39.50 42.00 107. 50 $107.50 110.50 130.00 38. SO 39.50 42.00 107.60 $107.60 110.50 130.00 38.50 39.50 42.00 107.50 An inspection of the foregoing table shows that for 6 and 7 foot grain binders the only change in the regular contract prices was in 1908, when they were advanced $7.60. This advance does not take any account, of course, of the fact that the company also began to require payment, generally, for attachments which previously were usually thrown in gratis (see p. 250). The 8-foot grain binders, on the other hand, were advanced $5 in 1907 and $10 additional in 1908, giving a total advance during this period of $15. The changes in the prices of mowers were parallel to those for 6 and 7 foot grain binders, only one advance being made, namely, $2.50 for the 5-foot mowers and $3 for the 6-foot mowers. The list price of corn binders was the same as that of 6-foot grain binders in each year, advancing $7.50 in 1908. The contract prices of harvesting machines shown above, while given specifically for Deering brands, were also applicable to the McCormick brands of harvesting machines of the corresponding kinds and sizes. Table 60 therefore brings out very clearly the policy of the com- pany with respect to these highly monopolized harvesting-machine lines for the period covered. In the case of every one of the machines listed, it will be seen, there was an advance in the contract list price, and in most cases a substantial advance. In this connection it should be repeated that the International Harvester Co. made a general reduction in the prices of harvesting machines in 1912. This reduc- tion, it should be noted, was made subsequent to preparations by the Government for filing a bill against the company in case a voluntary dissolution was not agreed upon. This price reduction amounted to PBOPiTS. 255 $5 for grain binders and to proportional amounts for certain other harvesting machines. The reason given by the company for this reduction was that the cost of production had decreased. It is not practicable to show the changes in the list prices of the new lines of the International Harvester Co. in the same manner. This is due to the fact, already noted, that the contracts are not made on the basis of printed list prices, but, instead, the prices are entered in the blanks provided for the purpose, and the prices so entered vary considerably, not only in different localities, but also for different dealers in the same general locality. While this discussion of prices is by no means complete, it is ob- vious that it tends to sustain the point repeatedly made in this report, namely, that the International Harvester Co. has taken advantage of its monopolistic position in harvesting-machine lines to increase both prices and margins, whereas in several lines where it meets keen competition the company has reduced prices, although in some cases this l^s not involved a reduction in the margin between cost and price. CHAPTER VI, PEODXrCTIVE EFFICIENCY AND FINANCIAI EESOTTRCES. Section 1. Introductory. Among the chief sources of power of the International Harvester Co. are its productive efficiency and large financial resources. Its productive efficiency is found especially in its low manufac- turing costs, which are chiefly due to its large volume of output. This advantage of large-scale production is most conspicuous with respect to the two largest plants which were doing business on a scale equally large prior to the original combination. Its large financial resources and great volume of business •nable it to maintain an elaborate selling organization and to grant un- usually long terms of credit. This advantage was derived to a large extent from the original act of combination which brought to- gether the business of nearly all the large harvesting-machine con- cerns, together with their financial resources. Furthermore, by uniting with them other powerful financial interests the combination was enabled to expand its operations over a very large part of the implement industry. Section 2. Cost of production. One of the chief elements of efficiency in manufacturing industries is found in the cost of production, and it is one which is, in many cases at least, most easily measured. Where goods of a simple and uniform character are involved, and where the business is prac- tically confined to production alone as distinguished from production and distribution, cost is generally the principal test of efficiency. On the other hand, quality may be equally or even more signifi- cant than cost, and unquestionably this is a very important factor in the farm-machinery industry. Where distribution, as well as manufacturing, is conducted by the producer, efficiency often de- pends as much on selling as on manufacturing. Efficiency in selling, however, is much more difficult to measure than efficiency in pro- duction, and a successful selling organization may have a relatively high cost per unit, yet be justified commercially by the fact that it procures a large volume of business which in turn may make pos- sible a low manufacturing cost. In the case of a monopolistic business, it may be one of the chief instruments of maintaining con- trol of the trade. 256 EFFIOIENOT AND EESOUEOES. 257 Importance of volume of business. — The economy of large-scale production of farm machinery, and particularly the production of the more elaborate machines, such as binders, has already been re- ferred to. After the International Harvester Co. was formed there was no increase in productive efficiency for harvesting machines on account of volume of output alone, because the largest plants of the combination, the McCormick and Deering factories, continued to operate on a no larger scale than before. As com- pared with the independent concerns, however, both of these plants were greatly superior in volume of output. Thus, for the McCor- mick plant the production of binders from 1903 to 1911 ranged from 29,643 in 1904 to 71,070 in 1911, and for mowers from 81,807 in 1904 to 131,411 in 1908. Similarly for the Deering plant, the pro- duction of binders ranged from 32,701 in 1904 to 62,884 in 1911, and for mowers from 70,430 in 1906 to 106,438 in 1908. None of the independent concerns approached these figures of output. In the production of binders^ for example, the largest output of any inde- pendent concern in any year from 1903 to 1911 was less than 12 per cent of the output of the McCormick plant for the same year, and similarly for mowers the largest output of any independent con- cern in any year from 1903 to 1911 was less than 16 per cent of the smallest output of the McCormick plant. This factor of volume of output, other things being equal, has an important influence on the cost of production. A good illustration of the influence of this factor is found in an estimate made by the International Harvester Co. in 1908 with respect to the advantage of transferring a part of its production of harvesting machines from the McCormick plant in Chicago to the Hamilton plant of its Canadian subsidiary (International Harvester Co. of Canada). According to this statement the transfer of the manufacture of the requirements of the trade with France in binders and mowers (namely, 5,150 and 20,800, respectively) from Chicago to Hamilton would increase the cost at the Hamilton plant for these products from about $1,113,000 to about $2,130,000, or about 90 per cent, based on previous average costs, but it was estimated that the increased volume of production thereby attained would reduce the total Hamilton factory cost by about $148,000, or by 6.9 per cent. The Hamilton plant in 1907 produced, among other machines, 10,656 binders and 13,828 mowers. If such an increase in output for a comparatively small plant is sufficient to reduce costs by 6.9 per cent, it is probable that if the output were multiplied several times a much larger reduction in cost might be expected. The advantage of the International Harvester Co. in the cost of production of harvesting machines, as stated above, was an advan- 258 BEPOBT OK THE INTEEKATIONAL HABVESTBE CO. tage which, so far as scale of operations alone is concerned, came with the acquisition of certain large plants, particularly the McCor- mick and Deering plants, and which was not created by the combi- nation itself. The volume of production of binders and mowers at the McCOrmick plant since it was acquired by the International Har- vester Co. has never equaled, in fact, the greatest volume of produc- tion in the years before the merger. While the costs of production at this plant before the merger were also generally lower than since that time, it is not proper to make a comparison between them, be- cause the costs of raw materials and labor have both increased con- siderably, and very large increases in this respect occurred just about the time of the merger; moreover, the methods of keeping costs in these two periods were not the same. When the International Harvester Co. went into the production of new lines a few years after its organization, its large financial re- sources enabled it to develop them on a considerable scale, and con- sequently, in such cases also it was able to reap considerable advan- tage from large volume of output. Nevertheless, it has not obtained in any of these new lines such a large proportion of the business as in the harvesting machine lines. Probably its greatest relative strength is in manure spreaders, in which its output at the maximum was several times larger than the maximum of its largest competitor. In disk harrows also it obtained a much larger output than any single competitor. In farm wagons only one of its competitors ap- proaches it in volume of output, although when it entered this busi- ness in 1905 there was one concern with a production more than three times as great. In comparing the costs of production of the International Har- vester Co. with those of independents, therefore, this fact of the greater volume of output of the International Harvester Co. should be kept in mind, as it is imdoubtedly one of its chief advantages. Cost or grain binders. — The most important machines manufac- tured by the International Harvester Co. are the grain machines, including grain binders, reapers, headers, etc. Of these, the grain binder is by far the most important in number, although in cost it comes between the header and the reaper. The grain binder, there- fore, demands particular consideration. Grain binders are made in several sizes, distinguished by the length of the cutter bar, namely, 5, 6, 7, and 8 foot machines. The chief element in the cost of a binder is the material used, the other important items being labor and factory " burden " ex- pense. The Bureau did not go into the details of these costs for recent years, the conditions being substantially similar, but the fol- lowing figures for one of the larger plants for 1907 for specific sizes and types of binder will show the chief elements of cost and the EEFICtENOY AND EESOUEOES. 259 characteristic differences for some of the different kinds and sizes of binders made at this plant : Table 61.— COMPARISON OF COSTS OF BINDERS AT ONE OF THE LARGER PLANTS OF THE INTERNATIONAL HARVESTER CO. IN 1907, SHOWING CHIEF ELEMENTS OF COST FOR SPECIFIED FOREIGN AND DOMESTIC MACHINES.i Number. Cost. Machines. Material. Labor. Burden. Experi- mental. Total. DomestioN. L. H. 0. E.:s Harvester, less carrier — 5-foot. 417 8,520 7,424 8,321 1,764 922 182 200 138.06 38.95 40.47 45.40 42.92 43.82 45.34 50.26 S9.87 9.98 10.31 11.42 11.85 11.96 12.30 13,41 $5.77 5.84 6.04 6.68 6.94 7.00 7.20 7.85 JO. 04 .05 .05 .06 .06 .06 ,05 ,06 t53, 74 6-foot 54,82 7-foot. 56,87 8-foot 63,66 Foreign N. L. H. O.E.:! Harvester, less carrier— 8-foot 61,77 6-foot.... 62,84 7-foot 64,89 8-foot 71,58 1 These factory costs do not include general and miscellaneous expenses, nor a very large item of selling expense, ' New left-hand, open elevator. An examination of the foregoing table shows that for these binders (which are typical of binder costs at that plant as a whole) the ma- terials in all cases form about 70 per cent of the total cost, labor about 19 per cent, factory burden 11 per cent. The amount of experi- mental expense chargeable to each machine was trifling. The total costs of the 5, 6, and 7 foot binders show a maximum difference of $3.13 for the domestic machines, and $3.12 for the for- eign machines. The 8-foot machines, however, cost $6.69 more than the 7-foot both for the domestic and the foreign. Comparing domestic and foreign machines, the cost of the former was invariably lower; the difference was about $8 in 1907. This is chiefly due to differences in cost of packing the machines for shipment. The International Harvester Co. in its statements of average costs often combines the 5, 6, and 7 foot binders in one group, and gives the cost of the 8-foot size sepa^^ately. This is because the first two types generally sell for the same price in a given market, while the 7-foot size is only a little higher. The 8-foot size, on the other hand, sells for a considerably higher price, but a part of this difference in price is due to the fact that tongue trucks are included in the price of the 8-foot machine. Coming now to the general average costs, the figures for the Inter- national Harvester Co. may be compared by plants, which show 260 BEPOBT ON a?HE INTEENATIONAL HAEVESTEE CO. decided differences therein. These are shown in the following table distinguishing the 8-foot binders from the other three sizes, the plants being designated by letters : Table -AVERAGE FACTORY COST i OF GRAIN BD4DERS AT DIFFERENT PLANTS OF THE INTERNATIONAL HARVESTER CO. IN 1911. Plant. 5, 6, and 7 foot binders. Moot binders. A . .. J56.12 53.48 74.58 65.51 59.53 180.41 B 67.29 C 82.77 D 7L44 E 87.52 1 These factory costs do not include general and miscellaneous expenses, nor a very large Item of selling expense. Some of the differences in cost are due to differences in the con- struction of the machines and the manner in which they are packed for shipment, but the main reason is found in the efficiency of the different plants resulting largely from the differences in volume of output. The Hamilton plant, for example, produces only McCor- mick and Deering models, but its costs per machine are higher than those of the McCormick and Deering plants on account of its smaller output. The plant which has by far the highest costs is also the one with the smallest volume of production. Taking all the sizes of binders together, the factory costs at the domestic plants showed the following averages for the years 1910 and 1911 combined: Table 63.— AVERAGE FACTORY COSTi OF ALL GRAIN BINDERS AT DIFFERENT DOMESTIC PLANTS OF THE INTERNATIONAL HARVESTER CO. FOR THE YEARS 1910 AND 1911 COMBINED. Plant. Average cost. Plant. Average cost. A t56.30 64.11 73.78 D . . B C 66.32 ' These factory costs do not include general and soiscellaneous expenses, nor a very large item of selling expense. The average costs for all binders show about the same relation for the different plants as the average cost for either the 5, 6, and 7 foot or the 8-foot machines. The smaller sizes greatly preponderate, how- ever, and practically control the relations of average cost. The binder business of the independent plants of the United States is substantially of the same character as that of the International BFPIOIBH-OY AlID EESOTJBOES. 261 Harvester Co., although they make a smaller proportion on the aver- age of the 8-foot machines. For the purposes of a rough compari- son of cost, therefore, it is sufficient to take the average cost of aU binders for the International Harvester Co. and the independent companies. There are also differences, of course, in the construction of the machines, which affect the costs of production, but the grain binders of the same size, whether for the International Harvester Co. or for the independents, ordinarily sell for about the same price in the same market in the United States and are substantially similar machines. The Bureau obtained from all the important independent binder makers statements as to their factory costs in 1910 and 1911. In this connection it obtained also the amoimt of general and miscellaneous expense other than selling expense. On account of differences in methods of making up factory cost and in allocating parts of gen- eral expense to factory cost, it probably gives a fairer comparison of cost to group all items of general and miscellaneous expense with factory cost in making comparison between different companies. For this purpose such general and miscellaneous expenses may be prorated over total factory cost. In this connection it should be noted that the International Har- vester Co., in making up its costs by machines, charges all the mate- rials furnished by its subsidiary companies; for example, foundry iron and steel bars from the Wisconsin Steel Co., at the prevailing market prices, so that in this respect its costs stand on the same basis as the costs of independent companies. The relation of this feature of the International Harvester Co.'s business to efficiency will be con- sidered later. (See p. 267.) A comparison of the average costs of binders for both the Inter- national Harvester Co. and the independent binder manufacturers reporting for the two years 1910 and 1911 combined is shown in the following table: Table 64.— COMPARISON OF THE AVERAGE COSTS i OP BINDERS FOR THE INTERNATIONAL HARVESTER CO. AND FOR THE INDEPENDENT MANUFAC- TURERS REPORTING, FOR THE YEARS 1910 AND 1911 COMBINED. [This table is intended to attord simply a broad and not a precise measure of differences in cost.] Item. Interna- tional Har- vester Co.2 Independ- ents. Factory cost General and miscellaaeous expense. . Total J56. 32 2.25 J70.83 6.35 58.57 76.18 ^ These costs do not Include a very large item of selling expense. ■ Includes domestic plants only. 262 EEPOBT ON THE INTBBNATIONAL HAEVBSTBK CO. The average factory cost of binders for the International Har- vester Co. was $56.32, as compared with $70.83 for the independents. In only two cases out of four was the factory cost of an independ- ent distinctly below the highest factory cost of the International Harvester Co., and in one case it was decidedly above it. In each case the output of the independent plants was decidedly smaller than the smallest output of any International Harvester Co. plant, except one. This fact largely explains their higher costs. Prorating the general and miscellaneous expense over total factory costs, the costs of the independent plants are relatively increased, the amount per binder being more than twice as high for the independents as for the International Harvester Co. This may be partly due, as already intimated, to differences in the methods of cost keeping, but undoubt- edly is also due in part to the small average output of the independ- ent plants. Taking the sum of the factory costs and the general and miscel- laneous expense, the average cost of the International Harvester Co. was $58.57, and that of the independents, $76.18. While this differ- ence appears very large, it is not any greater than the difference be- tween the costs of International Harvester Co. plants themselves. The real significance of this" difference in the average cost of binders for the International Harvester Co. and for the independents can not be properly appreciated without also taking into considera- tion the question of selling expense. This subject will be discussed in more detail later; it is sufficient here to call attention to the fact that the percentage of selling expense of the International Harvester Co. for its harvesting machines is considerably higher than that of the independents. Consequently, although these binders are sold at substantially the same prices, the differences in profit per machine can not be computed from the foregoing differences in cost, although the margin of profit of the independents is on the average much lower than that of the International Harvester Co. The foregoing comparison of cost of binders, although it is based on data which are probably not strictly comparable in points of detail, is regarded by the Bureau as sufficiently accurate, at least, to establish the general relations of cost. In other words, the average costs, if computed on exactly the same scheme of cost accounting, might increase or decrease the differences shown in the above table by an appreciable amount per binder ; nevertheless the general result would be substantially the same. It is certain, therefore, that the International Harvester Co. enjoys a very marked advantage with respect to the cost of prodTiction of binders, and considering the great importance of this machine in the farm-machinery trade this undoubtedly constitutes one of the chief sources of its power. BFFIOIENOY AND EBSOXJECBS. 263 Costs or mowers and bakes. — The costs of grass-harvesting ma- chines are best illustrated by the costs of mowers and rakes, the mowers being especially important. It is not necessary to discuss these costs in such detail as for binders. While there are different sizes of mowers and rakes, the variations in cost are less important for the chief classes of these machines than for binders. It will be sufficient, therefore, to show, in the first place, the difference in total factory cost for all sizes of mowers and rakes for the various domes- tic plants of the International Harvester Co.; these data are shown in the following table: Table 65.— AVERAGE FACTORY COST > OF ALL MOWERS AND RAKES AT DIF- FERENT DOMESTIC PLANTS OF THE INTERNATIONAL HARVESTER CO., FOE THE YEARS 1910 AND 1911 COMBINED. Plant. Mowers. Rakes. Plant. Mowers. Rakes. A $18.78 19.96 27.35 $10.42 10.65 12.87 D.. $24.09 $11.44 Average c. . , 20. 09 10.84 ^ These factory costs do not include general and miscellaneous expenses, nor large item of selling expense. As in the case of binders, some of the differences in cost of mowers and rakes at different plants, shown in the above table, are due to variations in the construction of the machines and the manner in which they are packed for shipment, as well as to variations in the relative number of the different sizes. The principal cause of these differences in cost, however, is found in the differences in volume of production. The business of the independent plants here under consideration in respect to mowers and rakes is, on the whole, substantially similar to that of the International Harvester Co. Certain of them produce a comparatively large number of one-horse mowers, which tends to make their average cost somewhat lower than it would otherwise be, iind there are other differences of a similar character. While the total business of these independent companies in mowers and rakes is, therefore, not exactly of the same character as that of the Inter- national Harvester Co., the differences are not sufficiently important to invalidate drawing broad conclusions from the figures shown. The Bureau obtained data as to the costs of mowers and rakes in 1910 and 1911 from a greater number of companies than for binders, because there are more independent manufacturers of importance in these two lines. These manufacturers included all the independent binder manufacturers, and also one other important group, namely, certain large full-line concerns which made mowers and rakes, but 264 REPORT ON THE INTERNATIONAL HARVESTER CO. not binders. The comparison of these costs with those of the Inter- national Harvester Co. is shown in the following table : Table 66.— COMPARISON OF THE AVERAGE COSTS ■ OF MOWERS AND RAKES FOR THE INTERNATIONAL HARVESTER CO. AND THE INDEPENDENT MANUFACTURERS REPORTING, FOR THE YEARS 1910 AND 1911 COMBINED. [Tills table is intended to afEord simply a broad and not a precise measure of differences in cost.] Mowers. Raises. Item. Interna- tional Har- vester Co.2 Independ- ents. Interna- tional Har- vester Co.> Independ- ents. 120.09 .80 $23.27 1.71 J10.84 .43 S12. 47 OATi^rfil ftTifi piisppIlanpoHiS oxp^nsp .90 Total 20.89 24.98 11.27 13.37 I These costs do not include a very large item of selling expense. * * Includes domestic plants only. The average factory cost of mowers for the International Har- vester Co. was $20.09, as compared with $23.27 for the independ- ents. The factory cost for each of the independents, however, was lower than the cost of the International Harvester Co. at the plant that had the highest cost, while all but two of them had lower factory costs than the next highest plant cost of the Inter- national Harvester Co. Some of the independents had larger out- puts than the smallest output of the International Harvester Co. plants, but most of them had smaller outputs. None of the inde- pendents, however, had such low costs as the costs of the International Harvester Co. at its McCormick and Deering plants, and tJieir production in every case was very small in comparison. The average factory costs of rakes for the International Harvester Co. was $10.84. as compared with $12.47 for the independents. All of the independents except two had lower costs for rakes than the highest plant cost of the International Harvester Co., and for two of them the costs were about the same as at the International Harvester Co. plant having the second highest cost. In only one case, however, did an independent plant have a larger output than the International Harvester Co. plant having the smallest output, and none of them equaled in output the next smallest rake plant of the International Harvester Co, The lowest factory cost of the inde- pendent rake plants was much nearer the lowest factory cost of the International Harvester Co. than for either binders or mowers. In rakes, apparently, the advantage of the International Harvester Co. in production is much less than for binders and less also than for mowers. EFFICIENCY AND KESOUECES. 265 Prorating general and miscellaneous expense over total factory costs, the relative costs of the International Harvester Co. and the independents remain practically unchanged, although the independ- ents had on the average a higher proportionate expense on this account. The reasons for this difference, as stated in connection with the discussion of the costs of binders, is probably chiefly due to volume of output. Taking the sum of the factory costs and general and miscellaneous expense, the average cost of the International Harvester Co. for mowers was $20.89, as compared with $24.98 for the independents, while for rakes these costs were $11.27 and $13.37, respectively. For mowers, these differences were not so great, however, as the differences between the different plants of the International Harvester Co., while for rakes they were nearly the same. In order properly to appreciate the significance of these differences in cost, it is necessary to consider the selling expense also (see p. 275) , which averages higher for the International Harvester Co. than for most of the independent mower and rake producers. While the mar- giri of profit for the International Harvester Co. is higher than for the independents, it is not as much higher as the figures of cost might appear to indicate. Finally, as was stated in connection with the comparison of binder costs, the Bureau does not present the cost figures reported by the International Harvester Co. and the independent companies, shown above, with the idea that they are absolutely comparable from a cost- keeping standpoint, inasmuch as different companies naturally have somewhat different methods of keeping their costs. On the other hand, from a broad point of view, and for all the purposes which are essential in this connection, these comparisons are regarded as show- ing the significant relation of cost, namely, that the International Harvester Co. has a distinct advantage in cost over the independent companies on an average. Cost or other machines — New lines. — The chief new lines in the manufacture of which the International Harvester Co. is engaged are harrows, manure spreaders, farm wagons, gasoline engines, trac- tors, and cream separators. Certain comparisons of its cost with those of independents are made below for disk harrows, manure spreaders, and two-horse farm wagons, considerable cost data having been secured by the Bureau from independent manufacturers of these machines. In these new lines the domestic production of the International Harvester Co. is generally confined to one or two plants. The par- ticular independent companies whose costs of production in these lines are compared with the International Harvester Co. were of 77854°— 13 19 266 BEPOET ON THE INTERNATIONAL HABVESTEE CO. two distinct kinds, namely, certain large concerns, including some full-line companies, and certain small companies making only a few lines, and sometimes only one line. Manure spreaders. — These machines are made in several sizes, and while the prices of the same makes do not differ very greatly for the sizes most commonly sold, there are apparently considerable differ- ences in the construction and quality of the goods. The spreaders made by the independent companies reporting to the Bureau, how- ever, all appear to be machines of good quality and reputation in the trade. The average factory cost of the International Harvester Co. was $54. .31 for the two years 1910 and 1911 combined, or, adding the prorated general and miscellaneous expense, it was $56.54. The costs of the independent companies showed a wide variation, some being distinctly above those of the International Harvester Co., and others below it in an even greater degree. The average was a little higher than that of the International Har- vester Co., but the Bureau does not regard this figure as significant. In respect to manure spreaders, therefore, the Bureau does not at- tempt to make any conclusion with regard to the relative advantages in cost of manufacture. Disk harrows. — These implements are made, of course, in many sizes, and the differences in cost for different sizes are relatively large. Most of the harrows made, however, are of small or medium sizes, and for these different sizes the differences in cost are not so great. There are, however, considerable differences in the cost on account of construction and quality. While many implement com- panies keep their cost accounts in such a manner as to make compari- sons difficult, this appears to be especially true for the independent companies reporting to the Bureau the costs of disk harrows. The average factory cost of the International Harvester Co. was $13.02, or, prorating and adding general and miscellaneous expense, it was $13.54. The independent companies reporting the costs of all their disk harrows showed an average cost of $14.64, or, prorating and adding general and miscellaneous expense, $15.48. For most of these independent companies the factoi'y costs were A^ery nearly the same, and only one of them was lower than the International Har- vester Co. Certain other companies reported only the cost of the principal size sold, but these are not included in the comparison. While the International Harvester Co., therefore, in the case of disk harrows, appears to liave had some advantage in cost over independ- ent producers, the difference was not very great, and it is a question whether the data are sufficiently satisfactory to make a positive conclusion therefrom. EFFICIENCY AND EESOUECES. 267 Two-Jiorse wagons. — Considerable information was also obtained as to the costs of two-horse farm wagons of independent companies, but the data generally were not very satisfactory in form. Moreover, differences in construction and quality of two-horse wagons would necessitate a detailed investigation in order to make proper compari- sons. The average cost of the International Harvester Co. for two- horse wagons in 1910 and 1911 combined was $46.32, and prorating and adding general and miscellaneous expense, $48.17. The costs of the independent companies reporting were in some cases consider- ably higher than this, and in some cases a little lower. The average was a little higher, but it is not necessary to give the exact figure, as it is probably not comparable with that of the International Har- vester Co., for the reasons above stated. So far as cost of production is concerned, therefore, the data are insufficient to show whether the International Harvester Co. possesses an advantage or not. General position of the International Harvester Co. with RESPECT TO cost OF PRODUCTION. — As repeatedly stated, reliance should not be placed upon the exact differences in cost which have been shown above, because the factory costs have been taken in some cases in the form in which the companies kept them, and perfect uniformity in the basis does not, of course, exist. However, the Bureau took pains in connection with this matter to define what was meant by factory cost, and in some cases the statements of cost, as kept by the companies, were amended to make them comparable. In some of the cases the companies reporting made their statements in considerable detail, while in others again the agents of the Bureau went over the question with the companies' accountants in order that the data might be as accurate as practicable. Where the differences shown in the average cost of the International Harvester Co. and the independents are comparatively small no special importance should be attached to them, but where they are of a marked character they correspond to a real productive superi- ority on the part of the International Harvester Co. The striking advantage it has with respect to the cost of production of binders, taken in connection with the great importance of this machine in the farm-implement trade, is undoubtedly one of its chief elements of power. Importance of integration in cost of production of the Inter- national Harvester Co. — From the beginning an important fea- ture in the organization of the International Harvester Co. was the inclusion with the implement factories of jDroperty in various natural resources, such as ore, coal and timber, and also plants for the manu- facture of iron and steel. This linking together of the production of 268 BEPOET ON THE INTERNATIONAL HARVESTER CO. the chief raw materials of the implement industry (namely, iron, steel, and Imnber) with the manufacture of the implements them- selves is now commonly called " integration." The advantages of integration generally are twofold — first, by ex- panding the investment and scope of operations to produce materials directly instead of purchasing them and thus save the payment of profits to other producers ; second, by providing for the needs of the business directly, to insure more suitable quality and to make sure of getting the materials as needed. Such expansion of investment and productive activity normally calls for a corresponding increase in profit, and it does not necessarily follow that the savings made in pro- ducing the final product will compensate for the increased investment and business risk. This is apt to be the case, however, wherever the raw materials are likely to advance steadily in value on account of monopolistic concentration of ownership or through combinations among the producers to artificially advance the price. With respect to the sale of iron ore and steel products throughout the period here un- der consideration (1903 to 1911), the conditions in the United States were such that there were undoubtedly advantages in the possession of raw materials and in the direct manufacture of intermediate products. Even under these circumstances, however, it is important to con- sider whether the quantity of such material required is sufficiently large to justify investment on a scale which will make economical operations possible. The principal investment of this kind by the International Har- vester Co. was in ore and coal mines and in iron and steel works. These were placed under the control of "a subsidiary corporation, the Wisconsin Steel Co. (See p. 148.) In order to manufacture iron and steel economically, however, the Wisconsin Steel Co. has devel- oped a plant which has a much greater capacity than is needed for the requirements of the implement factories of the International Har- vester Co. Consequently, a large part of its product is sold. For the years 1910 and 1911 the proportion of its sales to outsiders was about 42 per cent and 33.4 per cent, respectively, of the total. Hence, the Wisconsin Steel Co. is something more than a link in a scheme of integration. On the other hand, technical conditions make it neces- sary for the International Harvester Co. to buy a part of its require- ment of steel bars. As already stated, the International Harvester Co. buys its iron and steel from the Wisconsin Steel Co. at market prices, and its fac- tory cost of production of machines is based on these market prices, which include an element of profit accruing to the organization as a whole. The amount of such intercompany profit for the two years 1910 and 1911 (the years for which the costs have been shown above), EFFICIENOT AND BESOUBCES. 269 and the total cost of production at the implement factories for the same periods, were as follows : Table 67.— RELATION OF INTEECOMPANY PEOFIT OF THE WISCONSIN STEEL CO. TO THE COST OF PEODUCTION OF FAEM MACHINEEY BY THE DSTTEENATIONAL HAEVESTEE CO. IN 1910 AND 1911. Item. 1910 1911 Total factory cost at implement plants (excluding twine) Total intercompany profit of Wisconsin Steel Co.' 539,948,031.61 ! 1,715,292.84 $49,363,041.05 1,649,525.35 Net factory cost at implement plants 38,232,738.67 47, 713, 515. 70 1 Deducting miscellaneous losses in proportion to cost of sales. 2 Not deducting proportion of intercompany interest of S366,930.18 attributable to Intercompany busi- ness. No interest was charged in 1911. From these data it appears that the net cost of implements, as a whole, would be appreciably lower than the factory cost if deduction were made of these intercompany profits, namely, 4.29 per cent lower in 1910 and 3.34 per cent in 1911. A part of the intercompany profit, howeTer, is a normal return on the additional capital invested in the iron and steel business. ^Vhether the International Harvester Co. has a great advantage over other producers of agricultural implements through this inte- gration with the iron and steel industry, should be tested on the basis of the profits on investment of the "Wisconsin Steel Co. According to the accounts of the Wisconsin Steel Co. the net assets at the end of 1910 amounted to $16,441,427.69, and at the end of 1911 to $16,659,511.42. According to the Bureau's revision, comprising changes in the valuations of these properties (chiefly in ore) at the time of acquisition, together with changes in the reserve for ore extinguishment, the net assets of the company (including in assets money loaned by the International Harvester Co.) were $9,497,719.13 at the end of 1910 and $9,877,383.48 at the end of 1911. The net earn- ings of the Wisconsin ,Steel Co., according to its own accounts (with- out deduction of interest on loans of about $11,000,000 from the Inter- national Harvester Co.), were $2,444,859.95 in 1910 and $2,218,083.73 in 1911 (in which year no interest was paid on these loans). Accord- ing to the Bureau's revision of the net earnings (which consisted in restoring excessive ore extinguishment to earnings), they were, for 1910, $2,601,638.14 (again including interest on the loans from the In- ternational Harvester Co.), and $2,379,664.34 for 1911 (in which year no interest was paid on the loans above referred to). The rates' of profit on the net investment at the end of the year were, for 1910 and 1911, 14.9 per cent and 13.3 per cent, respectively, according to 270 EEPOKT ON THE INa?EKNATIONAL HARVESTER CO. the company's accounts, and 27.4 per cent and 24.1 per cent, respec- tively, according to the Bureau's revision. These rates of profit shown by the Bureau were extraordinarily large, even for the iron and steel industry, and hence this feature of integration in the International Harvester Co. is a great element of strength. The integration of the International Harvester Co. with respect to the lumber industry may be considered in a similar way. The timber and sawmill properties of the International Harvester Co., as shown above (see p. 148), are vested in the Wisconsin Lumber Co., a subsidiary company. Like the Wisconsin Steel Co., this company sells a large part of its product to outside interests, while the material jt sells to the implement factories of the International Harvester Co. is transferred at market prices. It is not necessary to enter into a detailed discussion of this investment, however, because, as stated above, the principal test of any advantage from such a con- nection is found in the profit earned by the subsidiary company un- der such circumstances, and the Wisconsin Lumber Co. practically makes no profits. Thus, according to the company's own statements, it showed a loss in 1910 of $7,018.19 and in 1911 of $4,857.60. While this loss, in the opinion of the Bureau, would not exist if the com- pany did not charge an excessive extinguishment on timber cut (tak- ing, of course, the Bureau's estimate of the original valuation of the investment in the timber), yet, even in that case the profits which would result would be very small in amount and would furnish a very low rate of profit on the real investment. Hence, in respect to its connection with the Wisconsin Lumber Co., there is no evidence of any advantage to the International Harvester Co. Section 3. Selling organization and selling expense. A brief mention of the elaborate methods used in selling agricul- tural implements has been already made (p. 55), and a more detailed description of the selling organization of the International Har- vester Co. will be given in the following chapter. The purpose of the present discussion is not to describe this selling organization or its practices, but to point out the great expense involved in the dis- tribution of agricultural implements, the relations of such selling expense to cost and profit, and to make some comparisons in this respect with the selling expenses of its comjietitors. Selling Expense of the International Harvester Co. — For the total business of the International Harvester Co. in 1911 the table following gives the selling expense by items, distinguishing the domestic selling expense from the foreign (including Canada). EFFICIENCY AND EESOUKCES. 271 Table 68.- -DOMESTIC AND FOREIGN SELLING EXPENSES OF INTEENATIONAL HAR- VESTER CO. AND AFFILIATED COMPANIES FOR 1911 SEASON. Item. Domestic. Foreign. Total. General and assistant general agents and general and ant general managers' salaries and expenses Office salaries and expenses Warehouse salaries and expenses Blockmen's salaries and expenses Special inducements to blockmen Canvassers' salaries, expenses, and commissions Special salesmen's salaries, expenses, and commissions. Experts' salaries and expenses Stationery, supplies, and postage Telephone and telegraph Advertising Express, transfer, drayage, and storage Rents Taxes and license fees Insurance, excluding marine insurance. Freight Duty and landing charges Marine insurance Miscellaneous Total. General office, Chicago: Sales department, direct charges Advertising department, directchargea. . Burden of other departments Advertising (not taken up by agencies). General selling expenses- Salaries, general travelers, etc Freight absorbed by Chicago office . Total. $509, 899. 80 618,341.26 571,081.81 1,810,812.69 143,323.51 1,958,599.44 346, 115. 36 850,060.05 173,863.69 101,560.15 515, 644. 03 274, 657. 20 377, 615. 23 74,386.87 141,006.40 1,341,049.01 97.07 196,903.43 $401,306.48 491,488.22 346,575.88 827, 666. 02 35,454.62 569,871.83 12,308.30 570, 697. 78 159,297.90 65,062.98 288,830.79 188,480.42 200, 174. 82 109,037.80 88, 844. 24 2,776,573.39 2, 189, 398. 00 49,800.29 327,462.88 $911,206.28 1,109,829.48 917,657.69 2,638,468.61 178, 778. 13 2,528,471.27 358, 423. 66 1,420,757.83 333, 161. 59 166, 623. 13 804,474.82 463, 137. 62 577,790.05 183,424.67 229,849.64 4,117,622.40 2,189,495.07 49,800.29 524.366.31 10, 006, 016. 90 9,698,322.64 19,703,338.54 186,906.28 44,274.18 64,681.08 203,380.33 276, 867. 82 16, 419. 18 129,661.96 22,063.08 44, 125. 78 66, 640. 53 53,695.41 459. 18 316,567.24 66, 337. 24 108, 806. 86 259,020.86 330, 663. 23 16, 878. 36 791,527.87 306,645.92 1,097,173.79 10, 796, 543. 77 10,003,968.56 20, 800, 512. 33 The above statement of selling expense shows not only the expenses reported from the various general agencies and for branch houses, but also the general office expense at Chicago, which, though only a small part of the total, is not a negligible item. In 1911 such expense, as allocated to the domestic business, constituted about 7 per cent of the total domestic selling expense. The chief items of domestic selling expense were for blockmen, experts, canvassers and freights; other important items were advertising, salaries and expenses of general and assistant general agents, and salaries and expenses at local offices and warehouses. The principal items of foreign selling expense were for duties and freights. The other important selling expenses were for salaries and 272 EEPOET ON THE INTEBNATIONAL HABVESTEB CO. expenses of blockmen, experts, and canvassers. It is noticeable that such expenses form a smaller portion of the foreign than of the domestic selling expense. In making a comparison of selling expense with sales it is prefer- able to exclude such items as freight^ duty, and marine insurance. Comparing the selling expense with the net proceeds of sale on this basis, the percentages of selling expense in 1911 are as follows : TABLE 69.