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EDITOKIAL EDITION

LIMITED TO ONE THOrSAND COPIES

Copyright 1905, By John D. Morris & Company.
Copyright 1906, By The Making of America Co.
Copyright 1903, 1905, By Charles Higgins.
Copyright 1902, by Forum Publishing Company,
copyright 1901, 1903, By George H. Ellis Company.
Copyright 1900, 1903, By The Gassier Magazine Company.
< 'opy right 1902, By The Yale Publishing Company.
Copyright 1902, 1903. 1904, By American Academy of Political

and Social Science.
Copyright 1902, By Houghton Mifflin Company.
Copyright 1901, 1905, By John R. Dunlap.
Copyright 1905, By William P. Gest.
Copyright 1902, By The Outlook Company.

CONTENTS

VOLUME III.

INDUSTRY AND FINANCE.

Our Industrial Position in the World.

by Henry Gannett 1

The Pioneers of American Industry.

by G. S. Callender 8

Concentration of Industry in the United States.

by J. A. Hobson 49

The Integration of Industry in the United States.

by William Franklin Willoughby 63

The Great Consolidations called "Trusts."

by Peter S. Grosscup 77

The Combination of Labor, Intelligence and Money.

by Charles R. Flint 91

Investigating the Trust Problem.

by Maurice H. Robinson 102

The Good and the Bad of Trusts.

by Charles J. Bullock 121

Trusts and Prices.

by Isaac A. Hourwich 145

Trusts in the Light of the Census Returns.

by William R. Merriam 159

The Rise and Supremacy of the Standard Oil Company.

by Gilbert Holland Montague 171

The Right of Congress to Control the Trusts.

by Philander C. Knox 204

How Congress May Control Trusts.

by Jeremiah W. Jenks 222

The Work of the Promoter.

by Edward Sherwood Meade 231

Hi

IV CONTENTS

The Captain of Industry and His Lieutenants.

by W. R. Lawson 244

Engineering in Industrial Works.

by William D. Ennis 257

The Drama of Furnace, Forge and Shop.

by Day Allen Willey 264

The Organization of Manufacturing Industries.

by Andrew Carnegie 273

■j Causes of the Success of American Manufactures.

by John Foster Fraser 283

The Relation of Education to Industrial and Commercial Development.
by Howard J. Rogers 300

Business Principles in the Conduct of Industries.

by Robert H. Thurston 311

Who Owns the Railroads.

by Solomon Huebner 330

Some Economic Aspects of Electric Power Distribution.

by Louis Bell 345

American Lumber.

by B. E. Fernow 355

The Commerce and Industries of the West.

by Leslie M. Shaw 363

Commercial Development of the South.

by Charles M. Harvey 370

Corporate Factors in American Progress — Wall Street and the Grain Pit.
by W. R. Lawson • • 377

Strength and Weakness of American Finance.

by Ellis H. Roberts 392

v Early American Financiers.

by George Alfred Townsend 401

•v. Concentration of the Banking Interests.

by Charles J. Bullock 411

CONTENTS V

Rise and Business of the Modern Trust Company.

by William P. Gest „ 428

Government Control of Banks and Trust Companies.

by William Barret Ridgely 441

Insurance in Practice.

by Oswald J. Arnold 452

The Insurance Investigation.

by Gilbert E. Roe 459 y

The Industrial and Financial Future of the United States.

by Frank A. Vanderlip 475

OUR INDUSTRIAL POSITION IN THE WORLD.

BY HENRY GANNETT.

[Henry Gannett, geographer of the United States geological survey ; born Bath, Me.,
Aug. 24, 1846; graduated Lawrence Scientific school and Hooper Scientific school;
geographer of tenth, eleventh, and twelfth censuses; and since 1882 of the geological
survey ; author of many articles in magazines and reviews chiefly on the resources of
the United States, and of the following among other books : Commercial Geography,
Building of a Nation, The United States, and Manual of Topographic Surveying.]

The United States has 7 per cent of the land area of the
earth, and 5 per cent only of the world's population. One
in 20 of the people of the world owe allegiance to Uncle Sam.
In numbers, we are exceeded by China, which has more than
one fourth of the earth's inhabitants; the British empire,
with nearly one fourth; and Russia, with about one twelfth.
All the people of China and 85 per cent of those of the British
empire represent an early civilization; the Russians promise
a high civilization in the future ; while the United States stands
for the highest type of the civilization of to-day. After us in
numbers are Germany, with 3.7 per cent of the earth's popu-
lation; Austria-Hungary and Japan, with 3 per cent each;
and France, with 2.5 per cent.

With only one twentieth of the earth's population, we
have subdued and devoted to the use of man not less than
one fourth of the cultivated land of the earth, that is, more
than India or China, with their enormous populations; and
our 400,000,000 acres of land under cultivation produce in
such profusion as to give us pre-eminence in most of the prod-
ucts of agriculture. Of the wheat of the earth we contribute
21 per cent, which is more than any other nation. Russia
produces but 15 per cent, and France but 12 per cent. We
export from one fourth to one third of our crop to supply the
deficiencies of Europe. Indian corn, one of the gifts of the
new world to the old, still finds its home in American soil;
for four fifths of the world's crop is grown in North America,
and not less than 76 per cent in the United States.

Vol. 3-1 1

2 HENRY GANNETT

Oats are more cosmopolitan. We produce a little more
than a fourth, and are slightly exceeded by Russia, while
Germany produces about three fifths as much as the United
States.

Rye and barley are a different story. Of these two
cereals the United States produces scarcely any, while Russia
raises more than half the world's crop of the former and a
fourth of the latter, leading the world in these two cereals.
Of rice we produce but a trifling amount, in comparison with
the enormous crops of China and India.

As with corn, so with cotton. Of this textile fibre the
United States furnishes three fourths of the world's supply,
while India contributes but one eighth, and Egypt one tenth.
Two thirds of our crop goes to Europe, to supply the factories
of England and the continent. Two thirds of the cotton
manufactured in Europe is raised by negro labor in our
southern states.

In the production of other fibres, the showing is not by
any means so favorable to the United States. In the matter
of wool, we are exceeded by Austria, Argentine, and Russia,
which produce, respectively, 19, 15, and 14 per cent of the
world's product, while the United States contributes only
11 per cent, and spends $20,000,000 annually in supplying
her deficiency. Of raw silk we produce none; of hemp 4 per
cent only, while Russia raises nearly half the world's supply;
and of flax fibre very little. Here again Russia comes to the
front, with nearly four fifths of the world's supply.

Potatoes we gave to Europe, and Europe almost monopo-
lizes their cultivation, producing over nine tenths of the
world's crop while the United States raises less than one
tenth of it.

Our production of sugar from all sources — from the cane
of Louisiana, Porto Rico, and Hawaii, and from beets — is but
8 per cent of that of the world. Of cane sugar, we raise about
one sixth, and of beet sugar little more than 1 per cent. We
spend $100,000,000 per year on imported sugar.

Of coffee and tea we raise comparatively trifling amounts,
importing practically all we use; but in the production of
tobacco we lead with 37 per cent of the world's product. In

OUR INDUSTRIAL POSITION IN THE WORLD 3

the production of hops we are exceeded by Great Britain and
Germany; our country producing but 18 per cent of the world's
crop.

In the making of alcoholic liquors this country does not
take high rank. Of the wine of the world, we contribute 1
per cent only ; of spirits, 10 per cent ; and of beer, 19 per cent.
Germany and Great Britain exceed us in the brewing of beer,
and France, Germany, Russia, and Austria in the manufac-
ture of spirits.

In live stock, our standing is good. We have one fourth
of the horses, or more than any other country except Russia;
and nearly one fourth of the cattle, far more than any other
country. We have only 7 per cent of the sheep, and here
we are exceeded by Austria, Argentina, and Russia; but we
have more than two fifths of the hogs on earth. Our meat
production is nearly one third that of the earth; our catch of
fish is proportionately but little less; and both are far greater
than those of any other country. Our dairy products are
nearly one fourth of those of the earth, and nearly double
those of any other country.

Summing up, it appears that of the entire agricultural
product of the world, the United States produces 23 per cent —
a little less than one fourth; while Russia produces 15 per cent,
and Germany and France, 12 per cent each. This proportion
of the agricultural product of the earth which is contributed
by the United States, enormous when contrasted with her
population and area, is further emphasized by the fact that
for every man here engaged in agriculture, a product valued
at $900 is contributed, while the average Frenchman produces
but $580, and the average German, but $510, in agricultural
products. In other words, the average American farmer
produces over 50 per cent more than the citizen of any other
nationality. This is due, primarily, to the fact that the farms
of the United States have larger areas. The average farmer
of this country cultivates 44 acres, while the Frenchman
cultivates but 13, and the German but 8. On the other hand,
farming is more intensive in Europe than in America, the
product per acre being nearly twice as great; but with the
abundance and cheapness of land and the high cost of labor

4 HENRY GANNETT

in America, it is plainly a good business policy for the Amer-
ican to get his crops by the use of much land, with a minimum
of labor. He is enabled by the use of better tools and more
machinery to work an area three or four times as great as the
European cultivates. The American uses machinery in farm-
ing as far as possible ; the European scarcely at all.

The position of the United States in the field of manu-
facture is, in many respects, quite as strong as in agriculture.
Of the cotton cloth of the world we make more than one fifth,
being excelled by Great Britain only. Of the woolen cloth
we make nearly one fourth, excelling in that respect the
mother country. Of linen, we make 27 per cent of the world's
product — more than twice as much as Germany, our nearest
competitor. Of the paper of the world we manufacture no
less than 46 per cent — not much less than one half that of
the world, three times as much as Great Britain, and nearly
four times as much as France. Of glass, we make nearly a
third of the world's product, while France, our nearest com-
petitor, makes less than one fourth.

It is, perhaps, in the manufacture of iron and steel that
our pre-eminence over other nations is more decided than in
any other commodity. The time was, and not so long ago as
to be beyond the remembrance of most of the present genera-
tion, when, as ironmakers, we were in an infantile condition.
It is only a few years since we became the leading nation of
the earth in respect to this, the most important, branch of
manufacture. Now 34 per cent of the iron ore of the world
comes from our mines ; 34 per cent of the pig iron comes from
our furnaces; and 37 per cent of the steel is produced in our
crucibles and converters. There is no other country on earth
that approaches this production. Germany's share in the
world's product of iron ore is less than one fourth, and of pig
iron only a little more than one fifth. Her steel product is
only about two thirds as large as ours. Great Britain pro-
duces half as much iron ore and two thirds as much pig iron
as this country does, and her steel product is just one half as
large as ours.

Of all the manufactured goods produced on earth, the
United States contributes more than one third, or 34 per cent.

OUR INDUSTRIAL POSITION IN THE WORLD 5

Our production of manufactured goods is nearly seven times
as great as our proportion of population. Great Britain con-
tributes 15 per cent of the manufactured goods of the earth,
Germany 12 per cent, and France 11 per cent.

These figures suggest an extraordinary efficiency for the
American artisan, which is borne out by examination of the
figures of production and of occupations. The average gross
manufactured product, per hand, in the United States has a
value of $1,900 per annum. The French artisan, under the
same definition, produces $650; the English artisan, $485;
and the German $450. In other words, the product, per hand,
of the United States artisan is nearly three times as great as
that of his nearest competitor. Of course, it is understood
that these figures, although comparable with one another,
are not correct as representing the value of the manufacturing
processes. The value of the raw material should have been
subtracted from that of the gross product before dividing
it by the number of hands. This would, naturally, reduce
the figures, but it would reduce them practically in the same
proportion.

This enormous difference in efficiency between the artisans
of the United States, on the one hand, and those of Europe on
the other, which is due mainly to the universal use in this
country of the most modern machinery and methods, enables
us not only to hold our own markets, but to invade success-
fully the home markets of other countries, to send coal to
Newcastle, steel to Sheffield, and cotton to Lancashire.

In mining the showing is still more favorable to us. Of
course, in this branch of industry we enjoy the abundance of
ores easily mined and worked, which fact is our chief advan-
tage. Of the coal of the earth we produce 29 per cent — more
even than Great Britain, which is now producing 27 per cent.
Of petroleum we produce 43 per cent, being exceeded in this
product by Russia, which produces more than half the world's
total. Of gold we produce 31 per cent, and of silver 33 per
cent, being the leading producer of both metals. Of copper
we produce 56 per cent; our nearest competitor being Spain,
with less than one eighth of the world's production. Of lead
we produce a fourth; again Spain follows with a little more

6 HENRY GANNETT

than one fifth. Of quicksilver we produce 29 per cent. Here
again we are exceeded by Spain, whose mine at Almaden
produces nearly 40 per cent of the world's supply. Of zinc
we produce one fourth, and here we are exceeded by the zinc
region of western Europe — the Rhine provinces, Belgium,
and the Netherlands, from which come nearly two fifths of
the world's supply. Tin is the only metal of importance in
the arts which we do not produce in quantity. Of the total
of all the mining products of the earth the United States
produces not less than 39 per cent, which is a far greater pro-
portion than that of any other country.