— COMPARISON OF SALES AND SELLING EXPENSE, EXCLUDING FREIGHT, DUTY, AND MARINE INSURANCE, OF THE INTERNATIONAL HARVESTER CO., DOMESTIC AND FOREIGN, IN 1911. Net proceeds of sales. Selling ex- pense. Per cent on sales. United States $65,511,343.98 37,298,906.99 $9,439,978.51 4,987,737.70 17.0 Foreign 13.4 Total 92,810,260.97 14,427,716.21 15.5 It thus appears that while the average selling expense was 15.5 per cent, the rate of selling expense was 17.0 per cent in the United States, as compared with 13.4 per cent in foreign countries. In order to push the sale of its goods, the International Harvester Co. employs a very large force of salesmen, of which the two most important classes are blockmen and canvassers. While the total number now employed by the company is much less than the aggre- gate number employed by the five companies which went into the combination in 1902, or even for the first few years thereafter, it is still very large. Probably the superior means of transportation and communication to-day make it possible to do much more work with a given number than was the case 10 years ago. The International Harvester Co. maintains about 90 general agen- cies in the United States, each of which has a considerable office and warehouse force. Distributed among the agencies in 1912 were 698 blockmen, or an average of about 8 blockmen to a general agency. These are the principal salesmen. Under them is a more or less mobile and changing force of canvassers. Many of the canvassers are temporarily employed. The largest number employed in any month in 1912 was 1,629, in June; in December of that year the num- ber dropped off to 858. Detailed figures for the amount of canvassing done by the Inter- national Harvester Co. are given in the following table furnished to the Bureau by the company : EFPIdEirCY AND EESOtTROES. 273 Tabie 70.— total number OF CANVASSERS EMPLOYED BY THE INTERNATIONAL HARVESTER CO. IN THE UNITED STATES FROM 1902 TO 1912, BY MONTHS, AND TOTAL NUMBER OF DAYS CANVASSED EACH YEAR. Year. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Deo. Days can- vassed. 25. 25. 25. 25. 25. 26. 25. 26. 25. 26. 25. 25. 1902'.. 1,365 660 183 103 388 460,039 19031.. 102 195 2,650 1,140 4,270 2,396 4,743 2,773 1,880 4,389 1904... 616 656 2.622 294 187 223 1905... 373 423 739 1,669 2,027 1,406 765 683 361 315 360 273,612 1906... 667 838 1,158 1,882 1,657 2,042 1,851 970 844 657 49S 483 327,622 1907... 659 908 1,184 1,505 1,237 1,540 1,389 802 725 533 446 372 279,904 1908... 416 564 871 1,439 1,688 1,711 1,326 1,082 889 677 568 603 276,698 1909... 651 834 1,028 1,346 1,556 1,698 1,356 1,080 950 777 715 667 306,131 1910... 814 1,052 1,296 1,689 1,708 1,695 1,389 1,192 1,072 889 824 738 337,901 1911... 885 1,061 1,316 1,611 1,816 1,830 1,633 1,438 1,241 1,070 1,038 980 366,449 1912... 1,061 1,245 1,300 1,516 1,596 1,629 1,446 1,271 1,155 1,004 932 868 •384,093 1 1902 and 1903 include Canada. > Up to Nov. 26. While the number of canvassers has diminished considerably since the first years of the company's operations, the total quantity of canvassing done has greatly increased since 1905, the first year for wliich complete data are available. This is due to the more steady employment of this force. Thus, in 1905 the number of days can- vassed (i. e., the total number of days canvassed by all canvassers) was 273,612, while in 1912, up to November 25, it was 384,093. It appears, therefore, that there is no tendency to restrict the amount of canvassing as a whole, although to-day it is distributed over a greater number of lines and volume of business. An interesting feature of this table is that it indicates in recent years an increase in canvassing in winter months when the activity of the company is more particu- larly directed to the sale of new lines. Selling expense eoe DirFERENT kinds of machines, etc.-^ While Table 68 gives a fairly clear idea of the general character of the selling expense, it does not indicate to what extent the expense applies as between different kinds of machines. In the first place, it should be noted that in addition to selling expense there is a considerable cost involved in the collection of notes and accounts receivable of the purchasers of goods, which also should be taken account of in connection with costs and profits for machines sold. The amounts of this collection expense in 1910 and 1911 were $1,048,836.80 in 1910, and $1,271,128.16 in 1911, or 1.2 per cent and 1.3 per cent, respectively, of the total sales (excluding steel and fiber) . Such accounts and notes can not always be collected, so there results a further loss or expense for bad debts. The amount set up for such loss or expense for the years 1910 and 1911, and was in each year almost exactly 1 per cent of the total sales excluding steel and fiber. 274 EEPOET ON THE INTEBNATIONAL HABVESTEB CO. According to a statement furnished to the Bureau by the Inter- national Harvester Co., the percentage of selling expense, collection expense, bad debts, etc., to total net proceeds of sale, less freight and duty, in the United States (i. e., proceeds of sale less discounts and allowances and with deduction of freight and duty) for several of the chief groups of machines, etc., in 1910 and 1911, was as follows: Table 71.— NET SALES PROCEEDS, LESS FREIGHT AND DUTY, IN THE UNITED STATES AND PERCENTAGE OF SELLING AND COLLECTION EXPENSE, BAD DEBTS, ETC., THEREOF, FOR THE INTERNATIONAL HARVESTER CO. IN 1910 AND 1911, FOR CHIEF CLASSES OF MACHINES, ACCORDING TO ALLOCATION MADE BY THE COM- PANY.i Item. Grain machines Grass machines Corn machines Tillage implements Seeding machines Engines and motors^ Wagons and spreaders Cream separators Miscellaneous machines, attacliments and repairs Twine Outside goods Total 1910 Net sales proceeds. 992, 992, 395, 927, 29, 545, 074, 0?3, 716, 615, 913 306.84 897. 49 798. 69 159. 71 003.41 746. 33 15.59 431.09 433. 78 630.28 800.82 55,225,924.03 Per cent selling expense, etc. 26.0 26.0 24.0 15.0 24.0 21.7 18.2 24.0 15.6 3.4 15.0 19.6 Net sales proceeds. til, 166, 696. 18 8,511,026.73 4,922,782.88 2,014,516.75 204,938.89 7,766,797.98 6,894,751.62 757,876.06 6,574,767.67 7,250,799.22 1,446,390.00 65,511,343.98 Per cent selling expense etc. 26.0 26.0 26.0 15.0 26.0 22.5 17.6 26.0 27.1 3.9 15.0 21.2 1 In this statement freight and dut.v are excluded from selling expense also. 2 Motors include motor vehicles and tractors. The total domestic selling expense, collection expense, bad debts, etc., in 1911 amounted to $11,744,177.02, or 21.2 per cent of the net proceeds of sales in that year. The selling expenses alone, less freights and duty (see Table 69), amounted to $9,439,978.51, or 80.4 per cent of this amount. Similarly, for 1910, the total domes- tic selling expense, collection expense, bad debts, etc., amounted to $10,807,150.86, while the selling expense alone less freight and duty amounted to $8,737,343.77, or 80.8 per cent of the total. For selling expense alone, therefore, the percentages would be somewhat lower than shown in the above table, but generally in about the same pro- portions for different kinds of machines, etc. The remarkable feature of these percentages of selling expense, etc., is the great difference between the different lines. Thus, for 1911, the average selling expense, etc., was 21.2 per cent, but for different classes of machines it ranged from 26 per cent for harvest- ing machines, to only 15 per cent for tillage implements. It is stated HFFICtENCY ANl) BESOUBCES. 2*75 by the comptroller of the company that on wagons alone the alloca- tion of selling expense is based on an assumed rate of 10 per cent, while the percentage allowed for spreaders is the same as for har- vesting machines. The reason given for allowing only 10 per cent for wagons is that the concerns which make and sell wagons exclu- sively have a selling expense of only 10 per cent on the average. While this is apparently true, it is important to consider that such wagon companies generally do not attempt to market their goods by means of an elaborate selling and distributing organization. It seems quite likely, therefore, that the selling expense allocated by the International Harvester Co. to wagons is unduly low. This is per- haps due to the comparatively low prices received in that line because of the active competition therein. The same criticism probably applies to twine and possibly also to tillage implements. ^Vhile there is no doubt that binders and certain other complicated machines require special selling expense, particularly where experts are em- ployed for setting them up, it is not evident why there should be such a great difference as shown above between wagons ( 10 per cent) and, for example, grass machines (26 per cent) . Comparison of selling expense or International Harvester Co. WITH independents. — In making comparisons of selling expenses, the chief difficulty in using the data obtained is in getting comparable lines of business. As the International Harvester Co. carries a full and varied line, a comparison of its rate of selling expense with that of independent manufacturers would not be of much value. It is necessary, therefore, to make comparisons between particular lines of the business of the International Harvester Co. and the business of such independents as are engaged in such particular lines of business only. For this purpose the selling expense of the International Har- vester Co. is taken on the basis computed by the company. These figures correspond to those shown in Table 71, but include Canada and other foreign business also. Harvesting machines. — The most available, and the only im- portant comparison of this sort which it is feasible to make, is that between the harvesting-machine business of the International Har- vester Co. and the business of the independent harvesting-machine companies which do not carry other lines to any important extent. While the data available for this comparison make it necessary to take the total business of the International Harvester Co., i. e., domes- tic and foreign, both the International Harvester Co. and the inde- pendents, as a group, are not very unequally engaged in the foreign trade in harvesting machines in comparison with their total business in this line. The average percentage of selling expenses for four independent harvesting-machine companies in 1910 and 1911 combined, was 19.3 276 EEPORT ON THE INTERNATIONAL HARVESTER CO. of their total sales (excluding freight and duty). The International Harvester Co. computes its selling expense on grain, grass and corn machines, domestic and foreign, for the same two years, at 22.7 per cent, excluding freight and duty. It appears, therefore, that the proportion of selling expense for the International Harvester Co. is greater than for the independents. A somewhat lower proportion of selling expense might perhaps be allo- cated to the harvesting machines in the case of the International Har- vester Co., and this would, of course, affect the comparison. How- ever, a large and expensive selling organization is employed by the International Harvester Co., and is a means it uses to get a, great volume of trade without reducing prices ; it can afford to do this on account of the fact that its average costs of production are lower than the average of the independents. (See p. 261.) The best way to show the relation of these two factors of cost and selling expense is to take the percentages of each of the items to the total sales. A comparison of the ratios of average cost, selling expense, and profits to sales of the International Harvester Co., for its harvesting-machine business with that of independent harvesting- machine companies, is shown in the following table : Table 72.— COMPARISON OF RATIOS OF COST, SELLING EXPENSE, AND PROFITS TO SALES BETWEEN THE INTERNATIONAL HARVESTER CO. FOR ITS HARVESTING- MACHINE BUSINESS AND FOUR INDEPENDENT HARVESTING-MACHINE COMPANIES, FOR 1910 AND 1911 COMBINED. International Harvester Co., harvesting- mactiliie business only. Four independ- ent liarvesting- machine companies. Costi Selling expense Profit Sales 100.0 100.0 ' Cost •>f sales, including general and miscellaneous expenses. The above table shows the division of sales into cost, selling ex- pense, and profit. The International Harvester Co. had a lower ratio of cost than the independents but higher selling expense. Its ratio of profits to sales was also higher. The disadvantage of the Inter- national Harvester Co. in respect to selling expense appears to be more than offset by the fact that its extensive selling organization is one of the chief instruments for getting the bulk of the business and thus maintaining its monopolistic position. Selling expense in relation to a " full line." — ^The advantage of a " full line " in the agricultural-implement industry has been repeatedly referred to, and particularly in connection with the EFFICEENOY AND BESOUECES. 277 advantage in selling. It does not follow that the fact will be obvious from a comparison of the rates of selling expense of different con- cerns. This is chiefly due, apparently, to two reasons ; first, a concern which carries a full line, like the International Harvester Co., may prefer to greatly increase its selling organization, and consequently its selling expense, for the purpose of pushing its sales and getting a very large volume of business. This in turn may reduce its manu- facturing costs more than enough to equalize the increase in selling expense. Second, a very important factor in the determination of selling expense is the system of distribution which is adopted. There are generally great differences in the selling expenses for different kinds of machines, owing to different methods and customs regarding sale and distribution. These are partly due to the technical require- ments of the business. Thus, custom has established a more elabo- rate system of distribution for harvesting machines than for tillage implements, while the character of the goods themselves, and the necessity for "setting up," etc., in the case of harvesting machines, involves a greater expense than for most other lines. While nearly all companies engaged in the distribution of certain harvesting machines utilize an elaborate organization for distribu- tion, full-line companies with great financial resources are, to a con- siderable extent, able to apply the same system to other lines, such as manure spreaders, engines, and wagons. This may increase their outlay for selling expense per unit, yet in so far as they eliminate the jobber, they obtain a higher price, generally speaking, for the goods. Furthermore, they are thereby enabled to obtain a much stronger hold on the trade. By selling directly to the dealer, they establish a custom which is not so easily changed for their business as a whole as if they dealt with jobbers only. Again, through the employment of canvassers and other salesmen, they are able to get into direct contact with the farmer, and thus have an influence in shaping the demand of the final purchaser. The most important "full-line" concerns have been briefly de- scribed above. (Seep, 188.) In this group especially important com- petitors of the International Harvester Co. are Deere & Co., Moline Plow Co., and Emerson-Brantingham Co. Of these full-line con- cerns, Deere & Co. was distinctly the most important from the point of view of financial resources, in 1910 and 1911, but even this com- pany was not in the same class with the International Harvester Co. in this respect. Those competitors of the International Harvester Co. which did not carry a full line were in most instances small. The International Harvester Co., which is by far the most im- portant "full-line" concern in the agricultural implement business in the United States, has a high percentage of selling expense, as has 278 EEPOET ON THE INTERNATIONAL HARVESTER CO. been shown above. (See p. 276.) None of the other " full-line " con- cerns from which the Bureau secured the necessary data showed such a high rate. Such concerns, however, were engaged chiefly in selling plows and tillage implements, for which the technical conditions and customs of the trade impose a much less expensive system of sale. Section 4. Policy of the International Harvester Co. in granting long terms of credit. From early times (see p. 55) a characteristic feature of the har- vesting-machine business has been the sale of goods on the installment plan, on account of the general inability of the farmers to purchase expensive machines, like binders, for cash. The farmer, or the dealer, was granted long terms of credit, commonly extending to two and three years, and sometimes longer. This system of selling was not so extensively employed in most other lines of agricultural implements. From a statement of the Mc- Cormick company as to the methods of doing business in 1902, given in Exhibit 2 (see p. 340), the following excerpt is made: The system of giving long credits to the farmer for purchas- ing reaping machines was established by Cyrus H. McCormick at the Ijeginning of his business early in the fifties, or about 1855. It has been continued up to the present time, and it is a fact that the harvesting-machine business gives longer credit to the farmers than they receive from the manufacturers of any other goods they buy. Plows and spring tools are sold on short time or for cash. Twine is sold principally for cash in the fall of the year it is sold. The usual terms for harvesting machines are one-third (i) in the fall of the year the machine is pur- chased (this is called cash), one-third (i) the fall of the follow- ing season, and one-third (^) the fall of the second season, so that a farmer who bought his machine in the spring of 1902 would pay one-third (i) of it in the fall of 1902, one-third (J,) of it in 1903, and one- third (i) of it in 1904, or, in other words, he would have used- the machine in three harvests before it was finally paid for. Excessive competition has extended this time until it frequently happens that a farmer has three years in which to pay for the machine after the season in which he purchased it. Competition has also brought about the undesirable feature of giving a farmer a year's time without interest when the crop conditions are unfavorable and he is not able to get full use out of his machine. It is also a custom to sell machines at the close of harvest on what are called " next year's time " without in- terest. That is to say, that if a farmer purchased a harvester or reaper in September of 1902, he gives his note without inter- est until the fall of 1903, and at that time he pays one-third (i) cash, and one-third (i) each in the fall of 1904, 1905. The policy of extending this long credit has worked to the advantage of the McCormick company in some ways by increasing sales, but if the collection departments of all the various companies were EFFICIENCY AND KESOUECES. 279 managed together, many improvements upon this system could be etfected by shortening the length of credit and by making the examination of the paper taken in payment more rigid. In the earlier years of its operations the harvesting-machine con- tracts of the International Harvester Co. contained a list of prices and terms veherein the cash price was shown and also the net time prices for two equal fall payments, and for three equal fall payments. For example, a printed letter issued in connection with a commission contract for McCormick harvesting machines, addressed to a dealer in Iowa, in October, 190.5 (for 1906 business), provided for the fol- lowing prices (f. o. b. Chicago) and terms: Item. GraiQ binder, G-foot cut, with bundle carrier Grain binder, 8-foot cut, with bundle carrier and tongue truck Com binder, with bundle carrier New Big 4 mowers, 5-foot Net cash price. $95 110 95 36 Not time prices (two equal fall pay- ments, 1906-7). $100 115 100 38 Net time prices (three equal fall pay- ments, 1906-7-8). 1106 120 105 This contract provided further that attachments should be sold for cash only, but that a transport truck would " be furnished gratis when absolutely necessary to close binder sale." Further, rakes under a sales contract if sold together with mowers under a commission con- tract, could be paid for in notes, limit of two falls, at one dollar ad- vance. For grain binders the contract provided that the number of pay- ments should be limited to three, and for mowers to two. For grain binders, the notes were to mature not later than December 1, 1906, 1907, and 1908, respectively, and to bear interest from September 1, 1906, or from date of delivery of machine. The discount to the dealer for cash payment was not to apply unless settlement was made by October 1, 1906. The notes accepted for time payments were to bccir interest at not less than 6 per cent per annum before maturity and 8 per cent per annum after maturity until paid. Where the machines are bought on time they have not only a higher price (about 5 per cent higher on two fall payments for binders), but also the notes taken bear interest both before and after maturity. It is provided in this contract form, however, that " the first note of a series may be made to draAv interest from maturity." The more recent practice of the company is to quote only time prices on its commission contracts for harvesting machines, and to allow for cash payment by stipulated discounts. Thus, a primed 280 EEPOET ON THE INTEENATIONAL HABVESTEE 00. letter form issued in connection with a commission contract for Mil- waukee harvesting machines, addressed to a dealer in Minnesota, February, 1911, provided for the following prices (f. o. b. Chicago) and terms: Item. Grain bindei's, 6-foot cut, with bundle carrier Grain binders, 8-foot cut, with bundle carrier and tongue truck. Com binders, with bundle carrier Reaper, 5-foot Geared mower, 5-foot cut Net time prices (two equal fall pay- ments 1911-12). Net time prices (three equal fall pay- ments 1911-12-13). $107.50 S112.60 130.00 135.00 107.50 112.50 56.50 38.50 This contract provided further that attachments sold with ma- chines could be paid for in notes in two equal fall payments, but only for cash if sold separately, and then at higher prices also ; thus, a transport for a grain binder was $3 for time payment when sold with the machine, and $6 for cash payment when sold separately. Furthermore, it provided that rakes under a sales contract if sold with mowers under a commission contract, could be paid for in farmers' notes (limit of two falls) at an advance of one dollar in price. For cash payments, the following provision was made : These two equal annual fall payment prices, 1911-1912, of machines and of attachments when sold with machines, are sub- ject to a discount of five per cent for cash received thereon at the discount dates mentioned below. If all the machines and attachments sold shall be settled for by the agent in cash at such dates, an additional discount of two per cent will be allowed pro- vided said agent shall have then fully discharged every other of his matured obligations and debts to said company. Further terms of payment, both for time and cash sales, were stated as follows: Itfim. Pay- ments limited t»- Notes to mature not later than— Notes to bear interest from (or from date of delivery of the machine)— Agent's cash discount date. Grain binders Com binders. Reapers Mowers Three... Three... Two.... Two Nov. 1, 1911-12-13 Nov. 1, 1911-12-13 Nov. 1, 1911-12 Nov. 1, 1911-12 Sept. 1,1911 Oct. 1,1911 Sept. 1,1911 Sept. 1,1911 Oct. 1,1911 Nov. 1,1911 Oct. 1,1911 Oct. 1,1911 EFFICIElirOY AND BBSOUECES. 281 The contract specifically provided, however, that " the first note of a series may be made tg draw interest from maturity." The rates of interest stipulated in this particular contract were not less than 7 per cent per annum before maturity, and 7 per cent per annum after maturity. The rates of interest which the International Harvester Co. charges on the notes it receives depend apparently to some extent, at least, on the laws of the respective States in which the business is done. The International Harvester Co. submitted the following table to the Bureau which shows in a comprehensive way the variations in this respect : Table 73.— VARIATIONS m THE RATES OF INTEREST RECEIVED BY THE INTERNA- TIONAL HARVESTER CO. ON FARMERS' NOTES IN THE UNITED STATES, BY STATES, m 1911. Rate of interest before maturity. Rate of interest after maturity. State. Rateo< interest before maturity. Rate of intfirest after maturity. Alabama Arkansas California Colorado Connecticut Delaware Florida Georgia.... Idaho Illinois Indiana Indian Territory. Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts — Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New York North Carolina. . North Dakota.. - Ohio Oklahoma Oregon Pennsylvania.. . Rhode Island South Carolina. . South Dakota. . . Tennessee Texas Utah Vermont Virginia Wasliington West Virginia. . - Wisconsin Wyoming 10 10 10 10 g 10 10 10 8 10 The International Harvester Co. not only perpetuated the system of selling harvesting machines on long terms of credit but also after it entered into the production and sale of various new lines, it ap- plied the same system to them also. In this connection it sometimes uses a commission contract instead of a sales contract. It is espe- cially able to do this on account of its great financial resources. Most of these new lines were formerly sold for cash or on short terms of 7T854°— 13 ^20 282 KEPOBT ON THE INTEENATIONAL HARVESTEK 00. credit, and even for certain of the larger concerns this innovation has made it difficult for competing manufacturers, to do business. In manure spreaders the International Harvester Co. often uses a commission contract and allows long terms of payment. Thus, in a signed letter on a printed form to a dealer in Minnesota in January, 1909, the net time prices (two payments) of manure spreaders were entered as follows : International No. 2 International No. 3 Clover Leaf and Com King i. . . $97.00 102.00 107.50 1 Trade name or brand. According to the printed terms, the prices quoted were f. o. b. Chi- cago, with a limit of two equal annual payments, all notes to bear interest from date of delivery of machines. The rates of interest were to be not less than 7 per cent before maturity, and 7 per cent after maturity. A discount of 5 per cent was allowed for cash, with 2 per cent additional if the agent's matured obligations to the company were all paid. While wagons are sold as cash goods, the International Harvester Co. often allows extended credit thereon without interest. For exam- ple, in a contract and order for Weber wagons, in January, 1908, a dealer in North Dakota ordered wagons on which the printed terms were cash November 1, 1908, or notes due November 1, 1909, with interest from maturity at 8 per cent. A further special provision was : " If any of the above wagons remain on hand and unsold November 1, 1908, the agent is to settle for same by note due November 1, 1909, without interest." The above cases are given merely as specific illustrations of a wide- spread practice of extending long credits in the new lines, and could be cited in numerous instances for these and other lines of goods from the actual contracts and orders obtained from the dealers. As early as January, 1908, the finance committee of the Interna- tional Harvester Co. of America adopted a resolution approving the policy of selling engines and manure spreaders on a commission contract. Representatives of the International Harvester Co. claim that its leading competitors grant equally long credits, and declare that its policy is to develop as far and as rapidly as possible the system of cash sales — that is, cash payment in the same season as the goods are purchased — and that discounts for cash are allowed for this reason. The general cash discounts allowed are those noted above (p. 280), namely, 5 per cent discount for cash on any part of the ErFIOIENCY AND EESOUEOES. 283 payment due the company, and 2 per cent additional if all matured obligations due by the dealer are paid up at the time of settlement. While in some localities there has been a great increase in the pro- portion of cash sales, nevertheless, taking the business of the Interna- tional Harvester Co. as a whole, it appears that the proportion of sales on long credit (i. e., one or more years) to total sales has shown an increasing tendency, especially in very recent years. This increase in the proportion of credit sales is partly due, at least, to the appli- cation of long credits on the new lines for which they were formerly uncommon. The extent to which long credits are thus allowed on purchases of goods from the International Harvester Co. is shown by the propor- tion of the amount of notes taken in a given year to the sales of the same year. Computations were made by the Bureau of the propor- tion of notes taken during each year and on hand at the end of the year, as compared with sales, from 1903 to 1911, which showed that for 1910 and 1911 the proportion of notes taken was considerably higher than for any of the preceding years. Of more special interest, however, is the practice of the Interna- tional Harvester Co. in respect to its business in the United States. The following table, furnished by the International Harvester Co., shows the percentage of cash sales and credit sales to total sales of the International Harvester Co. (for its agricultural implement busi- ness) in the United States: TABLE 74.— COMPAEISON OF PERCENTAGES OF CASH AND CREDIT SALES TO TOTAL SALES OF THE INTERNATIONAL HARVESTER CO. IN THE UNITED STATES, 1904- 1911. Year. Percent- age of sales for cash. Percent- age of sales for notes and accounts. Year. Percent- age of sales for cash. Percent- age of sales for notes and accounts. 19041 70.9 74.4 70.3 67.3 31.1 25.6 29.7 32.7 1908 69.4 68.9 66.4 64.2 30 6 1905 1909 31.1 1906 1910 33.6 1907 1911 35.8 ' Percentages as in original statement ; do not equal 100. According to the above table, the cash sales have shown, on the whole, a declining tendency, particularly in the most recent years. Data were not available for 1903. The proportion of cash sales ranged from 74.4 per cent in 1906 to 64.2 per cent in 1911. There was, of course, a corresponding increase in the credit sales, which in 1911 reached the maximum, namely, 35.8 per cent. 284 KEPOKT ON THE INTERNATIONAL HARVESTER CO. As a part of the same statement, the International Harvester Co. furnished data as to the percentages of the amounts of notes of various maturities taken in each year to the total amount of notes taken in each year, which are shown in the following table : Table 76.— COMPAEISON OF PERCENTAGES OF AMOUNTS OF NQTES MATURING IN SPECIFIED PERIODS TAKEN BY THE INTERNATIONAL HARVESTER CO. IN A GIVEN YEAR, WITH THE TOTAL AMOUNT OF NOTES TAE^IN IN THE SAME YEAR, 1904-1911. Year. Percent- age maturing first year. Percent- age, maturmg second year. Percent- age maturing third year. Percent- age, maturmg fourth year. Percent- age maturing fifth year. 1904 34.7 36.0 30.5 29.6 26.9 26.5 25.9 28.9 48.0 50.4 58.3 63.0 66.3 66.7 67.7 64.2 14.4 12.2 10.2 7.0 6.4 8.2 6.0 6.5 2.9 1.4 .9 .4 .4 .6 .4 .4 1905 1906 0.1 1907 . 1908 1909 . 1910 1911 Notes for the longer terms have shown an almost uninterrupted decline. Thus, three-year notes constituted 14.4 per cent of the total in 1904 and only 6.5 per cent in 1911, while four-year notes sank from 2.9 per cent in 1904 to only 0.4 per cent in 1911. Practically no five-year notes were taken. For the three and four year notes com- bined, the amount taken by the International Harvester Co. was 17.3 per cent of the total notes in 1904, and only 6.9 per cent in 1911. The most important classes of notes taken by the International Harvester Co., however, are the one and two year notes. For the former there has been a slight decrease and for the latter a large increase in recent as compared with earlier years. Thus, for one- year notes the proportion taken in 1904 was 34.7 per cent and 28.9 per cent in 1911, while for two-year notes the proportion taken in 1904 was 48.0 per cent and 64.2 per cent in 1911. Taking these two classes together, the percentage was 82.7 in 1904 and 93.1 in 1911. The assistant general manager of the International Harvester Co. insisted, however, that the company was earnestly trying to reduce the proportion of credit sales generally. On this point he stated in part as follows: I want to make a short general explanation, and that is, that since the organization of the Harvester Co. in 1902 we have had with us as stockholders certain banljing interests who have strenuously objected to the length of time on which this business has been conducted — the terms given — claiming that it was tying up too much capital. Since the earlier years of the organization we have been heavy borrowers, to an e:Stent that some of our finance committee thought was at one time really approaching EEFIOIBNOY AND BESOUECES. 285 the danger line; and the pressure on the operating men of the organization to try to reduce that has been rather constant. Many plans have been tried, one of which I described some time ago, and which was referred to as the 5 and 5 discount, which was tried out in certain districts in the Northwest. For a time, as I think these tables will show, we really made a little improve- ment in the percentage, but with the addition of traction engines, and some few threshers, and other large tools, which involve the necessity for a series of payments, our percentage in the last few years has dropped back to substantially where it was in the earlier days of the organization. We should be very glad if some plan could be worked out by other interests than ours to do more of the financing of the farmer. * * * Broadly, our policy has been to try to shorten the terms, and we have met with com- paratively little success. Our business as shown here will aver- age about two-thirds cash in the United States, on sales of all kinds. The other third is sold on longer time than we would like to see it. This statement apparently throws the burden of responsibility for extending credits on the selling organization. This emphasizes strongly, therefore, the fact that the extension of long credits is simply a means of getting business. The notes received for credit sales are of two kinds chiefly, namely, dealers' and farmers' bills. As to the variations in the accounts re- ceived from these two groups, the assistant general manager of the company made the following statements: Q. In these figures * * * jg any part of the amounts rep- resented there as cash anything that has been received by the general agent in the form of a note from the local dealer and by him cashed and the cash turned over to you from the general agent? — ^A. Very little. Our former treasurer, Mr. Richard F. Howe, in trying to meet this same problem a number of years ago, asked us to try out the question of our being able to dis- pose of this paper locally at a discount so as to avoid the enor- mous amount that we carried and the constant collection ex- penses. The plan was successful in certain localities, but in the majority of instances it was not practical to do it. In those territories where the local banker would'buy the paper we found the dealers were taking the discounts by themselves cashing those notes, and in the territories where the dealer could not do that it was impossible for us to do it. Q. Would there be important differences between the propor- tions of receivables received by the company from farmers and from dealers? — A. As to its total volume, the proportion of paper received from dealers is very much greater in percentage than it was years ago, for the simple reason that a very large part of our business to-day is what is called the sale lines, on which we do not take farmers' paper, while ten years ago it was practically all commission goods ; so that the relative proportion of dealers' paper is much greater to-day than it was ten years ago. 286 BBPOET ON THE IKTEBNATIONAL HABVESTEK CO. Q. How is it on the old harvesting lines? — A. The old har- vester lines, with a few exceptions, which have been referred to in this discussion, are on the commission basis, and that is just as it was ten years ago. But do you mean what percentage of the paper do we take? Q. For example, on the harvesting lines alone, we will assume your percentage is the same as on the aggregate — about two- thirds cash. Now, of that one-third receivables, has there been a noticeable variation in the proportion received in the form of farmers' notes and in the form of dealers' notes ? — A. Whatever variation there is would be a decreased percentage of farmers' notes and a somewhat increased number of agents' notes. * * * In a further discussion of this subject, the assistant general mana- ger gave some information as to the particular lines in which these long credits were used: Q. Would it be possible to show what the changes have been in respect to receipts of notes in particular lines, such as wagons, spreaders, harrows, cream separators, and gasoline engines? — A. We have had that compiled for certain territories for trade reasons, in order to know just what the conditions were. I do not think we have had a summary of it, nor do I think we have a complete compilation on that subject. * * * Q. Taking the country, as a whole, would you say that the proportion of paper received from these lines that I have enu- merated would make a substantial increase in the total percent- age? — A. That is a very difficult question to answer. In the Southern States the amount of notes taken for wagons, for ex- ample, would be considerable. In States like Illinois and Wis-" consin, representative States in the central district, it is nomi- nally nothing. The dealer cashes the wagon account, and, in fact, they pay most of their accounts. The cash discount on sale goods is such that they are usually able to get the funds from their local bank if they do not have them themselves. Q. But in States like Illinois and Wisconsin the amount of paper received for gasoline engines might conceivably be high A. That is particularly true Q. (Continuing.) Or for cream separators? — A. Not so much on cream separators. It is particularly true on engines running into large sizes, as tractor engines, something that we sell for $1,500 to $2,500, according to the size of the machine. There is more paper necessarily taken for that class of goods than there is for smaller units. Q. What about manure spreaders for the country as a whole? — A. We take but very few notes in settlement for manure spread- ers — I mean farmers' notes ; and comparatively few agents' notes. Q. I have the impression that quite a substantial proportion of the local agents from whom we received reports stated that in many cases they had settled for spreaders in notes due the following fall. — A. That is undoubtedly true in cases where the spreaders were purchased in quantity in excess of what the dealer had been able to market, and the explanation I think I gave before. We have been trying veiy earnestly to push the per- EFMCIENOT AND BESOUKCES- 287 centage of business on the spreader. We have spent a lot of money in all kinds of advertising as to the subject of soil fertility and the benefits to be derived, Believing we were doing good to the farmers as a class (and to ourselves as one of the big parties interested in the success of the farmer) in encouraging the use of the spreader ; and I haven't any doubt that we have perhaps overpersuaded the dealers in our efforts to promote the more general use of that tool. There have been some cases where, believing the man could sell a carload, we have persuaded him to take a car, and in case he was not able to handle all of them he would say " Now this was against my better judgment when I did it, and you should carry it for us for another six months," or whatever period might be required. There is a very general complaint from competing manufacturers, especially the smaller concerns, that the International Harvester Co. uses these long credits as a means of wresting trade from its rivals. The International Harvester Co., however, claims that some of its competitors, at least, use equally long credits. On this point the assistant general manager of the company made the following state- ments : Q. Let me put a general question on this subject: With a great company like the International Harvester Co. it is con- ceivable that tie extended credits might be used to very seriously handicap competitors A. Yes, I can quite appreciate Q. (Continuing.) And might be regarded in a measure as a reduction in price, notwithstanding the fact that you advance your price with the increasing length of term, I believe? Now there are two things I would like to have you discuss if you will ; how your larger competitors compare with you in that respect, and particularly whether the company has used these credits as a competitive weapon? — A. The subject matter that I have just gone over, showing our own need of a greater percentage of cash and the pressure brought to bear on the operating men for that, is in itself at least a partial answer. Q. I realize that. — ^A. Further than that, we have not used that. We have been accused of it, I am aware. Let me illustrate by a case in point. * * * The head of the Eumely concern. Dr. Edward M. Eumely, perhaps a couple of years ago called on me with that complaint. * * * The facts were that our average time of payment was more favorable than his was at the end of the season's business.^ Q. What year?— A. That was in the year 1911. * * * Q. Have any of your other competitors ever mentioned that subject to you? — A. Yes. A. J. Brosseau, of the Gale Manufac- turing Co., made that statement. In his case I do not believe he is justified, although I have no means of getting at the exact facts. The territory in which he does most of the business is a territory in which we are getting anywhere from 75 to 90 per 1 This instance, however, related chiefly to the tractor engine and thrasher trade, In wliich lines long terms have always prevailed, on account of the very expensive character of the machines. ^88 KEPORT OIT THE iNTEENAlIOlfAL HABVESTER CO. cent cash for our goods, and obviously we can not be an awfully bad disturber of trade terms in any territory where we get so large a percentage of cash. Q- What line was in question? — A. He was talking about tillage implements, that being the only line on which he com- petes with us. Q. Have you had such complaints from engine people? — ^A. Not that I recall. There may have been. Q. Such complaints would come more from people carrying one line than from full-line houses, would they not ? — A. I could not answer as to that. Q. The big houses like Deere and Emerson-Brantingham, or J. I. Case would have equally long terms of credit? — A. I am very sure that Deere has. I .am equally sure that J. I. Case's terms are longer than ours. Q. Having bigger units ? — A. Having a line that is comprised of larger units. As to Emerson-Brantingham, their present line would be longer than ours, because it takes in a considerable portion of threshing machinery. Prior to this past season I think that their terms would be somewhat shorter, because it was confined very largely to the sale of plows and tillage implements. Q. And some mowers?— A. And some mowers. But I think that to-day their terms will imquestionably average longer than ours. * * * While it is possible that certain large concerns for particular lines give equally long terms as the International Harvester Co. for the same lines, yet the International Harvester Co. seems to have led the way in some cases. There is no doubt that the smaller com- petitors of the International Harvester Co. find this situation very difficult to meet because their financial resources are generally inade- quate to do business in that way. The International Harvester Co. is enabled to pursue this policy of granting long terms because of the large resources which it ac- quired through combination. Furthermore, it has been aided therein by financial support of an exceptional character through its connec- tion with J. Pierpont Morgan & Co., its fiscal agents, and has also secured large loans from John D. Eockefeller, father-in-law of one of the McCormicks. (See p. 163.) Section 5. Summary. The preceding discussion shows, therefore, that the International Harvester Co. has a distinct advantage over competitors in the low cost of production of its harvesting machines, due chiefly to large- scale production. The volume of production at the McCormick and Deering plants was equally large prior to the combination. The combination gave the International Harvester Co. the additional ad- vantage of monopolistic control of that branch of the industry. These two advantages — large-scale production and monopolistic EFFICIENCY AND EES0UE0E8. 289 power in certain lines — ^were used to increase the trade in the new lines taken up rather than to reduce the prices of harvesting ma- chines. In 1912, it is true, there was some reduction in the price of its harvesting machines, but it is a fair question whether this action was not taken because of the prospect of increased competi- tion, and possibly also because of the Government suit. As already pointed out, the company also derives a great advan- tage from its exceptional command of capital. In itself this may be regarded as entirely harmless or even desirable. It is proper to point out in this connection that this exceptional command of capital was largely derived through the act of combination itself. But if this advantage, as well as that derived from large-scale production, is used in connection with a monopolistic advantage in certain lines to give the company domination over other lines, it may become a public menace. Obviously, it should be to the interest of the public to encourage efficiency of production, provided it is free from mo- nopolistic control and the final purchaser is allowed to share the benefits secured. If as a result of increased efficiency the Interna- tional Harvester Co. placed its harvesting machines on the market at a substantial reduction in price, such efficiency might fairly be regarded as an argument in favor of the combination. If, however, efficiency in this branch is to be used mainly as a weapon to strengthen the company's position in new lines, the question arises whether, when such position has been attained in the new lines, the company's policy will be to maintain high prices in these as well as in harvest- ing machines. At the moment it would appear that there is a possi- bility that the new competition now springing up may be sufficient to protect the public against unduly high prices. If, however, this protection comes only through competition and not through a dis- position of the company voluntarily to permit the consumer to share in the benefits of efficiency, this fact should be clearly understood because of its vital bearing upon the public policy toward great combinations. CHAPTER Vn. COMPETITIVE METHODS OF THE INTERNATIONAI HAKVESTER CO. Section 1. Introductory. This chapter deals with certain competitive methods used by the International Harvester Co. that have been criticized by manufac- turers, dealers, and others ; practices that the Bureau of Corporations regards as objectionable. The chief of these objectionable competitive methods are : (1) The maintenance of pretended competition in the earlier years of the organization. (2) The common practice of so allotting its brands of harvesting machines as to secure an undue proportion of dealers. (3) Attempted coercion of dealers to handle some lines of the company's products exclusively. (4) FxiU-line forcing. (5) Use of "suggested" retail price lists. (6) Use of special and discriminatory prices and terms. (7) Misrepresentations by salesmen regarding competitors. Detailed information on the subject of competitive methods was obtained through interviews with dealers throughout the principal grain States of the Mississippi Valley, and also in the Atlantic sea- board States. Inquiry was also made of all principal implement manufacturing concerns, and of jobbing houses at such points as Kansas City, Minneapolis, Omaha, St. Louis, Oklahoma City, Des Moines, Boston, Philadelphia and elsewhere, in regard to the trade practices of competitors, with particular reference to the Interna- tional Harvester Co. Careful examination of the minutes of meet- ings of the directors and of various committees of the corporation and its principal subsidiaries was made by agents of the Bureau. To a limited extent use has also been made of facts disclosed in proceed- mgs under the antitrust laws of several States and in the present suit of the Government against the International Harvester Co. In the course of the Bureau's investigation, its agents visited over 800 retail dealers at some 600 towns scattered through 27 States. These probably represented fully 75 per cent of the total number of active dealers at these particular points. Effort was made to secure as representative statements as possible. In the case of by far the greater number of the dealers visited by its agents, the Bureau had 290 COMPETITIVE METHODS. 291 no previous knowledge of their attitude towards the International Harvester Co., and, indeed, special effoi't was made throughout to interview as many dealers as possible in each locality visited with- out special regard to the brands of farm machinery handled. Nearly all these dealers, however, were or had been agents for the sale of some kind of the International Harvester Co.'s products. The results as regards the International Harvester Co. were ap- proximately as follows: Per cent. Favorable 25 Noncommittal 20 Specifically unfavorable 50 Unfavorable without specific complaint 5 Although some of these complaints are unimportant, the fact that so large a proportion of the total number of dealers gave information involving unfavorable criticism of the International Harvester Co., indicates that objectionable methods must have prevailed to a consid- erable extent. While it will be observed that a substantial proportion of the dealers made statements favorable to the company, the remark- able fact is that the proportion was not larger, because under normal conditions the relations of dealers generally to manufacturers ought lo be friendly. The International Harvester Co. positively denies that it has within recent years practiced certain objectionable methods which it admits were in use for a time following its organization. It is un- questionably a fact that the methods used have changed somewhat since that time; nevertheless, there is much ground for adverse criticism. Before the discussion of these competitive methods is taken up, it is desirable to give a brief description of the retail distribution of farm machinery and of the selling organization of the International Harvester Co. Section 2. Retail distribution of farm machinery. Over 95 per cent of all the farm machinery used in the country is purchased from the local implement dealer. The system of direct selling by the manufacturer to the farmer has not been extensively developed in this branch of industry. When factories first began to take over the work of the local black- smith and wagon maker in supplying the needs of the farmer, it became necessary to establish agencies with local storekeepers. As retail trade became differentiated, implements and hardware were commonly sold by the same dealer, and indeed still are in some parts of the country. Later, as implements increased in variety and the trade became further developed, in many sections the handling of 292 BEPOBT ON THE INTEENATlONAL HARVESTEB CO. farm machinery grew into a distinct business. These dealers gen- erally took up also the sale of wagons and other vehicles used by the farmer, and are therefore usually referred to as implement and vehicle dealers. From the beginning the dealer was an active force in pushing the sale of machines; he provided space for the storage and exhibition of machines ; he showed farmers how machines should be operated; and he was able to furnish information to the manu- facturer as to the reliability of prospective customers among the farmers in his vicinity. The terms of the agreement under which the dealer handles the products of the manufacturer of farm machinery are usually defined in a printed contract furnished by the manufacturer. This agreement names the conditions under which the dealer undertakes to handle the goods and under which the manufacturer agrees to furnish them. It enumerates the kind or kinds of machinery to be handled and pro- vides for prices, terms of payment, discounts, point from which dealer is to pay freight, and such other matters as may be considered necessary under the particular form of contract employed. Some- times it also specifies the quantity of machines to be purchased, but frequently leaves this to be determined later. Such contracts are usually referred to as agency contracts, although in form they may be either commission contracts or contracts of sale. Under the former the dealer is nominally the commission agent of the manufacturer, title to the goods or to the proceeds remaining in the latter until settlement, the dealer receiving the difference between the wholesale price of the manufacturer and the price paid by the retail purchaser as his commission or compensation. Under the sale con- tract the dealer buys the goods outright and becomes responsible for payment, although many contracts of this sort contain provisions in- tended to protect the manufacturer in case the dealer is threatened with insolvency. Some manufacturers use both kinds of contract with various modifications in particular terms. The period of time usually covered by these contracts is one year. The contract is submitted by the manufacturer's salesmen to the dealer before the opening of the season which it covers, usually the fall before, or at some other time before the business of the new season is under way. It is customary for the contract to contain a clause providing that after it has been signed by the dealer and the manufacturer's representative it must be approved by the general agent or some representative of corresponding responsibility before it becomes binding on the manufacturer. ~ The investment of the dealer, which is chiefly in his stock, varies somewhat according to the form of contract he has. His success under ordinary conditions, like that of other merchants, depends upon his ability to gauge the market demand for the goods and his COMPETITIVE METHODS. 293 skill as a salesman. From time to time he is visited by the manu- facturer's salesmen soliciting orders under the contract. Except in harvesting machinery most manufacturers leave the work of solicit- ing farmers' orders to the dealer and his employees, so that the number of machines that the dealer sells to farmers and the prices received usually depend upon his own efforts. Generally speaking, the dealer does not contract to handle more than one or two makes or brands of any particular kind of machine, and often is not allowed to by the manufacturer whose goods he sells. After selling the machines of a particular make for several years he may work up a custom closely connected with that brand of goods. At most towns there are only two or three implement dealers. This fact, taken in connection with the fact that few dealers handle more than one or two makes of any one kind of machine, presents a very serious problem to manufacturers of lines in which there exist a considerable number of competing factories. With a limited number of implement dealers in any particular locality it is clear that in some towns some manufacturers can not secure the serv- ices of a dealer with an established trade. The difficulty of securing satisfactory dealers at such points is often so great that some concerns contract with dealers whom other concerns consider unsuitable credit risks. Even this method of securing representation is not free from diffi- culties ; for the dealers themselves are organized into local. State and national associations, the chief purpose of which is to protect the trade of the retail dealer against any tendency on the part of manu- facturers or jobbers to sell direct to farmers, or to so-called " irregu- lar " dealers. It is, therefore, a great advantage in several ways for the manufacturers to contract with dealers having an established trade. In a few sections these conditions, among others, have led some makers of farm machinery to establish their own retail stores, but this method has not assumed any special importance as a means of reaching the farmer. A few manufacturers sell their products by the mail-order method, either directly or through established mail-order houses. The retail distribution of harvesting machines, however, developed certain peculiar characteristics. From the time that they began to be sold it was the common practice for the local blacksmith or store- keeper to agree with the manufacturer to handle such machines on a consignment basis, receiving as compensation a part of the retail price which was generally fixed by the manufacturer. To some extent this was true of various branches of the implement trade, but it was an especially prominent feature in the case of harvesting machines. This system of selling on a commission contract was due to the high prices of harvesting machines for which neither the farmers nor the 294 EEPORT ON THE INTERNATIONAL HARVESTER CO. dealers were generally able to pay in cash. For this reason the manu- facturer in settlement with the dealer agreed to accept farmers' notes, generally drawn to cover payments in two or three annual install- ments. In this manner the farmer was enabled to pay for a machine from the proceeds of the crops harvested with it. While this placed a financial burden on the manufacturer by increasing the capital he required, it also became a source of additional profit, since credit or long-time sales to farmers were at higher prices and the notes often bore interest both before and after maturity, and frequently at a high rate. Dealers of greater financial strength sometimes paid cash or settled for the machines with their own notes. The collection of great numbers of such notes required a special organization and large expense; the discounting of such notes ap- jjarently was not widely practiced. The harvester trade, therefore, early required the investment of considerable capital in the form of notes and accounts receivable. The use of a large amount of capital was also necessary by reason of other expenses peculiar to this branch of the implement industry. To work in connection with the local dealers a great many salesmen or " canvassers " were introduced. The canvasser was the local rep- resentative of a particular manufacturer, and not, like the local dealer, interested in the sale of goods of various makers; consequently he was a more persistent force in pushing the sales of his particular line among farmers. Another expense was that for the services of the so-called "expert." Since machines were shipped to dealers in parts, or in a " knocked down " condition, the several parts had to be assembled properly. Mechanical difficulties in setting up and operat- ing the machines were adjusted by the expert. This was an expense that manufacturers of most other kinds of farm machinery did not have to meet. These special characteristics of the trade gave rise to some diflfer- ences in the relations between dealers and manufacturers of har- vesting machinery, as distinguished from those existing between dealers and manufacturers of other lines, such as plows, tillage implements, farm wagons, etc. In the first place, the dealer's contract for harvesting machinery was a commission or consignment contract ; the contract with other manufacturers was more frequently a con- tract of purchase under which the dealer bought his goods and paid for them. Then, too, manufacturers of other lines than harvest- ing machines did not usually employ canvassers; consequently they did not come so closely in touch with the farmer, nor did they have so intimate a knowledge of the business of individual dealers. Fur- thermore, they generally sold to the dealer for cash or on relatively short terms, while the harvesting-machine manufacturers gave long credits. COMPETITIVE METHODS. 295 Section 3. Distributing system of the International Harvester Co. The distributing system of the International Harvester Co. is cen- tered in the International Harvester Co. of America (see pp. 88-91), which buys the machines and other products of the International Harvester Co. and also some outside goods. The America company sells principally to dealers who in turn sell to farmers. The sales organization of the America company is under the super- vision of a general sales manager at Chicago. Under him are a domestic sales manager in charge of selling operations in the United States and Canada, and a foreign sales manager in charge of selling operations in other parts of the world. The United States is divided by the company into five sales dis- tricts called, respectively, the Eastern, Southern, Central, North- western, and Southwestern districts, each of which is in immediate charge of a district sales manager with headquarters at Chicago. Each sales district is divided into general agencies, of which there are about 90 in the United States. In charge of each general agency is a general agent, who directs the traveling men and office employees of the general agency, approves contracts made with the local dealers, and has general supervision of the company's business in the group of counties assigned to his general agency. His territory is divided into " blocks " of one or more counties. In each " block " a traveling man, known as a blockman, has imme- diate supervision over the trade with dealers. Through him the dealer comes in personal contact with the company in making his contract of agency and in ordering goods from the company. The blockman keeps constantly in touch with the needs, financial condition, etc., of dealers, and the extent to which competing goods are handled in his territory. The company employs about 700 blockmen. While the travelers for most other concerns ordinarily get around to a particular town only once or twice a year, blockmen of the International Harvester Co. as a rule return to each dealer several times during a season. To accomplish this each blockman is given a comparatively small terri- tory to cover. Canvassers are also employed by the company to assist the block- men and to aid the dealer in soliciting orders for International Harves- ter Co. machines and other products among the neighboring farmers. A large proportion of the farmers in the United States are visited several times a year by one or more of these canvassers, who report the farmer's prospective needs to the company. The company also employs experts (though not so many as formerly) to aid in setting up and starting machines and to adjust difficulties that may develop in their use. A separate force is employed for the collection of 296 KEPOET ON THE INTEENATIONAL HABVBSTEB CO. accounts, and branch offices or agencies for collection are established at various points in the United States. Section 4. Pretended competition in early years. Shortly after its organization the International Harvester Co., as shown elsewhere, acquired the factories and business of four other harvesting machine companies. These were D. M. Osborne & Co., of Auburn, N. Y. ; the Aultman-Miller Co., of Akron, Ohio ; the Minnie Harvester Co., of St. Paul, Minn. ; and the Keystone Co., of Sterling, 111. For some time after the acquisition of these companies the change in ownership was concealed and they were operated as if they were independent. Osborne. — Almost immediately after the formation of the Interna- tional Harvester Co. overtures were made by oificers of D. M. Osborne & Co. for the sale of its business to the new combination. These nego- tiations were consummated in a contract dated January 15, 1903,^ by which the International Harvester Co. acquired the Osborne business. During 1903 and 1904 this change in ownership was kept secret; the Osborne company was widely advertised as an independent con- cern, and an official of the Osborne company made affidavits, as re- quired by the antitrust laws of the State of Missouri, certifying that the company was not a party to any agreement or combination to fix prices or output, and that it had not entered into any arrangement with any other corporation or persons to place the management or control in the hands of trustees for such purposes, or any arrange- ment that in any way tended to interfere with full and free compe- tition in the manufacture or sale of any of its products. Even the general agents of the Osborne Co. were not informed that the com- pany had lost its independence, but were assured from the home office of that company that there was no truth in the rumor that it had been acquired by the International Harvester Co. One of these general agents stated that just prior to the public announcement of the true state of affairs, in the latter part of 1904, he made a con- tract with a dealer who insisted that if it should develop that the Osborne concern was not in fact independent his contract of agency should be void. He stated that in view of the assurances of the company's officers he had no hesitancy in making the contract and in submitting it to the home office, where it was approved. Another former Osborne general agent interviewed by a repre- sentative of the Bureau said that while the advertisements referred to above were appearing he was making a hard fight with full belief in the independence of the company. The general agent stated that he had instructions from the home office to tell the blockmen, when a dealer asked whether the company was in fact independent, to take 1 See Exhibit 13, p. 370. COMPETITIVB METHODS. 297 the question up with the general agent over the telephone. The latter stated that he was authorized to give them his personal as- surance as general agent that the Osborne company was absolutely independent of the International Harvester Co. and that not a dol- lar's worth of Osborne stock was owned by the International Har- vester Co. This general agent further stated that he made such rep- resentations in a number of cases, even to within a week of the time when he was instructed to turn his office over to the representative of the International Harvester Co. In the judicial proceedings begun by the Government against the International Harvester Co., a former official of the Osborne com- pany has testified that the company got no directions from anybody in the International Harvester Co. with respect to its advertisements. He testified further that the policy of concealing the change of own- ership was at the request of the vendors of the Osborne business, to facilitate the collection of outstanding accoimts, and to protect the value of the capital stock of the Osborne company purchased by the International Harvester Co., deposited as security for the payment of the purchase price. Cyrus H. McCormick, president of the Inter- national Harvester Co., however, had previously testified, in the suit brought against the company by the State of Missouri, that during this period of secret ownership the original officers of the Osborne company actually managed and controlled its affairs, but under advice from the International Harvester Co., and that the advertising was done by the Auburn managers under the direction of the Inter- national Harvester Co. Following is an excerpt from his testimony : Q. What I am getting at is during these two years, although the old officers continued namely [nominally?] as ^e officers of the Osborne company, who actually conducted and managed the business of the Osborne company? — ^A. They managed and con- trolled it, but under advice from the International Harvester Company. The same officers continued in business, and the same management. Q. Now during that time the Osborne company had a separate plant in Missouri, I mean separate warehouses ? — ^A. Yes, sir. Q. Was any advertising done by the Osborne company during these two years? — A. I presume there was. Q. Who had charge of that? — A. The Auburn managers. Q- Under the direction of the International ? — A. Yes, sir. Q. So during these two years it did not become known to the public so far as you know that the Osborne company was owned by the International ? — A. Did not for the reason I stated. The reason referred to by Mr. McCormick appears to be his previous statement that — * * * they requested us not to let it be known because we did not buy their receivables. They requested us to give them 77854°— 13 21 298 EEPORT ON THE INTBENATIONAL HAEVESTEB CO. time to collect in their receivables ; we fixed no special time but we had conferences with them every now and then from time to time. * * * " Minnie. — On or about November 30, 1903, certain stockholders of the International Harvester Co. acquired by purchase from the American Grass Twine Co. control of the stock and business of the Minnie Harvester Co., engaged in the manufacture and sale of har- vesting machinery and twine at St. Paul, Minn. For two seasons the company was operated as an independent plant. The alleged pur- pose of this policy of secret control was to aid the American Grass Twine Co., the vendors, to collect the outstanding receivables of the Minnie Harvester Co. It is alleged, further, that this factory was merely operated to complete the manufacture of materials on hand, to wind up the business and dispose of assets. On September 30, 1905, the manufacturing plant, equipment, supplies and personal property of the Minnie Harvester Co. were transferred to the International Flax Twine Co., a subsidiary of the International Harvester Co. The manufacture of the Minnie harvesting machines was discon- tinued and the plant converted into a factory for the manufacture of flax twine for grain binders, an experiment that proved unsuccessful. AuLTMAN-MiLLEE. — When the Aultman-Miller Co. failed, its assets were purchased at a receivership sale in 1903 with credit furnished by some of the chief stockholders of the International Harvester Co. The business was transferred to the Aultman-Miller Buckeye Co., a new corporation, which took over the plants and business. The inter- est of the International Harvester Co. in this new corporation was not made public until the fall of 1905, the company meantime being con- tinued in operation. The defense made in this case is that the com- pany was operated solely to close up the business and liquidate the assets and to supply repairs to owners of Buckeye machines then in use. The transfer of certain property and business to the Inter- national Harvester Co. was made in the fall of 1905. The manufac- ture of harvesting machinery and binder twine has been discontinued at this factory and it is now used by the International Harvester Co. for the manufacture of autovehicles. Keystone. — Early in 1903 the Keystone Company, then engaged in the manufacture of corn shellers, hay tools and disk harrows, was pur- chased by two former managers of the McCormick Harvesting Ma- chine Co., associated with a former superintendent of the company and two or three others, and the manufacture of binders and mowers was undertaken. This acquisition appears to have been chiefly in the interest of these individuals, without any previous knowledge on the part of the owners of the McCormick business or any of the directors of the International Harvester Co. In October, 1904, however, cer- tain principal stockholders of the International Harvester Co., who COMPETITIVB METHODS. 299 were also its managing directors, purchased a controlling interest in the capital stock of the Keystone Company. The fact that the company had thus come under the domination of the International Harvester Co. was concealed until late in the season of 1905. During this time the company was advertised and represented to be independent, and its former officers continued in charge of operations. The reason given for the policy of concealment was that it was done to permit these officers to liquidate its bills and accounts to better advantage. In September, 1905, the plant, proper- ties and business of the Keystone Company were conveyed to the International Harvester Co. and the manufacture of Keystone binders and mowers was subsequently discontinued. The plant has since been used chiefly for the manufacture of hay tools and tillage im- plements. While the representatives of the International Harvester Co. have attempted to excuse these instances of pretended competition on the ground that they sought in this manner to protect the vendors' inter- ests, the Bureau does not regard this as any justification of a practice admittedly bad. Section 5. Effort to secure undue proportion of dealers. Attention has already been directed to the importance of the retail dealer in the sale of farm machinerJ^ The number of desirable dealers at any one town does not often exceed three. The retail dealer, generally speaking, prefers not to handle any specific brand of farm machinery that is handled by any other dealer within trad- ing distance of his customers. The International Harvester Co., by placing only one brand of its machines with a particular dealer, is able to absorb the services of a large proportion of the dealers available in any locality for the sale of the company's products. That it is the policy of the company thus to allot its brands is shown by the testimony of Cyrus H. McCormick, president of the company, in the Missouri case in 1908. He asserted that no two dealers at any one place would be given the same line, since " the dealers do not like it, it would not be good business, and it would not be considered good business to sell the same machine to two men, that would be a very bad thing." There is a widespread opinion in the trade that the policy of the International Harvester, Co. in giving a different line to each dealer is largely for the purpose of preventing competing manufacturers from securing their services. The company's representatives have denied that this was their purpose. The assistant general manager of the company, in discussing with the Bureau the competitive methods of the company, said on this point : * * * The statement that a man would prefer to handle orie line of commission goods is true, generally speaking. It 300 EBPOBT ON THE INTEKNATIOKAL HABVESTEB CO. was then and it is to-day. There is no objection on our part to a man taking any line of our commission goods not otherwise represented in his town ; yet it is very rare that a man asks for representation for more than a leading line, except the permis- sion to order anything that might be called for in other lines. His facilities are limited; his storage space, and the added ex- pense and annoyance, and the mistakes that inevitably occur in carrying three or four lines of similar products are a disadvan- tage to the local dealer. Q. I understand then that your position is that the company does not place its brands in this way for the purpose of handi- capping its competitors ; and you also contend that regardless of intent the practical effect is not to handicap your competitors? A. It does not. Its sole purpose is to get more active representa- tion of your goods which you can not do if you allow them to get into the hands of one man in a town. He will not give your customers the same consideration, the same service, as he will if he is handling a less number. Not only do we not try to eliminate them in that way, but it is a matter of real benefit to us in new sections when a competitor will get a real, live, active man in the trade. We sell more goods than we could do if we gave all our lines to one man and there was not any competitor there. However, the records of the company itself show that the restric- tion of an outlet for competitors' goods was at one time at least a feature of its policy in thus allotting brands. A recommendation of the sales committee of the company imanimously adopted at a meeting held January 15, 1903, which was shown in the evidence taken in the Government suit against the company, reads as follows: We believe that so long as there is competition it is desir- able for the International Harvester Co. to maintain five selling organizations for the purpose of getting the largest amount of effort from the greatest number of local agents without expense to the company, and for the purpose of utilizing in its own busi- ness as much as possible of the available local agency material rather than permit any of it to become available for competitors. To carry out this plan it becomes necessary for each division as far as possible to make exclusive contracts and thus get for that division the exclusive effort of the local dealer. To secure this it is necessary to give the local dealer the exclusive sale of the full line of goods of the division he is representing. The sales committee recommends from its standpoint that each division sell only the products of that division and that in line with this, if any of the divisions have not already a large enough variety of goods, that the variety be provided either by purchase or by equipping the division to manufacture the articles required to complete the line. This view is further substantiated by a refusal of the sales com- mittee in July, 1903, to endorse a suggestion for the use of a uni- versal tag on twine, its opposition to the plan being based on the ground that the doing away with distinctive trade names "'would COMPETITIVE METHODS. 301 result in a loss of ti'ade, tend to lower prices and give the outside manufacturers too good an opportunity for business." This evidence was presented in the Government suit, as was also a report of the gen- eral sales agent of the company to one of the vice presidents in June, 1904, in which he said : * * * We have, as you know, reached the conclusion in connection with the elimination of two of the present lines, that it is absolutely necessary that each of the agents who is to handle one of the three lines be supplied with a tedder or any other arti- cle which we may see fit to manufacture. We will, of course, by supplying each of the three sets of agents with a separate line of tools, be able to cover the best of the selling organization of the country in so far as local agents are concerned. Having reached this conclusion, we are naturally led to suggest that in developing further lines of implements it will be well for the ex- perimental department to take into consideration the immediate necessity for supplying the sales department with three lines of tools * * * Eventually, however, as stated, we must pro- vide, either by different painting or different branding, the three lines of these engines. In our judgment it will be a simple mat- ter to arrange our stacker and sweep rake so that we can supply each of these agents with something different. Perhaps in that case, these tools being so much like many others that are on the market at this time, simply a little variation in painting, with the names Deering, McCormick, and Champion stenciled, will meet the situation. * * * At a meeting of the executive committee of the International Har- vester Co. of America, held in July, 1904, approval was given to a recommendation of the sales manager that the company maintain three different brands of cream separators as soon as practicable. The foregoing statements leave no doubt that the company was fuUy aware that such an allotment of its brands tended to handicap competitors, and, moreover, certain of these statements show clearly that such a restriction of competition was expressly intended in em- ploying this method of distribution. Representatives of the com- pany, in discussing this practice with the Bureau, argued that this represented the policy of the company in the formative period of its organization, and, as above stated, denied that there was at present any intent to restrict competition. In the opinion of the Bureau, however, the continued allotment of brands in this way is significant. The policy of allotting different brands of harvesting machines to dealers has also been extended by the company to the new lines. On the subject of the different brands in the new lines the assistant general manager said : Q. "What can you say of developing three lines in each of the other kinds of products taken up? — A. We have developed 302 REPORT ON THE INTERNATIONAL HARVESTEK dO. anywhere from one to four or five. In «ur gasoline engines, for example, we ha^'e nevei- had but the one line; * * * Q,. What are the Victor and the Famous; are they not dis- tinct brands? — A. * * * There has been some effort, in places, to sell those as a separate line of engines, but it has been limited and ineffectual so far as results are concerned. Q. How about other new lines? — A. On cream separators we have two — Bluebell and Dairymaid. We have added an im- proved type, brought out under a new name. On farm wagons we acquired two — ^the Weber and the Columbus — in the pur- chase of the Weber factory. We acquired three; we acquired the other in the purchase of the Bettendorf's. * * * jjj spreaders we developed two lines, and afterwards bought a third line — the Kemp line. :{: :)c ^ 4= 4= ^ # Q. They are called International ? — A. They are marketed un- der distinct names, one being called the Corn King and the other the Clover Leaf. Q. And the Kemp goes under the name of Kemp? — A. No, the Kemp goes under the name of the 20th Century, which is the trade name they adopted. In reality we have two lines to- day. We have developed the endless apron spreader to round out or complete the Kemp line, and by throwing the other two types together we have really two lines. Q. How about disks? — A. On disk harrows we have marketed in the territory east of the Indiana line a number of disk har- rows under their respective trade names, Deering and McCor- mick ; this is a very small quantity relatively — broadly speaking, they are marketed under the names Osborne and Keystone. * * * * » Iff * Q. You spoke of two lines of seeders or grain drills; that does not include your jobbing line recently acquired? — A. No, it does not. But I want to say in explanation that our total sales of grain drills in the United States prior to the acquiring of this jobbing line, which we are now selling for the first tune, this season, were very limited both as to the quantity and the territory covered. * * * Q. Your new jobbing drill is sold under the name of Hoosier? — A. There are three — they have three names — Hoosier, Kentucky and Empire — all three being made in the factory at Richmond, Ind., but they are not sold in all territories; * * * 4: :jc :1c ^ 3fc :]c 3|i Q. Do you carry more than one line of auto buggies? — A. We do not. iic * 4: 4: etc :f! :|; Q. Do you have more than one line of tractors? — A. We have two, none of them made at Akron; they were earlier; one made in Milwaukee and the other in Chicago. Q. Different brands? — A. Different brands and different types of construction. One goes under the trade name Titan, for the Milwaukee ; the other under the name of Mogul, for the Chicago. COMPETITIVE METHODS. 303 Q. How about thrashers? You job thrashers to a slight ex- tent? — ^A. Yes, sir, we have jobbed some thrashers. First, a line made by the Belle City Manufacturing Co., at Racine, Wis., * * * and we have sold some thrashers of other makes, nota- bly the Aultman-Taylor. For the coming year we are selling a thrasher made by the Buffalo-Pitts Co., at Bufflao, N. Y. 4s 4: :|s « 4: 4! * Q. Do you have more than one line of hay presses? — A. Only one line of hay presses, and that until recently has not been a complete line ; we have been adding to it until we probably have a line fairly complete, as compared with our competition. * * * 4! * * * Q. Would that be sold at retail by more than one dealer in a town ? — A. No ; with the exception of a few points in the south- ern territory. There are a few points in the Southern States where we have sold two dealers in a town, by making some slight modifications on the press. Generally speaking, it is only sold as one line and is so advertised. Q. Generally speaking, with respect to these new lines, do you allow more than one dealer in a town to carry the same brand ? — A. The same principle would apply that would apply to commis- sion goods on any other line, and I think you will find it observed by the trade in almost any business. Q. Do you have the same brand for side-delivery rakes as j-ou have for sulky rakes ? — A. No ; we use the name Keystone on all side-delivery rakes, with the exception of a few made at the Springfield factory, which have been sold through the so-called Osborne division, as Osborne. In connection with this subject of a single line for a single dealer, it may be pointed out that this condition was found to exist at most towns visited by the agents of the Bureau, about the only exceptions being apparently at points where, rather than lose a sale for the company's machines, a dealer handling one of its lines had been permitted to take orders for some other brand in the absence of another dealer at that point handling the brand of machine desired by a customer. In a few cases dealers were found with regular con- tracts for more than one brand of International Harvester Co. har- vesting machines. Of course, not all the brands of the company are carried in every town. The president of the Acme Harvesting Machine Co. (which during the last few years has been the strongest competitor of the Interna- tional Harvester Co. in the sale of harvesting machinery in the West) testified in the Government suit that this policy on the part of the International Harvester Co. makes it hard for his company to get a sufficient number of dealers. A similar opinion is held by a number of other manufacturers interviewed who compete with the Interna- tional Harvester Co. in different lines. The conclusion of the Bureau on this matter is that, regardless of intent on the part of the International Harvester Co., this policy 304 EEPOET ON THE INTEKNATIONAL HAEVESTEB CO. of giving a different line to each dealer, taken in connection with its control of several distinct brands of each kind of machine, has a real effect in handicapping competition. Section 6. Exclusive handling. The commission-agency contracts of the International Harvester Co. in 1905 and prior years contained a clause by which the dealer was required under penalty to handle exclusively the company's harvesting machinery. A typical clause of this kind was as follows : Such agent esj)ecially agrees not to accept the agency for or to be interested in the sale of any grain binder, header, corn binder, husker and shredder, reaper, mower, stacker, sweep rake, hay rake or hay tedder, other than those manufactured by the International Harvester Company, either directly or indirectly, nor to permit anyone acting for him as employee, agent or partner, so to do while acting as agent for the said company under this contract, and said agent agrees to pay such company on demand as liquidated damages, twenty-five dollars for each grain binder, header, or corn binder; fifty dol- lars for each husker and shredder; ten dollars for each mower, reaper or stacker ; five dollars for each sweep rake, hay rake, or hay tedder sold in violation of this paragraph of this contract. The mere presence of this clause in the contract, even if not enforced, would deter many dealers from taking any step that might be construed as a violation. In 1905, however, at a time when antimonopoly proceedings against the company were threat- ened in several States, the exclusive clause was eliminated from the contract and has not been restored since. The use of this clause was discontinued in Texas as early as October, 1902, when the ex- ecutive committee of the America company passed a resolution approving a report of the sales committee recommending such action for contracts in that State. This resolution, however, directed each division of the company " to discourage any agent in Texas from handling more than one brand of machine." In connection with the elimination of the exclusive clause from the commission- agency contracts for 1906 the following excerpt from a letter written by one of the general agents of the company to block- men is significant: In the elimination of what has heretofore been known as the "exclusive" clause, a radical departure is being made in the commission agency business. It is of the utmost importance, therefore, that each traveler in the employ of this company sees to it at the time contracts are made for 1906 that our interests are taken care of and guard carefully against the intrusion of outside concerns on account of our waiver of the exclusive clause. It is our opinion that practically all of our agents will prefer to handle but one line of commission goods and as we are in a position to offer them greater inducements in the way of trade, COMPETITIVE METHODS. 