The business of transporting passengers and goods from
place to place is one of vast magnitude. It is estimated that
$6,000,000,000 are annually expended by the world in such
transportation. Of the agencies in use the railroads have
come to be the chief. For the last two generations the United
States has been busily engaged in building up a railroad
system and developing its management, so that it now pos-
sesses a most effective and thorough means of internal com-
munication. With our area of 3,000,000 square miles we
have nearly 200,000 miles of railroads. Our railroads com-
prise not less than 40 per cent of the earth, and exceed in
mileage those of all Europe.

Our shipping stands in nominal tonnage next to that of
Great Britain. The latter country possesses 38 per cent of
the tonnage of the world; the United States has 20 per cent.
After the United States comes Norway and Sweden, which,
with Denmark, has 10 per cent of the shipping of the world,
one half of the amount which sails under the United States
flag. The next is Germany, which possesses 6 per cent only.
It will be seen from this that although our merchant fleet is
little more than half that of Great Britain, it is very large
compared with that of other nations.

Summing up the earnings of the various agencies of trans-
portation, it appears that, of the total amount of such earnings
in the world, the share of the United States is very nearly
one third, or 32 per cent. This is considerably more than
double that of Great Britain, with 14 per cent; more than two
and a half times that of Germany, with 12 per cent; and

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THE PIONEERS OF AMERICAN INDUSTRY 9

Not to mention the promptness with which our people
turned from the free trade ideas of the revolution to the pro-
tective policy, when conditions seemed to require the develop-
ment of manufactures, consider the action of both the federal
and state governments towards the early transportation and
banking enterprise of the country. Before any European gov-
ernment had projected a comprehensive system of state canals
and roads, President Jefferson had called the attention of con-
gress to such a policy, and Gallatin had submitted his famous
report which outlined a complete system of roads and canals,
and recommended that the federal government construct
them directly or subsidize corporations for that purpose.
Work was actually begun by the federal government on the
Cumberland road in 1806; and it was ultimately prevented
from carrying out Gallatin's plan, not so much by the oppo-
sition of the majority of the people as by the accident of
hostile executive vetoes. As it was, the government for
many years made liberal appropriations of money and pub-
lic land to assist in the construction of the chief works recom-
mended by Gallatin. To the adoption of a policy of internal
improvement by the states there was no such obstacle, and
here we find the movement working itself out without ob-
struction. Something was done by the states in the last
decade of the eighteenth century to aid transportation enter-
prises. Virginia, Maryland, and New York voted money to
assist in extending canal communication from the Potomac
and Hudson into the interior. Pennsylvania voted a consid-
erable revenue to improving the navigation of rivers and to
subsidizing turnpike and bridge companies. But it was after
the close of the second war with England that the states took
up the work of internal improvement on a large scale. New
York led the way with her Erie canal in 1817, and soon after
expanded this into an extensive system of canals, reaching all
parts of the state. Pennsylvania followed in 1825 with an
equally extensive system of canals; Maryland, Virginia, and
the federal government began the Chesapeake and Ohio canal
in 1828; and Virginia as early as 1816 projected a canal to
connect the James river with the Ohio, and after 1820 pushed
its construction vigorously. A little later a number of railway

io G. S. CALLENDER

projects were undertaken; the Baltimore & Ohio in 1828; the
Erie in New York and the Western in Massachusetts in the
early '30's; while Virginia, South Carolina, and Georgia pro-
jected lines to connect their seaports with the western waters.
The movement was taken up in the west in the early '20's,
when Ohio began a system of state canals almost as extensive
as those of New York and Pennsylvania, followed about ten
years later by Indiana, Illinois, and Michigan, with extensive
systems of both canals and railroads. Kentucky and Ten-
nessee devoted considerable attention to the building of turn-
pike roads, and Kentucky especially to the improvement of
the navigation of her rivers.

Nor were the transportation enterprises the only ones to
receive the assistance of the states at this time. Almost from
the first introduction of banks into this country, it became a
common practice for the state governments to invest revenue
in bank stock. Many of the early bank charters reserved to
the states the right to subscribe for a portion of the authorized
capital, and this right was in most cases exercised. The
same policy was taken up in the western states about 1820.
In these states, however, the funds invested in bank stock
were not, as in the east, derived from revenue ; but the states
sold their bonds to secure the necessary funds. The first state
to do this on a considerable scale was Louisiana in 1824; and
between that date and 1840 the western and southwestern
states, including the territory of Florida, issued over $65,000,-
000 of bonds to provide banking capital to corporations.

Thus during the first thirty or forty years of the century
the federal and state governments became actively interested
in a great number of the most important enterprises in the
country. At the very time when the federal government
was paying off its funded debt, in order that it might not be-
come a permanent feature of our policy and thus tempt the
government to extravagant expenditure, the states were
creating a funded debt of more than $200,000,000 — a larger
debt than the federal government had ever owed, and the
first large funded debt created by the government of any
country for purely industrial purposes. It is the purpose
of this paper to explain at length the conditions which gave

THE PIONEERS OF AMERICAN INDUSTRY n

rise to this remarkable movement towards state enterprise
here in America, where of all places in the world we should
least expect to find it.

To form a correct judgment of the influences which pro-
duced this movement, it is necessary to understand the gen-
eral character of our economic development during the period
when it occurred. We will begin, therefore, with a brief
sketch of that development during the first forty or fifty
years of the nineteenth century. The most important event
in our economic history during this period was the opening
of the west. By the opening of the west I do not mean the
early settlement of the region west of the mountains, which
took place on a large scale during the thirty years after the
revolution. This in itself, as I shall attempt to show, had
very little influence upon the economic life of the country. I
refer rather to that improvement in the economic condition
of the west which set in about the time of the second war
with England, and which in a decade or two entirely changed
the relation of that region to the rest of the country, lifting
it for the first time into that important place in our economic
life which it has until recently occupied. This event marks
the shifting of the center of interest in our economic activity
from the ocean and foreign commerce to the interior and in-
ternal commerce. It was the ending of the colonial period in
our economic development, and the beginning of what has
been the chief object of our economic activity ever since;
namely, the application of capital to the settlement of the
interior and the development of its natural resources. In
order to appreciate the significance of this change to the
movement we are studying, it will be necessary to trace its
history in considerable detail.

The settlement of our new territory and the pushing of
the frontier back into the interior are features of American
life which began in colonial times. At the end of the revolu-
tion the back country of Pennsylvania, Virginia, and the Caro-
linas was full of people, and had its special frontier character-
istics in industry and social life. Following the revolution,
these backwoodsmen and many emigrants from the tide water
region, who had been ruined by the war and the exhaustion

12 G. S. CALLENDER

of the soil, moved into the region west of the mountains. The
census of 1790 showed 109,000 people in Kentucky and the
region south of it, not to mention those who had settled in
western Pennsylvania and Virginia, which must have
amounted to as many more. According to the census the
western states and territories contained 387,183 inhabitants
in 1800; ten years later they contained 1,075,398; and in 1820
2,207,476. To get the total western population, it is neces-
sary to add the number of inhabitants of western Pennsylvania
and Virginia, which in 1820 amounted to 248,476 and 147,531
respectively, making a total for the whole west of 2,603,483.
During the same period there was a great emigration to the
wild lands of northern and western New York, as well as
northern New England. In 1790 the census showed only
1,075 people in New York west of Seneca lake; in 1800 there
were still but 17,016; by 1810 this number had risen to 72,-
000; and in 1820 to 211,000. These figures show how large a
movement of people from the older communities into the in-
terior took place during the thirty years following the revolu-
tion. There must have been between one and a half and two
million people living west of the mountains at the outbreak
of the war of 1812.

Great as was this movement of people into the west, its
economic influence was very slight. The general character
of the industry of the country remained what it had been
since colonial times. The west at that time had few economic
prizes to attract settlers. To the emigrant from the tide
water region it offered a refuge from the pressure of hard
times, where he could easily gain a rich subsistence for a
numerous family. To the backwoodsman it could add to
this the wild, free life of adventure which was so attractive to
men of this class. But to the investor or the man who wished
to make a fortune it had as yet hardly anything at all to offer.
Consequently, its settlement could have little economic in-
fluence upon the country as a whole. A little consideration
of the conditions upon which the prosperity of a newly settled
country depends, and a comparison of these conditions with
those prevailing in the west at this time, will make this suf-
ficiently clear.

THE PIONEERS OF AMERICAN INDUSTRY 13

Since Adam Smith's time, economists have generally ac-
cepted his explanation of the prosperity of newly settled coun-
tries. "The colonists carry out with them a knowledge of
agriculture and of other useful arts, superior to what can grow
up of its own accord in the course of centuries among savage
and barbarous nations. . . . Every colonist gets more land
than he can possibly cultivate. He has no rent, and scarcely
any taxes to pay." . . The application of this efficient labor
to the abundant natural resources is supposed to result always
in a large production of wealth. . . . "The colony of a civil-
ized nation which takes possession, either of a waste country
or one so thinly inhabited that the natives easily give place to
the new settlers, advances more rapidly to wealth and great-
ness than any other human society." This explanation,
though it appears to account for the prosperity of new coun-
tries, does not in reality do so; for it quite overlooks the fact
that these conditions have not always resulted in rapid prog-
ress in wealth. The mere presence of a certain number of in-
dustrious people in a country abounding with fertile soil, for-
ests, mines, and fisheries, by no means insures a rapid develop-
ment of these resources and a consequent large production of
wealth. The economic advantages possessed by a people so
situated consist simply in the ability to produce food and raw
materials with a small outlay of labor. Before they can utilize
these advantages, certain favoring conditions must be present.
They must be able to dispose of these commodities in ex-
change for the commodities which they cannot so easily pro-
duce— in a word, they must have a market.

Theoretically, it is possible for the new country to secure
this market by the development of manufactures at home,
whereby a non-agricultural population is created; and it
might conceivably be better for the community, both socially
and economically, to secure its market in that way. But,
practically, it is very difficult, if not impossible, for it to do
this; and in any case the process of doing it would be so slow
that the "advance to wealth and greatness" must be much
less rapid than that of new countries is commonly supposed
to be. Manufactures on a large scale cannot be carried on
without a permanent wage-earning class; and in a community

14 G. S. CALLENDER

in contact with cheap, unoccupied land, where every one can
easily become an independent proprietor, it is almost impossi-
ble to create such a class. The social attractions of land
ownership outweigh those of high wages. Every one has
heard of the difficulty which was encountered in this country
during colonial times and the early part of the nineteenth cen-
tury in securing laborers to work for hire. Franklin tells us
that even the Scotch-Irish immigrants to Pennsylvania, who
had been trained as artisans at home, would not continue more
than a few years in that capacity; the early textile manufac-
tures in New England had to depend chiefly upon female
laborers, whose average period of service was less than five
years ; while the greatest difficulty was experienced by all the
states in securing common laborers to construct the early
canals. The creation of a wage-earning class in the north was
in fact very slow and very difficult before the flood of immi-
grants came in, and the chief economic advantage of immigra-
tion to this country consisted not so much in the fact that
the immigrants represented an actual addition to our labor-
ing population as that they supplied material out of which we
could easily create a wage-earning class at the time when we
needed to organize labor in order to construct our railroads
and develop manufactures. In the south, where even agri-
culture required the organization of labor in order to be con-
ducted most efficiently, the difficulty or impossibility of in-
ducing the whites to become wage earners while they were in
contact with cheap land is undoubtedly the chief reason why
the cotton industry in this country was developed by slave
instead of by free labor.

This difficulty of inducing men in a new country to give
up the position of an independent proprietor and become a
dependent wage earner does not prevent the development of
small manufactures, which are necessary for the immediate
and pressing wants of the community, and require no great
organization of workmen for their production. If the com-
munity for any reason is unable to secure these by trade, the
manufacture of them will usually arise, as it did to some ex-
tent in the northern colonies in the eighteenth century. But
the development of manufactures is not likely to go much be-

THE PIONEERS OF AMERICAN INDUSTRY 15

yond this, or, if it does, that development is sure to be very
slow so long as the cheap land continues. Under such condi-
tions there will be much rude comfort among the inhabitants
and no lack of the necessities of life. But the community can-
not advance rapidly in the production of wealth and the ac-
cumulation of capital; division of labor and development of
skill do not take place ; town life does not rise ; and social and
economic progress is slow. It may even happen that a com-
munity suffers a decline in both its economic efficiency and
social life, if compelled to remain for several generations under
such conditions. The Boers of South Africa and the south-
ern mountaineers are good examples of what may happen to
a new community which remains for a long period of time in
contact with cheap land and dependent upon the develop-
ment of manufactures within itself for its economic prosperity.
It is evident from this that the condition necessary to
enable the settlers of a new country to utilize their rich natural
resources, and so to advance rapidly in wealth and social well-
being, is a market for the commodities which its natural
advantages enable it to produce cheaply. It must have com-
merce with the outside world. In the history of modern col-
onization it is impossible to find a new settlement which has
made great progress in wealth where this condition of a mar-
ket for its products has not been supplied. All the leading
colonies have been concerned in the production of some two
or three commodities for which there was already a demand
in the markets of the world. It was so with the colonies of all
the European countries in the sixteenth, seventeenth, and
eighteenth centuries, which were concerned almost entirely
with the production of precious metals, tropical and sub-tropi-
cal products, like sugar, tobacco, rice, cocoa, and dyestuffs,
and a few products of the temperate zone, like furs, fish, and
naval stores. These were the only commodities which Europe
wished to buy of new countries at that time ; and the colonies
in many cases came into existence and in all cases grew in
wealth because they could produce to supply this demand.
The New England and middle colonies are no exception to
this rule; for, though they had few markets in Europe, the
rise of the West India sugar industry, based on slave labor,

16 G. S. CALLENDER

supplied the market which created their prosperity. Of course,
the founding of many of the colonies was due to other than
economic motives; but the subsequent progress of these col-
onies in wealth was due to the rise of markets for their prod-
ucts. The same thing is true also of the great colonies and
new countries of the nineteenth century, like Australia, South
Africa, the Canadian northwest, California, and Argentina,
whose economic progress has been primarily due to the rise
of a market in old countries for wheat, meats, cotton, wool,
and such commodities. There has always been a demand for
gold and silver, and that accounts for the great part which
their production has played in the settlement of new coun-
tries.