305 help, etc., we should be able to retain all of the advantages that we have heretofore enjoyed by reason of our exclusive con- tract by a proper presentation to each of our agents of our mu- tual interests. Commenting upon the letter, the assistant general manager of the company said : The only real error in that man's statement of the facts there is that he greatly overestimates any value that the exclusive clause has ever had in the past. The statement that a man would prefer to handle one line of commission goods is true, generally speaking. * * * Since the elimination of the exclusive clause from dealers' con- tracts, other means have not infrequently been employed to secure the same end. In a considerable number of cases reported to the Bureau from different parts of the United States, salesmen of the International Harvester Co. have endeavored to prevent the handling of goods made by competing manufacturers by threatening to dis- continue the dealer's agency for the harvesting machines of the Inter- national Harvester Co. These threats frequently were not carried out, especially if the dealer was handling a considerable amount of the company's goods and was firm in withstanding such pressure. In a majority of the cases of this sort specifically reported to the Bureau, however, on the dealer's refusal to accede to these demands his contract was canceled, or not renewed. In the sections of the United States visited by agents of the Bureau it was found that many dealers hesitate to take up the sale of inde- pendent makes of harvesting machines, fearing to lose the contract for some brand of the International Harvester Co.'s machines if they do so. Under the regular form of commission-agency contract used by the company the dealer waives the right of action for dam- ages should the company decide to cancel his contract forthwith. The paragraph of the contract which allows such action to be taken provides that the company — may at any time it considers its interests are neglected or jeopar- dized, without notice, annul and terminate this contract and take possession of all orders, notes, moneys and machines in the pos- session or under the control of the agent by virtue thereof ; and the said agent hereby waives and releases all right of action for damages because of such cancellation of contract. The same paragraph gives the company — entire control over all machines and orders, contracts, accounts, notes, moneys or other property accruing and growing out of the sale of said machines and repairs or other property. Under the provisions of this paragraph the threat to terminate the contract is peculiarly significant. 306 EEPOET ON THE INTEENATIONAL HABVESTEE CO. One general agent of the company wrote a western dealer in the summer of 1909, telling him that — no floor is large enough to hold our line and a competitor's line of goods. The International Harvester Co. claims that the instances in which the exclusive clause was enforced were very rare. It claims that it was put in the contract as a protection against a condition that once prevailed — and that still exists to some extent — where the dealer is inclined to " tie up " the goods of the manufacturer, allowing a car- load of the company's commission goods to be shipped him and then transferring his business to some other manufacturer, making the company stand loss or damage on the goods. The assistant general manager stated that the company deals with such cases at the present time by finding some other representative. He took the ground that the company can not afford to renew a dealer's contract when he leaves its goods to " lie dead " in the trade while he is selling some- body else's goods. This defense of the company does not explain numerous instances reported to the Bureau where dealers, who apparently have been doing a good business in International Harvester machines, state positively that salesmen of that company have threatened them with the loss of the agency for some brand of the company's harvesting machinery, or have actually canceled the contract, or failed to renew it, when they undertook to sell independent machines in connection with those of the International Harvester Co. Section 7. Full-line forcing. "Full-line forcing" is a term used to describe the practice of re- quiring dealers to order new lines of the International Harvester Co., as a condition to retaining the agency for some brand of the com- pany's harvesting machines. This does not necessarily mean that it is the regular practice or policy of the company to force every dealer to order every kind of goods made or sold by the company. As used in the present connection, it is applied to numerous instances where salesmen of the International Harvester Co. have used this method of coercing dealers into ordering new goods of one kind or another that otherwise they would not have ordered. This complaint comes to the Bureau from a very considerable number of the dealers and independent manufacturers from whom statements were secured. It is, of course, very difficult to say just where the practice of try- ing to induce dealers to take additional kinds of products ceases to be legitimate competition and becomes objectionable. The Interna- tional Harvester Co., like any other concern, desires to push the sale of its goods and naturally is disposed to take advantage of the fact COMPETITIVE METHODS. 307 that it has certain desirable machines in order to force the sale of its newer lines. Aside from any question of motive, it is apparent that any concern having a monopolistic position in the harvesting-machine business has an enormous advantage in forcing its entrance into new fields, and that this advantage is very susceptible of abuse. This practice and that of requiring exclusive handling, taken in connection with the policy of a different line for each dealer, clearly has a tend- ency to give the International Harvester Co. a high proportion of trade in the new lines similar to that which it now enjoys in harvest- ing machines. In manure spreaders, in the sale of which the use of the full-line forcing method is reported to have been frequent, the company already has more than one-half the total trade in the United States, and in other lines its proportion has increased in a marked degree. So many cases of this sort were found in different parts of the United States by agents of the Bureau that the only conclusion that seems possible is that this represents a frequent practice on the part of some salesmen of the International Harvester Co. to use the com- pany's domination of the harvester trade to build up the sale of new lines. The clauses of the commission agency contract, referred to else- where (p. 305), and the custom of renewing such contracts annually, give the salesmen of the International Harvester Co. an advantage over the dealer in negotiating for the handling of the company's products exclusively, or in greater variety. One paragraph of the contract provides in part — that this contract shall not be valid and binding upon the com- pany until the same is approved by the general agent. * * * Thus, when the general agent neglects or fails to approve the con- tract within a reasonable time, it affords the blockman an opportu- nity to work upon the dealer's fears that the contract will not be ap- proved at all, if the dealer handles competing goods, or, unless he orders additional goods specified by the blockman. Obviously, the particular kind or kinds that the blockman desires the dealer to pur- chase are those lines in which the dealer already has an established trade in an independent make. The salesman knows, so far as that dealer is concerned, that the market for competing manufacturers will be curtailed to the extent that the dealer can be brought to load up with the machines of his company and be kept in that condition, even if the dealer does not agree to handle the products of the Inter- national Harvester Co. exclusively. No figures are available to show how many dealers handling the harvesting machines of the International Harvester Co. also handle one or more kiiids of its " new " goods. The company, however, sub- mitted the following data which show the number of contracts with 308 REPORT ON THE IKTERNATIONAL HARVESTER CO. dealers for the sale of its harvesting machines and the number of agents selling certain of its new lines : Table 76.— NUMBER OF LOCAL AGENTS OE DEALERS SELLING SPECIFIED IN- TERNATIONAL HARVESTER CO. LINES, IN THE UNITED STATES, ACCORDING TO A STATEMENT OP THE COMPANY, 1908-1912. Item. 1908 1909 1911 1912 Number of contracts of old lines (binders, mowers, etc.) Number of agents selling — Spreaders Engines and tractors Hayrakes Hay loaders Cream separators Side-delivery rakes Wagons Shellers 31,758 6,417 4,153 15, 711 2,159 3,495 2,371 4,191 1,420 32,511 10,674 6,155 18,620 2,642 4,439 2,888 5,870 1.874 30,801 8,507 5,492 16,648 2,804 4,637 2,937 5,131 1,776 30,941 7,624 6,382 16,207 3,047 4,653 2,759 6,598 2,125 3D, 731 6,483 6,536 15,855 2,487 5,346 2,542 6,388 3,018 In connection with this policy of full-line forcing the assistant general manager of the company, referring to this table, said : If that has been our policy, we have been most awfully ineffi- cient in carrying it out, where the maximum of any one of the sale articles equals a little less than one-third the number of people we are doing business with on the binder and mower line. While the table indicates that a great majority of dealers with harvesting-machine contracts do not handle all kinds of the com- pany's products, in the opinion of the Bureau this is a very insuffi- cient answer to the complaint in question. It should be noted that in some of the principal new lines, such as wagons, cream separators, engines and tractors, there has been a practically continuous increase in the number of dealers from year to 3' ear, while in the same period the number of contracts for the old lines of harvesting machines has shown some tendency to decrease. It will also be noted that the table contains no figures for the num- ber of dealers handling such products of the company as twine, tillage implements (especially harrows), stackers and several other lines. If the number of contracts for these lines were included in the table, the total would undoubtedly be substantially increased. The table seems remarkable, indeed, as showing that within a relatively short time after taking up the sale of such new lines as spreaders, wagons and engines and tractors, the number of dealers handling these lines should be so great in proportion to the total number of harvesting-machine contracts. Commenting upon full-line forcing as a matter of business judg- ment, the assistant general manager of the International Harvester Co. said: The first broad answer to that is that it is wrong in principle * * * not referring now to the viewpoint of the public or COMPETITIVE METHODS. 309 consnmer, which you may be looking into, but to the view- point of the corporation. * * * I do not mean to infer that none of our men have done it. I am sorry to say that I know they have; but they are doing it not in the sense of following our policy but as they have been allowed to wander from the path of their instructions and our business policy. The reason if is wrong for us is this. * * * I do not consider that goods are sold when they are unloaded and forced on a customer under any form of coercion. * * * l^ other words, a salesman who secures business in that way is trying to add to his present volume of trade at the expense of a reputation that somebody else has built up for the house on some other line of goods ; while if he ^oes to work and sells those goods as they should be sold, on their merits, and convinces that man that they are the best value for the money that he can obtain, the fellow will go out and make a success at selling them. * * * So that fundamentally, outside of any question of moral right or wrong so far as the public or competitors are concerned, it is a fool practice for any business house to indulge in, and the bigger the house the more objectionable it becomes and the more damaging is its effect to the house. * * * As to its application, we have repeatedly called in men and pointed out the absolute folly of trying to obtain business along that line. We know that they have done it. * * * I think that is a matter of degree. I think going back five or six years there was quite a little of it. It has been gradually growing less, and if some of us live and stay on the ]ob it is going to get still less, because it is wrong. FuU-line forcing causes dealers to order goods in greater variety. Supplementary to this is an endeavor apparent on the part of some salesmen to overload the dealer with goods he already handles in greater volume than is warranted by his needs. It is difficult to say just where the line should be drawn, but in the opinion of some dealers and a considerable number of the competitors of the Inter- national Harvester Co. this latter practice has at times resulted in overloading the dealer with the products of the International Har- vester Co. Obviously, when carried beyond the real needs of the dealer, this practice is detrimental to the interest of any manu- facturer, but when judiciously applied it may be an advantage to the manufacturer employing it, by rendering it impracticable for the dealer to order goods of other makers. When the dealer is loaded up with the goods of one concern, the effect on the trade of com- peting manufacturers is usually the same as when the dealer is expressly required to handle such goods exclusively. From the facts and admissions here set forth, there can be no doubt that full-line forcing has been rather extensively practiced. Obviously, such methods assume greater importance from a public standpoint when employed by a company which, like the Interna- tional Harvester Co., has a monopolistic position in certain branches of the trade. 310 REPORT ON THE INTERNATIONAL HARVESTER 00. Section 8. Use of " suggested " retail price lists. Prior to the organization of the International Harvester Co., the retail prices of the machines of the McCormick Harvesting Machine Co. were printed in the contracts of that company, the dealer being paid a cash commission. According to a statement made by an official of this company, the regular form of this commission contract gave the dealer about 22 per cent of the retail price received from farmers •when sales were made for cash and about 20 per cent on time sales.^ In contracting with the dealer that company not only stipulated what the retail price should be, but also that it should be main- tained. The McCormick company claimed that it was very strict about mantaining this retail price, believing that if the dealer did not sell at a uniform price the trade of the company could not be maintained on a stable sales basis. The actual retail prices varied considerably for the machines of the different harvester companies, and when competition became severe dealers were sometimes paid a fixed sum as commission on such sales as were made at reduced prices. The organization of the International Harvester Co., by bringing all the principal companies in that line under a common control, gave the matter of retail price fixing a new aspect. The commission agency contracts of the company in 1905 and prior years, contained a clause by which the dealer agreed — to sell all machines or property received imder this contract at such prices and on such terms as may be fixed in writing by said company or its general agent, in the territory herein mentioned. Under this clause of the dealers' contract it was customary for the general agent of the company to write each dealer in his territory, fixing the retail prices at which the harvesting machines of the com- pany were to be sold. The substance of a typical letter of this sort is as follows : Conforming to the fifth clause of our 1904 agency contract with you, and that all agents and salesmen may be able to proceed intelligently in the work of taking farmers' orders for our machines, we suggest the following schedule of RETAIL PRICES for your future guidance until further notice: Machines. Cash. Two fall pay- ments. tl25 130 140 45 48 60 (130 Grain binders, 7 feet . . 135 145 47 Mowers, 6 feet 60 Mowers, 7 feet 62 • See Exhibit 2, p. 337, COMPETITIVE METHODS. 311 The clause requiring dealers to sell at prices fixed by the company was contained in the commission contracts of the company for 1905, and yet in September of that year the directors of the International Harvester Co. of America adopted the following resolution : Whereas, since the last meeting of this board it has come to the knowledge of the directors of the company that certain em- ployees of the company have taken action in transacting the business of the company with which such employees are respec- tively concerned, which action, if taken under the authority of this company, might be obnoxious to the law respecting the fix- ing of prices and cognate matters ; and Whereas, all such action has been taken without the knowledge of the directors or of the executive officers of the company who have been ignorant thereof until their attention has recently been called thereto ; and Whereas, all such action has been taken without the authority or approval of this board or of the executive officers of the com- pany and has been contrary to the established policy of the com- pany : Now, therefore, be it resolved, that all action above referred to be, and the same is, hereby repudiated and declared to be imau- thorized ; and the president of the company be, and he is, hereby authorized and directed to caution all the heads of the depart- ments of this company's business and through them their sub- ordinates against any violation of the laws relating to the fixing of prices and similar subjects. The fact that this resolution was passed at a time when outstand- ing contracts of the company contained the clause referred to above (see p. 310) was called to the attention of officials of the company, but they furnished no satisfactory explanation. It seems significant that at the same time the company was threatened with the proceedings under the antimonopoly laws of several States. Notwithstanding this resolution, however, since 1905 the clause fixing retail prices has been inserted by the company in commission contracts for the sale of thrashing machinery and binder twine. The elimination of the above clause from the harvesting-machine contracts of 1906 and subsequent years did not end the attempt of the company to influence the retail prices of these machines. Sales- men (blockmen and canvassers) were furnished with printed or typewritten lists of retail prices of the company's products, ap- parently to show the prices the salesmen were expected to observe in negotiations with farmers and which they were to urge dealers to follow as closely as warranted by competitive conditions. The prices shown in these lists are referred to simply as " suggested prices." Lists of suggested prices were found by the Bureau in the posses- sion of dealers, as well as of the company's salesmen. Such lists were found with dealers in New Hampshire, Massachusetts, New York, North Carolina, Tennessee, Indiana, Illinois, North Dakota, 312, EEPOKT ON THE INTEBNATIONAL HABVESTEB CO. and South Dakota, covering various years from 1908 to 1912, inclu- sive. In 1908 and 1909 the general agency of the International Harvester Co. at Boston, Mass., published retail price lists which were sent to local dealers in the territory covered by that branch. In New York State such lists issued by the general agency at Auburn in 1909 and in 1911 were found in the possession of dealers. In North Carolina, copies of a so-called "black book" of sug- gested retail prices for 1912 were found in the possession of dealers at several points. The Memphis office of the company, covering territory in western Tennessee, northern Mississippi, and the greater part of Arkansas, has issued a small "pocket catalogue" of retail prices which was sent to anyone who wrote for prices on machines. These catalogues were given to local agents to help them in fixing prices on machines. In this catalogue there is no distinction made between the different makes or brands, the prices being given simply for different sizes of particular kinds of machines. Suggested retail price lists appear to have been sent each year to dealers in Indiana in exchange for the ones issued to them the year before, much care being exercised apparently to recall the former lists before the new ones were sent out. In some cases such lists bear no evidence of their origin, but one such list issued by the general agency at Aurora, 111., is mimeo- graphed on the back of paper bearing the letterhead of that general agency, some of the sheets bearing a caution on a perforated slip at the bottom, as follows: "To Dealers: for your information! De- tach before using list." It then goes on to state the point of delivery and the discounts from these prices allowed to dealers. Dealers in South Dakota have been furnished by representatives of the International Harvester Co. with plain printed cards or type- written sheets of suggested retail price lists. One of these dealers had cards for 1911 and 1912. Prices current in some of the towns are higher than prices at other towns in this State. These cards are reported to be furnished by the blockmen to any dealer who asks for them. At one town a dealer stated that these lists were sent to him by the Aberdeen general agency, typewritten on a plain sheet of paper. He stated that the prices shown were generally observed by the dealers in that vicinity. Typewritten lists and booklets of prices were also found with dealers in North Dakota, covering principally the years 1908 and 1909. Similar lists were also found in the hands of dealers at various other towns of the United States. In Michigan a dealer stated that in 1910 a so-called " green book " was in current use by dealers. Some of these price lists cover only the goods handled by the dealer under commission agency contract; others include suggested prices COMPETITIVE METHODS. 313 for the company's entire line, including the goods handled by the dealer under sale contract. The position of the International Harvester Co. is that the dealer is an independent merchant, and that even the commission contract is only nominally one of agency, at least so far as prices are con- cerned. The assistant general manager of the International Har- vester Co. denied that it is the policy of the company through these price lists or otherwise to attempt to control the prices at which the company's machines are sold by the dealer to the farmer. His state- ment was as follows: Q- * * * We find that, apjjarently to a very general extent, the representatives — usually general agents — of the company have given out so-called suggested prices at which machines should be sold to the ultimate purchaser, the farmer. Is it the policy of the company to attempt to control the prices at which these machines should be sold, and not the dealer ? — A. Absolutely, no. In fact, our instructions have been absolutely to the contrary ; in fact, as emphatic and positive as we know how to make them, even to the extent of discharging men who have disregarded these instructions. But there is a constant demand, on the part of our salesmen, for these suggested prices, I think largely growing out of trade practices where so many different lines of goods are sold, marked at a list price, which is really a retail price, and the retailer is given a discount or series of discounts from list. * * * Some of our men have been stupid enough — indiscreet enough — to comply with that request to the extent of getting out a "suggested " list. I might say, however, in justice to them that there was a period along about 1904 or 1905 when that was recog- nized by oyr counsel, at the time, as not being objectionable. Later, instructions were issued not to do it, as it led to a misun- derstanding as to what our motives were. Many of our branch houses have compiled lists for our own men, and the need for doing this any of you gentlemen familiar with the retailing of goods will quickly comprehend. Very frequently our men meet a customer who inquires for some tool or article that we make. Perhaps his neighbor has bought something, or he has seen some- thing that we make, but which is not carried by the dealer with whom our salesman is working ; and it is incomprehensible to the farmer for the salesman to say that he does not know the price on an article made by the company he represents, and so for his convenience a memorandum has been made up, sometimes in the form of a typewritten letter, sometimes in the form of a printed pamphlet, giving the approximate retail price. Usually that price is considered to be the maximum price asked by agents in that district who do handle the goods. Obviously, if our salesman quoted a price less than was customary, he would be in hot water immediately with the dealer who was selling at any figure above that quotation. * * * ******* Q. What is the history of this book ? Who got it up, and for what purpose? — ^A. Our agent at Grand Eapids, Mich. This 77854°— 13 ^22 314 BEPOKT ON THE IITTERNATIONAL HABVESTEK CO. one is number one. They are issued to our own salaried men, and, on leaving our employ, they are required to return them to the office ; they are not given to any local dealer. ******* Q. Are these lists gotten up at the head office of the com- pany ? — A. No ; they are not. To my knowledge there are only perhaps five or six points in the United States where I know of such lists having been gotten out. Q. In what time ? — A. In recent years — during the last two or three years' time. It has been done at Aurora, 111. ; it has been done at Grand Kapids, Mich. ; Milwaukee, Wis., and, I think, at one or two other points. Memphis, Tenn., is one, and to the best of my knowledge they have been confined entirely to our own salesmen. Q. You do not know of any cases where they have been handed out to the dealers to guide them in naming prices to farmers? — A. We have heard or a few cases where the general agent has given that information in some form to the dealers; but this has been promptly corrected as it came to our knowledge, the last one I know of being at Sioux City, Iowa. Q. In what year ? — A. Within the last two years. They fur- nished them not to every dealer but to certain dealers who asked for it — a typewritten retail list, gotten up for the dealer at his request. That thing came to our knowledge, and we promptly ordered it to be discontinued. Q. Does the salesman have any instructions in regard to this matter — positive instructions either from you or from the gen- eral agents? — A. Our general agents have all had positive in- structions on this subject. I can answer that positively. Q. What are they? — A. That they should not in any way in- terfere with, or indicate to the retail merchant the price at which he should sell his goods. That is, for the past seven or eight years, I should say. That was not true when we started out doing business. Q. Those instructions were made in writing to the general agents? — A. Those I have knowledge of are made across the table, personally, with the general agent, and more emphatic than I could do it in writing. Q. Was that done because you found the general agents were dictating the retail price? — -A. Some of them were doing it re- gardless of instructions. Q. You take it up only with those agents whom you find actu- ally doing it. It is not a subject of a general letter to the agents ? — A. I can not recall it ever being made the subject of a general letter; and there would be no need of giving this matter atten- tion except as we had information to the effect that a man was not following the usual policy, which he is certainly not doing when he gives a retail price to any local agent. Q. Do you have any information as to the instTuctions given to the blockmen or the canvassers ? — A. Yes ; but I can not make that as specific as you perhaps want. In some cases, I have ; but not in all. Now, just one more word on that subject. Follow- COMPETITIVE METHODS. 315 ing this demand on the part of the local dealer for a list of re- tail prices, we brought out in a catalogue, or dealers' book, a year or two ago, a blank form in which he might insert his prices for his own convenience; and we told him we could go no fur- ther than that. We told him. Here is a catalogue, or list, of all the goods we have to sell ; that we could only furnish him with the wholesale price, and, then, he might, for his own convenience, insert, or extend, his retail figures in the proper place in this cata- logue. That has been of comparatively recent date, say, within the past two years. Q. That was sent to all dealers ? — A. I can not say all dealers, but generally in sections where there was a demand for a retail price from the trade. It appears from this statement that in the catalogue referred to space is provided in which retail prices may be entered. It is then, of course, a simple matter to communicate these prices to the dealer. Furthermore the Bureau received reports from dealers in Okla- homa, Missouri, Kansas, Ohio, Illinois, North Dakota, South Dakota, Indiana, and other States that the salesmen of the company give dealers oral information of the price at which the company's goods should be sold, and the prices at which other dealers in the locality are selling. Evidently the same result can be reached by this oral method as by the use of the printed lists. It will be noted from the statement above quoted that the Inter- national Harvester Co. professes that it is opposed to the issuance of these suggested price lists. Obviously, the company could completely stop the practice if it genuinely desired to do so. While the company's position is that these lists have no effect and are not intended to have any effect in the direction of maintaining retail prices, the Bureau is of the opinion that their distribution actually does have an effect in this direction by deterring dealers from making price concessions in some lines. Section 9. Discriminations in prices and terms. The general practice of the International Harvester Co. is one of uniform prices to dealers for similar machines of the same quality and quantity. Complaint was made to the Bureau that in some instances the company has engaged in local price cutting to an ex- tent not warranted by ordinary competitive conditions. Admis- sions of the company show that moderate concessions are rather fre- quent. A limited number of deep cuts have been found by the Bu- reau, but the company positively asserts that this is not its policy, although admitting that substantial cuts have been made in a few instances to dispose of old or damaged or old-style machines, par- ticularly harvesting machines. It is difficult to draw the line be- 316 KEPOKT ON THE INTBBNATIONAL HABVESTER CO. tween moderate cuts and those that would be considered excessive. It should be pointed out that local price discrimination for the pur- pose of destroying the trade of competitors is contrary to the law in several of the States in which the International Harvester Co. is engaged in trade. In some of the new lines, such as farm wagons and manure spread- ers, in which lines the company's proportion of business has rapidly increased, the International Harvester Co. has pursued a policy of distinctly low prices and long terms. This it has no doubt been able to do by reason of high prices in the sale of old lines, in which it meets, of course, comparatively little competition. So long as local competition is confined to dealers handling differ- ent brands of the company's products, there is, generally speaking, relatively little use for special prices, terms, or discriminations, ex- cept, apparently, to unusually strong dealers, or at times to move old stock. When necessary, however, to meet competition the general agents of the companj' appear to have had a considerable degree of authority to name prices and terms that will get business. A former general agent of the company, in discussing the use of special prices and terms with a representative of the Bureau, said that the district sales manager (from whom the general agent receives his orders) does not tell the general agents in so many words to get business by cutting prices below those of competitors, but that when the general agent goes ahead and gets business by cutting prices below those of competitors, there is ordinarily no objection from headquarters. The assistant general manager of the International Harvester Co. stated that the general agents of the company have no fixed limits in the extent to whicli they are permitted to authorize special con- cessions. He claimed that these employees should not work within " dead line " limits but should have authority to dispose of old and damaged stock at the best prices obtainable ; that it was a question of a man using good business judgment. For the purpose of prevent- ing the abuse of this authority the district sales managers are main- tained at Chicago to see that the general agents do not " slaughter " prices and terms. He stated that the general agent has no positive instructions, but that he knows that if he does not make a good show- ing his usefulness to the company is gone, and further that each gen- eral agent is checked up on the total amount of his concessions and as to whether he has made any that are exceedingly heavy. If the total amount of concessions is small and it does not appear that he has made a big cut and if there is nothing that — looks out of reason, that is probably all there is of it, but if the total amount is excessive or if he has made a heavy concession on any particular article or quantity he is immediately called upon to explain why that has happened. COMPETITIVE METHODS. 317 According to the assistant general manager, however, the company does not regard a heavy concession made " to meet competition " as having been made for a satisfactory reason. He said : We found that every once in a while somebody had done some- thmg foolish. * * * We realize there has been some weak- ness m the control of this feature and have taken steps that must be eftecti¥e. They come into our office every thirty days— any concession of any kind from the regular wholesale list covering both terms and prices. In further explanation he said : We have to confess that the check on concessions— while not admitting that there have been any grievous errors committed under it, because there have not— but there have been such that we would not have approved had we the opportunity to stop it in time, and we have put in a more effective and prompt check on any possibility of that sort of thing happening. Of course, it goes without saying that if we had not found it necessary we would not have gone to that trouble. Harvesting machines.— It is clear that by reason of its dominat- ing position in the harvesting-machine trade the company would not ordinarily find it necessary to cut the prices of these machines except as some competitor might be getting too strong a foothold in some particular locality. It is probably true that the International Har- vester Co. does not want to completely eliminate competitors in this line. Indeed, until the season of 1912, regular wholesale prices to dealers for International Harvester Co. harvesting machines were somewhat higher than those of its chief competitor in the principal grain States west of Chicago. A few instances have been found, however, where substantial cuts are reported to have been made apparently for the purpose of defeating sales by this competitor and some others. The International Harvester Co., as already stated, claims that its salesmen are permitted to make cuts of the character of those men- tioned only in order to move out-of-date stock and that it does not countenance such cuts for the purpose of meeting the competition of independent machines. General agents of the Harvester company have at times been au- thorized to cut prices on stocks of harvesting machinery on hand at the end of the season. One general agent, in discussing these clean-up sales, said that he had been instructed to avoid publicity in such transactions in giving the blockmen under him authority to allow these prices to dealers. It is admitted by the company that there has been some discrimina- tion made to local agents in the matter of setting up harvesting ma- chinfes and for doing their own work of canvassing. This practice is excused on the ground that it does not reflect a business policy but a, 318 KEPOET ON THE INTEBNATIONAL HAEVESTEB CO. weakness in the organization of the company which the company is trying to eliminate. It is practically admitted that up to two or three years ago concessions of this sort ranging from $3 to $7 on each binder were made even where the work was not performed by the dealer but by employees of the International Harvester Co., and that it is probably still being continued in some cases. The as- si.stant general manager of the company stated that the company had been trying to eliminate this allowance and had eliminated it in many cases about a year ago, when a reduction was made in the price of machines. He stated that in his opijiion the business of the company has been very much better in this respect in 1912 than it has ever been heretofore. He put the reason for the effort to eliminate this con- cession on the ground that it is dangerous for a big corporation to grant concessions that can not be explained satisfactorily to compet- ing dealers. Apparently this allowance has often been used in cases where the work has actually been performed by the employees of the company as an effective concession to push the sale of the company's harvesting machines. It should be pointed out that this concession has admittedly pre- vailed more generally in the East than elsewhere, where the eastern independent factories making harvesting machines find their best domestic market. It also appears significant, when considered in connection with a letter (produced as evidence in the Government fuit), dated August 30, 1902, addressed by the sales committee to the chairman of the executive committee of the company. The sales committee thought that it would be necessary to make concessions of about $5 on harvesters and binders and of $2 on a mower in ter- ritory east of Pittsburgh, for the purpose of meeting conditions and prices that had existed in the past and where the company was " likely to encounter its strongest competition in the future." This letter also recommended that each division be permitted to make con- cessions in certain special cases to some agents who had been accus- tomed to lower prices — with whom we might consider it advisable to continue to do business, even at reduced prices, rather than to allow them to be- come part of the organization of any one of the companies with which the International Harvester Co. will have to compete. The assistant general manager of the company admitted that dur- ing 1903 it was unquestionably a part of the policy of the sales com- mittee of the company to depart from the regular fixed price to meet local competition, but he denied that such policy was what was spe- cifically referred to in this letter, but rather a difficulty foreseen in trying to bring about an even price. COMPETITIVE METHODS. 319 Inasmuch as machines are generally sold f. o. b. factory, except for eastern and southern territory, freight charges are an important consideration to the dealer. The sales committee of the International Harvester Co., in a letter to the executive committee dated August .SO, 1902 (introduced in evidence in the Government suit), said: We bring before you the question of making all prices deliv- ered to the agent's point and prepaying the freight. We do not wish to be understood to be recommending this, but only sug- gesting it for your consideration, the intent of doing this being its effect in our favor as against competing harvester companies and securing and holding to us the best dealers in the country'. This would be an extremely popular concession, and one that more than likely competing companies would not be financially able to grant. This recommendation of the sales committee does not appear to have been adopted generally, however, by the company. It is evi- dent that the adoption of this policy generally would handicap any concern without large resources, but it is also evident that when applied to some dealers and not to others it constitutes a discrimi- nation. In some sections where the International Harvester Co. formerly followed this practice of prepaying freight it has been abandoned. For example, dealers at several towns in Illinois stated that up to two or three years ago they purchased the machines of the International Harvester Co. delivered at their home stations, but at the present time they are compelled to pay the freight from Chicago. East of Chicago it is the usual practice of all harvesting-machine companies to sell carload lots at a delivered price and less than car- load lots delivered at the nearest general agency or transfer point. To dealers in certain parts of the West equalizing of the less than carload freight rate to the carload rate (i. e., making an allow- ance to the dealer for the difference between the less than carload rate and the carload rate) appears to have prevailed to a greater extent formerly than at present, but it appears to be still used at times as a discriminatory allowance. Obviously, it is difficult to determine exactly the cumulative re suit or even the extent of the concessions, large and small, that have been made by the International Harvester Co. in the sale of harvest- ing machinery during the 10 years of its existence. On the whole, the Bureau does not consider that the trade of competitors of the In- ternational Harvester Co. in harvesting machines has been greatly impaired by reason of such unfair discrimination in that branch of its business. New lines. — ^In the new lines of the International Harvester Co., such as harrows, farm wagons, manure spreaders and gasoline en- 320 REPORT ON THE INTERKATIONAL HARVESTER CO. gines, some local concessions in prices and terms have been found in various parts of the country. A more important matter in its effect upon competitors in these lines, however, is the policy of the company of establishing generally over a broad territory an un- usually low basis of prices or granting terms longer than those customary in the trade. If the International Harvester Co. were doing business in these lines only, and chose to do business on a low- price basis, there would be little ground for criticism. The impor- tant point in this connection is that the International Harvester Co. reaps a monopolistic profit from its harvesting-machine lines, and is thereby enabled to pursue an unusually low price policy in other lines, apparently with the object of securing control of them also. In this connection the assistant general manager of the company acknowledged that considerable price reductions had been made on certain new lines in which the company's prices "were not in line with the market." Many of the company's principal competitors complain of the long-payment plan of the International Harvester Co. Harroxos. — In the harrow trade, one Kansas City jobber asserted that the International Harvester Co. had " shot the market to pieces." One of the best-informed independent manufacturers mak- ing tillage implements declared that the International Harvester Co. " sells terms, not harrows." He stated that representative terms of the independent manufacturers for spring trade are net cash July 1, with 5 per cent off for settlement April 1, and on fall trade net cash November 1, with 5 per cent off September 1. As compared with these terms he asserted that the International Harvester Co. gives practically two years' time. According to the representative of an Omaha jobbing house the prices of the International Harvester Co.'s harrows to different dealers in that jobbing territory varied as much as 10 per cent, making competition extremely difficult in view of the low basis of prices. An official of an eastern factory whose competition with the Inter- national Harvester Co. is in harrows and other implements, stated that — ever since the International Harvester Co. was organized our company has had more or less difficulty in meeting their prices. We had an established trade with dealers in the Eastern States and in Ohio and Michigan, and everythiiw went along in good shape until the International began to offer special terms and discounts which we could not afford to meet. The idea of giving small dealers a special discount was new to us. We always gave a big buyer some extra consideration, but never felt that the small buyer was entitled to the same treatment. The terms and COMPETITIVE METHODS. 