Let us see now what were the conditions existing in the
west before 1812, and how far they correspond to those we
have found to be necessary to secure the prosperity of a new
community. Separated from the eastern seaboard by com-
plete lack of water communication, the western people were
unable to send any of their produce to the eastern cities, ex-
cept a few cattle, hogs, and horses, which could be driven to
market over long distances, and a few commodities like furs,
which could stand the expense of land carriage. They were
compelled, therefore, to depend almost wholly upon such mar-
kets as could be found at the mouth of the Mississippi. With
the exception of a small amount that went from northern
Ohio and western New York, nearly all western produce was
sent down the rivers to New Orleans. Not only was this an
expensive and dangerous voyage before the days of steam-
boats, but there was very little demand for the produce of
the west when it arrived at New Orleans. The population on
the lower Mississippi was very small, and required little, if
any, western produce for its own consumption. The rest of
the produce had to be sent around by sea to the Atlantic cities
or exported to the West Indies, Mexico, or Europe. The
total value of the produce received at New Orleans in 1807
was only $5,370,000, and by 1816 it had increased to only
$8,773,000. Thirty nine per cent of this in the latter year
came, however, from Louisiana and the lower Mississippi.
The remainder represents the chief part of the exports of an

THE PIONEERS OF AMERICAN INDUSTRY 17

agricultural community of nearly two million people, an aver-
age of only about $2.70 per head of population. The number
and size of towns in the west at this time is another convin-
cing proof of the slight development of trade which had taken
place. The only town of any considerable size in the whole
west was New Orleans, through which passed the bulk of the
exports and a considerable part of the imports. This town
had 24,562 inhabitants in 1810. Pittsburg, from which was
distributed the larger part of the imports, and which con-
tained the most important manufactories in the west, had
only 4,768 inhabitants; Lexington, which carried on nearly
all the commerce of Kentucky and Tennessee, had only 4,326
inhabitants; and Cincinnati had only 2,540. The other com-
mercial places like Louisville, Nashville, Natchez, and St.
Louis, were little more than mere villages, with about one
thousand inhabitants each. The significance of these figures
will appear more striking if we compare them with similar
ones for some new communities of later times. In 1891 the
two colonies of Victoria and New South Wales, whose industry
was almost entirely agricultural and pastoral, had an average
export of $20 per inhabitant. Washington and Oregon, with
a population of 663,198 in 1890, had commerce enough to
build up four cities with an aggregate population of 145,150,
besides several smaller towns of from 1,000 to 4,000 inhab-
itants. Kentucky and Tennessee had in 1810 almost exactly
the same population — namely, 668,238; and the town which
is said to have carried on the larger part of their commerce
had but 4,326 inhabitants.

With regard to manufactories there were, as we should
expect, a great number of small, local ones, producing articles
of prime necessity. Almost every community had one or
more grist and sawmills; and very many had forges, tanneries,
and salt works, fulling and carding mills, and paper mills. In
Pittsburg, Lexington, and Cincinnati there were a number of
industries that were not purely local in character. But the
size of these towns, which were more largely commercial than
manufacturing centers, show how small were these industries ;
and travellers did not fail to note the obstacles which retarded

their further growth. Michaux comments on the hisrh price

vol. 3— a

18 G. S. CALLENDER

of labor, and says it "is occasioned by the inhabitants giving
the preference to agriculture, there being but few who put
their children to trade, because they require their assistance
in their own employment."

Such was the condition of the west before the war of 1812,
and its economic relation to the rest of the country. Turn
now to the changes which followed the war and their effect
upon the west, and through it upon the country at large. As
we have seen, the chief obstacle to the prosperity of this
section was the lack of a market. Two events soon removed
this obstacle, and started the whole country forward on its re-
markable career of development. The first was the introduc-
tion of the steamboat ; the second was the extension of cotton
culture into the southwest. The steamboat was introduced
on the Ohio at Pittsburg as early as 1811; but it was six
years later before it had demonstrated its ability to stem the
rapid current of western rivers. With that event the western
country was suddenly supplied with a system of transporta-
tion which reached wide stretches of country, and brought
them into easy communication with the seaboard. With the
rise of the cotton industry in England and Whitney's famous
invention in this country, cotton culture began its amazing
growth.

For more than twenty years it was confined almost entirely
to the eastern seaboard. A small amount was raised about
New Orleans in Louisiana, near Natchez in Mississippi, and
near Nashville in Tennessee; but in 1802 only 29,000 bales were
exported from New Orleans, and this had increased to only
37,000 in 1816. About the latter date cotton planters began
to turn their attention for the first time in considerable num-
bers to the southwest. The great body of fertile soil in this
region suited to the cultivation of this staple, the numerous
navigable rivers, coupled with the fact that cotton, having
large value in small weight, could bear the expense of land
transportation to the rivers from a long distance over poor
roads, combined to make this extension of cotton culture into
the southwest the source of the greatest profits in agriculture
which the American people had ever enjoyed. A flood of
emigrants from the older slave states now poured into this

THE PIONEERS OF AMERICAN INDUSTRY 19

region. Alabama and Mississippi did not contain more than
75,000 people in 1816. Only four years later their population
was 200,000, and it more than doubled during the next ten
years. Louisiana, which contained about 76,000 people in
1810, had 143,000 in 1820, and 215,000 in 1830. Certain parts
of Tennessee, Arkansas, and Florida, where cotton could be
raised, were settled with equal rapidity. New Orleans was
the great central market to which the cotton product of this
region was sent; and it received, as we have seen, only 37,000
bales in 1816. That amount rose to 161,000 bales in 1822,
428,000 bales in 1830, and reached 923,000 in 1840. The
cultivation of sugar in Louisiana was also increasing at this
time, and was equally profitable.

The effect of this extension of cotton and sugar cultivation
into the southwest upon the southern states is well known.
It opened up a very profitable field for the employment of the
labor and capital of this section, and this economic advantage
went chiefly to the revival and extension of the slave system.
But its effect upon the northern states, especially the newer
states of the northwest, has hardly received the attention its
importance deserves. In reality, it was that movement which
gave to them their first important market, and thus supplied
the one remaining requisite to their economic development.
The use of slave labor on a large scale not only prevents the
rise of manufactures, but it alwaj^s causes a curious territorial
division of labor in agriculture as well. Slave labor, to be effi-
cient, must be carefully supervised ; and its maximum efficiency
is therefore obtained only in those branches of agriculture
which permit the close organization of labor. For this reason
every slave community devotes itself for the most part to the
production of a few staples, like cotton, sugar, tobacco, or rice,
and finds it cheaper to purchase its food and other agricultural
supplies, as well as its manufactured articles, from free labor
communities. This gives rise to a trade in agricultural com-
modities between the slave communities and other agricultural
communities. The important trade between the northern con-
tinental colonies in the eighteenth century and the West Indies
was a trade of this kind; and it was principally the develop-
ment of the sugar colonies of the West Indies by slave labor,

20 G. S. CALLENDER

and the consequent dependence of these colonies on other com-
munities for food and raw material, which provided New Eng-
land and the middle colonies with their most important mar-
ket. In exactly the same way the introduction and spread of
cotton and sugar culture into the southern part of the Missis-
sippi valley led to a division of labor between the planters of
the south and the farmers of the north, and gave rise to an
important trade in agricultural produce upon the western
rivers of the same character as that which went up and down
the Atlantic coast during colonial times between the northern
colonies and the West Indies.

The development of this trade between the cotton planters
and the farmers began with the first introduction of cotton
culture into South Carolina and Georgia. Ramsey tells us
that down to about 1793, when cotton began to be raised in
South Carolina, that state produced both wheat and corn for
export. By 1807, however, the greater profit to be earned in
the production of cotton had attracted labor and capital to
that industry, and the state was importing both wheat and
corn. Olmsted said in 1856: "The slave labor of the state
[South Carolina] is almost exclusively devoted to the culture
of cotton and rice. Live stock, meat, corn, breadstuffs, and
forage, though the soil and climate of a large part are entirely
favorable to that production, are very largely imported; and
for nearly all sorts of skilfully manufactured goods the people
are quite dependent on the free states. Trade and skilled
labor of all sorts is mainly in the hands of persons from the
free states or foreign countries." Live stock was raised in
great numbers in the back country of the southern colonies
in the eighteenth century, and was a considerable item of
export; but, after the introduction of cotton culture, horses,
mules, and swine were imported into these states from Ken-
tucky and Tennessee. This trade had become very large by
1825, and played a considerable part in the discussion over
the tariff and nullification in the years following. In the
southwest the same tendency to concentrate attention upon
the two great staple products, sugar and cotton, and to pro-
cure food and other supplies from the north, showed itself
even more strongly than in the east. Flint says of Louisiana

THE PIONEERS OF AMERICAN INDUSTRY 21

in 1825 that "corn, sweet potatoes, melons, and all northern
fruit, with the exception of apples, flourish here; though the
planters find the great staples, cotton and sugar, so much
more profitable than other kinds of cultivation that many of
them calculate to supply themselves with provisions almost
entirely from the upper country." An English traveler in
the southwest in the '50's had a similar comment to make:
"Strange to say, it is more difficult to raise the requisite
quantity of provisions for a southern plantation than to manu-
facture wagons, plows, houses, and articles of clothing. The
bacon is almost entirely imported from the northern states, as
well as a considerable quantity of Indian corn."

The extent of this commerce between the northwest and
the south it is impossible to ascertain with accuracy, for
there are no reliable statistics of it as a whole. The rapid
growth in the number of steamboats on western rivers, espe-
cially the number running between the Ohio and upper Missis-
sippi and New Orleans, indicates a corresponding increase in
the trade between these sections. Steamboats on the western
rivers increased from 20 in 1818 to 200 in 1829, 450 in 1842,
and 1,200 in 1848, while their size and carrying capacity was
also increasing. Besides this a large amount of flatboat ton-
nage existed, and a considerable part of the produce of the
Ohio valley was sent to market by this means. In 1845 the
flatboat tonnage amounted to 620,000 tons, and the steamboat
tonnage to 1,262,000 tons. The number of steamboat arrivals
at New Orleans from the Ohio and upper Mississippi are not
separated from the total arrivals before 1859, but in that year
they were about 1,500 out of a total of 4,000. The value of the
produce received at New Orleans increased from $8,700,000 in
1816 to $26,000,000 in 1830, $50,000,000 in 1841, and $185,-
000,000 in 1860. Between 1816 and 1820 about 61 per cent
of this tonnage was from produce from the northwest. The
proportion, though not the total amount, of farm produce
declined until it reached 28 per cent in 1860. The steady
growth of the river towns which handled this trade also indi-
cates its growth. Thus Cincinnati increased from 9,600 in
1820 to 115,000 in 1850, Louisville from 4,000 to 43,000, and
St. Louis from 4,900 to 77,000. It was estimated in 1845 that

22 G. S. CALLENDER

during the twenty years previous planters had spent $900,-
000,000 in neighboring states for mules, horses, implements,
and clothing. These are but rough indications of the extent
of this trade; but they are sufficient to establish the fact that
it was very large, and that it grew up almost entirely after
1815.

The influence of this extension of cotton culture upon the
north was not confined to the agriculture of the northwest.
It affected every other northern interest as well. The pros-
perity which it brought to the whole southern and western
population increased their ability to purchase such manu-
factures as they required, and thus provided eastern manu-
facturers with a rapidly expanding market. This was the
great influence which caused the steady growth of manufac-
tures from 1816 to the civil war, both under the protective
policy of the earlier and the low tariff policy of the later years.
Commercial interests also received great stimulus. The in-
ternal trade of the country sprang at once into commanding
importance. A large and prosperous agricultural population
in the south and west was devoting itself to the production
of valuable crops of food and raw material, and exchanging
them with the northeastern states and Europe for manufac-
tures. This trade opened new opportunities for the merchant,
the banker, the shipowner, the insurance company — to the
whole commercial class, in fact. The fact that all the capital
which the south accumulated was put into cotton culture left
this whole field open to the commercial capital of the northeast.
An eager rivalry arose among the commercial cities of the sea-
board to secure a share of this internal trade, and each appre-
ciated that its future position would be determined chiefly by
the success of its efforts in this direction.