321 inducements offered by the International and the prestige they get from the old harvesting lines they control, have made it pretty hard for small concerns like ours" to compete with them. In connection with these statements other competitors also stated their belief that low prices and long terms in harrows have been adopted by the International Harvester Co. for the purpose of se- curing control of that branch of the implement industry — a policy that it is better enabled to pursue by reason of its monopolistic posi- tion in the harvesting lines. Farm Wagons. — Until within recent years the manufacture of farm wagons has been chiefly in the hands of concerns making little else. For this reason the effort of the International Harvester Co. to secure this market has been severely felt by many such concerns. It is peculiarly a trade in which the capital of the manufacturer is not turned over rapidly, owing to the necessity of purchasing wood stock to be seasoned before it can be utilized. Any extension in the time of payment by dealers correspondingly lengthens this period during which the manufacturers' capital is not available for rein- vestment in his business. In the sale of wagons the contract of the International Harvester Co. has a definite settlement date on its face, but it has become cus- tomary in many cases for a dealer to settle at the end of the season for such wagons as he has sold and for the company to take the deal- er's note and carry the stock unsold until settlement time at the end of the ensuing season. This practice is not common among other wholesalers of wagons. It is the usual practice among wagon manu- facturers and jobbers to sell to dealers on terms of about six months, except in straight carload lots, which may be carried for a period of nine months or a year. Some wagon manufacturers require settle- ment of one-half the amount in four months and the other half in six months, with 5 per cent discount for cash in 30 days, with an April 1 dating on shipments made during the earlier months of the year. Sometimes a dealer ordering a second carload is allowed 5 per cent discount for cash in 60 days. The general opinion among independent wagon manufacturers and jobbers handling in- dependent makes of wagons was that there was little or no money in the farm-wagon trade, owing to the competition of the International Harvester Co. They asserted very generally that the terms allowed by the International Harvester Co. would eventually destroy the trade of the smaller wagon concerns. In this connection it should be repeated that the returns of the International Harvester Co. on its wagon business are exceptionally low. (See p. 243.) According to an eastern manufacturer of farm wagons, when the International Harvester Co. began to push this line its prices and 322 EEPOET ON THE INTERNATIONAL HABVESTEK CO. terms, both to dealers and farmers, were such that his company could not afford to compete. In 1908 he reached the conclusion that the International Harvester Co. was bent on securing control of this branch of the industry, and recommended that his company gradually get away from the standard farm wagon line. Up to the time the International Harvester Co. entered this trade this eastern concern had had no trouble in maintaining its own in competition with other concerns. The burden of the competition of the International Harvester Co. in the farm wagon trade has not been confined to its small com- petitors, however. A branch house manager in the West of one of the larger full-line competitors of the International Harvester Co. stated that the prices and terms for International Harvester Co. wagons and disk harrows had cut into the business of his own company to the extent of 75 per cent. He asserted that the Interna- tiona] Harvester Co. is " smothering " competition on account of its size and not by reason of the quality of its goods. Similar complaints of the prices and terms of the International Harvester Co. on wagons have been reported by other competitors. Perhaps the most striking feature of the whole situation is the fact that the company has greatly increased its output in the face of a decreased output for the United States as a whole, while as just stated its profits in this department are unusually low. Manure spreaders. — In the sale of manure spreaders the Inter- national Harvester Co. has admittedly been very aggressive, and ac- cording to the statement of the assistant general manager the con- cessions allowed have been much larger and more frequent than on any other line of the company's goods. This he attributed to the fact that the company has made a vigorous fight to increase its business in this line and to dispose of machines on hand in anticipation of a change from wood construction to steel construction, and a change in type from high to low-wheel machines, which, he asserted, had made it necessary to market the stock on hand at considerable con- cessions in price. He claimed, however, that this has also been found necessary by other manufacturers. For several years the International Harvester Co. has sold spread- ers on both of its principal forms of contract — commission and sale. In the commission form of contract the dealer is allowed to sell these machines on two years' time, and while the sale contract names definite prices, terms and dates of settlement, dealers have very fre- quently been permitted to settle by note for machines unsold at the end of the season. As shown elsewhere, the company has acquired more trade in this line than is enjoyed by all of its competitors com- bined. Eepresentatives of the Bureau found cases where jobbers with a considerable volume of trade had given up the sale of inde- COMPETITIVE METHODS. 323 pendent spreaders, the reason given being that they were unable to compete with the prices and terms of the International Harvester Co. Other jobbers interviewed asserted that for the same reason they were contemplating discontinuing the sale of these machines. Substantial differences were found by the Bureau in the prices and terms on spreaders of the International Harvester Co. to dealers in the s|me general locality. Gasoline engines. — There is a very considerable number of factories making nothing but gasoline engines. Nearly all of these manufac- turers interviewed, even those of considerable size, stated that it is very difficult for them to meet the terms of the International Har- vester Co. One competitor alleges that in some cases the Interna- tional Harvester Co., in selling its engines, takes payment in notes ma- turing in the fall of four consecutive years,^ compared with 6, 9, and 12 months at longest for his own concern. He said that his own com- pany can not tie up its capital by allowing such long terms; it re- quires some cash payment and the longest notes generally run for about six months. He stated that the prices of the International Harvester Co. are pretty well maintained, but that long credit ex- tended by the company is attractive to some purchasers and gives it a great advantage. Among the numerous manufacturers of gasoline engines in south- ern Michigan also, the principal ground of complaint against the International Harvester Co. is likewise the difficulty of meeting its terms. Some of these manufacturers also called attention to certain variations in the retail prices of the engines of the International Harvester Co. Section 10. Misrepresentation of competitors by salesmen. Farmers and dealers alike desire, of course, to purchase machines that they feel are well constructed of good material, made by a com- pany able to furnish repairs at any time they may be needed to re- place broken or worn-out parts. Any doubt in regard to such mat- ters tends to injure the company affected. Such an injury exists if doubts are created as to the financial standing of a manufacturer, or that he may not continue in business, thus making it impracticable to obtain repairs when it becomes necessary to do so. Similar appre- hension arises if the farmer or dealer believes that control of the business of a particular manufacturer has been acquired by another competing concern, since such a change might result in the discon- tinuance of the purchased company's line. In the competition of the several harvester companies before the International Harvester Co. was organized it appears to have been I These are probably extreme cases ; see p. 284. 324 REPORT ON" THE INTERNATIONAL HARVESTER CO. the policy of the selling organization of each company to effect sales by discrediting other concerns and their products through misrepre- sentation of some sort, as well as by selling their own machines on merit. (See p. 61.) It seems to have been a recognized custom to carry such tactics even to the point of persuading farmers to cancel orders already given to competitors. The consolidation of several harvesting-machine companies under common control lent color to reports that, of the other concerns not already taken in, this or that company, or an option for its purchase, had been acquired by the International Harvester Co. Several instances of this sort occurring in the earlier years have been reported to the Bureau. An official of the International Harvester Co. positively denies, however, that this practice was ever countenanced by that company. The latest case of which he had any recollection was one occurring in New York State some time in 1905 or 1906, where the attention of the International Harvester Co. was called to the case of a canvasser who, when sued for damages by an independent manufacturer for making such state- ments, appealed to the International Harvester Co. to defend the suit. The reply alleged to have been given by the officials of the International Harvester Co. was that if the man was guilty of such a practice after all that had been said to stop it the company would do better to help the competing manufacturer to convict him. It is stated that the company not only did not help this employee but that he was discharged, making public apology to the independent manufacturer. At about the same time or somewhat later complaint was made to the International Harvester Co. by another competitor that salesmen of the former were circulating reports that the International Har- vester Co. had become interested in the management of the competing company. During the last few years salesmen of the company do not appear to have been active in spreading stories of the kind mentioned. In this connection an official of a competing company says that while formerly there was more or less talk by the salesmen of the Inter- national to the effect that the company of which he is an official was about to be taken over by the International Harvester Co., he be- lieves that such statements would not be made at present except by a salesman who didn't know his business. This is corroborated by the statement of an official of another independent company, who says: There hasn't been so much attempt to break the contracts of the independents lately, particularly in the case of getting farmers to cancel orders for independent machines. * * * Eecent complaints have been chiefly to the effect that the salesmen of the International Harvester Co. frequently represent that pur- COMPETITIVE METHODS. 325 chasers of competing harvesting machines will be unable to secure i-epair parts, the implication being that the competitors may not continue in business. A representative of the International Har- vester Co. admitted that this practice existed to some extent, and also that it was serious and indefensible. He said that the com- pany had " used a lot of time, energy, and money trying to eliminate it," and contended that it was inherited from the bitter competition which preceded the formation of the company. He asserted posi- tively that it was contrary to the policy of the company. While the Bureau received numerous complaints of this sort,- apparently the practice has not resulted in seriously handicapping competitors. Section 11. Conclusions. It appears, therefore, that the International Harvester Co. has resorted to practices which are clearly objectionable. It has at- tempted to monopolize local retail dealers through its policy of main- taining several brands of harvesting machines and giving only one brand to a dealer. It has sought, by threatened cancellation of its binder contracts, to induce dealers to handle its products exclusively. Furthermore, it has used its binder agency as a club to force dealers to handle its new lines. Its agents have misrepresented competitors in statements that farmers will not be able readily to secure repair parts. It has employed " suggested " retail price lists. Finally, in lines substantially monopolized, it has maintained a high level of prices, while giving reduced prices or long credits on machines in which it meets active competition. It has thus employed its monop- oly in the harvesting-machine branch of its business to further its control of the new lines, a practice which appears to have been the keynote of its policy. Kepresentatives of the International Harvester Co., in answering some of the complaints above discussed, made a strong point of the fact that the business of the company's competitors, particularly in harvesting machines, had increased in recent years. This is un- doubtedly a fact, as already shown. (See p. 181.) It is important to point out, however, that this is no real defense for practices which in themselves are bad. It is a fact which may properly be taken into account in estimating the effectiveness of competitive methods, but not the propriety of methods which are unquestionably unfair or improper. Moreover, as already shown, the International Har- vester Co. has thus far substantially maintained its monopolistic postion in the harvesting-machine business, while in several of the newer lines, in which it had no interest at its organization, it has in a short period of years built up its business so rapidly that in some of these it now has a large proportion of the trade, and in one, manure spreaders, a majority of the business. 326 EEPOET ON THE INTEBNATIONAL HABVESTER CO. The company furthermore laid considerable stress on the fact that whereas in the early years of the organization various methods were extensively employed which were undoubtedly objectionable, many of these had been eradicated or greatly reduced. The Bureau is of the opinion that this is to some extent true. But the numerous com- plaints received by the Bureau with respect to conditions in recent years show clearly that these objectionable practices have by no means been eliminated. In considering these competitive methods of the company it should be borne in mirtd that practices which might be regarded with more or less indifference if there were a number of competitors of sub- stantially equal size and power may become highly objectionable when one competitor far outranks not only its nearest rival but practically all rivals combined, as is true of the International Har- vester Co. for several of its most important lines. EXHIBITS. Exhibit 1. STATEMENT MADE BY MB. STANLEY McCORMICK AND MR. BENT- LEY TO MR. PERKINS, JUNE 27, 1902, IN NEW YORK CITY. The McCormick Company is an Illinois corporation, organized in 1879 under the Laws of the State of Illinois, with a capital stock of $2,600,000. This stock is held entirely by the McCormicks. The company's officers are a president, vice president, secretary, assistant secretary and treasurer. The incorporation papers provide for a directorate of five. There have been only four directors for several years. These are Mr. Fowler and the three McCormick brothers. The company has 65 salaried general agents in this country. Sal- aries average about $2,500 a year for each general agent ; no commis- sion. Each general agent reports to the central office at Chicago. Under these 65 salaried general agents there are sub or local agents, numbering about 12,000, for the most part engaged in other lines of business. The company has 2,000 traveling salesmen in this country. These are hired by the general agents entirely. These traveling salesmen are employed from about the first of March until the first of October. They are paid a salary of from $50 to $75 a month, and in addition are paid their traveling expenses. They work entirely under the direction of the general agents, who send them to the sub agents, with whom they work, drumming up trade and selling machines. These traveling men received last year, in salaries and traveling ex- penses, $1,200,000. The sub or local agents are paid entirely by commission. That commission is variable according to the article sold, but it averages about 20 per cent. Mr. A. E. Mayer is manager of the sales department and is in charge of the selling organization. The offices of the general agents throughout the country, about 65 in number, are in many cases in the buildings owned by the McCor- mick Company in the various cities, which buildings are used as storehouses for goods. Thirty out of the 65 general agencies arc housed in buildings owned by the McCormick Company. The build- ings are almost all used entirely by the McCormick Company. As a rule the buildings are located in the wholesale district of each city, along the line of a railroad, with switching facilities. A bond of $5,000 is required from every general agent. The gen- eral agents have great latitude in the hiring of traveling men. 328 RBPOET OK THE INTEBNATIONAL HAEVBSTEB CO. The general agent reports each month to the central oflSce at Chi- cago as to the number of men he has hired. In this same report the general agent makes a statement as to the number of machines re- ceived, the number of machines sold, on what accounts he has paid out money, notes collected, etc. There is no method of controlling the relations between the general agent and the traveling agent or the local agent, or of knowing whether the general agent has used good judgment and his best efforts to conduct the business at the minimum cost in all respects, except by comparison with previous years in his own district, whether man- aged by him or some other general agent, and by frequent visits of inspection from the head office. MANXrrACTUEING DEPARTMENT. The Works and the Twine Mill are thoroughly " sprinkled " and are largelj^ insured in the Senior Mutual Companies. Mr. McCormick knows of no patents that have just expired or that are about to expire that would affect their business one way or the other. The McCormick Company is now erecting a plant, which will cost from $600,000 to $750,000, in which they will manufacture their own malleable iron. This plant is in the immediate vicinity of the pres- ent works. The Deering people have been manufacturing their malleables for from five to ten years. By manufacturing their own malleable iron the McCormick Company should save the profit of the malleable foundry and also have advantages in being able to get a sure and regular supply of the malleable iron, which is a very im- portant feature. The McCormick Company have nothing that is a radical improve- ment over anything of the Deering people, and the Deering people have nothing that is a radical improvement over anything of the McCormick Company. The McCormick Company own a patent on the mower, which they consider a very important one, which covers the feature of raising the cutter bar from the ground to a vertical position without the driver leaving his seat. This feature is not, perhaps essential to the operation of the mower, but it is one that has proved very attractive in selling. It has been on the market for about three years and it has taken very well, so that the McCormick Company think it may become an important feature. The McCormicks feel that they con- trol this. The McCormick Company also control a patent which covers the Aertical plan of construction of the corn harvester, and Ihey consider this a very important patent, being superior to the horizontal plan which is used by the Deering Company. The Os- borne Company are building under the patent of the McCormick Company, paying the McCormick Company a royalty. The McCor- mick Company have been approached by the Milwaukee Company for permission to use this plan under the same conditions, but they have refused. 1894 was the first year in which the corn harvester was put on the market. Several hundred were sold during the first year. During 1901 about 27,000 were sold. EXHIBITS. ■ 329 The McCormicks know of nothing immediately connected with the manufacturing end of the business that is likely to affect it adversely in the immediate future ; on the contrary they are con- stantly putting in improved machinery and labor saving devices and generally systematizing the plant, all of which goes to produce the machine at a lower cost. They are also getting a more accurate system of ascertaining the cost of- manufacture. The McCormick Company are developing a very important new business in using flax fibre for the manufacture of twine. The process is being patented. There are no lawsuits of any importance now on between the har- vesting companies, in connection with patents. The McCormick Company has given the D. Co. notice of infringement of the mower patent referred to. This is infringed also by other companies. IjAboe situation. There was a riot in Chicago in 1887 and the McCormick Com- pany's men were more or less mixed up in it. The anarchists as- sembled near the works, harangued the men, and finally got some of them wild. They made a rush for the gates and battered them in. No special damage was done, however. Since then there has been but one trouble in the foundry, and that was owing to the in- troduction of the pneumatic moulding machines. These were aban- doned afterward because they were not satisfactory. Occasionally . there has been a slight disturbance among the machinists — one or two men were discharged perhaps, but the disturbances were very slight. There are no unions that the McCormick Company have to deal with. The same is true of the Deering people. The company is doing some good work in the lines of " betterment " or " welfare work " among its employees. TRANSPORTATION ARRANGEMENTS. The McCormicks leased about four miles of track from the Santa Fe Railroad and incorporated it into a railroad called the Illinois Northern Eailroad. They also put their own track system in the works and connected it with the Illinois Northern. The McCormick Company's dealings are entirely with the Illinois Northern Railroad, which railroad acts as a go-between with the McCormicks and the other railroads. The Illinois Northern Rail- road has traffic arrangements with quite a number of other railroads ; for instance, the Pan-Handle, the Burlington, the Santa Fe, the Chicago Terminal and Transfer, the Union St«ck Yards Railroad (which is another transfer line) , the Pennsylvania, and the Chicago & Alton; so that it gives the McCormicks very good railroad facili- ties and makes it very easy and convenient for the McCormicks to make arangements with the other railToads. The McCormick works are situated rat Blue Island and Western Avenue. There are 5,300 employees in the reaper works, and 1,200 in the twine mill. This mill is next to the reaper works. The twine works, however, is conducted as an entirely separate organization, reporting direct to the central office. 77854°— 13 ^23 330 EEPORT ON THE INTEBNATIONAL HABVESTEK 00. FINANCIAL POLICY, During the last two years $12,000,000 has been added to the assets of the company. The policy is to secure working capital through the year by borrowing it from the banks, beginning early in the spring and borrowing as the money is needed from time to time, and then liquidating during the fall and winter. For instance,' this year they expect to borrow about $10,000,000 in all. This, however, is a larger sum than is ordinarily borrowed, and is occasioned by the improvements being made in the plants and the new construction going on. Last season, for example, the maximum sum borrowed was about $5,500,000 and this was practically all repaid by the first of January. During the last five years over $15,000,000 has been invested in additions to plant In Chicago and in the country. In the last five years the company have declared about $5,000,000 in dividends. About one-third of the money borrowed last year was furnished by the McCormicks themselves or through other individuals, and two-thirds was borrowed from Chicago, New York and Boston banks. The bank loans were obtained this year at about 4 per cent interest. Last year the interest was the same. The McCormicks believe that the other companies have always borrowed a great deal more money than they did. From 50 per cent to 60 per cent of the machines are sold for cash and the rest on time covering two years from the fall when the machine is sold. The loss on the time sales is about 4 per cent. Five per cent additional is charged on a machine when the sale is a time one. The notes are carried by the company itself. The company has a system of special agents who do the collecting in certain localities. Out of 65 agents there are about 6 who are collecting agents. The company has been rather fortunate in not having many deficits or defalcations among the general agents. The general agents keep the money collected from sales, report once a month, and remit with their reports. CENTRAL OFFICE. There is the head of the sales department, and he has an assistant. There is the head of the collection department, and he has an as- sistant. This head has charge of all collections and of such general agents as do not have special collecting agents in their territory. These general agents report to collection department. There is the head of the twine department, which is an entirely separate works. This head has charge of the twine mill and reports directly to the central office. The twine sales are always for cash. This head also has charge of the purchasing of the fibre from which the twine is made; he also has an assistant; this head also has re- lations with the general agents on all twine questions. There is the head of the purchasing department. He has charge of all the purchasing, with tne exception of the fibre, for the manu- facture of twine. There is the head of the transportation department. He has charge of the Illinois Northern Railroad and all questions of trans- portation rates. EXHIBITS. 331 There is the head of the legal, patent and experimental departments, which are merged m the one man as they all seemed to be connected. Ihere is the head of the foreign sales. The foreign sales are sepa- fu u T t^i^iomestic sales, so that although Mr. Mayer is called tne head ot the sales department it would be more accurate to say that he is the head of the domestic sales department. There is the head of the accounting department. A new department was recently organized, which is called the order and shipping department. The head of this department at- tends to all orders that are received, sees that the orders are filled promptly, and attends to shipping them. There is the superintendent of the reaper works, who ranks as the head of a department. There is the head of the advertising department. The total sales of machines last year amounted to $18,400,000. Total sales of twine amounted to $4,000,000. Repairs amounted to $1,000,000. The net profit on the $18,400,000 of machines sold was approxi- mately 22 per cent. There was practically no profit on the twine end of the business, either to Deering or ourselves owing to the un- settled conditions resulting from the Philippine war which raised the cost of the fibre. The profit on the $1,000,000 of repairs was probably about 45 per cent. "While the profits of last year have not been made up, they are known to be over $4,000,000. In a general way, the machine sales five years ago amounted to about $12,000,000. It is estimated that a combination will produce an increase in the sale of repairs; so that even if the sale of machines fell off in the next five years, the sale of repairs would necessarily increase, and the percentage of profit on repairs is very large. The McCormick and Deering people, in talking over how they might get together, estimated, in the matter of good will, that about two average years' profits ought to represent the good will of each company's business. In negotiations not a great while ago the Deerings rather expressed the opinion that if the McCormick and Deering Companies were to come together it ought 'to be on a basis of about 53 for the McCor- mick Company and 47 for the Deering, while the McCormick figures have been anywhere from 55 to 60 for the McCormick Company and 40 to 45 for the Deering Company. These figures are not as far apart as they seem to be, because the Deering people have always refused^ to regard the outstandings as legitimate assets of the busi- nesses in forming a combination. Without these the percentages, according to the McCormick Company's figures, are about 55 to 45 as against the Deering's figures of 53 to 47. OTHER COMPANIES. The Deering Company Is estimated to be wortli, including their bills receivable $25. 000. 000 The Massey Harris Co. of Canada 9,000,000 (This estimate was made by Mr. Swift of the McCormick Co. Mr. Middlekauff has estimated this company to be worth $18,000,000.) The Champion Company (Warder, Bushnell & Glessner) of Spring- field, O.. is estimated to be worth 8, OOO, 000 The Piano Manufacturing Co. of Chicago 6, 000, 000 The Milwaukee Harvesting Company 1 4, 500, 000 332 BEPOET ON THE IWTEENATIONAL HAEVESTEE 00. The Champion Company. — Mr. Glessner is president of this com- pany. Mr. Harold McCk)rmick saw him three or four weeks ago and sounded him as to what he would think of the several harvesting companies getting together. Mr. Glessner seemed to be very much interested in having it done and said that his company would not be particular as to details or as to what influence would predominate. The Champion Company is a stock company and the stock is rather closely held by the gentlemen directly interested in the management of the company, with the exception of the Warder interests. Mr. Warder was the senior partner of the firm. Pie is now dead and Mrs. Warder lives in Washington. The Warders have no active interest in the business. It has been said that Mrs. Warder owns about one-third of the stock of the company. Mr. Fowler had a conversation with her about a year ago, in which he got the impres- sion that she would like to sell. The Piano Company. — ^Mr. W. H. Jones is president of this com- pany and is the dominating influence. Mr. O. W. Jones, his brother, IS vice president. He visited Mr. McCormick about four weeks ago and in a casual way asked if something could not be done in the way of a combination. He remarked : " If you and I were appointed a committee of two to put this through it wouldn't take us a week to wind it up," giving the impression that he was anxious to see it put through. This Mr. Jones takes rather a pessimistic view of the trade. He thinks that prices will have to be reduced considerably. He thinks, for instance, that a machine now selling to the trade for $100 will soon have to be sold for $75. At one time he expressed himself as entirely friendly to control by the McCormicks. He also thought the smaller companies like the Piano Company would stand a better show in the case of strenuous competition than the larger companies, because of smaller charges in the way of organization. GENERAL. Mr. Deering has approached both the Piano and Champion Com- panies, but so far as is known he has no option on either one. Mr. Deering has claimed that the McCormicks have conducted their collection department in too liberal a manner. Mr. Deering is about 75 years old. He is a born trader of the David Harum type. He gives one the impression, however, that if he once gave his word he would stick to it. His reputation is that of a very shrewd, skillful trader. He is the kind of man who would make a bluff and then stand by it, no matter what the consequences. Disaster might come to the negotiations from a determination on his part that he would make a gamble of it; that is, he would ask for a certain price and if he did not get it he would say " Well, we'll go on just as we are now." Mr. Deering may oppose the kind of organization the McCormick Company has, which develops the strength and capability of im- portant men and places responsibility upon them. His plan has always been to keep the lines in his own hands and then play off one man against another. This plan has produced much jealousy and friction in the Deering Company. Mr. Deering's relations with Judge Gary are very close, but they are of such a nature that you would get a great deal more help if EXHIBITS. 333 Judge Gary came to you with a proposition than if you got at Deer- ing through Judge Gary. Judge Gary has far more influence over Deering than anyone else. Mr. Deering usually has some scheme up his sleeve. For instance, he very likely might already be negotiating to get hold of the Warder interests and might be planning to do the same with regard to the other companies. The men who represent the elder Mr. Deering, who has retired from the business, are Mr. Charles Deering and Mr. James Deering, his oldest and youngest sons, and Mr. Richard Howe, his son-in-law. These three younger men constitute the present copartnership. Mn William Deering, however, keeps in close touch with the main mat- ters of the business. The thing that would prevent an excessive demand on Mr. Deer- ing's part would be the fact that he asked for only two average years' profits as the measure of good will of his company. The demand for control of any new company by the McCormicks has been the chief obstacle met in these negotiations with Deering. The Deerings have indicated that they would prefer not to sell for cash, but would take securities and keep an interest in the manage- ment of the new organization. Mn Deering has urged that the whole trade be taken into the com- bination. Against this it has been suggested to him that if only 90 per cent were brought in it would.be quite possible to deal with an- other of; the minor companies if any one made excessive demands ; that is, no minor company is probably essential to the combination, although the five named are undoubtedly the most desirable. Mr. E. K. Butler was general manger of the McCormick Company up to 1897, since which time he has been out of the business entirely. He is about 65 years old. It is said that he is now in the service of the Deering people. It would not be advisable that he be brought into the business in any capacity. Exhibit 2. statement submitted to bawkers by mccormick harvest- ing machine co. in 1902. Organization, McCokmick Harvesting Machine Company. The sales of the product of the McCormick Company are under the supervision of three departments: 1. Sales department (domestic). 2. Foreign department. 3. Twine department. SCOPE. (1) Sams department (domestic) .—Mr. A. E. Mayer, sales man- agerv This department has charge of the United States and Canada. In Canada, for the sale of machine and repairs (or duplicate parts) the business is done through six general agencies: Eegina, N. W. Ty. Ogdensburg, N. Y. Winnipeg, Man. 5?°'i*^''®^l'/- *^- Toronto, Ont. Boston. Mass. 334 REPORT ON THE INTERNATIONAL HARVESTER CO. In the United States business is done through sixty-five general agents and one dealer at Salt Lake City. The general agencies are in, Mass. : Boston. New York: Ogdensburg, Elmira, Al- bany, Eochester. Penn. : Pittsburg, Harrisburg, Phila- delphia. Ohio : Cleveland, Columbus, Cincinnati. W. Vir. : Parkersburg. Vir. : Richmond. N. Carolina : Charlotte. Georgia : Atlanta. Tenn. : Nashville, Jackson. Ky. : Louisville. Ind. : Terre Haute, Indianapolis, Evans- ville. Mich.: Grand Rapids, Saginaw, Jack- son. Wis. : Eau Claire, Green Bay, Madison, Milwaukee. 111.: Aurora, Peoria, Quincyt E. St. Louis. (2) FoEEiGN DEPARTMENT. — Mr. W. C. Mundt, foreign manager. Mr. Mundt has under his charge — Mexico. — Direct representative in this country, under Mr. Mundt, is August Hyde, selling outright to 15 dealers at points as follows: Minn. : Mankato, Minneapolis, Albert Lea. Iowa: Sioux City, Ft. Dodge, Daven- port, Ottumwa, Des Moines, Council Bluffs. Mo. : Kansas City, Springfield. La. : New Orleans. Tex.: Dallas. O. T. : Oklahoma City. Kas. : Topeka, Wichita. Nebr. : Lincoln. S. Dakota: Aberdeen, Sioux Falls. N. Dakota: Grand Rapids [Forks], Fargo. Mont. : Helena. Wash. : Spokane. Ore. : Portland. Cal.: Stockton. Colo. : Denver. Irapuato, Gto., Mexico. Mexico City, D. P., Mexico. Puebla, Puebia, Mexico. San Luis Potosi, San Luis Potosi, Mexico. Colonia Dublan, Chih., Mexico. Gomez Palacio, Durango, Mexico. Chihuahua, Chih., Mexico. Juarez, Chih., Mexico. South America.- 0. Porfirio Diaz, Coah., Mexico. Guaymas, Sonora, Mexico. Guadalajara, Jalisco, Mexico. Monterey, Coah., Mexico. Jiminez, Chih., Mexico. Saltillo, Coah., Mexico. Parral, Chih., Mexico. Durango, Dgo., Mexico. Santiago, Chile. Valparaiso, Chile. -Selling outright to dealers at points as follows : Buenos Aires. Montivideo, Uruguay. Cuba. — Selling outright to one dealer at Havana. Africa. — Selling outright to three dealers at points as follows : East London. Malmesbury, C. C. Durban, Natal. Australia. — Our direct representative, under Mr. Mundt, is Fred Hewetson, handling the business with dealers to the number of four at, Melbourne. Sidney. Perth. Adelaide. New Zealand. — Selling outright to one dealer at Christchurch. Europe. — Mr. W. C. Couchman has charge of the trade of Europe and is called the European manager. He has entire charge of the trade in Europe, and Mr. Mundt is his local representative at this office, but Mr. Couchman is not responsible to Mr. Mundt, their posi- tions being of a co-ordinate nature. (1) General agencies at, Hamburg, Germany. Budapest, Hungary. London, England. Zurich, Switzerland. Berlin, Germany. Riga, Russia. Odessa, Russia. EXHIBITS. 335 (2) Selling outright to dealers at, Finland: Helsingfors, Abo, Wiborg. Norway: Christiania. Egypt: Alexandria. Sweden: Malmo, Pitea, Umea, Stockholm, Sundsvall, Ostersund, Gefle. Holland: Groningen. Denmark: Copenhagen. Turkey : Constantinople. Italy: Grosseto. Spain: Bilbao. Roumania: Bucharest. Portugal: Lisbon. Greece: Athens. France: Paris. (3) Twine department. — H. L. Daniels, manager. The twine de- partment sells through the same agencies and has the same scope as the domestic sales department and the foreign sales department com- bined. The twine department deals upon the question of twine just as the other two departments deal on the question of machines. METHOD. The product of the McCormick Company in machines and twine is sold in different ways to meet the different conditions of the territory organization. In general there are three ways of selling our product : (1) Consigning our product to our general agents, who in turn consign them to the local agents, who in turn sell them to the farmers. (This is the method in vogue in the United States.) (2) Consigning them to our general agents, who sell them to the local agents, who sell them to the farmers. (This is the method which is coming in vogue in Europe.) (3) Selling direct to each dealer, who in turn sell direct to smaller dealers, or to the farmer. (This is the method which is in vogue in foreign countries generally, but which is being supplanted in Europe . by plan No. 2.) Generally speaking our grain han^esters, com. harvesters, reapers, mowers, headers, shredders and header binders are handled by the local agent on a commission basis. This may be a cash sale or a time sale, but in either event the local agent gets the commission on the price he sells to the farmer as his remuneration. (The exception to this method is where these machines are sold outright direct to the dealers, we getting our pay for them either against the bill of lading or in short time notes. This is the custom in general in foreign coun- tries, excej)t in Europe.) Our twine, rakes and sickle grinders are usually sold outright on a net cash basis to the local agent. These sales are not on a commission basis. By net cash we mean payment between October and January 1st of the season in which they are sold ; the exception to this custom being in cases of irresponsible local agents, speaking from a financial standpoint, where we desire to control the sale of the twine and to continually hold the ownership of it, in which case it is sold on commission, we retaining the title until it passses directly to the 336 REPORT ON THE INTERNATIONAL HARVESTER 00. consumer. Or, in the case of rakes, where occasionally we will take a note for a rake, that is sold by the local dealer, with a mower; both machines being settled for by note. Summing up the situation, our commission business is done through our general agents in the United States and Canada, except- ing in case of twine and rakes which are sold through the same channels on our regular cash basis. Again, outright sales are gen- erally made to foreign countries, including Mexico, excepting in Europe. In Europe our trade is undergoing a transition. A few years ago we had no direct representative in Europe, but sold out- right to each dealer. Within the past few years we have estab- lished our o^n organization in Europe with the result that to-day we have seven general agencies doing business on a consigiunent basis. The other channels in Europe are at present on the direct sales basis. (l) CONSIGNMENT TO GENEEAl AGENTS, WHO CONSIGN TO LOCAL AGENTS, WHO IN TTJBN SELL TO THE FABMEB. During the fall and winter and the spring we manage [manufac- ture] our product and distribute the surplus or product, over the capac- ity of the warehouses in Chicago, to our various warehouses through- out this country. Up to April 1st we have to store the machines and twine very largely at our own expense and through our own channels. After April 1st our local agents will receive shipments direct from the Works and will store them themselves. However, under the pressure of the trade this date is continually advanced on the calendar. After the season's business in the fall, the general agent commences to organize his force for the coming year's campaign. This is done during the process of settlement of the past season's business, so that in many districts at no time of the year is the district without a canvassing force in the field selling our machines. This applies more particularly to the central middle states and southwestern states, where the winter wheat is sown. In the ter- ritories in the North and northwest canvassing is postponed until February or March, largely on account of it being a spring wheat country and the uncertainty of crops until late in the season. One of our territories handled by a general agent will contain from 75 to 175 local agents, according to the population and according to the crop producing capacity of that territory. These local agents are divided up into districts of 15 to 40 local agents, presided over by dis- trict agents, so that a general agent will have directly over [under] his control and responsibility from 5 to 10 district agents. These men receive from $75 to $110 or $115 a month. They are the lieutenants of the general agent, presiding over their respective districts and are held responsible for the trade in their districts. They are men who have risen up from the ranks and should be capable of selling machines as well as collecting. money for machines and should be men, who could make settlement with the local agent at the end of the season. Under each district agent is the selling force of from three to ten men who go round the country, riding largely in buggies, visiting the farmers and soliciting the purchase of machines and twine, and generally it is desirable that they should be accompanied by the local agent of that eection. These men receive from $40 to $75 per month and their EXHIBITS. 