The effect of all these changes upon the economic con-
dition of the country at large was almost revolutionary. It
opened the eyes of the people to the economic possibilities of
their situation, and turned their attention for the first time to
the exploitation of their natural resources. The west ceased
to be a mere refuge of poverty and field for the adventure of
pioneers. The enterprise and capital of the country turned
away from the ocean and foreign commerce, and found here

THE PIONEERS OF AMERICAN INDUSTRY 23

a new field for its operation. One of the most striking features
of the new period was the increase of speculative activity
everywhere in American industry. This was largely the result
of the enormous increase in land values, to which the changes
we have described gave rise. The choice cotton lands of the
southwest and the coal lands of eastern Pennsylvania sud-
denly became worth fabulous sums. Along the canals and
rivers, especially in western New York and central Ohio,
farm produce more than doubled in value; and the value of
the land rose correspondingly. From New York on the east
to New Orleans on the west, new towns were springing up
along the lines of trade, and old ones growing with a rapidity
that was new in American experience. The population of
New York increased from 123,000 to 203,000 in the ten years
from 1820 to 1830; New Orleans, from 27,000 to 46,000;
Cincinnati, from 9,000 to 24,000; and Louisville, from 4,000
to 12,000. Buffalo and Rochester were hardly in existence in
1816; in 1830 they had 18,000 inhabitants. *The number of
villages along the New York canals increased from 55 to 105
between 1817 and 1833. Of course, the growth of all these
cities and towns caused a corresponding increase in the value
of real estate. That of New York went up from $69,000,000
to $165,000,000 in ten years, and the increase in many others
was still greater. It is easy to see how all these things would
foster speculation. Josiah Quincy declared in 1826 "that the
enormous increase in wealth without labor which has come
to fortunate speculators since 1815 seems to make the invoca-
tion of chance legitimate business."

We are now in a position to understand the economic
forces which were acting in this country during the early part
of the nineteenth century, and to judge correctly of the causes
which led the American people at that time to make so large a
use of the powers of the state to assist industries. There are
three matters which need to be considered in this connection,
in order to bring out the situation which produced the move-
ment. The first is the great increase in the demand for capital
which accompanied the opening of the west; the second is the
supplies of capital which were available at that time to satisfy
this demand; and the third is the obstacles which prevented

24 G. S. CALLENDER

this capital from being secured and applied to the various
projects of the time by the ordinary agency of private enter-
prise, the corporation. We will take up each of these matters
in turn.

The effect which the economic changes described above
had upon the demand for capital may best be shown by com-
paring the chief enterprises in which capital was invested before
1815 with those that arose after that date. Demand for capi-
tal in any community means the existence of numerous oppor-
tunities for its profitable investment. Such opportunities had
always existed in America in sufficient numbers to absorb all
the capital that could be obtained, and interest had been high;
but these opportunities had been confined for the most part to
enterprises connected with commerce, to mercantile transac-
tions, banking, insurance, shipping, and, to a small extent,
manufactures. The people had not found it profitable to risk
much capital in enterprises designed to promote the settlement
of the country and the exploitation of its resources. The prin-
cipal ways in which capital is applied to a new country for this
purpose is in constructing works of transportation, canals or
railroads, and in supplying advances of goods through com-
mercial credit or making loans of cash to settlers to enable
them to clear and cultivate the land. In Pennsylvania and
the states north of it considerable progress had been made in
building turnpike roads during the ten or fifteen years prior
to the war. But the improvement of rivers and building of
canals, which alone could enable remote regions to send their
produce to market, had been almost entirely neglected.
Numerous efforts had been made to induce capital to take up
this work, but with very little success. Two small canals, one
in Massachusetts to connect Boston with the Merrimac river,
the other in South Carolina to connect Charleston harbor with
the Santee river, were all that had been completed. An im-
perfect canal navigation had been opened from the Hudson
to Lake Ontario, and the navigation of the Susquehanna,
Potomac, and James rivers slightly improved. The capital for
these works had been secured with great difficulty ; and many
similar projects, like the Delaware & Chesapeake, the Dela-
ware & Schuylkill, and the Schuylkill & Susquehanna canals,

THE PIONEERS OF AMERICAN INDUSTRY 25

had secured no capital at all. In the settlement of the west
and the development of its resources, men were even less
inclined to risk their capital. I have found no evidence that
any eastern capital was invested in this way before 1815.
The settler moved out into the wilderness with his own
little stock of household goods, farm implements, and
cattle. No merchant with large credit in the east stood ready
to advance supplies of food and other necessaries to him, while
he devoted his labor to the production of a crop to be sent to
market, nor was he assisted to clear his land and prepare
it for cultivation by loans of cash from individuals or mort-
gage companies. Of course there were banks in the new states ;
but most of them were mere paper money machines, with no
capital at all, and those that had a real instead of a nominal
capital had to depend more upon local than upon eastern
supplies.

After 1815 the situation began to change. As the settle-
ment of the west took on a different character with the im-
provement of its economic condition, enterprises designed to
promote its development received much more attention from
the business men of the country. Not only was the utility of
such works to the public more clearly perceived, but the
possibility of their yielding a profit to the investor appeared
less remote; and, as a result, many more such projects came
into existence. The commercial cities of the seaboard were
the first to be affected. They had long been interested in
western trade, and some of them had made efforts to improve
their communications with the west; but the trade before
1815 was comparatively small, as we have seen, and, with the
exception of a canal of little value from the Hudson to Lake
Ontario and some little improvement in the roads from Phila-
delphia and Baltimore to the Ohio river, nothing had been
accomplished. They now took up the matter in earnest.
New York was the first to act, and in two years after the
close of the war was ready to break ground on a canal to
connect the Hudson with Lake Erie, and another to connect
it with Lake Champlain. Virginia established a board of
internal improvements in 1816, and began the James river
& Kanawha canal in 1820; Pennsylvania commenced the

26 G. S. CALLENDER

construction of a canal to connect the Susquehanna river
with Pittsburg with a portage railroad over the mountains in
1825; Maryland, Virginia, and the federal government under-
took to build the Chesapeake & Ohio canal to connect the
Potomac and Ohio rivers in 1828; and a legislative com-
mittee recommended a canal to connect Boston with the
Hudson as early as 1826. With the advent of the railroad
a new crop of projects to reach the west arose. The Balti-
more & Ohio was the first, begun in 1828; a few years later
the Massachusetts project of a canal to the Hudson was
changed into the Western railroad from Worcester to Albany ;
New York planned the Erie railroad to connect New York
harbor with Lake Erie; Virginia proposed to reach the west
by a railroad from Lynchburg on the James river canal
southwest to the Tennessee river; Georgia was to reach the
west by extending her local railroads from Atlanta to Chat-
tanooga; while South Carolina, Kentucky, and Tennessee
united to further the construction of the Louisville, Cincin-
nati & Charleston railway to connect the Ohio river with
the south Atlantic seaboard. Besides these larger works
there was a multitude of smaller ones in nearly all the eastern
states. Not to mention turnpike roads, there were the
Blackstone and Farmington canals in New England, the
former to connect Providence with Worcester, and the latter
New Haven with the Connecticut valley. New York and
Pennsylvania planned a network of lateral canals connect-
ing their main works with all parts of these states. The
development of the anthracite coal industry began immedi-
ately after 1815, and led to a series of canal projects in New
York, New Jersey, and Pennsylvania. The Schuylkill navi-
gation was the first, beginning in 1815, and followed about
1825 by the Lehigh Navigation and the Delaware & Hudson,
and Morris canals. The Raritan canal was also projected a
little later, to connect New York and Philadelphia. A great
number of small canals and river improvements were under-
taken in Maryland, Virginia, and the states south of them.
The Delaware & Chesapeake and Dismal Swamp canals were
the largest of these. The local railway projects were numerous

THE PIONEERS OF AMERICAN INDUSTRY 27

in all the states after 1830, particularly in Massachusetts,
New York, and Virginia.

In the west the transportation enterprises were scarcely
less numerous or magnificent. The most important works
were to connect the lakes with the Ohio and Mississippi rivers,
while the rest were either branches of the main lines or shorter
lines designed to connect the interior of the states with the
lakes or the rivers. The first to be undertaken was the Ohio
canal from Cleveland to Portsmouth, which was begun in
1825 ; the Miami canal from Cincinnati to Dayton was begun
at the same time, but was soon after extended to Toledo, mak-
ing a second line from the lake to the Ohio river; the Mus-
kingum river was made navigable from its mouth to its junction
with the Ohio canal at Dresden; and two canals were built
from the Ohio canal eastward to connect with the canal sys-
tem of Pennsylvania. In western Pennsylvania a line was
built from Beaver on the Ohio river to Erie on the lake. West
of Ohio the Wabash canal was projected from the Miami to
the navigable waters of the Wabash, thus connecting Lake
Erie with the Ohio by a fourth route. The Illinois & Michi-
gan canal from Chicago to the Illinois river made still another
connection between the lakes and the river system of the
west. Besides these, many smaller canals were projected and
partially constructed: the Whitewater canal northward from
the Ohio river to the national road in eastern Indiana; the
Central canal of Indiana through the state from the Wabash
canal to Evansville on the Ohio river; several branches to the
Ohio canal ; the Sault canal and one across the lower peninsula
in Michigan ; the Louisville & Portland canal around the falls
of the Ohio; a canal around the Muscle Shoals of the Tennes-
see in northern Alabama; the improvement by slack water
navigation of the Kentucky, Licking, Green, and Barren riv-
ers in Kentucky. These improvements, together with the
rivers and lakes, made up a network of navigable waterways
for the west quite equal to anything then to be found in the
world. About the middle of the '30's several of the west-
ern states also projected important railway lines. Michigan
undertook to build two lines across the state to connect Lake
Erie with Lake Michigan. Illinois planned and began the con-

28 G. S. CALLENDER

struction of the Illinois Central to connect the Illinois and
Michigan canal at La Salle with Cairo on the Ohio river, with
numerous branch lines to the east and west, reaching all parts
of the state. There was one line each in Indiana and Ken-
tucky, from Madison on the Ohio to La Fayette on the Wabash
canal in the one case, and from Louisville to Frankfort in the
other. In Ohio, Kentucky, and Tennessee great numbers of
turnpike roads were projected. Capital was required also for
the expanding internal trade of the country and to assist in a
more rapid development of western agriculture. This showed
itself in the establishment of numerous large banks in all the
new states, to which reference was made at the beginning.
It is clear from this that the twenty years following 1815
was marked by an enormous increase in the demand for capi-
tal. All these enterprises were not mere visionary projects,
to be talked about and then abandoned; but capital was in-
vested in every one of them, and the larger part of them
were actually carried through. If we compare them with
the small number and size of the enterprises carried on dur-
ing the twenty years before 1815, we are struck at once by
the contrast. They evidently mark the beginning of what
we may call the capitalist era in American industry. With
the exception of banks, whose capital is in fact not invested
in a single industry, but divided up in loans among a great
number of different industries, there had never been an indus-
trial undertaking in the country that called for as much as
a million dollars capital. Moreover, the fixed capital accumu-
lated in this country was up to that time insignificant. The
people knew nothing of large enterprises in which great
amounts of capital had to be sunk, and profits awaited for a
long period of years. The canal and railway projects to con-
nect the eastern cities with the west, and the lakes with the
Ohio and Mississippi, required from two or three to ten millions
dollars; and years must elapse for the country to settle and
trade to develop before they would yield their maximum re-
turn. The new demand for capital was not only vastly greater
than anything hitherto known, but it was for large masses of
capital to be sunk, and therefore all risked in a single enter-
prise.

THE PIONEERS OF AMERICAN INDUSTRY 29

So much for the extent and character of the demand for
capital which arose at this time. Let us see now what sup-
plies of capital were available for investment in these enter-
prises. There were of course but two sources of supply — the
savings of our own people and such surplus capital as foreign-
ers could be induced to lend us. Regarding domestic capital
the situation had greatly improved during the generation prior
to 1815. In the colonies, as in all new countries, there was no
considerable fund of loanable capital. Such capital as existed
was chiefly in the form of trading capital or shipping, and was
used by its owners themselves rather than lent out by them
to other persons. But even the trading capital of the colonies
was by no means all owned by Americans. Adam Smith says
that the greater part of the exports and coasting trade of the
colonies was carried on by capital of merchants residing in the
mother country; and even the warehouses and stores from
which goods were retailed in some colonies, particularly in
Virginia and Maryland, were owned by the same parties.
The complete lack of commercial banks in the colonies goes far
to confirm the truth of this statement. Goods were sold on
long credits of a year or more by English merchants, and the
bills either carried by them until collected or else discounted
by bankers in England. There was thus no basis for commer-
cial banking in the colonies. It was estimated that Americans
owed English merchants $28,000,000 for goods at the outbreak
of the revolution. After the revolution English merchants
relied upon their ability to grant longer credits than the
merchants of other countries could give, to secure control of
our trade; and the conditions which had preceded the war
were promptly re-established. Madison declared in 1785 that
England had never monopolized the trade of Virginia more
completely than she did at that time. The events which
changed this situation were the outbreak of the wars in Europe
and the rise of the cotton industry. By throwing into our
hands a vast carrying trade, and by supplying us with markets
for cotton and foodstuffs, these events furnished Americans
an opportunity to accumulate capital, which they eagerly em-
braced. The trading capital of the country now for the first
time passed into the ownership of our own citizens, and it is

30 G. S. CALLENDER

significant that this period marks also the rise of commercial
banking as well as of marine insurance in this country. The
growth of our merchant marine, the numerous small manu-
factories which sprang up after the embargo, as well as the
beginning of turnpike and bridge building, all indicate the
progress which was made at this time in the accumulation of
capital.