337 expenses. These men, including their salary and expenses, often times run up a bill of $125 to $150 a month to the company, in return from that they are supposed to sell from say 10 to 40 orders a week based upon the time of the year and the ability, of the man. Then there IS the expert who goes out as harvest draws near and fixes up the machines which the farmer complains of during the winter and which the local agent desires to have patched up in order that his standing in the community, as a hustling local agent, can be estab- lished in the eyes of his constituents. These experts, therefore, fix up last year's machines by adjusting them, or putting on new duplicate parts, in case worn parts are necessary to ba replaced, and then as harvest approaches these experts go round the country and set up or build our machines for the local agent and for the benefit of the farmer. There are very few farmers who can set up their own machines. Also, there are very few local agents who have the ca- pacity and the help at their command to set up the machines for those people to whom they sell. The local agent, if he is a good local agent, IS A typical man in his community. lie must be aggressive and popu- lar. It, does not make much difference what business he is in, al- though the best local agents are continually in the implement business of one kind or another, but there are good local agents who are in the lumber business, hardware business, etc. These local agents at the beginning of the year make a contract with the district agent of their territory in behalf of the general agent to the effect that they will sell the McCormick line for the coming year on such and such terms. We usually specify the terms very clearly. Some of the companies do not specify the terms, but leave that to be decided afterwards. Some contracts are written on a sliding scale basis, so mucli for so many machines, so much less for so many more machines, etc., but usually a straight commission contract is made with them, giving them 22 per cent off the retail price to the farmer for cash say, or 20 per cent for time; cash being payment between October and January 1st of the season in which the goods are sold ; time being 2, 3 and 4 yearly pay- ments. The McCormick Company is very strict about maintaining the retail price to the farmer, believing that no matter what price they get from the local agent, if he does not sell his product on an uniform basis, their trade cannot be maintained upon a staple sales' basis. Therefore; in making a commission basis with this local dealer, we not only stipulate that we are to give him a certain commis- sion on the retail price which is asked, but that that retail price shall he-maintained to a greater degree as is compatible with the conditions of the territory which we ourselves carefully watch. Out of this com- mission the local agent pays the freight on the machine and is sup- posed to go to the extent of doing his own canvassing among his con- stituents for orders. It, also, theoretically calls for the cost of setting up the machines to be borne by him, but under the stress of competi- tion not only do we usually have to set up the machine for him, but, as mentioned above, we have to send our own canvassers out into the territory to sell this product upon which he gets his commission. On the other hand the stress of competition makes the local agent many times unable to sell his machine for retail price which we ask him to get, so he sometimes in order to make the sale will throw in a sack of twine for which he has to pay us, or he will take back in exchange an old machine at a valuation of five to fifteen dollars, which we do not 338 BEPOBT ON THE INIEENATIONAL HAKTESTEB CO. receive and recognize (which is of little or no value to him), so that after the transaction is all completed, there are expenses coming out of the local agent's commission, so that to-day he does not get very much money out of his commissions. The sale of twine, rakes and sickle grinders is not made upon a commission basis, except in exceptional cases, but these goods are sold outright to the local agent at the beginning of the season, or as early as we can make the sale, and he takes upon himself the re- sponsibility of selling these goods. As a matter of fact, however, if a local agent cannot sell his twine which he has bought from us he is oftentimes unable to settle with us for that twine m cash, so that we are compelled in certain instances to accept his paper for the sale of that twine. Therefore, in summing up this classification of doing business we find the general agent at some large city looking to the central office here in Chicago, under whom are his staff of district agents, canvassers and experts who do business with his corps of local agents, who are dealers m the community and who make commission con- tracts with the McCormick Company for the disposal of their goods during that season. When these canvassers go out into the country to take orders for machines, with or without the presence of the local agent of that section (as the case may be), they take the order of the farmer for whatever machine he wants, at whatever price it may be, and they make this order out in triplicate form, one copy the farmer keeps, one copy of this is sent to the local agent and one copy is sent to the general agent at headquarters. The general agent thereupon enters into a consultation with the local agent as to the security of this sale and as to the standing of this farmer. The gen- eral agent, or through his collecting force, rates that order. If it is good he tells the local agent that he accepts the order, which acceptance relieves the local agent of responsibility later on ait settle- ment time. If he is bad, he turns the order down, and the local agent cannot consider that order made for him. The method of rating the orders before the settlement of the local agent, at the end of the season, is different in different territories. In some territories the general agents do not rate their orders first, but hold the local agent responsible to cash in any orders which they turn down at set- tlement time with him and when they refuse to take the paper of this farmer. It is usually the custom after getting the order of a farmer not to settle with him by taking his notes for the goods until after he has had his machine set up on his farm and in many cases until after he has cut his crop. We are endeavoring to make settlement with the farmer now either before or at the time of the delivery of the machine. After the orders have been received and the machine has been sold, the local agent, or the canvasser, endeavors to secure settlement for this machine by taking a note. After this note has been received by the company, it is turned over to the col- lection department for collection, or in case of cash, the local agent turns over the cash, which he has received from the farmer, to the company and thereby gets his extra commission for cash. Some strong local agents give the company cash for the machines, getting the extra discount thereby and then retain the notes themselves, or get them discounted at the bank, but this is rather unfrequent. EXHIBITS. 339 The district agents go into the central office of the general agent frequently for orders and to discuss questions pertaining to other districts. At the general agencies on Sunday the force usually con- venes at headquarters to talk over the affairs of the week and to out- line the program for the coming week. The canvassers and experts are routed either by the general agent or by the district agent with the concurrence of the general agent. Settlement with our local agents is made after the season's business is over, and is usually done by the district agent, who settles for the machines, twine, duplicate parts, etc. At the same time, he often renews the contract for the coming year if he is satisfied with the local agent's settlement with him, or if he is not, he holds the question of a future contract open. Sometimes, the district agent will hold out the next year's contract with a local agent pending his satis- factory settlement of the present year's business. Summing up, the general agent is on our force all the year and is on the regular salary payroll. The district agent is the same. The canvassers and experts are short time men ; length of time and salary and expenses depending upon the pressure of the trade in the given locality. The local agent is a dealer in an independent business, but carries the McCormick line on a commission basis, having samples in his store, and protects and cares for the interests of that line. I might add in conclusion that in some few cases we make a contract with the local agent giving him simply $10 on a binder and $5 On a mower, and we do all the work. It practically means the same as a commission deal with a little less energy on their part in helping us to drum up the trade. (2) CONSIGNMENT TO CUE GENERAL AGENTS, WHO SELL THEM TO THE DEALERS, WHO SELL THEM TO THE FARMERS. This method is that which developed in Europe and is the evolu- tion from the third class hereafter mentioned, in which we hereto- fore have sold to large dealers, who in turn sold outright to smaller dealers and in this same manner to the farmer. Owing to our growth of the business in Europe we have eliminated in several of the countries this large dealer, who heretofore would take a number of machines from us, pay us cash and sell them to his smaller dealers and to the farmer. Under our present system in these cases, we consign our goods to our general agent in Europe and he sells to these dealers throughout his territory. In this way we have elimi- nated the big dealer, absorbed his profits and put into the business energy and aggressiveness, which he did not have under this system. We have canvassers and experts to a smaller degree than is the case in America, but the number of these is growing on our forces. We find that in territories where we have taken over the handling of the machines, our trade is growing very fast, and we are getting many dealers to buy our goods who heretofore did not do so. It is natural to suppose that in the course of time we would change the local dealer to a commission basis as we do in the United States but it would be some time before this would be done. To conform to the laws of several of the countries in Europe, we on our books put these machines to their account at a certain valuation, but, of course, the 340 BEPOKT ON THE INTEENATIONAL HAEVESTEK CO. general system is not changed, which is as above stated. These smaller dealers, therefore, buy the machines of our general agents in the various countries, and these various general agents look to Mr, Couchman, at Hamburg, for their policies and instructions, their accounting, etc, and he in turn transfers his information to this office through Mr. Mundt, (3) SELLING DIBEOTTO BIG DEALEES, WHO SELL DIBECT TO SMALLEB DEALEKS, WHO SELL DIBECT TO THE FABMEBS. This is the method of doing business with all the foreign countries in general, except those parts of Europe where we have taken our business over on a general agency basis. The big dealer buys his machines of us, at a price laid down in New York City usually, and he hands out these machines in the territories under his control to dealers under him ; in many cases, there being two or three stratums of dealers before the farmer is reached. Of course, each dealer takes a slice as his part of the transaction ; this slice being to him a larger percentage of profit than we would be satisfied with if we had the various profits of these middle men for our account. We have also found that they do not push the trade as we do, on a direct organi- zation basis; also, that they use our machines to further their other lines of goods regardless of the interests of the McCormick Com- pany. In some cases, as in Australia, we furnish a man to help our dealers sell goods, such as with our agents at Sidney and Adelaide in Australia. In other cases, as in Mexico, we have a man who is prac- tically general agent, who deals directly with these larger dealers and whose business it is to see that they buy and dispose of the por- tion of machines which we think in that territory is ours. COLLECTION DEPARTMENT. The system of giving long credits to the farmer for purchasing. Reaping Machines was established by Cyrus H. McCormick at the beginning of his business early in the fifties, or about 1855. It has been continued up to the present time, and it is a fact that the har- vesting machine business gives longer credit to the farmers than they receive from the manufacturers of any other goods they buy. Plows and spring tools are sold on short time or for cash. Twine is sold principally for cash in the fall of the year it is sold. The usual terms for iharvesting machines are one-third (J) in the fall of the year the machine is purchased (this is called cash), one-third' (i) the fall of the following season and one-third (i) the fall of the second season, so that a farmer who bought his machine in the spring of 1902 would pay one-third (i) of it in the fall of 1902, one-thirdi (i): of it in 1903, and one-third (i) of it in 1904, or, in other words, he would have used the machine in three harvests before it was finally paid for. Excessive competition has extended this time until it fre- quently happens that a farmer has three years in which to pay for the machine after the season in which he purchased it. Competition has also brought about the undesirable feature of giving a farmer a year's time without interest when the crop conditions are unfavorable and he-is not able to get full use out of his machine. It is also a cus- tom to sell machines at the close of harvest on what are called " next EXHIBITS. 341 year's time " without interest. That is to say, that if a fafmer pur- chased a harvester or reaper in September of 1902, he gives his note without interest until the fall of 1903, and at that time he pays one- ithird ii) cash, and one-third (i) each in the fall of 1904, 1905. The policy of extending this long credit has worked to the advantage of :the McCormick Company in some ways by increasing sales, but if the collection departments of all the various companies were man- aged together, many improvements upon this system could be effected by shortening the length of credit and by making the examination oi the paper taken in payment more rigid. The collection department is managed from the central office, Mr. Alex Legge being the head of that department. He has an assistant and a force of clerks. The notes themselves when taken at the vari- ous general agencies are not sent to Chicago, but are kept by the gen- eral agents or the general collection agents at the branch offices throughout the country, records of the notes being sent to Chicago. The collection department, so far as records and correspondence are concerned, is managed entirely separately from the sales department, but the system of handling this on the field is not uniform. In some cases, the general agent who has charge of the sales also has charge of the collections, in his own district. Where this plan is in opera- tion the general agent has under him a special assistant on the collec- tions, and this assistant has charge of the detail work, referring all matters for decision to the general agent. Special collecting agents are employed, who confine their work to making the collections through the various towns in the district. They go directly to see the 'farmer and where possible they notify the farmer to go in to a certain town and meet them for the payment of the n6te. Eecently the system of rating the paper before accepting it has been installed, and in this way the class of paper is found to be improved, and the work of the collection agency becomes easier. The rating of the paper is done usually by the collection department, and the parties who make the estimates upon the paper are usually a banker in the town and perhaps one of the merchants. In some cases, the sales department makes this rating. The line of organization on this point has not been very clearly drawn. Where the general agent has under his control both the sales department and collection de- partment he works them more nearly together than in the case where a general collecting agent has separate charge of the collections. Frequently, the same man may be worked on collections for eight months of the year, and then be used for four months on sales or other work. This is usually where an exceptionally good man is employed and where the general agent does not wish to lose his services for the coming year, and consequently feels it best to employ him during the summer^ in order to have his services during the fall. In case of many of the regular collectors they are kept busy nearly all the summer, getting securities for old claims and getting collec- tions in shape for active work when the money begins to come in from August on. The books and records of the collection depart- ment at every general agency are kept entirely separate from those of the sales depairtment. On ordinary questions the general agent or the general collecting agent has discretion, but he usually refers any important matter to the home office. In case of 'bringing suit 342 REPORT ON THE INTEENATIONAL HARVESTER CO. he refers the matter to the Chicago office if any judgment has to be exercised on the question. In some of the districts presided over by general agents, a general collecting agent is installed in the same office with the general agent, but he is not under the direction of the general agent,' and he reports to the collection department at Chicago. In such cases, the organi- zation is kept quite distinct, although even here there is more or less assisting of one department by the other. The salaries of collectors are as a rule a little higher than those of salesmen, and the effort is to keep them as permanently employed as is consistent with the economical handling of the general agency. The collection general agents make an annual settlement with the company every winter; in the same way that the general agents of the sales make their settlement, and all the notes are checked over and the accounts of the year. The collection agents remit direct to Chicago as rapidly as the money comes in. The expense for the maintenance of the collection department is remitted to them direct from Chicago. The decision as to whether or not to accept certain notes in payment of machines rests with the general agent or with the general collecting agent, whichever may be the head of the collec- tion department m each territory. The loss on bad paper is four per cent (4 per cent) or less making computation over a term of years. It is felt that the interest account accruing on these notes fairly equalizes this loss. The receipts from the collection department begin to come in strong in August and increase up to November and December, which are the heaviest months. From this time forward, they begin to decrease until by March they fall off to a small amount. This incident to the business necessitates the policy of borrowing during the summer months, as it has not been considered advisable to have enough capital in the business to carry the entire manufacturing season through the sum- mer. If this were done, the amount of surplus would be so large that it could not be advantageously loaned or handled. A bond to the sum of five thousand dollars ($5,000) is required of all general collecting agents. EXHIBPT 3. AGREEMENT BETWEEN DEEBING HARVESTER CO. AND WILLIAM C. LANE, JULY 28, 1902. An agreement, made and entered into this 28th day of July, nine- teen hundred and two, by and between the Deewng Haevester Com- pany, a copartnership consisting of Charles Deering, James Deer- ing and Richard F. Howe (hereinafter called the "Vendor"), party of the first part, and William C. Lane (hereinafter called the "Pur- chaser"), party of the second part. Whereas the Vendor owns certain manufacturing properties lo- cated at Chicago, Illinois, and in Canada, and employed in the manu- facture of harvesting machinery and other properties intended for use in connection therewith; and Whereas the Purchaser desires to acquire said properties and in- tends, upon the acquisition of said properties, to sell, convey and EXHIBITS. 343 transfer the same to a corporation now existing or hereafter to be organized under the laws of the state of Illinois or other state (hereinafter called the "Purchasing Company"), with capital stock as hereinafter provided: Now, this agreement witnesseth, that the parties hereto have agreed and covenanted as follows: First. The Vendor agrees, for the considerations and upon the terms hereinafter stated, to sell, assign, transfer, convey and deliver unto the Purchaser, his nominee or assign, by good and indefeasible title free and clear of incumbrances, indebtedness and liabilities, ex- cept as herein stated, and the Purchaser agrees to purchase, all and singular the real estate, factories, plants, buildings, improvements, machinery, patterns, tools, apparatus, fixtures and appliances of the Vendor, and all the patents, inventions, devices, patent rights, licenses, trade-marks, trade-names and good-will of all and singular said property as a going concern, and also all of the products manu- factured and in process of manufacture, materials, supplies and mer- chandise on hand at the time of closing said sale and all and singular its then pending contracts for the purchase of property or materials or the sale of product; also all other property of the Vendor apper- taining to the Vendor's business aforesaid. There shall also be sold and purchased with said properties $16,000,000 (at face value and accrued interest) of bills and accounts receivable representing sales made by the Vendor. Such bills and accounts receivable are to ma- ture prior to March 1, 1905, and are to be guaranteed as hereinafter provided. Cash may be substituted for the whole or any part of such accounts and bills receivable at the option of the Vendor. Second. The Vendor agi'ees that, as soon as practicable after the execution of this instrument, it will duly execute and acknowledge, and cause to be forthwith deposited with J. P. Morgan & Co., or a trust company designated by them, as depositary, proper deeds and other instruments of conveyance and sale for the granting, conveying and transferring as aforesaid unto the Purchaser and his assigns, all the property hereinbefore recited. Such depositary shall hold the said deeds and other instruments in escrow and deliver the same to the Purchaser or upon his order only upon receiving for account of the Vendor the consideration hereinafter provided, and upon the performance by the Purchaser of the provisions hereof. Third. The Vendor agrees to deliver to said depositary as soon as practicable full statements in respect of its property and its assets and liabilities, its contracts for the purchase of materials and other property and for the sale of its manufactured products and otherwise relating to its property and business. The Vendor agrees that, pend- ing the performance of and while this contract is in force, jt will not, without the written consent of the Purchaser, or of said Purchasing Company, enter into any new contracts or assume any new obliga- tions or make any purchases or sales except such as are necessary and customary in the ordinary conduct of its regular business or to main- tain it as a going concern and except such as niay be necessary for the performance of agreements already entered into ; nor make pay- ments in advance of their maturity on pending contracts. The Vendor further agrees that during and while this contract is in force, no new capital shall be employed in its business and no bonds issued, and that no mortgage, lease or conveyance shall be made upon or in 344 REPORT ON THE INTERNATIONAL HARVESTER CO. respect of its real estate or plant without the written consent of the Purchaser ; and also that in case of any difference of opinion between the Vendor and the Purchaser in relation to the conduct of the busi- ness of the Vendor, such difference shall be decided by J. P. Morgan or George W. Perkins, whose decision shall be final. All service con- tracts of the Vendor taken over by the Purchasing Company shall be terminable on sixty days notice unless in specific cases otherwise de- termined by said Purchasing Company; and the Vendor shall indem- nify the Purchasing Company against any claims under profit sharing contracts. In the case of any property delivered to the Purchaser by the Vendor which is subject to incumbrance, the amount of the incumbrance shall be deducted in determining the value thereof. Fourth. The Purchaser and said Purchasing Company and his or its nominees, the appraisers, accountants and counsel, shall have the right to examine the deeds and other instruments of conveyance and transfer so to be deposited by the Vendor with the depositary as aforesaid, and shall, if the Purchaser shall so require, be furnished with abstracts of title, title deeds and surveys which may facilitate the examination of the title to the property to be conveyed or trans- ferred, and shall have free access to all the deeds, contracts, boolts and records of the Vendor for the purpose of examining and verify- ing the statements made with respect to its property, business, assets, liabilities and status. Fifth. The purchase price to be paid by the Purchaser to the Vendor for all and singular said property shall be the aggregate of the several appraisals and valuations hereinafter provided for and of said accounts and bills receivable and cash, if any, and shall be payable in full paid and non-assessable shares of the capital stock of the said Purchasing Company taken at par. In order to make such appraisals and fix and determine such val- uations, the property of the Vendor shall be classified as follows : (1) Real estate, buildings, factories, warehouses, fixtures, ma- chinery, tools, patterns, drawings, moulds and all other personal property used in connection with .or appertaining to the Vendor's business and which is not intended for sale in the ordinary course of business or to form part of or to be consumed in the manufacture of the Vendor's products, and including pending contracts for purchase of real property and for construction of buildings or fixtures, but not including the propertj and contracts otherwise classified. The assets of this class are hereinafter collectively designated as " Plant." (2) All materials on hand, manufactured, unmanufactured or in process of manufacture, including any and all articles intended to form part of or to be used in manufacturing the Vendor's product. The assets of this class are hereinafter collectively designated as " Materials on hand." (3) Unexecuted contracts or orders for the sale of the Vendor's manufactured products, but not including contracts or orders for deliveries after the year 1902, for which latter contracts and orders (although to be transferred) no allowance shall be made. No allow- ance shall be made for contracts or orders for delivery prior to January 1, 1903, unless the material necessary for the compfetion of the machines or other manufactured products shall be in the pos- session of the Vendor and upon its plant at the time of the appraisal. EXHIBITS. 345 Such contracts are hereinafter collectively designated as " Pending Sales." (4) All contracts heretofore entered into by the Vendor for the purchase of materials to be used in the manufacture of its product. Such contracts are hereinafter collectively designated as " Material Contracts." (5) The coal, iron and steel properties of the Vendor, including its coal and iron lands, steel plant and blast furnaces, such property being hereinafter referred to as the " Deering Iron, Coal and Steel Properties." (6) Patents, patent rights, devices, inventions, licenses, trade- marks, trade-names and good-will, including the value of the estab- lished business, name, standing in the trade, stability of business, organization, trade and custom as a going concern. Such assets are hereinafter collectively designated as Patents, Good-Will, etc." The value of the plant, as above defined, shall be ascertained and determined by three appraisers, who shall fix the present value of such plant as a going concern. One of such appraisers shall be nominated and appointed by the Vendor, and the other two by J. P. Morgan & Co. The present value to a going concern of said materials on hand, of the said pending sales, and of the said material contracts, as above defined, shall similarly be determined by three appraisers, one to be nominated and appointed by the Vendor and two by J. P. Morgan & Co. Such appraisers shall make allowance in their judg- ment for unprofitable contracts. The value of the Deering Iron, Coal and Steel properties to a going concern, as above defined, shall be determined by J. P. Morgan or George W. Perkins. The value of the patents and good-will shall, for the purposes of this contract, be a sum equal to the net profits of the Vendor during the two years ending November 30, 1902, as ascertained in the manner hereinafter provided, plus ten per cent, thereof; and to such amount shall be added the value of the name, standing in the trade, stability of business, organization, trade, custom, etc., of the V( as a going concern, which value shall be fixed by J. P. Morg: George W. Perkins in his sole discretion. The profits for said two years shall be ascertained and reported to J. P. Morgan & Co. by three accountants, one of whom shall be nominated by the Vendor and the other two by J. P. Morgan & Co. In calculating the net profits of the business, there shall be excluded all allowance for interest on bills and accounts receivable as well as the cost of collecting bills and accounts receivable, and all interest paid or payable on moneys used by the Vendor but belongmg to any of the members of the Vendor or WiUiam Deering & Co. or William Deering or any member of his family. Said accountants, in calculating the net profits for said two years, shall make allowance for depreciation or loss, if any, on bills and accounts receivable, for depreciation or loss, if any, on materials on hand, and for deprecia- tion if any, of the said plant from wear and tear or otherwise. In each case hereinbefore enumerated, the decision, appraisal or report of a maiority of the appraisers or accountants or the decision o± J. P. Morgan or George W. Perkins (if sole arbitrator or appraiser), 77854°— 13 24 of the Vendor an or 346 EEPOET ON THE INTERNATIONAL HARVESTER 00. as the case may be, shall be binding and conclusive upon the parties hereto. Sixth. Payment of the amount of all contracts or orders for sales of manufactured products included as assets of the Vendor as afore- said and transferred under this contract, shall be guaranteed to the satisfaction of J. P. Morgan & Co. by the Vendor and the net value thereof shall be appraised on that basis. Any and all accounts and bills receivable transferred by the Vendor hereunder shall be taken at their face value and accrued interest to date of transfer, but the Vendor shall guarantee and hereby does guarantee that the Pur- chaser or the Purchasing Company shall realize thereon such face value and interest accrued and to accrue and that said principal and interest shall all be received on or prior to the first day of March, 1905. The collections shall be made by the Purchasing Company, but the expenses of collection shall be borne by the Vendor. Pend- ing such collections, the Vendor agrees to advance and pay to the Purchasing Company on demand, from time to time, on account of such guaranty such amounts as the board of directors of the Purchas- ing Company may determine to be necessaiy or convenient for the conduct of its business, but not in excess of such amounts as J. P. Morgan & Co. may from time to time approve. If such advance payments be made by the Vendor, then the Purchasing Company shall transfer to the Vendor or their nominees an equal amount in prin- cipal and accrued interest of uncollected accounts or bills receivable of the earliest maturities. The Purchasing Company may take such measures as to it may seem wise, for the collection of the accounts and bills receivable and grant extensions and indulgences to debtors by whom the same are payable without release of or prejudice to such guaranty or extension or change of the obligation of the Vendor to make payments as aforesaid. The Purchasing Company shall from time to time, on demand, furnish the Vendor a full statement showing which accounts and bills receivable remain unpaid, and what, if any, disposition has been made in regard thereto or steps taken to enforce the collection thereof. The Vendor shall secure the guaranties in this article provided, by collateral or otherwise, to the satisfaction of J. P. Morgan & Co. in their discretion. Seventh. The Purchasing Company shall have such corporate title, capital stock, organization, by-laws, directors and committees as may be approved by J. P. Morgan & Co. and shall have, in addi- tion to materials on hand and inventories, a working capital of $60,000,000 to be represented by cash or bills and accounts receivable guaranteed as aforesaid. Eighth. The amount and the classes (if there be more than one class) of the capital stock of the Purchasing Company shall be de- termined after the ascertainment of the aggregate value of all its assets and properties, but such amount and such classes shall sever- ally be satisfactory to J. P. Morgan & Co. If, however, there be only one class of stock, the capital stock shall not exceed $120,000,000 par value, even though the aggregate value of the assets and proper- ties of the Purchasing Company be in excess thereof. If there be both preferred stock and common stock, the preferred stock shall not exceed $120,000,000 par value and shall entitle the holders to cumulative preferential dividends at the rate of but not to exceed EXHIBITS. 347 six per cent, per annum, with preference as to principal and accumu- lated dividends on dissolution or liquidation ; and the common stock shall not exceed the remaining value of the corporate assets and properties as so determined, which value may be ascertained and de- termined irrespective of the special appraisals which are to be made under this agreement. If there shall be tAvo classes of stock, then and in that event the \^endor shall be entitled to receive as additional purchase price under this agreement common stock to an amount that shall bear to the total issue thereof the same proportion that the preferred stock to be received by the Vendor under this agreement shall bear to the total issue of preferred stock. Ninth. The purchase provided for in this contract shall take ef- fect as of such day in September, 1902, as shall be designated by the Purchaser with the approval of J. P. Morgan & Co. ; the appraisals shall be made as of such date as nearly as practicable, and the per- formance of the contract shall be completed prior to January 1, 1903. Tenth. The charter or certificate of incorporation or organization of the Purchasing Company shall provide, among other things, that the capital stock of the corporation shall not be increased or dimin- ished except upon the affirmative vote or consent of the holders of at least two-thirds of each class of the outstanding capital stock of the company. Said charter or certificate may also provide that the stockholders may enter into a voting trust of their stock for a limited period. The charter or certificate shall likewise provide that no mortgage or lien upon the real property, plants, tools, or machinery of the Purchasing Company shall be created without the affirmative vote or the written consent of the holders of at least two-thirds of each class of the outstanding capital stock. Eleventh. The Vendor undertakes and agrees that it or the hold- ers of the stock of the Purchasing Company so to be issued in pay- ment for the property to be transferred and conveyed under this agreement, shall deposit their stock with J. P. Morgan & Co. or a trust company to be designated by them, as depositary, upon a voting trust, which shall provide, among other things, for the appointment of three voting trustees, one of whom shall be J. P. Morgan or George W. Perkins and the other two shall be persons appointed by J. P. Morgan & Co. The voting trust agreement shall be for the period of ten years with provision, however, that it may be terminated at any time after the expiration of five years upon ninety days notice, if a majority of the voting trustees shall so decide. The capital stock of the Purchasing Company shall be transferred to such voting trus- tees, who shall issue transferable certificates of beneficial interest en- titling the holder to any dividends, distribution of profits and sub- scription rights which may accrue in respect of the stock so held by the voting trustees, and upon the termination of the voting trust entitling the holder to a proportionate amount of the stock so trans- ferred to the voting trustees. The form, terms and provisions of the voting trust agreement shall be subject to the approval of J. P. Mor- o'an & Co The voting trust agreement shall contain adequate re- strictions upon the voting power of the voting trustees in respect of an increase or diminution of capital stock, or the creation o± any mortgage as aforesaid, so that any vote or consent by the voting trustees for any such increase or diminution, or mortgage, shall be 348 BEPOET ON THE INTERNATIONAL HABVBSTEE CO. given only upon the affirmative vote or written consent of the owners of a corresponding amount of the voting trust certificates of interest outstanding. The "Vendor shall further agree with J. P. Morgan & Co. that dur- ing the first year after the issue of such stock or voting trust certifi- cates, the Vendor shall own, and shall refrain from selling or other- wise disposing of at least eighty per cent, of the original holdings acquired under this agreement or otherwise; during the second year at least sixty per cent, of such original holdings; during the third year at least forty per cent, of such original holdings ; and thereafter, and during the existence of the voting trust, at least one-third of such original holdings, provided, however, the Vendor may at any time after the expiration of the fourth year withdraw from the custody of J. P. Morgan & Co. and sell or otherwise dispose of, the remaining one-third of said original holdings, or any part thereof, but in such case any voting trustee representing such holdings shall immediately resign as trustee if desired by the two remaining trustees. A suc- cessor shall thereupon be appointed by the other two trustees. As guaranty for the performance of the foregoing covenant not to sell or otherwise dispose of stock or voting trust certificates, the Vendor shall severally pledge with J. P. Morgan & Co. an amount of stock or voting trust certificates equal to the proportion which they have agreed to continue to own, which stock shall be released and delivered to them or upon their order from time to time as they may become entitled to sell ; but, except as herein otherwise provided, one- third of the total original holdings as aforesaid shall remain pledged with J. P. Morgan & Co. during the existence of the voting trust. In case during the first year after the issue of said stock by the Purchasing Company the Vendor shall desire to sell any of the stock or voting trust certificates which it is free to sell under the provisions hereof, it shall offer the stock to J. P. Morgan & Co. by notice in writing, specifying the amount of the stock and the price at which the same is offered, and the Vendor shall be entitled to sell such stock to others only in case J. P. Morgan & Co. shall not within twenty days thereafter purchase said stock at the price named in the notice or at a price satisfactory to the Vendor. Twelfth. This contract, or any part thereof, may be transferred by the Purchaser to the Purchasing Company, and such Purchasing Company may thereuiaon enforce all and singular its terms and con- ditions as fully to all intents and purposes as if it were a party thereto. The place of performance of this contract shall be at the office of the Hudson Trust Company, Hoboken, New Jersey. Thirteenth. The individual members of the Vendor shall jointly and severally guarantee the performance of this contract. Fourteenth. The Purchaser undertakes to duly secure by contract the appointment of J. P. Morgan & Co. as the fiscal agents of the Purchasing Company and their acceptance of such appointment, in order that the Purchasing Company may secure and have the benefit and advantage of the advice of said firm in the management of its financial affairs. If any dispute should arise under this contract as to its true intent or meaning, or in respect of the performance of any part thereof, whether between the parties hereto or between the Vendor and the EXHIBITS. 349 Purchasing Company, the matter in dispute in each and every case shall be lett to J. P. Morgan or George W. Perkins as .sole arbitrator, and the decision of such arbitrator shall be binding and conclusive upon the parties. Fifteenth. In case any appraiser, arbitrator, accountant or voting trustee shall for any reason fail or cease to serve, then and in said event another or a successor shall be nominated and appointed in his place by the Vendor or by J. P. Morgan & Co. respectively as the case may be, subject, however, in the case of voting trustees to the provisions of the voting trust agreement. Eeferences in this agreement to J. P. Morgan & Co. shall apply to that firm as now or hereafter constituted. In witness whereof, the party of the first part and the party of the second part have hereunto set their hands and seals the day and year first above written. Deehing Harvester Company, Charles Deering, [seal.] James Deering, [seal.] By Charles Deering, A ttorney-in-fact. James Deering, Richard F. Howe, [seal.] Wm. C. Lane. [seal.] Exhibit 4. supplemelttaii agreement between deeeing harvester CO. AND WILLIAM C. LANE, AUGUST 11, 1902. Supplemental agreement, made and entered into this 11th day of August, 1902, by and between the Deering Harvester Compant (hereinafter called the " Vendor ") , party of the first part, and WiLLLAM C. Lane (hereinafter called the " Purchaser ") , party of the second part. The parties hereto have entered into an agreement, dated July 28, 1902, (hereinafter called the," Original Agreement"), providing for the sale by the Vendor to the Purchaser of the property of the Vendor as therein described. The parties hereto have agreed that said property shall be conveyed and transferred by the Vendor to the Purchaser forthwith and in advance of the determination of the exact purchase price of said property as in said Original Agreement pro- vided. Now, in consideration of the premises, the parties hereto have agreed and covenanted as follows : First. The Vendor shall forthwith convey and transfer to the Pur- chaser all of the property described in the Original Agreement by instruments of conveyance which shall contain covenants of warranty and further assurance. The Vendor shall also forthwith assign and transfer to the Purchaser all of its accounts and bills receivable, and the same shall be subject to the provisions of the Original Agreement respecting the accounts and bills receivable to be transferred by the Vendor to the Purchaser as therein provided, but the Vendor shall 350 BEPOET ON THE INTEBNATIONAL HAEVESTEB CO. be entitled to substitute cash in place of any such accounts and bills receivable. Second. The Purchaser shall cause to be prepared, as soon as prac- ticable, a statement of the accounts and bills receivable assigned by the Vendor as herein provided, including such as may be received prior to the date in September vrhich shall be fixed by the Purchaser with the approval of J. P. Morgan & Co. for the adjustment of the purchase price payable to the Vendor. If the aggregate of such ac- counts and bills receivable, at their face value and accrued interest, shall exceed the sum of sixteen million dollars ($16,000,000), then the excess shall be held for the account of the Vendor, and shall be available to be applied by the Vendor towards any other payments that may be due by the Vendor to the Purchaser, or in such other manner as the Vendor shall direct. Third. The capital stock of the purchasing company provided for in said contract shall be one hundred and twenty million dollars ($120,000,000), but, prior to Januarj 1, 1903, capital stock shall not be issued to an amount exceeding sixty-two and one-half (62^) per cent, of the aggregate amount of the money and cash assets acquired by said company and of the value of the other property acquired by said company, as such value shall be ascertained and fixed by the board of directors of the company at the time of the acquisition of such property. Fourth. Forthwith upon the conveyance of said property by the Vendor to the Purchaser, the Purchaser shall deliver to J. P. Morgan & Co. stock trust certificates for such an amount of the capital stock of the purchasing company as shall, in the opinion of J. P. Morgan & Co., be required to proA'ide the amount of stock trust certificates necessary for ultimate delivery to the Vendor in payment for the property, accounts and bills receivable and cash to be transferred and paid by it as herein and in the Original Agreement provided. J. P. Morgan & Co. are hereby authorized to deliver to the Vendor, from time to time, such amounts of the stock trust certificates so delivered as, in their opinion, it is proper to deliver to the Vendor. If after the final ascertainment of the amount of stock trust certifi- cates to be delivered to the Vendor, as herein and in the Original Agreement provided, and after the delivery to the Vendor of such stock trust certificates, any of said deposited stock trust certificates shall remain on deposit with J. P. Morgan & Co., the same shall be returned to the Purchaser, but if the stock trust certificates on de- posit with J. P. Morgan & Co. shall not be sufficient for the purpose of such delivery, then the deficiency shall be forthwith supplied by the Purchaser. Fifth. The purchase price to be paid by the Purchaser to the Vendor for said property shall be ascertained as provided in the Original Agreement, and notwithstanding the immediate transfer and delivery of the property of the Vendor, the purchase shall, so far as the adjustment of the purchase price is concerned, be considered as taking effect as of such day in September, 1902, as shall be designated by the Purchaser, with the approval of J. P. Morgan & Co. ; and, for the purposes of this contract and of the Original Agreement, the profits of the Vendor for the two years ending November 30, 1902, shall be ascertained in accordance with the provisions of the Original Agreement. The Purchaser shall cause separate accounts of the EXHIBITS. 