Still another circumstance contributed to the increase of
our resources during this period. The rapid payment of the
national debt, both before and after the war of 1812, had the
effect of augmenting the capital available for investment.
Between 1815 and 1830 the government collected in taxes
$123,500,000, and paid it over to the owners of its bonds. In
this way small sums were taken from many individuals, and
put into the hands of that class in the community who are by
nature and habit disposed to save. If these small sums had
remained in the hands of the people, they would, for the most
part, have been spent, especially since the machinery for col-
lecting small savings of large masses of people, such as is
provided by the savings banks and life insurance companies,
did not then exist. Of course, so far as the national debt was
owned abroad, its payment would not have the effect of in-
creasing capital. On the contrary, it might have the opposite
effect of driving capital out of the country, unless other se-
curities could be furnished, which the foreign investor would
be willing to purchase. Such securities were provided by us
during the period we were paying off our national debt most
rapidly ; and little, if any, foreign capital was lost by the pay-
ment of the debt.

It is evident from these facts that after 1815 this country
had a considerable fund of domestic capital available for con-
structing its public works. In the newly settled communities
of the west and southwest there was little or no such fund;
but in the east, especially the southern New England and
middle states, and, to a less extent, in Virginia and South
Carolina, it was possible to raise quite large amounts, enough
probably to construct the more important works required.
Certainly this was the case in New York, where the canal
commissioners reported in 1817, that they entertained no

THE PIONEERS OF AMERICAN INDUSTRY 31

doubt but that as much money can be obtained in this country
as may be required for the canals on the credit of the states,
at an interest of 6 per cent, by the creation of a funded debt.
All the earlier loans for the New York canals were made
without difficulty; and the capital secured was chiefly, if not
wholly, domestic.

But it was not upon domestic capital alone, or chiefly,
that the country had at this time to depend. It was able to
draw also upon Europe, and more especially upon England.
This circumstance had so great an influence upon the move-
ment we are studying that it calls for a full statement of the
facts concerning it. We have seen that English capital in the
form of trading capital came freely to America in colonial
times and after. To some extent also it came in other kinds
of investment, at least after the revolution. Thus Hamilton
noted in 1791 that several industries were owned largely by
Englishmen; Pitkin estimated that $30,000 000 of our national
debt was owned abroad in 1815; the United States bank re-
ported in 1809 that three quarters of its stock of $10,000,000
was held by foreigners; and the commissioners appointed by
New York to consider the practicability of a canal through the
west said in their report of 1812, that notwithstanding the
scarcity of money consequent on the wars which had so long
raged in and ravaged Europe, a loan of $5,000,000 could be
obtained there on the credit of the states. Obviously, even
as early as this England was experiencing more or less diffi-
culty in finding at home profitable investments for the great
volume of savings which the inventions and improvements of
the last part of the eighteenth century enabled her to accumu-
late. The pressure of surplus capital was, however, not left
in its full force until the close of the wars in 1815. Up to that
time the new savings had been absorbed by the growing manu-
factures, the agricultural improvements of the time, the ex-
panding commerce, the increase of shipping, the building of
canals and turnpikes, and, above all, by the expense of the
wars.

There was no place in English industry where so much
new capital could be employed. Commerce and the new
manufactures continued to absorb a considerable amount

32 G. S. CALLENDER

of it; but the difficulty in finding a new market for a rapidly
increasing product placed a stubborn limit to their rate of
expansion. Conditions were still more unfavorable in agri-
culture, where landlords and farmers were unable for many
years, even with the assistance of corn laws to earn a fair
profit on the capital already sunk in improvements. The
canal system of the country was nearly complete. All the
leading centers of industry were connected with each other
and with the seaboard. Turnpike building progressed but
slowly. Until the railroad should be introduced, the trans-
portation system could absorb but little additional capital.
Under these conditions the rate of interest must inevitably
fall; and, to escape that fall, those who had savings to invest
would be forced to turn to highly speculative investments at
home or to lend their capital in foreign countries.

A number of circumstances recommended the United
States to English investors. In the first place the rapid pay-
ment of the national debt and its final extinction in 1832
strengthened American public credit as hardly anything else
could have done. No other country had ever paid off a na-
tional debt, and it was felt that there could be little risk in
lending money to a people whose resources were so great and
whose disposition so frugal. Moreover, the enterprises for
which capital was required in America were favorably regard-
ed by the English public. From the point of view of the
investor, canals in England had been very satisfactory.
Eighty companies, with a total capital of $150,000,000, re-
ported in 1825 an average dividend of 5f per cent. Ten of
these paid from 20 to 28 per cent dividends; and the stock
of thirty three companies, representing one-third of the total
mileage, was quoted at prices ranging from $1,000 to $1,500
per share, and a few as high as $3,000 and $4,000. American
canals could hardly hope to prove as profitable as this; but
they did not seem at all visionary enterprises, and the finan-
cial success of the early ones created great confidence in them.
Towards the banking enterprises of the southwest English
capitalists were equally well disposed. England was inter-
ested in securing a steady increase in the supply of raw cotton,
and in making loans to the southwest for banking purposes

THE PIONEERS OF AMERICAN INDUSTRY 33

she was in reality investing her capital in the same great in-
dustry which was the basis of her manufacturing system.
Moreover, banking in America had proven very profitable.
Englishmen had invested heavily in the stock of the first and
second United States bank, had received large dividends, and
suffered no losses. More and more, therefore, her capitalists
after 1815 turned to this country; and by 1830 they seemed
ready to supply us with all the capital necessary to complete
our system of canals and railways, as well as to assist in the
development of our agriculture.

It is impossible to ascertain with accuracy the amount of
English capital which found its way to this country during this
period. Webster thought there might be $50,000,000 of state
stock owned abroad in 1836. Two years later Mr. Garland
submitted to the house of representatives a list of our stocks
owned abroad which put the total at $110,000,000. President
Van Buren in his message of 1840 placed the amount at $200,-
000,000, and the annual interest charged at not less than
$12,000,000. A committee of the house of representatives a
few years later estimated the amount of state securities pur-
chased by foreigners at nearly $150,000,000. Besides this
amount $28,000,000 of the stock of the United States bank
and $9,000,000 of the stock of the Farmers' Loan and Trust
company, the Camden & Amboy railroad, and the Com-
mercial bank of Vicksburg, was owned abroad. Mr. Gar-
land's estimate shows a further sum of about $19,000,000 of
the stock of various corporations, chiefly banks, owned abroad.
These estimates cannot be verified, but they show that the
movement of foreign capital to this country for the purchase
of our securities was large.

Not only did foreigners purchase a large amount of our
securities, but foreign capital came to us also through the me-
dium of commercial credit. We have seen that during the
twenty years prior to 1815 Americans had come to own their
own trading capital. In the later twenties, however, we again
began to make use of foreign capital in our commerce. Before
this it had been the practice for English merchants to execute
orders for America, and transmit the invoices and bills of lad-
ing to their agents in America, who then delivered the goods

Vol. 3—3

34 G. S. CALLENDER

on receipt of payment. The wealth and financial standing of
American houses increased to such an extent that they began
to establish their own agents in the manufacturing districts of
England and the continent for the purchase and shipment of
goods to America. They were able also to obtain credit with
the great Anglo-American houses in London or Liverpool, who
would then allow the agents to draw upon them at four months
to pay for the goods purchased and shipped to America. This
arrangement was also introduced into other branches of our
foreign trade, notably with India, China, and South America.
American merchants were allowed to pay for their cargoes
from those places by means of bills on London, which were
allowed to run until met by the export of American produce.
The system practically amounted to this : Englishmen bought
nearly all of our products for cash, sold their own to us on
credit, and in addition supplied us with letters of credit
against which we could draw in all parts of the world. The
effect of such an arrangement would obviously be to replace
American capital engaged in foreign trade by English capital
supplied by the great Anglo-American mercantile houses in
London and Liverpool or by the numerous joint stock banks
which eagerly discounted the paper of these houses. The
American capital thus liberated from trade became available
for carrying on the various improvements within the country.
The amount of capital thus lent to us on commercial account
may be estimated from the acceptances of these Anglo-Ameri-
can houses, which in 1836 were said to amount to $100,000,000.
If we add this to the amount invested in our securities of
various kinds, it is safe to say that nearly $300,000,000 of
foreign capital was lent to this country between 1815 and
1840.

The American people were perfectly aware of the possi-
bility of securing foreign capital at this time. New York from
the first looked to this source to secure the funds necessary for
her canals; Ohio did likewise; and Louisiana and the city of
New Orleans, in the early twenties, were negotiating loans in
London. The success of these first loans encouraged others;
and after 1830 the whole country looked to England for
capital to carry out its system of internal improvements, just

THE PIONEERS OF AMERICAN INDUSTRY 35

as Australia and Argentina have relied upon the same sources
in later times. A large number of the public works were
planned with this prospect clearly in view, and would not
have been undertaken without it. Events proved that the
works could not be carried on after foreign capital ceased to
be lent freely to them. When the market for American
securities in London failed towards the end of 1839, work on
public improvements in most of the states was checked, and
ceased altogether in several of the western states. The
Wabash & Erie canal in Indiana and the Illinois & Michi-
gan canal in Illinois were not completed until arrangement
was made with English capitalists some years later to supply
the funds.

Such was the situation regarding the demand for capital
in this country, and the supply of it during the period we are
investigating. We come now to the question how far private
enterprise was able to deal with this situation. The means by
which the large masses of capital required by modern industry
are brought together, is the corporation ; and we have next to
examine the condition of corporations, and ascertain how far
they were able to perform the services required of them.
Private business corporations began to be created in this
country soon after the revolution; and their rise was un-
doubtedly due to the growth of industries which required
more capital than could be easily supplied by individuals or
partnerships. The industry in which they first appeared,
and in which for many years the most important ones were
to be found, was banking. Congress chartered the bank of
North America in 1781, and the next year Pennsylvania and
New York each granted it a charter. By 1791 most of the
states had chartered one or more banks, and the federal gov-
ernment the bank of the United States. Ten years later
there were eighty eight state banks, and in 1830, 330. Insur-
ance companies grew up about the same time, and became
very numerous as the commerce of the country expanded after
the outbreak of the European wars. There were twenty nine
companies in the city of New York in 1830, nineteen in Boston,
thirteen in Philadelphia, and six each in Baltimore and New
Orleans. When the people turned their attention to improv-

36 G. S. CALLENDER

ing the transportation facilities of the country, a large number
of companies for that purpose were formed. Virginia char-
tered two canal companies in 1784, and several were chartered
by Pennsylvania, New York, and Massachusetts by the end
of the century; but canal companies were never numerous in
any of the states, and, as already pointed out, in very few
cases accomplished the purposes for which they were formed.
Far more important and more numerous were the turnpike
and bridge companies, the first of which was chartered by
Pennsylvania in 1792, and which after 1800 were created in
great numbers by all the states north of Maryland and to
some extent by the southern states. By 1812 Pennsylvania
had chartered 57, New York 112, Massachusetts 78, Maryland
8, Virginia 8. Pennsylvania also chartered twenty one bridge
companies during the same period, and they were nearly as
numerous in other states. In the same way, when the em-
bargo turned the attention of the northern states to manu-
facturing, corporations for that purpose made their appear-
ance, especially in New England and New York. Five or six
such companies were chartered in Massachusetts before 1808,
but 106 were chartered between that time and 1815; and in
New York forty seven were chartered in the six years follow-
ing 1809. Water companies also appeared about this time.
Twenty six were chartered in New York before 1812, and
twenty one from that time to 1829. Steamboat companies
were also created in considerable numbers as the introduction
of steamboats took place.

Thus by 1830 business corporations of various kinds were
very numerous in this country, and the American people had
already shown remarkable facility in forming them. De
Tocqueville declared that the most democratic country on
the face of the earth is that in which men have, in our time,
carried to the highest perfection the art of pursuing in com-
mon the object of their common desires, and have applied
this new science to the greatest number of purposes.

Nevertheless, a little consideration of the extent and
character of the business operations of corporations at this
time will show that they were not yet able to raise very
large sums of capital, especially for such enterprises as were

THE PIONEERS OF AMERICAN INDUSTRY 37

then most prominent. Much the largest corporations were
banks; and, with the exception of the United States bank,
there was but one that had as large a capital as $2,900,000.
Of the 330 state banks, only seven had as much as $2,000,000
capital, and only thirty as much as $1,000,000. Several of
the largest of these were in the south, and were heavily sub-
sidized by the states. Insurance companies were still smaller.
New York had two with $1,000,000 capital, and New Orleans
one; Philadelphia had one with $600,000; and in all the rest
of the country there were only fifteen with a capital of half a
million dollars. The great majority of both banks and insur-
ance companies were small concerns with less than $100,000
capital. Two or three of the big textile manufacturing com-
panies of New England had about a million capital in 1830;
but, for the most part, manufacturing companies were even
smaller than insurance companies. It would appear from
these facts that no great difficulty was experienced in raising
from half a million to one or two millions of capital for banks
and insurance companies. But it should be noted that all
the larger companies of this kind were organized in the com-
mercial cities, where most of the loanable capital of the
country was owned. The capital was supplied chiefly by
the business men of the cities where they were organized.
Except in the west and south, where state aid to banks was
common, banking corporations did not have to attract capital
from a distance or collect it from a great many small sources
in different communities. Moreover, in neither of these in-
dustries was the capital actually sunk in a single industrial
undertaking; it was in reality divided in loans among a great
number of different industries, chiefly commercial, and for
that reason involved much less risk than industries requiring
large fixed capital. The conditions for the formation of cor-
porations were, therefore, very favorable in these industries.
To a great extent, conditions were also favorable to the for-
mation of manufacturing companies. The amount of capital
necessary to establish a manufacturing industry was not
large, and could be easily supplied by a few men. The stock
of manufacturing companies was usually owned by the men
directly interested in the enterprise, and was rarely bought

38 G. S. CALLENDER

and sold. It was not quoted on the Boston stock market
before 1827, and in 1830 the stock of only six of the largest
companies was dealt in there. In the case of turnpike and
bridge companies it would seem that no great difficulty should
have been experienced in raising the small amount of capital
which they required. Nevertheless, one state at least,
Pennsylvania, found it advisable to adopt the policy of sub-
sidizing turnpike companies as early as 1806, and bridge com-
panies in 1811. By 1822 that state had subscribed $1,861,000
to the stock of fifty six turnpike companies, and $382,000
to the stock of twelve bridge companies. South Carolina
also expended about $2,000,000 of state funds on turnpikes
and canals. We have already seen how few of the canal
companies formed before 1815 succeeded in accomplishing
very much. The Middlesex in Massachusetts and the Santee
& Cooper in South Carolina were the only important ones
not assisted by the states. They were comparatively small
undertakings, requiring only a little over $500,000 each.
The state of New York supplied most of the capital of the
Western & Northern Inland Lock Navigation company,
and Maryland and Virginia did the same for the Potomac
and the James river companies. Companies that received
no public assistance, like the Delaware & Chesapeake in
Maryland and the Delaware & Schuylkill and Schuylkill
& Susquehanna in Pennsylvania, were unable to accom-
plish anything worthy of notice. In the later twenties a
number of canals were built by private companies, with
little or no assistance from the states. The Blackstone and
Farmington canals in New England, the Morris canal in
New Jersey, and the Lehigh Navigation in Pennsylvania
were constructed entirely with private funds. The Schuylkill
Navigation and the Union canal companies received small
subscriptions of stock from Pennsylvania; New York con-
tributed $800,000 to the Delaware & Hudson canal ; and the
federal government, Pennsylvania, Maryland, and Delaware,
$475,000 to the Delaware & Chesapeake canal, which was
resumed in 1824. The largest of these were the Delaware
& Hudson canal, which cost $2,300,000, and the Schuylkill
Navigation, which cost $2,190,000. The Blackstone and

THE PIONEERS OF AMERICAN INDUSTRY 39

Farmington canals were estimated to cost about $500,000
each, and the others ranged from $1,000,000 to $1,500,000.

From these facts it is safe to conclude that corporations
before 1830 were not able to raise any large amounts of capi-
tal without public assistance. This was not due to a lack of
adequate supplies of capital, as we have seen. The difficulty
related rather to the means of securing control of the existing
supply, — of inducing its owners to invest it in the various en-
terprises of the day. -The nature of that difficulty will be
apparent if we consider for a moment the position and charac-
ter of the persons who did the saving and supplied the capi-
tal for the community at that time. So far as domestic
capital was concerned, there was no large class of persons,
who on account of large incomes were willing to devote a
part of their savings to risky investments or to those from
which a return must be slow as well as uncertain. Such capi-
tal as existed was chiefly in the hands of small savers, who
were naturally more interested in security than in the chance
of large returns. There was no doubt a certain number of
persons affected by the gambling spirit, as the prevalence of
lotteries goes to show. There was also a considerable number
of speculators pure and simple, — men who buy and sell, mak-
ing or losing from the fluctuations of prices. But there were
very few speculative investors, — men who devote a part of
their savings to investments involving great risk and requir-
ng long periods of time to yield a return. This latter type of
persons is very numerous in this country at the present time ;
and, as a result, there is a great amount of savings constantly
seeking new and uncertain investments. The existence of this
speculative fund renders it certain that every project which
offers even a remote chance of success, be it either the expan-
sion of an old industry or the establishment of a new one, will
receive a thorough trial. In the early part of the nineteenth
century such persons were comparatively few. Consequent^
there was no such speculative fund, and no such assurance
that promising industrial experiments would be tried. It is
this difference which made the argument for protection to
infant industries have so great force in the time of Hamilton
and Clay, and gives it so little in our own time.

4o G. S. CALLENDER

Regarding foreign capital the situation was somewhat dif-
ferent. There were many people in England ready to risk
their capital in all sorts of uncertain undertakings rather than
accept the inevitable fall in the rate of interest, as the wild
speculations which preceded the crisis of 1825 abundantly
proves ; but, from the nature of the case, before modern means
of communicating came into existence a foreigner could have
but an imperfect knowledge of the character of the enterprise
for which his capital was sought. He could not acquire the
knowledge necessary to judge the merits of the project he was
asked to support. Consequently, it was necessary, in order to
secure his capital, to offer him a pledge of the faith and credit
of some individual or combination of individuals who were able
to command his confidence, as well as to present a promising
enterprise. Accordingly, we find that English foreign invest-
ments in the early part of the nineteenth century were made
chiefly in public securities. The stock and bonds of private
corporations formed in foreign countries, unless indorsed by
the government, played but a very small part on the London
stock market until after the middle of the century. It was the
public securities of the European countries, the Spanish- Ameri-
can republics, and the American states, which were chiefly pur-
chased by the English capitalists. The only American corpo-
ration whose securities were well known in Europe before 1830
was the United States bank, and even ten years later only
about a dozen American corporations had sold any of their
securities there.

Such were the conditions regarding the demand for capi-
tal, the available supply of it, and the ability of corporations
to secure control of large masses of it, during the first thirty
years of the century. With these facts before us, the chief
reason for making use of the powers of the state in industrial
affairs, which was noted at the beginning, becomes clear. The
opening of the west gave rise to an enormous increase in the
demand for capital, chiefly to provide works of internal im-
provement. To construct any of the more important of these
works required several millions of capital — an amount far
greater than had been brought together in any industry in this
country up to that time. For corporations to secure so much

THE PIONEERS OF AMERICAN INDUSTRY 41

capital it was necessary to bring together the many small
savings of this country, and to attract the large ones of
foreigners. There was no body of private individuals in the
country well enough known and with sufficient influence in
the business world to establish the credit of a corporation so
that it could command the confidence of both these classes of
investors. The only securities that could do this were public
securities, or the securities of corporations which were guar-
anteed or assisted by the government. American public credit
had been raised to the highest pitch by the debt paying policy
of the federal government; and it was inevitable that the
American people should turn to the only means in their power
to provide for their needs. When New York demonstrated
that it was easy to secure all the capital necessary for carrying
out public works by the issue of bonds on the credit of the
state, the way was open for other states to pursue the same
course; and only New Jersey and the smaller New England
states refused to enter upon it.

The crisis of 1839, and the subsequent embarrassment of
the states, ruined public credit for a time, and put an end to
the movement. In the older states of the north, like Massa-
chusetts, New York, and Pennsylvania, it was never resumed,
except in the case of the enlargement of the Erie canal and
the building of the Hoosac tunnel. In the west and south,
however, where capital was more difficult to secure, public
assistance to railways was resumed in the later forties, and
continued in some sections until comparatively recent times.
In the west this assistance was granted in the shape of sub-
sidies by comities, towns, and cities. In the south, however,
the states also took part in it. Virginia, South Carolina,
Tennessee, and Missouri created debts aggregating over $80,-
000,000 for this purpose between 1848 and the civil war.
South Carolina, Georgia, and Louisiana were fairly started on
the same course when the war broke out; and, after the war,
under the reconstruction governments, all the southern states
adopted the policy on a large scale. Local bodies were also
active. Hardly a southern city of any importance failed to
make grants of aid to railway lines in which they were espe-
cially interested. In Louisiana, Mississippi, and Kentucky

42 G. S. CALLENDER

general acts were passed granting permission to the counties
to issue bonds for this purpose. During the same time the
federal government made large grants of land to the states,
which were turned over to railway companies; and, in one
case, the Union and Central Pacific railways, gave bond sub-
sidies as well. Thus so long as corporations found difficulty
in raising the capital required to build railway lines, the credit
of the national, state, and local government was freely used
to assist them.

The question naturally arises now whether this movement
at the beginning was due entirely to the difficulty of securing
sufficient capital by means of private enterprise. Was there
no feeling on the part of the American people that the busi-
ness of supplying transportation and banking facilities could
not be safely intrusted to private enterprise? Was there no
widespread public opposition to corporations as such? To
answer that question, it is necessary to examine the discus-
sions which preceded the various public enterprises as they ap-
pear in the messages of governors, the reports of legislative
committees, and the congressional debates on internal im-
provements. Such ideas were not entirely absent from these
discussions. Thus the New York canal commissioners in their
first report on the Erie canal devoted a few remarks to the
question of whether the canal should be built at public or
private expense, and protested against a grant to private per-
sons or companies :

Too great a national interest is at stake. It must not
become the subject of a job or a fund for speculation. Among
many other objections there is one insuperable, — that it would
defeat the contemplated cheapness of transportation. It
should always, on occasions of this sort, be recollected that the
reasons adduced for grants to individuals in Europe apply
inversely here. Few of our public citizens have more money
than they want, and, of the many who want, few find facilities
for obtaining it; but the public can readily, at a fair interest,
command any reasonable sum. Moreover, such large ex-
penditures can be more economically made under public
authority than by the care and vigilance of any company.

THE PIONEERS OF AMERICAN INDUSTRY 43

The Ohio canal commissioners in 1825 reported in favor of
state construction rather than grants to corporations, and gave
the following reasons for their opinion :

Our jurisprudence, which borrows its principles and rea-
sons from England, has vigorously adopted this doctrine of
immortality of corporations, naturalized and established it
as law in our free government, and stretched over its dogma
the segis of the constitution, so that now whatever is granted
to a private corporation by the legislature is holden to be
intangible and irrevocable. . . . Nothing can be more inter-
esting to the whole community than the great navigable
highways through the state from the lakes to the Ohio river
on the routes proposed. It does not consist with the dignity,
the interest, or the convenience of the state that a private
company of citizens or foreigners (as may happen) should
have the management and control of them. The evils of such
management cannot be fully foreseen, and therefore cannot
be fully provided against. . . . Besides, such works should
be considered with a view to the greatest possible accommo-
dation to our citizens; as a public work, the public conven-
ience is the paramount object; and a private company will
look only to the best means for increasing their profits. The
public convenience will be regarded only as it is subservient
to their emolument. We think, therefore, that it would be
extremely hazardous and unwise to intrust private companies
with making these canals which can be made by the state.

Such opinions as these indicate the existence of a certain
amount of opposition, not only to the corporate control of im-
portant works of transportation, but also to corporations them-
selves. The popular opposition to the United States bank in
Jackson's time was, no doubt, to some extent due to this
hostile feeling, although it should be noted that many of the
states, which denounced that institution as a monster corpora-
tion, did not hesitate to create state banks of several millions
capital, and to give them a complete monopoly of the banking
business within their territory. These views were, however,
far from representing the prevailing attitude of the people.
They appear but rarely in the public discussions, are nowhere
discussed in detail, and do not appear to have had much

44 G. S. CALLENDER

influence in determining legislation. The readiness with
which the legislatures of all the states created corporations
for all sorts of purposes, whenever they were called for by
individuals, in many cases granting the privilege of limited
liability, shows that the opposition to corporations as such
was insignificant.