351 business of the Vendor, when transferred to the purchasing company, to be kept so long as may be necessary for the purpose of ascertain- ing the profits thereof for the year ending November 30, 1902, and for the purpose of determining and apportioning the profits in ac- cordance with the Original Agreement. Sixth. The Original Agreement shall continue in force except as herein modified, and any questions arising under this Supplemental Agreement shall be determined by J. P. Morgan & Co. as sole arbi- trators. In witness whereof the Vendor has caused this agreement to be duly signed in the name of said firm, and the Purchaser has signed his name and affixed his seal hereto the day and year first above written. Wm. C. Lane. Deering Harvester Company, Charles Deering, James Deering, In presence of : By Charles Deering, Joseph P. Cotton, Attor7iey-in-fact. Temple Bowdoin. Kichaed F. Howe, By Charles Deering, A ttorney-in-fact. James Deering. Exhibit 5. PBOPOSITION PROM WILLIAM C. LANE TO INTERNATIONAL HARVESTER CO., AUGUST 12, 1902. New York, August 12, 1902. To the International Harvester Company : I hereby offer to sell to you, upon the terms stated below the factories, plants, good-will and other property (excluding, except in the case of the Milwaukee Harvester Company, cash and receiv- ables, for which provision is made below) of the following concerns engaged in the business of manufacturing and selling harvesting and agricultural machinery, tools and implements and allied products : McCormick Harvesting Machine Company. Deering Harvester Company. Piano Manufacturing Company. Warder, Bushnell & Glessner Co. Milwaukee Harvester Company. In the case of the Milwaukee Harvester Company, I offer all of its property as a going concern including its accounts and bills re- ceivable, but subject to the payment of its debts and liabilities. The other properties are to be free of debt except in so far as encum- brances may exist upon certain parcels of real estate not occupied by manufacturing establishments. In the case of the Warder, Bush- nell and Glessner Co. no accounts and bills receivable are offered. The total aggregate price at which I offer said properties as going concerns is one hundred and thirty-two million dollars ($132,000,- 000) . I also agree to furnish you, in connection with, and in addition 352 EEPOBT ON THE INTEENATIONAL HAHVESTEB CO. to, said properties, sixty million dollars ($60,000,000) of working capital, to be represented by accounts and bills receivable (exclusive of those of the Warder, Bushnell and Glessner Co. and the Milwaukee Harvester Company) received by said manufacturers in the ordi- nary course of business and guaranteed to your satisfaction, or in cash, or partly in such accounts and bills receivable and partly in cash, as I may elect. I offer to accept for said property, money and receivables aggre- gating in value and amount one hundred and ninety-two million dollars ($192,000,000), your entire capital stock, of the aggregate par value of one hundred and twenty million dollars ($120,000,000), subject to an agreement that in case, prior to July 1, 1903, you deter- mine to issue stock in addition to said one hundred and twenty mil- lion dollars ($120,000,000) to represent the Company's surplus of sixty million dollars ($60,000,000) or any part thereof, such addi- tional stock be common stock and be issued to the holders of said one hundred and twenty million dollars ($120,000,000) of original stock, fro rata, and that thereupon the latter stock shall be preferred stock, in accordance with the terms of your certificate of incorporation. My offer is made upon condition that when I have provided con- veyances of said property satisfactory to your board of directors and have provided the working capital of $60,000,000, either in cash or in accounts and bills receivable guaranteed to the satisfaction of your board of directors, I shall be relieved of further responsibility m the premises and shall be deemed to have fulfilled my contract. I enclose herewith, for your consideration in connection with this offer, drafts of the following papers: 1. A general conveyance by myself to the Company of the property and business of each of the manufacturers above named. 2. An assignment by myself to the Company of the accounts and bills receivable of each of said manufacture]^. 3. A separate agreement with reference to the payment of said .sum of sixty million dollars ($60,000,000). 4. An agreement between the Company and myself providing that, in case the amounts collected upon the bills receivable of the respec- tive manufacturers exceed the amounts in such agreement specified, the excess shall be paid to me or upon my order. Yours truly, Wm. C. Lane. ExHmiT 6. becommendation of committee of board of directoiis of international harvester co. in re proposition of wil- liam c. lane of august 12, 1902. August 13, 1902. To the hoard of directors of the International Harvester Company: The undersigned Committee, appointed to consider the proposi- tion from William C. Lane to your Company, make the following report : Your Committee have conferred with Mr. Lane and obtained from him further information regarding the value, earning capacity and EXHIBITS. 353 prospects of the properties mentioned in his proposition, and have also conferred with E. H. Gary, Esq., Chairman of the Executive Committee of the United States Steel Corporation, who for many years has been familiar with the harvester industry, having recently bad occasion to inform himself regarding the present value and earn- ing capacity of several of the properties. Your Committee are of the opinion that the five properties men- tioned in Mr. Lane's offer are the most important in their line of business in the United States, and that each of them has for several years enjoyed a prosperous, profitable and growing business. Each of the plants is believed to be in excellent condition and supplied with all the facilities necessary for effective manufacturing. The combined sales of the five concerns are believed to be at a rate exceeding $50,000,000 per year, and, with that amount of business, your Company should be able to earn a liberal return upon the capital and surplus which it would have in case of the acceptance of Mr. Lane's offer. Considering that under Mr. Lane's proposition the properties come as going concerns with current materials, stock in trade, and goods manufactured and in process of manufacture on- hand, it is believed that $60,000,000 of working capital will be ample for the needs of the Company, although not excessive, because of the long terms of credit which are customary in the harvester business. Your Committee, therefore, report that the properties offered by Mr. Lane are, in their opinion, worth to this Company the sum of $132,000,000, the price mentioned in Mr. Lane's offer, and they recom- mend their acquisition by the Company, together with the $60,000,000, of working capital, at the aggregate price of $192,000,000, payable by the issue of $120,000,000 of the Company's capital stock. Mr. Green of your Committee has examined the instruments of conveyance and draft of agreement which accompanied Mr. Lane's offer, and advises that they are in proper form. Respectfully submitted. Roland R. Dennis, George W. Hebaed, Robert S. Green, ' Oomndttee. Exhibit 7. kesolution of intebstationaii harvester co. accepting OFFER OF WILLIAM C. LANE, ATIGXJST 13, 1902. Whereas, this Company has been organized for the purpose of manufacturing, selling and dealing in harvesting and agricultural machinery, tools and implements, and for the other purposes men- tioned in its certificate of incorporation; and "Whereas, "William C. Lane has submitted to the directors a propo- sition to sell to this Company the factories, plants, good-will and other property (excluding, except in the case of the Milwaukee Harvester Company, cash and bills and accounts receivable), of the following concerns engaged in the business of manufacturing and 354 BEPOET ON THE INTERNATIONAL HARVESTEE 00. selling harvesting and agricultural machinery, tools, implements and allied products j McCormick Harvesting Machine Company. Deering Harvester Company. Piano Manufacturing Company. Warder, Bushnell & Glessner Co. Milwaukee Harvester Company ; and Whereas the aggregate price at which said properties are offered as going concerns is $132,000,000 ; and Whereas said William C. Lane has also offered to furnish the Company, in connection with, and in addition to, said properties, $60,000,000 of working capital, in accounts and bills receivable (ex- clusive of those of the Milwaukee Harvester Company), received in the ordinary course of business by the McCormick Harvesting Machine Company, the Deering Harvester Company and the Piano Manufacturing Company, and guaranteed to the satisfaction of this company, or in cash, or partly in such accounts and bills re- ceivable and partly in cash, as said William C. Lane may elect; and Whereas said William C. Lane has agreed to accept, in payment for said properties valued at $132,000,000, and for said $60,000,000 of working capital, the entire capital stock of this Company, having an aggregate par value of $120,000,000, subject to an agreement on the part of this Company that in case, prior to July 1, 1903, this Com- pany shall determine to issue stock, in addition to said $120,000,000, to represent any part of the Company's surplus of $72,000,000, such additional stock be common stock, and be issued to the holders of said $120,000,000 of original stock pro rata, and that the latter stock be preferred stock in accordance with the terms of this Company's certificate of incorporation ; and Whereas, after due deliberation the board of directors have deter- mined that the properties offered by said William C. Lane, as above recited, at an aggregate valuation of $132,000,000, are necessary for the business of this Company and are worth at least the said sum of $132,000,000; and ' Whereas, by resolution of the stockholders of this Company the directors have been authorized to receive subscriptions for its entire capital stock, and to sell all or any part thereof at par and issue the same in payment for said property ; and Whereas, said William C. Lane has submitted with his proposition drafts of various instruments of conveyance and an agreement in- tended to carry out the said proposition if accepted by this Company ; ResoVved, that the said properties are necessary and desirable for the business and purposes of this Company, and that in the judgment of the directors the value of the same, exclusive of said working capital of sixty million dollars ($60,000,000), is at least one hundred and thirty-two million dollars ($132,000,000) ; further Resolved, that this Company accept the proposition of said Wil- liam C. Lane, and purchase from him said properties, and accept from him said working capital of sixty million dollars ($60,000,000), upon the terms and conditions mentioned in said offer ; further Resolved, that the President of this Company is hereby authorized and directed to duly accept the conveyances, assignments and agree- ments to be executed by said William C. Lane, and to execute said EXHIBITS. 355 agreement on behalf of this Company and affix its corporate seal thereto, and that the Secretary is authorized and directed to attest the same, and that the officers of this Company are authorized and directed in all respects to carry out said agreement of the Company; further Resolved, _tha,t the officers of this Company are authorized and directed to issue to said William C. Lane, or his nominees, certifi- cates for one million two hundred thousand (1,200,000) shares of one hundred dollars ($100) each, and having an aggregate par value of one hundred and twenty million dollars ($120,000,000) of full- paid and non-assessable shares of this Company's capital stock, less the sixty thousand dollars par value thereof subscribed for by the incorporators, to which extent the amount to be paid by said Lane is reduced; further Resolved, that the Treasurer of this Company is authorized and directed to enter upon the books of this Company said properties, other than said sixty million dollars ($60,000,000) of working capi- tal, at the value of one hundred and thirty-two million dollars ($132,000,000), at which the same have been acquired by the Com- pany, and to establish by proper entries a surplus account of seventy- two million dollars ($72,000,000) | further Resolved, that the officers of this Company are hereby authorized and directed to from time to time execute and deliver such instru- ments, and do such further acts, as to them shall seem necessary or proper for the purpose of carrying these resolutions into effect. Said resolutions having been seconded, were by vote unanimously adopted, all of the directors of the Company voting. Upon motion all the papers submitted by Mr. Lane were ordered on file. Exhibit 8. INTERJiTATIOlTAL HARVESTER CO.: VOTING TRUST AGREEMENT BETWEEN WILLIAM C. LANE AND GEORGE W. PERKINS, CHA.RLES DEERING, AND CYRTTS H. McCORMICK, VOTING TRUSTEES, DATED AUGUST 13, 1903. This agreement, made in the City of New York this thirteenth day of August, one thousand nine hundred and two, by and between WiLUAM C. Lane, party of the first part, and Geokgb W. Perkins, CHAEtES Deehing and Cyrus H. McCormick (hereinafter called the " "Voting Trustees ") , parties of the second part, Witnesseth as follows: Whereas, the International Harvester Company (hereinafter cfiUed the " Company ") , is a corporation organized under the laws of the State of New Jersey, with a capital stock of $120,000,000, divided into 1,200,000 shares, of the par value of $100 each, all of which stock has been issued and is outstanding ; and Whereas, the party of the first part has caused to be delivered to the Voting Trustees certificates for fully paid shares of the capital stock of the Company to the amount of its entire capital stock (ex- cepting such shares as are necessary to qualify directors) ; and said certificates, together with such other certificates for stock of the 356 BEPOET 02Sr THE INTEBNATIONAL HABVESTEE CO. Company as hereafter, from time to time, may be delivered here- under, are to be held and disposed of by the Voting Trustees under and pursuant to the terms and conditions hereof ; Now, therefore, First. The Voting Trustees agree with the party of the first part, and with each and every holder of stock trust certificates issued as hereinafter provided, that, from time to time, upon request, they will cause to be issued to the party of the first part, or upon his order, in respect of said stock of the Company received from him, certificates in substantially the following form : International Harvester Company. No. Shares. STOCK TRUST CERTIFICATE. This certifies, that, as hereinafter provided. will be entitled to receive a certificate or certificates for fully paid shares of one hundred dollars each, of the capital stock of the International Harvester Company, and, in the meantime, to receive payments equal to the dividends, if any, collected by the undersigiied Voting Trustees upon a like number of such shares standing in their names; such dividends, if received by the Voting Trustees in stock of said Company, to be payable in stock trust certificates. Until the actual delivery of such stock certificates, the Voting Trustees shall possess, in respect of any and all of such stock, and shall be entitled, in their discretion, to exercise, all rights and powers of absolute owners of said stock, including the right to vote for every purpose and to consent to any corporate act of said Company ; it being expressly stipulated that no voting right passes by or under this certificate, or by or under any agreement expressed or implied. This certificate is issued pursuant to, and the rights of the holder are subject to, and limited by, the terms and conditions of a certain agreement, dated the thirteenth day of August, 1902, by and between William C. Lane and the undersigned Voting Trustees. Stock certificates shall be due and deliverable in exchange for stock trust certificates on, but not before August 1, 1912, unless a majority of the Voting Trustees elect, as they may, to terminate said agreement after August 1, 1907, upon not less than ninety days' notice. This certificate is transferable only on the books of the Voting Trustees by the registered holder hereof, either in person or by attorney duly authorized, according to rules established for that purpose by the Voting Trustees, and on surrender hereof ; and. until so transferred, the Voting Trustees may treat the regis- tered holder as owner hereof for all purposes whatsoever, except that they shall not be required to deliver stock certificates here- under Avithout surrender hereof. This certificate is not valid unless duly signed on behalf of the undersigned Voting Trustees by , their agents, and also registered by , as Registrar. EXHIBITS. 357 In witness whereof, the undersigned Voting Trustees have caused this certificate to be signed by their duly authorized agents, — , this day of , one thousand nine hundred and Registered this day of By- By- 190—. Voting trustees. Their agents. President. By Registrar. Secretary. Second. At any time after August 1, 1907, if a majority of the Voting Trustees so decide, this agreement may be terminated; but at least ninety days' notice of an intention to terminate this agree- ment must be given by the Voting Trustees according to the provi- sions of Article Tenth hereof. This agreement shall in any event terminate on August 1, 1912, without notice by or action of the Vot- ing Trustees. On August 1, 1912, or upon the earlier termination of this agreement, the Voting Trustees, in exchange for, or upon sur- render of any stock trust certificate then outstanding, shall, in ac- cordance with the terms hereof, deliver proper certificates of stock of the Company, and may require the holders of stock trust certifi- cates to exchange them for certificates of capital stock. In case on or after the termination of said agreement the Voting Trustees shall deposit with an incorporated bank or trust company of good standing, having an office in the City of New York, stock certificates properly endorsed for transfer in blank, representing stock of the Company to a par amount equal to the par amount of stock trust certificates outstanding, with authority in writing to such bank or trust company to deliver the same in exchange for stock trust certificates when and as surrendered for exchange as herein provided, then all further liability of said Trustees, or any of them, for the delivery of stock certificates in exchange for stock-trust cer- tificates shall cease and determine. Third. The term Company, for the purposes of this agreement and for all rights thereunder, including the issue and delivery of stock, shall be taken to mean the said corporation organized under the laws of the State of New Jersey, or any successor corporation or corpora- tions into which the same may be consolidated or merged. Fourth. From time to time hereafter, the Voting Trustees may receive any additional fully paid shares of the capital stock of the Company, and in respect of all such shares so received, will issue and deliver certificates similar to those above mentioned, entitling the holders to the rights above specified. In case the Company shall 'hereafter have both common and preferred stock the Voting Trustees may receive, subject to the provisions hereof, certificates representing fully paid stock of each class, and the stock trust certificates shall indicate upon their face whether they represent common or preferred 358 EEPOHT ON THE INTERNATIONAL HAEVESTEE CO. Stock, and holders of stock trust certificates representing one class of stock shall have no interest in, or claim upon, stock of the other class. In any such event the stock trust certificates outstanding shall be surrendered by the holders thereof in exchange for new certificates specifying the class of stock, whether preferred or common, repre- sented thereby. In case the Voting Trustees shall receive any stock of the Company issued by way of dividend upon stock held by them .subject to said agreement, they shall hold such stock subject to the terms of said agreement, and sitiall issue stock trust certificates repre- senting such stock to the respective registered holders of the then outstanding stock trust certificates entitled to such dividend. Fifth. Any Voting Trustee may, at anjr time, resign by delivering to the other Trustees, in writing, his resignation, to take effect ten days thereafter. In case of the death or the resignation or inability of any Voting Trustee to act, the vacancy so occurring shall be filled by the appointment of a successor or successors, to be made as fol- lows: Any successor in the line of succession to George W. Perkins shall be appointed by J. P. Morgan & Co., as said firm now is or may hereafter be constituted. Any successor in the line of succession to Charles Deering shall be appointed by James Deering, or in the case of his failure to act, by Richard F. Howe, and in case of the failure of either to act, by the other two Voting Trustees. Any successor in the line of succession to Cyrus H. McCormick shall be appointed by Harold F. McCormick, or in case of his failure to act, by Stanley McCormick, and in case of the failure of either to act, by the other two Voting Trustees. The term Voting Trustees, as used herein and in said certificates, shall apply to the parties of the second part and their successors hereunder. Sixth. The Voting Trustees may adopt their own rules of pro- cedure. The action of a majority of the Voting Trustees expressed from time to time at a meeting or by writing with or without a meet- ing, shall, except as otherwise herein stated, constitute the action of the Voting Trustees and have the same effect as though assented to by all. Any Voting Trustee may vote in person or by proxy, and may act as a director or officer of the Company. Seventh. In voting the stock held by them, the Voting Trustees will exercise their best judgment from time to time to secure suit- able directors, to the end that the affairs of the Company shall be properly managed, and in voting and in acting on other matters which shall come before them as stockholders or at stockholders' meetings, will likewise exercise their best judgment, but they assume no responsibility in respect of such management or in respect of any action taken by them or taken in pursuance of their consent thereto as such stockholders, or in pursuance of their vote so cast, and no Voting Trustee shall incur any responsibility by reason of any error of law or of any matter or thing done or suffered or omitted to be done under this agreement, except for his own individual wiUful malfeasance. Eighth. The Voting Trustees possess and shall be entitled in their . discretion to exercise, until the actual delivery of stock certificates in " exchange for stock trust certificates, all rights and powers of absolute owners of said stock, including the right to vote for every purpose and to consent to any corporate act of said Company, it being expressly EXHIBITS. 859 stipulated that no voting right passes to others by or under said stock trust certificates or by or under this agreement, or by or under any agreement, expressed or implied ; the Voting Trustees shall not, how- ever, during the pendency of this agreement, vote in respect of the shares of the capital stock of the Company held by them, to authorize or consent to any mortgage or other lien upon the property of the Compa,ny, or (except as herein otherwise specifically provided) to authorize any increase or diminution in the amount of the authorized capital stock of said Company, except with the consent in each in- stance of the holders of stock trust certificates representing two-thirds in amount of each class of stock at the time deposited hereunder, given in writing, or by vote at a meeting called for that purpose ; provided, however, that the Voting Trustees may, in their discretion, prior to July 1, 1903, without the consent of holders of any stock trust cer- tificates, consent to and authorize the increase of the Company's capital stock to an amount not exceeding one hundred and eighty million dollars ($180,000,000) . Ninth. For the purposes of this agreement any consent in writing by the holders of stock trust certificates may be in any number of concurrent instruments of similar tenor, and may be executed by the certificate holders in person, or by agent or attorney appointed by an instrument in writing. Proof of the execution of any such consent, or of a writing appointing any such agent or attorney, or of the hold- ing by any person of stock trust certificates issued hereunder, shall be sufficient for any purpose of this indenture, and shall be conclusive in favor of the Voting Trustees with regard to any action taken by them under such consent, if made in the following manner, viz. : {a) the fact and date of the execution by any person of any such consent may be proved by the certificate of any notary public or other officer authorized to take, either within or without tlie State of New York, acknowledgements of deeds to be recorded in any State, certifying that the person signing such consent acknowledged to him the execu- tion thereof; or by the affidavit of a witness to such execution. (&) the amount of stock trust certificates held by any person executing any such consent and the issue of the same, may be proved by a cer- tificate executed by any trust company, bank or other depositary (wheresoever situated) whose certificate shall be deemed by the Voting Trustees to be satisfactory, showing that at the date therein mentioned such person had on deposit with such depositary, or ex- hibited to it, the stock trust certificates numbered and described in such depositary's certificate. TentL All notices to be given to the holders of stock trust certifi- cates hereunder shall be given either by mail to the registered holders of stock trust certificates at the addresses furnished by such holders to the Voting Trustees or to the agents of the Voting Trustees, or by publication in two daily papers of general circulation in the City of New York, and in two daily papers of general circulation in the City of Chicago, twice in each week for two successive weeks; and any call or notice whatsoever, when either mailed or published by the Voting Trustees as herein provided, shall be taken and considered as though personally served on all parties hereto, including the holders of said stock trust certificates, and such mailing or publication shall be the only notice required to be given under any provision of this agreement. L. B.' L. S.; 360 EEPOKT ON THE INTEENATIONAL HABVESTEB CO. Eleventh. This agreement may be simultaneously executed in sev- eral counterparts, each of which so executed shall be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. In witness whereof, the several parties have hereunto set their hands and seals, in the City of New York, the day and year first hereinabove mentioned. Wm. C. Lane. G. W. Perkins. Chaeues Deeeing. [l. s.] [ Voting trustees. Cteus H. MoCoemick. State or New Yoek, | County of New York,f^" On this 13th day of August, in the year nineteen hundred and two, before me personally came William C. Lane, to me known, and known to me to be the individual described in and who executed the foregoing instrument, and he acknowledged to me that he executed the same. [seal.] John P. Tuomet, Notary Public, Kings County. Certificate filed in N. Y. Co. State or New Yoek, County of New York,] On this thirteenth day of August, in the year nineteen hundred and two, before me personally came George W. Perkins, Charles Deer- ing and Cyrus H. McCormick, to me known, and known to me to be the individuals described in and who executed the foregoing instru- ment, and they severally acknowledged to me that they executed the same. [seal.] John J. Daly, Notary Public, Kings County. Certificate filed in N. Y. Co. Exhibit 9. agbeement between charles deeriwg, james deering, AND RICHARD F. HOWE AND WILLIAM C. LANE, MARCH 24, 1903. Memorandum of agreement, made the twenty- fourth day of March, A. D. 1903, between Chaelbs Deeeing, James Deeeing and Richaed F. Howe (hereinafter called the " Vendors ") parties of the first part, and William C. Lane (hereinafter called the "Purchaser"), party of the second part. The parties hereto entered into an agreement dated July 28th, 1902 (hereinafter referred to as the " Main Agreement ") , and an agree- ment supplemental thereto (hereinafter referred to as the " Supple- mental Agreement"), dated August 11, 1902. In consideration of the premises and the covenants herein con- tained, the parties hereto have covenanted and agreed as follows : I. Instead of three Boards of Appraisers, as provided in the Main Agreement (two of the said Boards being in said Main Agreement called the "Appraisers " and one the "Accountants "), only one board EXHIBITS. 361 or set of appraisers shall be appointed. The three members thereof shall be chosen in the manner provided in the Main Agreement re- spect — in the selection of Appraisers and Accountants. This single board shall determine all the questions and exercise all the functions which by the Main Agreement were provided to be determined and exercised by the three Boards of Appraisers above described. The Board of Appraisers, however, shall not appraise the Deering coal, iron and steel properties mentioned in the Main and Supplemen- tal Agreements, or any other property, which, by the terms thereof, are to be appraised by J. P. Morgan or George W. Perkins. II. The two years' profits with reference to which the value of the patents and good-will of the Vendors shall be determined, shall be the profits for the two full business years, or seasons of 1901 and 1902, instead of those for the two years ending November 30th, 1902. This change is made because of the difficulty in determining at the present time the profits of the Vendors for the latter period. III. The capital stock of the Purchasing Company referred to in the Main and Supplemental Agreements, or if there be more than one class of stock, then the preferred stock of the Company, shall be increased beyond the limit of one hundred and twenty million dollars ($120,000,000) fixed by the Main Agreement, by an amount equal to the excess, if any, over fifty-three million dollars ($53,000,- 000) of the aggregate value, to be determined as in the Main and Supplemental Agreements and herein provided, of the assets and property of the McCormick Harvesting Machine Company, the Deer- ing Harvester Company, the Piano Manufacturing Company and The Warder, Bushnell & Glessner Company, acquired by the Pur- chaser as of September 30, 1902, including the patents and good- will and the value of " name, standing in the trade, stability of busi- ness, organization, trade, custom, etc.," but excluding bills and ac- counts receivable and cash. Any such additional capital stock shall have the same character (with respect to its being common or pre- ferred and its right to stock dividends) as the one hundred and twenty million dollars ($120,000,000) of capital stock provided for in the Main and Supplemental Agreements. The stock representing any such increase shall be subject to an agreement on the part of the Purchasing Company that it shall be issued only to pay for property acquired as aforesaid. IV. In reaching their conclusion as to values and amounts the appraisers may consider as evidence the facts and information gathered by Jones, Caesar & Company and their reports thereon (including the inventories taken under the supervision of Jones, Caesar & Company) and may also consider the facts and information gathered by the American Appraisal Company and the Manufac- turers Appraisal Company as well as their reports thereon; but such facts, information and reports shall not be regarded as evidence of any higher nature than any other facts or information which may be submitted to the appraisers by any party m interest; it being expressly understood that it shall be the duty of the appraisers to weigh all facts, information and reports so submitted to them and to give to all such facts, information and reports such weight as the appraisers, or a majority of them, shall, in the exercise of an inde- pendent, critical judgment, deem proper. 77854°— 13 25 362 REPORT ON THE INTERNATIONAL HARVESTER 00. It is further understood that nothing in this agreement con- tained shall give the appraisers any jurisdiction or pow^r in respect to appraising the value of any property or good-will which under the provisions of the Main and Supplemental Agreements aforesaid are subject to appraisal by J. P. Morgan or George W. Perkins. V. This agreement shall be read in connection with the Main and Supplemental Agreements, and said agreements as supplemented and modified hereby shall continue in full force and effect. In witness whereof, the said Charles Deering, James Deering and Eichard F. Howe have hereunto set their own names and seals and the firm name of the Vendors and the said William C. Lane has hereunto set his hand and seal, the day and year first above written. Executed in duplicate. Charles Deering. James Deering. Richard F. Howe. William C. Lane. SEAL. SEAL. seal. SEAL. Exhibit 10. agreement between william c. lane and j. p. morgan & co., AUGUST 13, 1902. An agreement, made and entered into in the City of New York on the thirteenth day of August, 1902, by and between William C. Lane, party of the first part, and the firm of J. P. Morgan & Co., parties of the second part. The party of the first part has acquired and is entitled to receive and dispose of stock trust certificates representing a large amount of the full-paid and non-assessable shares of the capital stock of the International Harvester Company (hereinafter called the " Com- pany ") , a corporation organized under the laAvs of the State of New Jersey, with a capital stock of one hundred and twenty million dol- lars ($120,000,000) divided into one million two hundred thousand (1,200,000) shares of one hundred dollars ($100) each. The party of the first part has entered into four several contracts, dated July 28, 1902, respectively with the McCormick Harvesting Machine Company, the Deering Harvester Company, the Piano Manufacturing Company, and the Warder, Bushnell and Glessner Co., each of which contracts provides for certain services to be ren- dered by the parties of the second part, and by J. P. Morgan or George W. Perkins, members of said firm. The party of the first part desires to procure from the parties of the second part the sum of twenty-two million five hundred thousand dollars ($22,500,000) in cash. Now, this agreement witnesseth, that the parties hereto, for and in consideration of the premises, and of the agreements hereinafter recited, and of the sum of ten dollars ($10) to each paid by the other, the receipt whereof is hereby acknowledged, have agreed and hereby do agree as follows: First. The party of the first part agrees to sell, assign, transfer and set over unto the parties of the second part stock trust certificates representing twenty-five million five hundred thousand dollars EXHIBITS. 363 ($25,500,000) par value of full-paid capital stock of the Company for the sum of twenty-two million five hundred thousand dollars ($22,500,000) in cash, payable on demand, and in full payment for the said services rendered and to be rendered by the parties of the second part; and the party of the first part agrees that immediately upon the payment of said sum of twenty-two million five hundred thousand dollars ($22,500,000) he will deliver to the parties of the second part, or upon their order, stock trust certificates representing said shares of stock, properly endorsed in blank. Second. The parties of the second part will take from the party of the first part stock trust certificates representing shares of valid full- paid and non-assessable stock of the Company to the amount of twenty-five million five hundred thousand dollars ($25,500,000) par value, as herein provided, and, upon receipt thereof, will pay to the party of the first part, or upon his order, twenty-two million five hundred thousand dollars ($22,500,000) in cash. Third. The party of the first part further agrees to pay to the parties of the second part any disbursements and expenses which they may incur in connection with the services to be rendered as hereinbefore provided, including the fees and expenses of any counsel, appraisers, and expert accountants employed by the parties of the second part. Fourth. This agreement shall bind the executors and adminis- trators of the party of the first part and the successors and assigns of the parties of the second part, whose engagement and rights here- under are those of partners and are to be borne and enjoyed by the present firm of J. P. Morgan & Co. or any successor firm, however constituted. In witness whereof, the party of the first part has hereunto set his hand, and the parties of the second part have caused these presents to be executed in their firm name, the day and year first above written. In presence of: Wm. C. Lane, [seal.] J. P. Morgan & Co. ExHiBrr 11. AGEEEMENT BETWEEN McCORMICK HARVESTING MACHINE CO., DEBKING HARVESTER CO., THE WARDER, BUSHNELL & GLESS- NER CO PLANO MANUFACTURING CO., AND WILLIAM C. LANE AND INTERNATIONAL HARVESTER CO., AUGUST 17, 1903. Agreement, made and entered into this seventeenth day of August 1903 between the McCoemick Harvesting Machine Company, the Deering Harvester Company (a co-partnership). The Warder, BusHNELL & Glessner Company and the Plano Manttfactdring Company (hereinafter collectively called the "Vendors" and sev- erally called the McCormick, Deering, Champion and Plano Com- panies, respectively), parties of the first part, William C. Lane (hereinafter called the "Purchaser"), party of the second part, and the International PIarvester Company (hereinafter called the "International Company"), party of the third part. 364 EBPOBT ON THE INTEElirATIONAL HARVESTER CO. Each of the Vendors and the Purchaser have entered into three certain agreements dated respectively 28 July 1902, 11 August 1902 and 24 March 1903. The Purchaser has transferred to the Interna- tional Company all of the property and rights which he has received or to which he may be entitled under said contracts. The Purchasei" has deposited with J. P. Morgan & Co. stock trust certificates repre- senting Fifty-three Million Two Hundred Fifty Thousand (53,250,- 000) Dollars, par value, of the capital stock of the International Com- pany, for the purpose of providing the purchase price payable to the respective Vendors under said contracts respectively, for the property (other than cash and accounts and bills receivable) transferred there- under. The Purchaser has also deposited with J. P. Morgan & Co. stock trust certificates representing Forty Million (40,000,000) Dol- lars, par value, of the stock of the International Company for de- livery to the McCormick, Deering and Piano Companies respectively, in the following amounts, as payments or collections are made upon the accounts and bills receivable of said three Vendors heretofore assigned by them respectively to the Purchaser, and by the Purchaser to the Company : McCormick Company, Twenty Million (20,000,000) Dollars, par value. Deering Company, Sixteen Million (16,000,000) Dollars, par value. Piano Company, Four Million (4,000,000) Dollars, par value. The appraisers provided for in said contracts have been duly ap- pointed but have made no appraisals. The Vendors have, however, respectively agreed that the amounts to be received bv them for their respective properties should be determined by Ge^i-;i,e W. Perkins and the amounts hereinafter mentioned have been determined by said Perkins. In consideration of the premises and other valuable consideration, the parties hereto have covenanted and agreed to and with one another as follows: I. The appraisal of the property of the respective Vendors in the specific manner provided for in said contracts is hereby waived by the respective Vendors and by the Purchaser, who hereby agree with one another that said Vendors shall receive, and shall respectively accept, in full payment for the property (other than cash and ac- counts and bills receivable) transferred to the Purchaser and by the Purchaser to the International Company, pursuant to said contracts, or to which the International Company is entitled under said con- tracts and its contracts with the Purchaser, stock trust certificates for the following amounts respectively of the stock of the International Company, such amounts having been ascertained and determined as hereinbefore recited : McCormick Company, Twenty-six Million, Three Hundred Twenty- one Thousand, Six Hundred Fifty-six and eighty-six hundredths (26,321,656.86) Dollars, par value. Deering Company, Twenty-one Million, Three Hundred Sixty-two Thousand, Five Hundred Fifty-four and sixty-four hundredths (21,362,554.64) Dollars, par value. Champion Company, Three Million, Three Hundred Seventy- two Thousand, One Hundred Eighty-five and ninety-one hundredths (3,372,185.91) Dollars, par value. EXHIBITS. 365 Piano Company, Two Million, One Hundred Ninety-three Thou- sand, Six Hundred Three and nine hundredths (2,193,603.09) Dollars, par value. Said respective amounts shall in each case be inclusive of any stock trust certificates already delivered to any of the Vendors on account of the purchase price of property other than cash and accounts and bills receivable. Said stock shall be common stock of the Inter- national Company of a total issue of One Hundred and Twenty Million (120,000,000) Dollars, par value, and shall carry all rights to dividends since the organization of the International Company, whether payable in cash or in stock. In addition to the stock trust certificates aforesaid, pursuant to the provisions of the contracts aforesaid and to the award of said George W. Perkins, it is provided as follows : The International Company agrees to pay on account of indebted- ness of the McCormick Company owed by the McCormick Company 30 September 1902 for property (other than cash and accounts and bills receivable) transferred by the McCormick Company to the Purchaser and by the Purchaser to the International Company, amounts with interest thereon as follows : Eleven Thousand Five Hundred (11,500) Dollars with interest at the rate of five (5) per cent, per annum from 21 May 1902. Four Thousand (4,000) Dollars with interest at the rate of five (5) per cent, per annum from 5 June 1902. Sixteen Thousand Six Hundred Sixty-six and sixty-six hundredths (16,666.66) Dollars, without interest. The International Company further agrees that so far as any por- tions of said indebtedness, principal or interest, have at any time been paid by the McCormick Company it (the International Com- pany) will repay to the McCormick Company in cash on demand all amounts so paid by the McCormick Company, with interest thereon at the rate of five (6) per cent, per annum from the respective dates of payment thereof by the McCormick Company. The McCormick Company represents and guarantees that no other encumbrances (ex- cept current taxes and assessments) than the indebtedness aforesaid provided to be assumed and paid by the International Company existed 30 September 1902 against the aforesaid property of the McCormick Company; and represents and guarantees that the in- debtedness aforesaid was lona -fide indebtedness of the McCormick Company 30 September 1902. The International Company further agrees to pay on account of indebtedness of the Deermg Company owed by the Deering Com- pany 30 September 1902 for property (other than cash and accounts and bills receivable) transferred by the Deering Company to the Purchaser and by the Purchaser to the International Company, amounts with interest thereon as follows : Three Hundred and Fifty Thousand (350,000) Dollars with in- terest at the rate of five (5) per cent, per annum from 19 April 1902. One Hundred and Fifty Thousand (150,000) Dollars with interest at the rate of five (5) per cent, per annum from 21 April 1902. Five Thousand Three Hundred Forty-six and thirteen hundredths (5,346.13) Dollars with interest at the rate of three and one-half (3^) p^ cent, per annum from 22 April 1902. 366 EEPOET ON THE INTEENATIONAL HAEVESTEB CO. Eleven Thousand Five Hundred Twenty-seven and forty-five hundredths (11,527.45) Dollars with interest at the rate of three and one-half (3^) per cent per annum from 30 October 1902. Four Hundred Four Thousand, Two Hundred Twelve and sixty- three hundredths (404,212.63) Dollars, without interest. The International Company further agrees that so far as any por- tions of said indebtedness, principal or interest, have at any time been paid by the Deering Company it (the International Company) will repay to the Deering Company in cash on demand all amounts so paid by the Deering Company, with interest thereon at the rate of five (5) per cent, per annum from the respective dates of payment thereof by the Deering Company. The Deering Company represents and guarantees that no other encumbrances (except current taxes and assessments) than the indebtedness aforesaid provided to be assumed and paid by the International Company existed 30 September 1902 against the aforesaid property of the Deering Company; and represents and guarantees that the indebtedness aforesaid was bona fide indebtedness of the Deering Company 30 September 1902. The Champion Company and the Piano Company severally repre- sent and guarantee that, 30 September 1902, no encumbrances whatever (except current taxes and assessments) rested upon any property by them respectively transferred to William C. Lane as aforesaid. Each Vendor shall pay all indebtedness (owed by it either on general account or on account of any particular property sold by it to the Purchaser) except so far as is above in this contract otherwise provided. The International Company further agrees to pay to each Vendor, in cash, the amount of the inventory of that Vendor's property in Australia transferred to the Purchaser and by the Purchaser to the International Company, less any amomits thereof included in figures heretofore prepared by or under the supervision of Jones, Caesar & Company; each such inventory, however, first to be certified by Jones, Caesar & Company and approved by the Finance Committee of the International Company. The International Company further agrees to pay on demand to the Piano Company One Hundred Thousand (100,000) Dollars in cash. II. J. P. Morgan & Co. shall forthwith deliver to the respective Vendors ninety (90) per cent, (including any stock trust certificates already delivered as aforesaid) of the stock trust certificates to which the Vendors are severally entitled as in the next preceding Article hereof provided. The balance of said stock trust certificates for the aggregate of $53,250,000 shall remain on deposit with J. P. Morgan & Co. pending the delivery to the International Company by the respective Vendors of confirmatory deeds and certificates of title to their respective parcels of real estate, deliveries of the stock trust certificates reserved as aforesaid to be made to the respective Vendors upon the order of the International Company or upon the joint order of either Cyrus H. McCormick, Harold F. McCormick or Stanley McCormick and either Charles Deering, James Deering or Kichard F. Howe, one McCormick and one Deering (or Howe) of those here named being hereby duly authorized to determine jointly EXHIBITS. 