The considerations which received the principal attention,
and which chiefly determined the policy pursued, were of an
entirely different nature. They related to the utility to the
community of the various improvements contemplated, and to
the inability of private enterprise to secure the capital to
construct them. Long arguments were presented to show
that the benefits to be derived by the community at large
from such improvements were sufficient to justify their con-
struction at public expense, even though private capital
should not find it profitable to undertake them.

Such reasoning as this may be found in the public docu-
ments of most of the states which adopted the policy of inter-
nal improvement. Sometimes it appears in the discussions
which preceded the construction of the works, and some-
times it is used to justify that policy after experience had
shown that the tolls were not sufficient to pay the interest on
the public debt created to carry it out. The Ohio canal
commissioners at the outset of their enterprise, after express-
ing their opinion that the construction of the canals would be
a prudent investment of capital, declared that a more impor-
tant and interesting inquiry is what are the advantages which
the people of this state may derive by the construction of
navigable canals.

After the canals had been finished, they laid still greater
stress upon the fact that, in estimating their value to the state,
the revenue accruing from tolls was a matter of secondary im-
portance. By taking the amount of tonnage received and ex-
ported from either end of the canal in 1832, and estimating
the rise in the price of exports and the fall in the price of
imports, they reached the conclusion that the aggregate saving
to the people had amounted to $312,000; whereas the taxes
raised to pay interest on the canal amounted to only $143,-
000.

THE PIONEERS OF AMERICAN INDUSTRY 45

The attitude of the people toward the policy of internal
improvements was not due to any modern socialistic or
populistic idea that the business of supplying transportation
and banking facilities to the community was not a safe and
legitimate one, to be left to the management of private en-
terprise. As a matter of fact, only a part of the states under-
took the actual construction and control of such works.
This was the policy of New York, Pennsylvania, Ohio, and
the northwestern states, excepting in the case of one or two
canals and railways and all the turnpikes; but Massachusetts,
Maryland, and the southern states generally pursued the
policy of shortening corporations to carry out the works, and
assisting these corporations by subscriptions to their stock
or by loans of state credit. After the crisis of the early
forties, all the states pursued this policy of assisting corpora-
tions. It required the experience of later years with the
evils of unrestricted private railway management, the rise
of labor difficulties, and the appearance of monopolies and
trusts in many industries, to teach the American public that
private enterprise might sometimes require to be restricted
and controlled rather than stimulated, in the interest of
public welfare. Down to the civil war, except in case of
the banking industry, the powers of the government were used
to encourage and assist private enterprise, not to restrict it.

It remains to add a few words further concerning the con-
nection of the states with banking enterprises. It has already
been pointed out that nearly all the states invested public
funds, derived either from revenue or from the sale of state
bonds, in the stock of banking corporations. The motive
which caused this widespread connection of the states with
banks was not, however, the same in all sections of the coun-
try. In the older states, both north and south, it was not
primarily, if at all, due to a desire to encourage the growth of
banking. Banks needed no such encouragement in those
states. On the contrary, they were regarded as very profita-
ble enterprises, and the investment of capital in them as a dis-
tinct privilege. In New York, at least, the struggle of indi-
viduals to secure charters from the legislature gave rise to
political corruption. Many of the early charters contained

46 G. S. CALLENDER

provisions for the investment of educational funds in bank
stock. The early Connecticut charters provided that "the
bank shall at all times be open for subscriptions at the rate
of $100 for each share from the school fund of this state, and
from the funds of any college, ecclesiastical society, school, or
corporation for charitable purposes within the state." Sev-
eral New York charters contained similar clauses. The act
which rechartered the bank of New York in 1813 authorized
the comptroller of the state to subscribe $15,000 to the stock
of the bank for the benefit of the common schools; and the
treasurers of Hamilton, Union, and Columbia colleges were
given the right to subscribe a similar amount for the benefit
of these institutions. Banking privileges were frequently
given to companies formed for the purpose of carrying out
canals and railwaj^s, as in case of the Morris Canal company,
the Central Railway and Banking company of Georgia, and
the Southwestern Railroad bank of South Carolina. Clearly,
the banking business was looked upon as in some way excep-
tionally advantageous to the investor; and the devotion of
the surplus public revenue to the purchase of bank stock was
simply a device for increasing the revenue of the state.

In the newer states, where capital was more scarce, other
motives played a considerable part. The people were anxious
to furnish a circulating medium, and also to provide banking
accommodations to the commercial classes as well as loans to
farmers. But in all, except the cotton states of the gulf
region, the desire to secure for the benefit of the public the
large profits to be earned in the banking business was an im-
portant, if not the most important, motive which led the
states to invest in these industries. Thus, when Indiana and
Illinois began their system of internal improvements, they
both increased the capital of certain banks, and authorized
the states to subscribe for the new capital. In Illinois the
act which authorized this action was entitled "an act to
increase the capital stock of certain banks, and to provide
means to pay the interest on a loan authorized by an act en-
titled ' an act to establish and maintain a general system of in-
ternal improvements. ' " These states could borrow money at
5 or 6 per cent interest, and the banks earned from 7 to

THE PIONEERS OF AMERICAN INDUSTRY 47

9 per cent dividends. They found it profitable, therefore,
to provide for the payment of a part of the interest on their
internal improvement debts by selling bonds and investing the
proceeds in bank stock. A similar motive influenced the ac-
tion of Kentucky and Tennessee. The governor of Kentucky
urged the legislature to subscribe for bank stock in order to
provide funds for a system of public education; and the act
which established the bank of Tennessee, in which the state
invested $1,500,000, was entitled "an act to establish a state
bank to raise a fund for internal improvements, and to aid in a
system of education."

In the southwest the situation was different. The de-
mand for capital here, and the difficulty of obtaining it, were,
perhaps, greater than in any other part of the country. It is
true there were no important works of internal improvements
undertaken, except in Louisiana, where the state issued $1,-
200,000 worth of bonds to assist railroad companies. But the
character of agriculture gave rise to a very great demand for
capital. The plantation system carried on by slave labor is
a highly capitalistic form of industry. Not only has labor
to be employed on a large scale, but the planter has to pur-
chase the labor outright, as well as to maintain it from year
to year. This involves an enormous initial expense to the
person who begins cotton or sugar culture with slave labor.
As the planter's crop is marketed but once in the year, it is
necessary for him to have large supplies of provisions on hand
before these provisions can be paid for from the proceeds of
his crop. The southern planter was therefore more like a
man engaged in manufacturing or commercial business than
like a northern farmer, and, like the manufacturer and mer-
chant, required from time to time advances of capital to
enable him to carry on his business. When it came to set-
tling a new country with such a system of agriculture, the
demand for capital became still greater. The hardy settler
of the northwest could move into the wilderness with his
family and gain a livelihood for them from the first, while he
cleared his land and prepared it for cultivation; but the
planter had to maintain his slaves while the land was being
cleared and the first crop produced, which would require at

am

riiiyiMjinnilUtt

48

G. S. CALLENDER

least a year and often more. The capital required to supply
this demand not only did not exist in these new states, but
it could be supplied to only a limited extent from older slave
states, since slavery prevented that accumulation of capital
which would have taken place in a free community possessing
the same favorable economic conditions.

The planters of this region had therefore to attract capital
from the north and from Europe; and for this purpose the
credit of individual planters or of such corporations as could
be formed in a new country was as inadequate as it was in
northern states to secure funds for canals and railways.
Nothing was left but to make use of public credit to supply
this deficiency; and every new slave state in the south from
Florida to Arkansas established one or more banks and
supplied all or nearly all of their capital by a sale of state
bonds. Many of the banks were known as " property banks,"
and were designed especially to furnish loans to planters.
The business of all of them consisted in providing the capital
for producing and marketing the cotton and sugar of this
region. Thus in the southwest, where nature already pro-
vided an adequate system of transportation, the state banking
enterprises formed the counterpart of the internal improve-
ment movement of the north and east,

CONCt'N'

I

• ••-.,'

ud

-

CONCENTRATION OF INDUSTRY IN THE UNITED

STATES.

BY J. A. HOBSON.

[J. A. Hobson, one of the most eminent of English economists; born Derby, England,
July 6, 1858; educated at Lincoln college, Oxford; classical master at Faversham
and Exeter, 1880-87; lecturer in economics for the university extension department
of Oxford university, 1887-97; contributor to the leading British and American
economic reviews, and author of Economics of Distribution, International Trade,
Problem of the Unemployed.]

If by capitalism we understand industry involving large
capital, owned or controlled by a few men and worked for
private profit, there is a sense in which the United States
must rank as the first capitalist nation in the world. It is not
indeed the case that so large a proportion of her material
wealth or of her industrial population is engaged in those
manufacturing and transport industries which are distinctly
capitalistic, as in Great Britain, Holland, and Belgium, or per-
haps even Germany. Agriculture is still her most important
single branch of industry ; farm property still largely exceeds
in value the aggregate of her manufacturing establishments,
while 36 per cent of her occupied population are employed in
agriculture as compared with 24^ per cent in manufacturing
and mechanical pursuits. Even if we turn to the statistics
of manufactures, the enormous growth of concentrated cap-
italism in America is not at first apparent, for the increase
in the actual number of separate businesses in almost all in-
dustries is very large. It is indeed quite evident that small
competing businesses occupy a very great part of the manu-
facturing field. A closer inspection of the situation, how-
ever, shows that, though the number of businesses is grow-
ing, the total capital engaged in the trade is growing far more
rapidly.

This first proof of concentration is corroborated by many
other evidences, which sustain the popular belief that a large
proportion of the business in an increasing number of indus-
tries is passing into the control of a very small number of cor-

Vol. 3-4

49

48 G. S. CALLENDER

least a year and often more. The capital required to supply
this demand not only did not exist in these new states, but
it could be supplied to only a limited extent from older slave
states, since slavery prevented that accumulation of capital
which would have taken place in a free community possessing
the same favorable economic conditions.

The planters of this region had therefore to attract capital
from the north and from Europe; and for this purpose the
credit of individual planters or of such corporations as could
be formed in a new country was as inadequate as it was in
northern states to secure funds for canals and railways.
Nothing was left but to make use of public credit to supply
this deficiency; and every new slave state in the south from
Florida to Arkansas established one or more banks and
supplied all or nearly all of their capital by a sale of state
bonds. Many of the banks were known as " property banks,"
and were designed especially to furnish loans to planters.
The business of all of them consisted in providing the capital
for producing and marketing the cotton and sugar of this
region. Thus in the southwest, where nature already pro-
vided an adequate system of transportation, the state banking
enterprises formed the counterpart of the internal improve-
ment movement of the north and east,

CONCENTRATION OF INDUSTRY IN THE UNITED

STATES.

BY J. A. HOBSON.

[J. A. Hobson, one of the most eminent of English economists ; born Derby, England,
July 6, 1858; educated at Lincoln college, Oxford; classical master at Faversham
and Exeter, 1880-87; lecturer in economics for the university extension department
of Oxford university, 1887-97; contributor to the leading British and American
economic reviews, and author of Economics of Distribution, International Trade,
Problem of the Unemployed.]

If by capitalism we understand industry involving large
capital, owned or controlled by a few men and worked for
private profit, there is a sense in which the United States
must rank as the first capitalist nation in the world. It is not
indeed the case that so large a proportion of her material
wealth or of her industrial population is engaged in those
manufacturing and transport industries which are distinctly
capitalistic, as in Great Britain, Holland, and Belgium, or per-
haps even Germany. Agriculture is still her most important
single branch of industry; farm property still largely exceeds
in value the aggregate of her manufacturing establishments,
while 36 per cent of her occupied population are employed in
agriculture as compared with 24^ per cent in manufacturing
and mechanical pursuits. Even if we turn to the statistics
of manufactures, the enormous growth of concentrated cap-
italism in America is not at first apparent, for the increase
in the actual number of separate businesses in almost all in-
dustries is very large. It is indeed quite evident that small
competing businesses occupy a very great part of the manu-
facturing field. A closer inspection of the situation, how-
ever, shows that, though the number of businesses is grow-
ing, the total capital engaged in the trade is growing far more
rapidly.

This first proof of concentration is corroborated by many
other evidences, which sustain the popular belief that a large
proportion of the business in an increasing number of indus-
tries is passing into the control of a very small number of cor-

Vol. 3-4 49

52 J. A. HOBSON

manufacture. But her advance was very rapid; the resource-
fulness bred of an adventurous career manifested itself in
remarkable mechanical inventiveness, and in quickness to
seize and improve the best European inventions; no trade or
individual traditions blinded their eyes, they had no old plant
or machinery to consider, but began with the latest and the
best ; the high wages of manual labor were a stronger stimulus
to substitute machines than any European nation felt; no
federal restrictions and little effective state control were
allowed to hamper the full economy of the machine and the
factory system; the preternaturally rapid development of the
railroad system by European capital opened up to them the
vast and varied natural resources of their country. Employer
and workman were subjected to a keener stimulus of gain than
ever prevailed in England, even during the rise of Lancashire,
and this stimulus was mainly directed to the improvement of
machinery. Lastly, the tariff greatly facilitated the rise of
the manufactures, and, by securing the American manufac-
turer against foreign competition, has proved specially effica-
cious in feeding infant industries into giants and enabling
them to exercise a giant's tyranny. The size of the American
market has commonly sufficed to support the fullest economies
of large scale production with the best plant and the most
complete division of labor, while the possession of almost
complete security against outside competition has enabled a
corporation, which has once secured supremacy in the domes-
tic market, to save most of the expenses of competition, and
to mature its plans for conquering foreign markets. The
abnormally high profits which a tariff enables such a trust to
earn in its domestic sales may certainly be used to enable it to
undersell foreigners in their markets, the export trade being
of the nature of bounty fed or by-products which it is profita-
ble to sell for whatever price they will fetch. This phase of
the trust economy deserves fuller discussion than I can here
afford to give; but it is certainly the case that this power of
"dumping" goods in foreign markets at below cost price is an
important international implication of the trust.