367 in their discretion when further deliveries of stock trust certificates reserved as aforesaid shall be made; in any event, however, each Vendor shall, upon delivery to the International Company of all confirmatory deeds and certificates of title above referred to, be en- titled to immediate delivery of all of the stock trust certificates to which it is entitled under the provisions of this Contract. III. The International Company is hereby substituted as to future transactions in the place of the Purchaser as the party of the second part under said contracts, and hereby agrees with the respective Ven- dors to carry out and perform the provisions of said contracts, as modified hereby, in the place and stead of the Purchaser; but (not- withstanding the provisions of this Article III) the Purchaser shall procure and deliver to the International Company, without delay, proper confirmatory deeds conveying to said Company or to its order the property transferred to him in August 1902 by the Vendors and by the Milwaukee Harvester Company, a Wisconsin corporation. IV. The Vendors severally hereby accept the International Com- pany as the party of the second part under said contracts in the place and stead of the Purchaser, and in consideration of such sub- stitution hereby respectively release the Purchaser from any fur- ther liability under said contracts or any of them, or under any and all arrangements connected therewith or resulting therefrom includ- ing any unpaid expenses incurred by the Purchaser in carrying into effect the provisions of said contracts or otherwise incurred by the Purchaser in connection with the organization of the International Company; subject, however, to the provisions of the last clause of Article III above. V. The International Company hereby accepts the arrangements now in force respecting the Sixty Million (60,000,000) Dollars of working capital which the Purchaser has agreed to furnish, as a full performance of the Purchaser's agreements in respect of working capital, and the Purchaser hereby transfers to the International Company all his claims against the McCormick, Deering and Piano Companies respecting the accounts and bills receivable which they have severally assigned to the Purchaser and which the Purchaser has assigned to the International Company, and the McCormick, Deering and Piano Companies severally agree with the International Company that the International Company is hereby substituted in place of the Purchaser in respect of said arrangements, the Purchaser being hereby released in respect thereof ; and the International Com- pany hereby agrees to carry out each and all of said arrangements. VI. The International Company hereby releases the Purchaser from any and all liability of any kind whatsoever in respect of any and all contracts between the Purchaser and the International Com- pany and any and all matters and things connected therewith or aris- ing 'therefrom ; subject, however, to the provisions of the last clause of Article III above. . , ,, ,. t,t , ■ ^ In witness whereof the McCormick Harvesting Machine Company, The Warder, Bushnell & Glessner Company, the Piano Manufactur- ing Company and the International Harvester Company, have caused this instrument to be executed and their respective corporate seals to be hereunto affixed by their respective proper corporate officers, and the Deering Plarves'ter Company and the members thereof and 368 BEPOET ON THE INTEENATIONAL HAEVESTER CO. William C. Lane have hereunto set their hands and seals, all as of the day and year first above written. Executed in six (6) original parts. McCoEMicK Haevesting Machine Company. [seal.J By Cyeus H. McCoemick, its President. Attest, the seal of said Company : Haeold F. McCoemick, its Secretary. Deeeing Haevestee Company, By Charles Deeeing. Chaeles Deeeing. [seal. James Deeeing. [seal. EiGHAED F. Howe. [seal. The Waedee, Bushnell & Glessnee Company, [seal. By J. J. Glessnee, its Vice President. Attest, the seal of said Company : G. B. Glessnee, its Secretary. Plano Manueactueing Company, [seal.J By W. H. Jones, its President. Attest, the seal of said Company : O. N. Jones, its Secretary. Wm. C. Lane. [seal.] Inteenational Haevestee Company. [seal.] By Cyeus H. McCormick, its President. Attest, the seal of said Company : Richaed F. Howe, its Secretary. Exhibit 12. ageeement between international haevestek co. and the milwaukee haevestee. co., septembee 2, 1902. Memorandum of Agreement made this 2d day of Septeinber, 1902, between the International Harvester Company, a corporation of the State of New Jersey (hereinafter referred to as the Manufacturing Company), party of the first part, and the Milwaukee Harvester Company, a corporation of the State of Wisconsin (hereinafter re- ferred to as the Selling Company), party of the second part: The Manufacturing Company is engaged in the business of manu- facturing harvesting and agricultural machinery, tools and imple- ments and twine and in selling its products in the United States of America and other countries. The Selling Company is duly authorized by law to engage in the business of selling harvesting and agricultural machinery, tools and implements and twine. The Selling Company desires to enter into a contract with the Manufacturing Company for the purchase and sale of the former's products in the United States of America and elsewhere. In consideration of the premises and agreements herein contained and other valuable considerations, the receipt whereof from each party is hereby acknowledged, the parties hereto covenant and agree as follows: 1. The Selling Company shall undertake the sale of the Manufac- turing Company's products in the territory aforesaid and shall main- EXHIBITS. 369 tain such branch houses, warehouses and agencies and employes as shall be necessary to that end. The Selling Company shall do such advertising and take such measures as shall be necessary to exploit the sale of the Manufacturing Company's products. The Selling Company shall purchase from the Manufacturing Com- pany from time to time such of the Manufacturing Company's prod- ucts as it requires to fill its orders and carry a sufficient stock at its various warehouses and branch houses. All of the Manufacturing Company's products purchased by the Selling Company shall be purchased free on board the cars at the city in which is located the particular plant at which the products purchased were manufactured and all products so purchased and de- livered shall be the property of the Selling Company. The Manufacturing Company shall manufacture such harvesting and agricultural machinery, tools and implements and twine of the kinds heretofore manufactured by the plants of the Manufacturing Company, as well as of such other lands as the parties hereto may agree upon, as the Selling Company shall require for its business and shall carry such a stock of the various kinds of machinery, tools and implements and twine as shall be necessary to meet the requirements of the Selling Company's business. 2. The prices to be paid by the Selling Company for the_ product of the Manufacturing Company purchased under the provisions of this contract shall be the following : SCHEDtTLE. The prices of any articles not expressly mentioned in this schedule shall be such as may be agreed upon by the General Manager of Manufacturing for the time being of the Manufacturing Company, and the General Manager of Sales for the time being of the Selling Company, or as may be otherwise fixed in any legal way. Settle- ments between the two companies shall be made not later than the first day of February in each year for the business of the preceding year. The Selling Company may make payments either in cash or in accounts and bills receivable received by it from its agents and customers, or partly in cash and partly in such accounts and bills receivable. The Selling Company hereby guarantees the payment at maturity of the principal of and interest upon all accounts and bills receivable so used in payment. In case any of such accounts and bills receivable are not paid at maturity the same may, at the option of the Manufacturing Company, be reassigned to the Selling Company and in such case the Selling Company shall pay the Manu- facturing Company in cash the amount of principal of and interest accrued up to the itime of such re-assignment upon the accounts and bills receivable so re-assigned. The Selling Company further agrees that it will, without delay, take such action as shall be necessary in law for the changing of its corporate name from " Milwaukee Harvester Company to Inter- national Harvester Company of America. 1 .Q^Q A This contract shall continue m force until October 1, 1903, and thereafter from year to year unless terminated by either party on any first day of October on at least thirty (30) days previous notice in writing to the other. 370 BEPORT ON THE INTERNATIONAL HARVESTER CO. In witness whereof, the parties to this contract have caused their respective corporate names to be hereunto subscribed by their respec- tive presidents and their respective corporate seals to be hereunto affixed, duly attested by their respective secretaries, all as of the day and year first above written. International Harvester Company, By Cyrus H. McCormick, (Signed) Its President. Attest : [seal.] Richard F. Howe, (Signed) Secretary. Milwaukee Harvester Company, By Geo. P. Miller, (Signed) Its President, Attest : [seal.] Arthur W. Fairchild, (Signed) Secretary. Exhibit 13. AGREEMENT BETWEEN THOMAS M. OSBORNE AND EDWIN D. METCALF AND INTERNATIONAL HARVESTER CO., JANUAR-S* 15, 1903. Agreement, made this 15th day of January, 1903, between Thomas M. Osborne and Edwin D. Metcalf (hereinafter referred to as the '• Vendors ") , parties of the first part, and the International Har- vester Company, a corporation of the State of New Jersey (herein- after referred to as the " International Company ") , party of the second part. D. M. Osborne & Company is a corporation of the State of New York, with an authorized and issued capital stock of $300,000, and having outstanding in addition thereto $690,000 par value of stock Hcrip, which has been treated, as entitling the holders thereof to the same rights as stockholders in respect of the assets and earnings of the company. Said company owns a manufacturing plant at Au- burn, New York, and is engaged in the manufacture and sale of har- vesting machinery and other farm implements. The Columbian Cordage Company is likewise a corporation of the State of New York, and has an authorized and issued capital stock of $300,000. It owns a plant for the manufacture of twine and rope at Auburn, New York, and is engaged in the business of manufac- turing and selling twine and rope. The real estate occupied by the plants of said companies is free from mortgage, and said companies respectively have free and unin- cumbered titles thereto. D. M. Osborne & Company is hereinafter referred to as the " Os- borne Company," and the Columbian Cordage Company as the "Columbian Company," and the two corporations together as the "Auburn Companies." EXHIBITS. 371 The Columbian Company is substantially free from debt. The Osborne Company has no mortgage or funded indebtedness, but has a floating debt of approximately $2,500,000. The International Company desires to acquire the capital stock of the Auburn Companies, and also all of the assets and business thereof, with certain exceptions hereinafter specified. Now, therefore, this agreement witnesseth : I. The Vendors hereby sell, and the International Company hereby purchases, all of the capital stock and all of the stock scrip of the Osborne Company and all of the capital stock of the Columbian Company. The Vendors will deposit with The Standard Trust Com- pany of New York (hereinafter referred to as the "Trustee"), certifi- cates endorsed for transfer in blank, representing all of said capital stock of the Auburn Companies, and also all of said stock scrip of the Osborne Company likewise endorsed in blank. The stock cer- tificates and scrip so delivered shall be held by the Trustee as collat- eral security for the payment of the five-year notes of the Inter- national Company aggregating $3,500,000, to be delivered to the Ven- dors as hereinafter provided. II. Simultaneously with the execution of this agreement, the Inter- national Company shall deposit with the First National Bank of the City of New York the sum of one million dollars ($1,000,000), which sum the said bank is hereby authorized to pay to the Vendors when the Vendors shall, on or before the 31st day of January, 1903, deposit with the Trustee at least ninety-five per cent, of each of said three classes of securities. The certificate of the Trustee as to such deposit may be accepted by said bank as conclusive evidence thereof. It is the expectation of the Vendors that all of each of said three classes of securities shall be deposited simultaneously, but in case any part (which shall not exceed five per cent, of the issue) of any of said three classes of securities shall not be deposited when said sum of $1,000,000 is paid, the same shall be deposited on or before the said 31st day of January, 1903. The Trustee shall issue to the Vendors appropriate certificates of deposit describing the securities deposited hereunder. III. The purchase price to be paid by the International Company for the stock and stock scrip purchased as herein provided is the sum of three million two hundred thousand dollars ($3,200,000), and in addition thereto the actual cost (as hereinafter defined) of the sup- plies, materials on hand, manufactured products and goods in process of manufacture, which assets are hereinafter collectively referred to as the "Inventory Assets." Said purchase price shall be paid as follows : (a) One million dollars ($1,000,000) in cash as herembefore pro- vided. (b) Three million five hundred thousand dollars ($3,500,000) by the delivery of negotiable notes of the International Company in such denominations as the Vendors shall designate, dated January 15, 1903. and maturing on, or at the option of the maker at any time before, January 15, 1908, and bearing interest at the rate of five per cent, per annum, payable semi-annually. (c) The balance by notes of the International Harvester Company in such denominations as the Vendors shall designate, dated January 372 REPORT ON THE INTERNATIONAL HARVESTER CO. 15, 1903, and maturing, with interest at five per cent, per annum, on, or at the option of the maker at any time before, November 1, 1903. Of said $3,500,000 of notes, $2,200,000 thereof shall be delivered when all of said stock and stock scrip shall have been deposited with the Trustee hereunder. The remainder of said notes and such addi- tional notes, if any are to be given, shall be delivered when the in- ventory herein provided for shall have been delivered by the Vendors to the International Company. If the aggregate amount of such inventory shall be less than one million three hundred thousand dol- lars ($1,300,000), there shall be a proportionate reduction in said payment of $3,500,000. The five-year notes of the International Company to be given the Vendors as herein provided shall be negotiable notes substantially in the form hereto annexed [omitted from this exhibit] and marked " Form of note." IV. The Vendors shall be entitled to cause the Auburn Companies to transfer, deliver and pay to the Vendors, and to exclude from the sale herein provided for, the following property : (a) Except as hereinafter otherwise provided, all of the cash and accounts, claims and bills receivable of the Auburn Companies as of January 15, 1903. (b) All lands owned by either of said companies located elsewhere than at Auburn which have been received in payment or settlement of debts incurred in the conduct of the business and which form no part of the premises occupied and used by either of the companies in connection with its business. (c) The warehouse properties of the Osborne Company located, respectively, at Minneapolis, Chicago and St. Louis. (d) All of the tarring machinery in the factory of the Columbian Company, and all of the machinery therein or under contract for delivery, which is designed especially for use in making and handling rope and not intended for use or in fact used in making or handling twine. The property described in this paragraph is hereinafter referred to as the " Keserved Property." V. The Vendors shall also be entitled, for a period of one year from February 15, 1903, to use, for the purpose of making rope, two hun- dred (200) of the six hundred (600) spindles now installed in the factory of the Columbian Comijany and a proportionate part of the preparing machinery, and during such period shall be entitled to carry on in said factory the business of manufacturing rope and tar- ring yarn with such machinery now installed or under contract for delivery, and so long as they shall so use such factory they shall pay to the Columbian Company a proportion of the entire expense for power, light and heat for the factorj', based on their use of the fac- tory. The Vendors shall take over at cost a proportionate part of the stock of hemp on hand or contracted for, based on the consumption, of hemp in the rope business of the Columbian factory as compared with its aggregate business. VI. The Vendors shall deliver to the International Company as soon as practicable, an inventory as of January 15, 1903, showing the actual cost of the Inventory Assets to the Auburn Companies. In the case of raw materials, the term " actual cost " shall mean the EXHIBITS. 373 actual cost to the Osborne or Columbian Company, as the case may be, delivered at the factory or at any other place to which the raw mate- rials may have been delivered in connection with the company's busi- ness ; and in the case of manufactured products, the term " actual cost " shall mean factory cost, to which freight and transportation shall be added in the case of goods situated elsewhere than at Auburn, and in the case of goods in foreign countries, the shipping charges and duties shall be added. In the case of machines and other items in the inventory which are not current, proper deductions shall be made for depreciation. In the factory cost shall be included a proper amount for general factory expenses, but no allowance for the cost of selling. The Vendors hereby guarantee the accuracy of said inven- tory and of the valuations and costs therein stated. One or more per- sons appointed by the International Company may take part in the making of said inventory. If any question shall arise in connection, with the inventory it shall be referred for final decision to three per- sons, one chosen by the Vendors, one by the International Company, and the third by the two persons so chosen. VII. The Vendors agree that when said sum of $1,000,000 shall have been paid to them as herein provided, they will, from time to time, provide such resignations of directors and officers of the Auburn Companies as shall be requested by the International Company, and secure the election, to the vacancies caused by the acceptance of any such resignations, of such persons as shall be designated by the International Company. The responsibility of the Vendors in re- spect of the election of additional directors shall cease in the case of either of said companies when a majority of its board of directors shall be persons nominated by the International Company. VIII. The International Company shall have the option and right until and including March 15, 1903, to purchase the three warehouses of the Osborne Company located respectively at Minneapolis, Chi- cago and St. Louis, and in case of the exercise of such option by notice in writing, the Vendors shall cause said warehouses and the real estate upon which they are located to be deeded and delivered to the Osborne Company upon receiving the sum of one hundred and sixty-five thousand dollars ($165,000) in cash. In such case the Vendors shall cause to be conveyed, in the case of the St. Louis and Chicago warehouses, a clear and unincumbered title to the real estate upon which they are located and in the case of the Minneapolis ware- house the leasehold interest of the Osborne Company. IX. The Vendors shall be entitled to use the name " Columbian " or " Columbian Cordage Company " in connection with the manufac- ture and sale of rope, but in case the International Company should hereafter purchase the rope business reserved by the Vendors, then the right to use. the names " Columbian " and " Columbian Cordage Company " in connection with the manufacture and sale of rope shall pass to the International Company, or to such persons or corpora- tions as it shall designate. . t - , , . X. The Vendors assume, and hereby agree to indemnify the Au- burn Companies and the International Company against, all debts, claims, demands and liabilities of the Auburn Companies or either of them, as of January 15, 1903. In the case of uncompleted con- tracts, the liability shall be apportioned as of said 15th day of Jan- 374 EEPORT ON THE INTEKNATIONAL HAEVESTEB CO. uary, 1903, between the Vendors and the Auburn Companies, the intention being that the Vendors assume all risk and liability properly apportionable to the business of the Auburn Companies prior to said date, the Auburn Companies continuing to be liable for all liabilities apportionable to the business subsequent to said date. The Vendors covenant and guarantee that neither of the Auburn Companies have any contracts (including those relating to the rope and tarring busi- ness of the Columbian Company) except such as have been made in the ordinary course of business. As security for the performance by the Vendors of their agree- ments in this paragraph contained, the Vendors shall deposit with the First National Bank of the City of New York one million dollars ($1,000,000) of said notes of the International Company, to be held by said bank until the indebtedness of the Auburn Companies (exist- ing on January 15th, 1903, for which the Vendors are liable, in accordance with the terms of the preceding paragraph) has been reduced to one million dollars ($1,000,000), whereupon said notes shall be delivered to the Vendors. Said bank may accept the cer- tificate of the Vendors and of the Treasurer of the Osborne Company as conclusive evidence of the amount of such debt unpaid. The Osborne Company shajl be entitled to retain its accounts and bills receivable as further security for the payment of the indebtedness of the Osborne Company, and, except as hereinafter otherwise provided the assignment thereof herein provided for shall not become effective until said indebtedness has been substantially paid. XI. The Vendors covenant and guarantee that the Auburn Com- panies have respectively good and valid titles, free from incumbrance, to all of the real estate occupied by their factories and appurtenant buildings in Auburn, New York. XII. The International Company shall cause the Auburn Com- panies to attend to the collection of said accounts and bills receivable under the direction of such officers or persons as shall be designated by the Vendors, and the Auburn Companies shall be reimbursed for the actual cost of making' such collections. The collections on ac- count of said accounts and bills receivable of the Columbian Company shall be paid to the Vendors as received. The collections on account of the bills and accounts receivable of the Osborne Company shall be applied to the payment of the debts of the Osborne Company, for which the Vendors are liable under the provisions of Section X hereof, under the direction of the Vendors. When the debts of the Osborne Company, for which the Vendors are liable under the pro- visions of Section X hereof shall have been reduced below $1,000,000, the Vendors may require the Osborne Company, from time to time, to assign all of the uncollected accounts and bills receivable except- ing an amount thereof exceeding by 25% the unpaid debts of the Osborne Company for the payment of which the Vendors are liable ; but in such case the International Company may select the accounts and bills receivable which shall be retained for the purpose of secur- ing the payment of such debts. XIII. The Vendors agree that from and after the date hereof the business of the Auburn Companies shall be managed by the present directors and officers of the Auburn Companies (so long as they shall remain in control of said business), without any departure from the EXHIBITS. 375 ordinary course of business and in consultation with the officers of the International Company. The International Company agrees that in case a majority of the directors of said companies shall be persons of its choice, the plants of the Auburn Companies shall be carefully maintained, and their assets shall not be dissipated or wasted. So long as the unpaid notes of the International Company issued hereunder shall exceed three million dollars ($3,000,000) , the factories in Auburn shall be kept in operation to their reasonable capacity according to the conditions which shall, from time to time, prevail in the various lines of business in which said companies are engaged, and without the diversion of business from said factories. The International Company also agrees to advance to the Auburn Companies such moneys as shall be necessary to keep them supplied with working capital, and also agrees that no mortgage shall be placed upon the plants of either of said companies. All the cove- nants of this paragraph shall cease to be binding upon the Interna- tional Company when all of its said note shall have been paid. XIV. The International Company is hereby granted the option until and including March 1, 1903, to purchase the rope and tarring machinery and business hereinabove reserved, for the sum of two hundred and fifty thousand dollars ($250,000), and in case of such purchase, the International Company shall assume, or cause the Columbian Company to assume, the contracts incident to said rope business, and shall also purchase, or cause the Columbian Company to purchase, the supplies, materials and goods manufactured and in process of manufacture incident to said business, at prices to be de- termined in the same manner as is provided in Paragraph VI hereof for determining the prices for the " Inventory Assets " of the Auburn Companies. The International Company may, if it shall so elect, instead of purchasing said rope and tarring machinery business as an entirety, purchase and acquire such an interest as it shall designate, not exceeding one-half, in the stock of a corporation to be organized by the Vendors to acquire said rope and tarring machinery and busi- ness, the basis of the capitalization of such company to be two hun- dred and fifty thousand dollars ($250,000) for said machinery and good will and in addition thereto an amount of stock equal to the value of the supplies, materials and goods manufactured and in process of manufacture incident to said business, determined as here- inbefore provided, and such additional capital as the Vendors may deem necessary. Such corporation if organized shall take over said rope and tarring business as a going concern. XV. In consideration of the purchase herein provided for, each of the Vendors covenants and agrees with the International Company and with each of the Auburn Companies that he will not for a period of ten years from the date hereof engage in, or become connected with or interested in as officer, employe, or otherwise, any business of manufacturing or selling harvesting machinery and other agri- cultural implements, or binder twine (except that of the Interna- tional and Auburn Companies), in any part of the United States, excepting the states of Arizona and New Mexico, or in Australia or South America, or in any European countries, excepting Holland and Belgium. In case the International Company elects to pur- chase or to cause the Columbian Company to purchase, the rope and 376 BEPOET ON THE INTEBNATIONAL HAEVESTEB CO. tarring business reserved to the Vendors as herein provided, then the covenants of this paragraph shall apply to the business of manu- facturing and selling rope and tarring yarn. Each of the Vendors shall, if the International Company shall so request, enter into con- tracts with both of the Auburn Companies containing substantially the covenants of this paragraph. In case the International Com- pany should fail to pay said notes and said collateral security for their payment should be sold as the result of such default, then the Vendors shall be released from the covenants of this paragraph. XVI. All notices under or in reference to this agreement may be mailed to the Vendors at Auburn, New York, and to the Interna- tional Company at its office in the City of Chicago, and any notice so mailed shall be deemed to have been duly given. The obligation of the Vendors under this agreement shall be joint and several and shall bind their respective heirs, executors and administrators. In witness whereof, The International Company has caused this instrument to be executed and its corporate seal to be hereunto affixed by its proper officers, and the said Thomas M. Osborne and the said Edwin D. Metcalf have hereunto set their hands and seals the day and year first written above. ^Signed J Thomas M. Osborne, [seal.] (Signed) Edwin D. Metcalf. [seal.] International Harvester Company, (Signed) By Geo. W. Perkins, Chairman Finance Com/mittee. (Signed) Richard F. Howe, Treasurer. Exhibit 14. McCOBMICK HARVESTING MACHINE CO.: PRELIMINARY BALANCE SHEET CLOSE OF 1901 SEASON, SEPTEMBER 30, 1901. Increase or decrease com- pared with previous year — increase, roraan; decrease, italics. ASS Reaper works: Land BiiildtnErs Machinery ETS. $518,194.88 2,172,425.40 950,009.97 111,002.20 675,033.12 499,170.78 268,366.15 13,640,631.25 1,285,206.10 284,623.84 908,980.65 143,619.95 308,300.00 19, 473. 79 5199,968.68 172,729.76 $372,698.44 583,339.82 Twine miU: Land Buildinps Machinery 345,483.22 237,856.60 General office: 5,058.86 5,712.45 16, 267. 69 805,677.99 10,771.31 General agencies: Warehouses 69,046.22 53,311.66 Equipment 103,311.66 122,357.88 19,US.S9 Farm and other R. E Deferred charges to P. & L S8,610.S^ EXHIBITS. 377 McCoBMicK Habvesting Machine Co. : Pkeliminakt Balance Sheet Close of 1901 Season, September 30, 1901 — Continued. Increase or decrease com- pared with previous year— increase, roman: decrease, italics. ASSETS— continued. Stoclcs and bonds: Stocks $24,416.27 Bonds 1,000.00 $25 , 416. 27 Cash 1,274,549.08 Accounts receivable; General agents 7. 463, 173. 78 Foreign 2, 460, 286. 22 MisceUaneous 113, 419. 36 10,026,879.36 Bills receivable; Local agents 1, 273, 678. 23 Special 279, 400. 18 1,653,078.41 Reaper notes; 1880 12,934.09 1881 16,824.39 1882 32,937.81 1883 62, 214. 66 1884 64,611.73 1886 60,068.26 1886 34,797.84 1887 69,236,60 1888 68,950.99 1889 72,511.-74 1890 94,674.77 1891 116,274.41 1892 216,630.23 1893 201,554.06 1894' 167,426.30 1896::!;;;;:.. ■- 264,242.18 1896 289,722.68 1897 372,688.44 1898;:;!; 897,982.24 1899 2,454,096.95 190o"' 5,635,969.15 1901 8,612,079.06 ■ 19,777,227.47 Inventories: Reaper worl $4,805 871 6.3 Grinders 485,977.68 -294,397.73 Totals 23,346,066.80 11,582,883.81 6,764,721.41 4,998,461.68 Earnings from other sources: Interest (R/N B, rec. and accts.)- -- Hemp investment 754,364.58 55,441.17 29, 224. 33 617.59 84,5.06 15,000.00 21,532.50 6,506.44 1,380.26 1,111.51 13,236.86 26,692.39 Real estate- Agencies— Net earnings Gen'l office— Net earnings Farms, etc.— Net earnings Rental of Illinois Northern Railway. Royalties Implement profits (general agents). . J.McC.) Profit and loss— Direct credits- instated $136.04 Worthless accounts, reinstated 542.66 Wortliless accounts, foreign, reinstated. 411. 30 Gain on sales of farm lands 3,787.32 agency warehouses 20, 291. 43 Gain on sales of scrap 221,87 Surplus in bank 122.04 Profit on implement sales 1,179.83 Total of earnings from other sources 925,951.67 376,769.29 223,361.10 516,255.56 22,684.28 32,461.28 10,084.03 694.49 3,760.82 135.00 1,401.72 689.25 206,664.71 liOsses, expenses, etc.: Chicago office 5,924,403.2! Firelosses Patent expense ....- Field work Bridge account Emergency donation a/c. James McPhail, foreign oxp. a/c Profit and loss— Direct charges- Worthless notes... $183,828.95 Worthless ao- Worthless ac- counts, foreign . . 134. 26 Worthless ac- counts, office 2, 848. 68 Claims and dam- ages .. 1.601 35 Money lost in tran- sit 20.00 Special commis- sions, etc 34. 30 Loss on sale of farm lands 2,904.57 Total of losses, expenses, etc 1,394,741.53 Net earnings, season 1901 . 4,529,661.72 exhibits. 379 Exhibit 16. Mccormick harvesting machine company: general bal- ance SHEET, SEPTEMBER 30, 1902. ^ , ASSETS. Property ana plant: Cook County real estate — Reaper works, real estate 51,150,366.29 Twine mill, real estate 129 602 20 Other real estate (Schedule 1) .■ gi^ 29o! 63 Buildings, improvements, machinery, etc.— Reaper works (Schedule 2) . i. 189! 417 84 . Buildmgs, improrements, machinery, etc.— Twine mill (inoludinE flax experimental, $49,816.36) (Schedule 3) 1 666 440 26 Powers building, real estate leases (Schedule 4) ' ' 2o'ooO 00 Powers building, buildings and equipment (Schedule 4) 279' 872 08 General agencies— Land, buildings, and equipment (Schedule 6) 1, 176, 306. 11 Farms and other real estate (exclusive of Cook County real estate) 62, 682. 35 Timber and timberiands (Schedtile 6) 314, 950. 66 Patents 354,249.39 Total TOoperty and plant $9,385,067.80 Inventory— Raw material, finished product, etc.: Raw material, work in progress, etc., at reaper works $5,264,828.18 Raw material, work in progress, etc., at twine mill and out- side mills 265,162.84 6, .509, 991. 02 Completed machines 3 014,125 50 Repair parts 870,6.33.47 Twme 893,9.53.86 Total inventory— Raw material , finished product, etc 10, 288, 603. 85 Other inventory items: Inland freight (from Chicago to seaboard on foreign machines) 36,311.32 Advertising, season 1903 3, 220. 20 Total, other inventory items 39, 631. 62 Advances for construction and operation of Mosher sawmill (Schedule 7) 121, 016. 31 ($11,738.31 not transferred a/c to be adjusted between I H Co Mc Co & \\ . C. Lane.) Investments— Hemp and hemp lands: (?) B. P. Clark, trustee 75,000.00 Compania Industrial de Baja (California) Ill, 021. 13 Total investment hemp and hemp lands 186, 023. 13 Investments — Stocks and bonds; MO L (Chicago Union Transfer Ry. stock 18,773.98 . a ^ Grand Hotel Co., Council Bluffs, stock 466. 79 >• ., "a JNicaragua Canal Construction Co., stock 5,175.50 ■"o t. til Indianapolis Sentinel, bonds 3,0.00.00 r*" 2 ^ - S- i Total investments, stocks and bonds 27,416.27 Current and miscellaneous assets: Cash, general office 132,296.48 G. N. Wilson, cashier reaper works 2,000.00 ( ?) Twine mill contingent fund 460. 00 Reaper notes and bills receivable (Schedule 8) 22, 623, 271. 29 (?) Bills receivable (special) '279,774.45 Accounts receivable, general agents' balances (Schedule 9) 11, 646, 397. 64 Accounts receivable sundry individuals and companies (Schedule 10) 1, 483, 609. 28 Total current and miscellaneous assets 36, 067, 698. 14 Deferred profit-and-loss items: ■gl |.g« Paris exposition 122, 019. 16 Interest paid in advance 36, 694. 43 ($4 667.13 interest accrued on Spl. B/R. was transferred.) Locke pool 31,994.61 Speciafreport 11,915.00 Mosher sawmill profits suspense 3, 063. 37 Jas. McPhail, experimental 1, 850. 32 Com harvester, experimental 692. 43 Bridge 200.00 F. Craycroft 179.70 Acme Gas Co. option 100.00 St. Louis exposition 41. 65 Buffalo exposition ^ 14. 57 Total deferred profit and loss items 208,765.24 Total assets 56,324,122.26 > $113,630.22 not transferred. 380 REPOKT ON THE INTEKNATIONAL HABVESTEB CO. McCoRMicK Harvesting Machine Company: General Balance Sheet, September 30, 1902 — Continued. LUBILITIES. Capital Stock $2,500,000.00 Current liabilities; Notes payable, short time 89,100,000.00 NofBS payable, long time 1, 809, 371. 66 Special surplus (S.THoC.) 300, 000. 00 Accounts payable (Schedule 11) 1,080,274.31 Pay roUs (Schedule 11) 152,670.49 Unclaimed wages •. 2,691.41 E. B. McCagg mortgage 6, 750. 00 Interest accrued 68,261.05 Total current liabilities 12,518,918.92 Totalliabilities 15,018,918.92 Surplus: Surplus, beginning ol season 1901 29,917,072.84 Add- Direct credits during season 1901 J980, 662. 52 Direct credits during season 1902 1,505,683.33 2,486,245.85 32,403,318.69 Deduct- Direct charges during season 1901 580,223.44 Direct charges during season 1902 275, 266.52 855,489.98 31 547 828 73 Net profits, season 1901 4,631,809.36 Net profits, season 1902 5,125,665.25 9,757,374.61 Total surplus 41,305,203.34 Total 66,324,122.26 Exhibit 17. Mccormick harvesting machine co.: profit and loss, sea- son 1903. Gross sales: Machines, repair parts, etc $19, 846, 293. 14 Twine and rope.... 6,478,877.72 Total 25,325,170.86 Less twine discounts and commissions 11, 343. 46 Total sales 25, 313, 827. 40 Cost of product sold: Cost of manufacture- Machines, repair parts, etc $ft, S41, 336. 30 Twine 4,894,225.18 Total cost of manufacture 14, 736, 661. 48 Cost of repairing defective machines, etc 58, 036. 81 Purchases of twine and rope 17, 004. 20 Total 14,810,602.49 Machines made in season 1902 included in 1901 sales $121, 765. 70 Kepair parts and coyers donated and used for repairing defective machines, etc 53, 861. 98 Increase in inventory of finished product- Machines, repair parts, etc 1,668,718.97 Twine and rope 596, 048. 55 2,340,385.20 Total cost of product sold 12, 470, 217. 29 Gross profit on sales 12, 843, 610. 11 Expenses: Machine department 8, 080, 026. 91 Twine department 237, 387. 89 8,317,414.80 Net earnings 4,526,195.31 Other Income 1,152,981.64 Total income 5,679,176.85 Deductions from income 553,611.60 Profits for season 1902 5 125 565.25 exhibits. 381 Exhibit 18. deering habvesteb, co.: assets and liabilities, febbxt- ARY 1, 1903. ASSETS. 1. Factory plant J3, 200, 7.59. 42 2. Branch houses 203, 839. 4S 3. Other real estate 278, 242. 82 4. Office furniture 39, 144. 98 6. Inventory 2, 263, 157. 13 6. Spent on 1902 construction 7, 036, 700. 80 7. Current 1902 expenses 347, 032. 62 8. Bills receivable 8,774,614.45 9. Cash balance 1,692,257.04 10. General agency cash working funds 53, 978. 60 11. Loans 3,506,600.00 12. Due from individuals, firms, etc 171, 843. 86 13. Miscellaneous accounts 1, 596, 837. 66 14. Freight claims 32,978.94 16. Suspended banta and del. collectors 7, 882. 68 16. Sundry accounts 217, 485. 90 17. Stocks and bonds 39, 160. 00 18. Local agents' balances: 1894 4,648.13 1S95 12,661.52 1896 18,663.37 1897 7, 827. 81 1898 13, 619. 44 1899 11,489.44 1899, foreign 19, 269. 23 1900. 23,102.04 1900, foreign 10,047.38 1901 690,667.50 1901, foreign 920,578.97 Patents 250,000.00 31,344,071.21 LIADILITtE.?. Miscellaneous accounts payable 474,714.91 Due travelers 70,011.41 William Deering & Co 2, 766, 811. 13 WilUam Deering, cash loan 2, 929, 346. 49 William Deering, special account 1,484,672.89 James Deering, special account '. 400,000.00 Charles Deering, special account 400, 000. 00 Mrs. Howe, special account 180, 408. 68 8, 701, 965. 51 Contingent, Feb. 1, 1901 $2, 895, 292. 10 Contingent added for 1901 303, 899. 62 — 3,199,191.72 Profit and loss: 1894 -5166,828.20 1S95" ' 698,627.73 1896;;;;:;;;:;;: 917,122.74 1897 1,443,898.91 1898; ;::::;. :::.:.: 2,830,118.68 6,366,496.28 Less amounts paid P. D. M., G. F. S., & L. C. S 217,322.35 6, 139, 173. 91 1899 3,216,826.80 9,355,000.71 1900 1,735,792.10 Deduct tor Adj. M:elb.A/C& Ins. A/C 8,874.44 1,7^,917.00 loni 2,357,995.61 13,439,913.98 nanital 3,000,000.00 sS^pto.v.v.".:;::::::::::::::;;;;;;: 3,000,000.00 31,344,071.21 382 eepobt on the rntebnational hahvestee co. Exhibit 19. deebinghabvesteb co.: profit and loss, february 1, 1903. Inventory of machines, twine, and extras on hand at factory and in the country as per stmt. 2/1/1901 $3,582,504.62 Oil inventory 2/1/1901 plus oil purchased in 1901 53,371.62 Machines and extras taken back and applied on accounts in 1901 31, 981. 80 1901 construction account 8,589,333.90 12,257,191.84 Deduct: Inventory machines, twine, and extras on hand at factory and in country as of 2/1/1902 12, 263, 167. 13 Inventory of oil 2/1/1901 16,234.98 2,279,392.11 9,977,799.73 Selling costs 2, 416, 089. 99 Collecting costs 377, 942. 69 Advertising 131, 990. 73 Salarie,s, C. D., J. D., & R. F. H 15,000.00 Patent expense 68, 609. 44 I-oss and discount 48, 922. 42 Loss and discount, special merchandise 4, 580. 45 Benevolent account 2, 487. 00 Insurance ^ 4, 760. 74 Foreign real estate 1, 100. 68 General expense 13, 081. 72 3,084,465.76 Total debits 13, 062, 265. 49 Merchandise sales 17, 034, 419. 58 Oil sales 67,967.13 Interest balance 74, 658. 25 17,177,034.98 Commissions on extras, com J156, 872. 52 Commissions on extras, net 13,569.60 Gratis com., extras 83, 856. 45 Gratis net, extras 22, 618. 81 Allowance on oil 9, 037. 89 Freight allowed 700, 860. 26 Allowances 291, 269. 65 Discount for cash 174, 799. 06 1,452,874.24 Net sales 15,724,160.72 Gross profit 2,661,895.23 Contingent, 2/1/1902 3, 199, 191. 72 Contingent, 2/1/01 3,096.751.08 Less deducted on a/c Melbomne stock 200, 468. 98 2,895,292.10 Contingent from 1901 profits V 303, 899. 62 1901 net gain 2,367,995.61 exhibits. 383 Exhibit 20. DEERnsTG HARVESTER CO.: ASSETS AND LIABILITIES, JANUARY 31, 1903. ASSETS. Factory plant $3,364,714.66 Branch houses '226 496.26 Keal estate 311 341.76 Inventory.. 3,469,380.93 Bills receivable 13 511 864.85 Cash balance 778 822.94 Loan account '.'.'.','.. ' 50o' 00 Due trom sundry firms 37 424 72 Miscellaneous accounts 7 325' 134 46 Freight claims ■..".■.■.■.".■.■■.■■.■■.■". ' 45',oeo!lO Buspended banks and delinquent collectors . 6 501. 82 Sundry accounts 3o' I07! 64 Stocks and bonds 339'579 29 Net ledger accounts: ' 1894 2,615.46 1895 10,969.70 1896 15,088.24 1897 6,180.27 1898 10,767.08 1899 9,148.15 ISOO 10,431.28 1901 .34,379.66 1902 8,826,793.18 Foreign ledger accounts: 1899 10,207.15 1900 10,047.38 1901 43,135.09 1902 2,051,172.72 Patents 260,000.00 40,727,863.68 UABIUTIES. Accounts payable 2, 593, 006. 53 Bills payable 3,061,527.45 Sundry accounts payable 62, 570. 76 ■William Deering, cash loans 3, 000, 903. 69 Wmiam Deering 2,820,874.43 William Deering & Co 62,0.''2.60 William Deering, special 1,812, 891. 10 Charles Deering, special 409, 750. 00 Mra. Howe, special 184, 806. 14 Contingent, 1902 3,199,191.72 Loss and gain $13,236,318.23 Loss and gain, 1902 4,183,940.93 17,420,259.16 Capital 3,000,000.00 Surplus 3,000,000.00 40,727,863.68 384 kbpobt on the inteknational harvester co. Exhibit 21. '^ deebing harvester co.: loss and gain, jantjary 31, 1903. Inventory macMnes, twine, and extras on hand at factory and in country February 1, 1902. $2, 263, 157. 13 Oil inventory, plus purchases in 1902 74,405.75 Machines, extras and twine talcen back and credited agents' accounts in 1902 48, 937. 35 Factory account for 1902 13,289,791.3] 15,676,291.64 Deduct: Inventory machines, twine, and extras on hand at factory and in country as of February 1, 1903 $3,469,380.93 Oil inventory, February 1, 1903 13,821.72 3,483,202.65 Add: SeUing costs 2, 555, 197. 00 Collecting costs 386, 397. 74 Advertising 147, 246. 49 Salaries 10, 000. 04 Patent expense 5,890.08 Loss and discount 63, 383. 74 Loss and discount, special merchandise 2,660.63 Benevolent account 1, 925. 00 Foreign real estate expense 1, 963. 97 General expense 17,545.68 Marine insurance 95. 28 12,193,088.89 3, 182, 195. 66 Merchandise sales 20, 820, 719. 72 Oil sales 94, 360. 41 15,376,284.54 20,915,080.13 Deduct: Commissions on extras, com $172,618.70 Commissions on extras, net 19.644.49 Gratis extras, net 23, 667. 68 Gratis extras, com 108,305.33 Allowance on oil 7, 907. 23 Freight allowed 728, 189. 63 Allowances on mach., &c 286,165.22 Discount for cash 181, 348. 27 1,527,846.45 Net sales 19, 387, 233. 68 Add: Interest 146, 775. 46 Switching 6.400.96 Rent Ij 102. GO Dividends 19, 7og. 77 171,991.79 ■ 19,659,226.47 Profit for 1902 4,183,940.93 O