These manufacturing trusts do not, however, stand alone;
closely linked with them, both in industrial working and in

CONCENTRATION OF INDUSTRY 53

finance, are certain other forms of advanced capitalistic struc-
ture, commonly enjoying ampler and more secure monopoly,
and supported more directly by privilege. The political
development of America has left to private enterprise many ol
the most important industries which in civilized European
states have come under the direct administration of the state
or the municipality. Almost all the supply of ordinary
municipal services, with the exception of water, still remains
in the hands of private companies, and the rapid development
of these services, especially those connected with electric
traction, lighting, and telephones, has yielded huge elements of
monopoly profit, which American cities are just beginning to
learn how to tax, and which have formed useful feeders for
great national manufacturing trusts, such as the Westing-
house Electric company. More important still are the rail-
road, telegraph and express companies, performing, as private
monopolies for profit, most of those transport services which
have in Europe and in our colonies been undertaken by the
state.

The railroad system is the first of two distinctive features
which mark America as the stronghold of unrestrained capital-
ism. It is not merely that it represents the largest and most
complicated organization of private capital in the modern
world. Still more important is the fact that this railroad sys-
tem is the pillar of the whole fabric of capitalism, which is
rightly regarded as monopolistic in character and anti-social
in the economic and political power it wields.

The more closely I have reflected on American conditions
the more strongly I am convinced that the railroad is the true
center of gravity in the economic system of America. It is the
railroad, more than the tariff, which in point of fact has been
"the mother of trusts." This is sufficiently illustrated both
from the early history of the Standard Oil company and of the
Carnegie Steel company, which was the nucleus of the Ameri-
can Steel corporation; here, as in so many other instances,
discrimination in railway rates and secret rebates have been
the prime condition of early success. In such a country as
America railroad transport has always been the most critical
stage in that series of processes by which the raw material

54 J. A. HOBSON

must pass to the manufacturer, and from the manufacturer
or wholesale merchant to the retailer and the consuming
public. There may be other opportunities of cornering sup-
plies, but the industrial stream most commonly is narrowed
in the transport stage; if, then, effective competition can
there be stopped, the profits of the producer can be sucked by
paying low prices for his goods while the consumer is squeezed
by high prices for his commodities, and these gains can be
shared by the railroads with any industrial confederates with
whom they are in league. The power of the railroad over the
greater part of the republic to make or mar cities, industries,
the welfare of entire states, has been too notorious to require
discussion. The very self-sufficiency of America, the pride of
her economic policy, has fed the railway power, increasing the
part played by land transit, diminishing the part played by
ocean carriage in her distribution of raw materials and com-
modities. So far as internal traffic is concerned, the Missis-
sippi and, during a portion of the year, the northern chain of
lakes, afford the only check upon the control of the railroads
over the grain and meat traffic from the west and the middle
states to the thickly peopled east, the distribution of manu-
factured goods from the northeastern states over the whole
continent, and the carriage of coal and iron from the mines
to the manufacturing centers. Corners in grain and in cattle
can be formed or broken only by the active agency of the rail-
roads, as is proved by recent cases in the courts. The an-
thracite coal mines of Pennsylvania are absolutely owned or
fully controlled by the seven railroads which traverse the
district, and which for this purpose are operated as a single
system; the greater part of the soft coal mines are similarly
held by other non-competing roads, and the silver and copper
mines of Colorado, Nevada, Montana, are little more than
annexes of the railroads. While, with the mining and manu-
facturing development of America, the railroads have assumed
an absolutely more important part in the economic life of the
nation, this power itself is rapidly concentrating into a few
large units. So far as the most important traffic is concerned,
that between the middle west and the eastern states, this
tendency has gone so far already that three groups, fairly

CONCENTRATION OF INDUSTRY 55

stable in their composition, have been formed controlling
nearly all the roads between Chicago and the coast, and from
Chicago stretching out their tentacles through those great
mining and agricultural states which are destined in the early
future to become the center of industry and population in the
United States.

This railroad concentration which is proceeding apace all
over the continent is not merely an instinctive movement for
self-protection and monopoly on the part of the railroad man-
agers. It represents the first fruits of that domination of the
financier over industry which is the second distinctive char-
acteristic of American capitalism. Everywhere advancing,
this active control of the financier over industry in general has
proceeded further in America than elsewhere, partly because
conditions are more favorable to bold speculative coups, partly
because business life there has evolved and brought to the
front a bolder and more imaginative type of financier.

The naive theory of capitalism provides no place for the
financier, save as banker or insurance broker. Investors, as
business men recognizing the uses of large capital, pool their
capital for some purpose which they deem profitable, elect
their directors, and delegate to them certain powers of control ;
the directors appoint the management, and exercise a general
control over the conduct of the business subject to the su-
preme control of the body of shareholders. Such is the
democratic theory of capitalism. In practice the formation
and control of these great capitalist corporations is very differ-
ent, and that difference mainly consists in the injection of the
power of the financier into the system of modern capitalist
industry. He performs two functions, both of them necessary
in the existing order. The first is the formation and reforma-
tion of corporations and the merging of smaller into larger
corporations. In his capacity of dealer in profitable "notions,"
he takes the initiative in the capitalist movement, directing
the flow of industrial energy into profitable channels. Even
when the idea emanates from an industrial specialist, a busi-
ness man in the narrower sense, it can only fructify in the
hands of the financier, who, as promoter, contractor, and un-
derwriter, carries it from the world of ideas into the world of

56 J. A. HOBSON

reality. For this necessary work the financier takes his pay-
ment, sometimes a reasonable fee, sometimes an extravagant
sum which cripples the future of his industry derived in part
from the ignorance or over-confidence of shareholders, in part
from consumers in anticipation of the monopoly prices which
such a corporation hopes to impose by control of markets.
This is the work of the financier in construction or reconstruc-
tion, where he has no genuine continuous interest in the work-
ing of the business.

His second function is as holder of and speculator in stocks
and shares. Here his legitimate or social function is that of
furnishing an intelligent registration of values, scaling them
up and down in accordance with the play of actual forces in
the industrial world. With this legitimate work is often asso-
ciated an illegitimate, anti-social process, not so much of
gambling (for pure gambling, or taking chances, does not
rightly belong to the class of financiers who rule in America),
as of the artificial manipulation of stocks and shares, bulling
and bearing, in order to make profits from forced oscillations
of values. These predatory practices appear to be playing
an ever larger part in the formation of recent trusts ; many of
these are promoted less by the industrial economies of large
production, or even the calculated profits of prospective
monopoly, than by the design of creating a large quantity of
marketable paper, which should serve the two purposes of
enabling the financial promoters to sell inflated stock to ignor-
ant investors, and of furnishing material wherewith to bull
and bear the market, and by such manipulations to fleece
minor gamblers.

At various eras in the world's history supreme power has
passed into the hands of a little group of financiers, but never
has that power been greater, more strongly rooted in actual
control of industry, or more strongly concentrated in an able
personnel, than in the America of to-day. Had I space, I
ought to trace the origin of this financial control in the peculiar
monetary history of the United States, and the combination
of economic and political forces which have raised a few great
banking and insurance houses to a pinnacle of power. The
consolidation of the banking and insurance business has

CONCENTRATION OF INDUSTRY 57

already gone far towards the establishment of a single great
monetary power outside and beyond the effective control of
the government, but usurping some of the functions of the
state. The most salient fact to-day in America is the financial
control of the chief means of transport by land and sea, the
mining industry, and the manufacturing trusts by several
small groups of men, partly bankers who have entered indus-
try, partly industrial magnates who have entered the wider
world of finance. It is impossible to ascertain, or accurately
to designate, the relations between these little groups of po-
tentates— sometimes engaged in fighting one another in Wall
street or in the courts for the control of a system of railways,
sometimes united for a common swoop upon the products of
small investors, sometimes in mixed relations of friendship
or hostility over a corner in the produce markets. Industry
in America no longer belongs to industrialists but to financiers.
In the railroad world Morgan and Rockefeller and Havemeyer
are in joint control with more distinctively railroad men like
Hill and Harriman, and the forces are commonly described
by the name of some great Wall street general. So important
is the financial side of the great manufacturing businesses that
their chiefs inevitably drift into the larger financial world, so
that the owners of the standard oil, the steel, the sugar and
other trusts are continually associated with fresh alien enter-
prises.

While the identification of the great financiers of Wall
street with the control of the railroad system of America is
the most fundamental fact, the growing prominence of trans-
port and finance enables these groups to exercise a general
control over great organized industry. Everywhere this con-
solidation of financial control is accompanied by a centraliza-
tion of business management. It is not indeed strictly true
that capital is passing into fewer hands, for in America as
here the structure of the corporation lends itself to a multipli-
cation of investors, and in some corporations a new labor policy
is projected along this line. But while the number of capital-
ists, or investors, is increasing, the control and probably the
ownership of the bulk of capital is passing into fewer hands.
For the great financiers are becoming to a larger extent than

58 J. A. HOBSON

before permanent owners of large portions of the more profita-
ble businesses which they finance. A great trustmaker,
banker, or mine owner must find fields for the investment of
his profits, and, as he has the best opportunity for discrimi-
nating genuinely progressive from merely speculative invest-
ments, he is disposed more and more to secure himself against
misfortune by holding large shares in sound remunerative
businesses.

In endeavoring to develop a public policy towards trusts
and great corporations it will be important for Americans to
make up their minds clearly about the economic supports of
these capitalist structures, and in particular to test one point
of economic theory. It is not difficult to ascertain that con-
trol of the best natural resources, railroad discrimination, and
the tariff have been important aids in originating and support-
ing trusts. But are these the only supports? If so, tariff re-
form, enforcement of federal and state control of railroads,
and some system of taxation of land values might suffice to
defend the consumer, the would be independent producer,
and the workers against any dangerous abuse of power. But
if, in addition to these supports, the mere advantage of a big
capital over a smaller capital, or, in other words, the operation
of the law of increasing returns, is an economy sufficient in it-
self to breed a trust, a more drastic policy than any which
America is yet prepared to face may be required.

Few American economists, and no American statesmen,
have squarely faced the issue; those economists who have
faced it, differ in judgment. The point at issue is precisely
this. Every one admits that up to a certain point a business
with a large capital has usually a net advantage in competing
with a smaller business. It is evident that this is applicable
to the case of the great capitalist businesses which ripen into
trusts. But is there a limit to the economy of mere size, so
that, this limit being reached, any further advantages of size
are more than offset by waste, the business on the whole now
conforming to a law of diminishing returns? If so, is this
limit reached before the size of the business has enabled it to
attain monopoly? Upon the answer to this question much
depends. Professor Ely, often regarded as a socialist, holds

CONCENTRATION OF INDUSTRY 59

that land monopoly, railroad illegalities and tariff are the sole
supports of the trusts, the advantages of mere size of business
evaporating before the stage of monopoly is reached; Pro-
fessor Jenks, on the other hand, regards the advantages of
mere size as in themselves sufficient to support a trust. The
issue is one of fact which cannot easily be resolved. For it is
not possible, I think, to find a trust or strong corporation
which has not enjoyed at least one of the artificial supports I
have named. This does not prove that a trust could not
grow without them, but it distinctly does cast the onus pro-
bandi upon the socialist as distinguished from the Henry
George man, the free trader, and the railroad reformer.

I have used the words trust and monopoly for the sake of
convenience. Monopoly is, of course, entirely a matter of de-
gree. No American trust has a monopoly unqualified by
some measure of real and direct competition, while potential
competition furnishes a further genuine restraint upon the
abuse of power over the consumer. Even the oil trust has
small competitors over a portion of its home market, and
one independent pipe line still exists, competing for export
trade. But a growing degree of monopolist power attaches
to the great corporations which I have described, and the sur-
viving competition, real and potential, seems inadequate to
secure the consuming public against rises of price unwarranted
by the cost of production.

Perhaps Mr. Russell Sage goes too far in saying, "If the
truth were known, concentration of wealth is popular with
the masses;" but it is certainly true that the millionaire has
been an object of admiration rather than of enmity among
the masses. The sporting instinct in America has been spe-
cially directed towards the race for wealth, the racing regula-
tions are not too particular, and the winner is greeted with
general applause by the millions of spectators who are eagerly
seeking for some chance of similar personal distinction. Great
wealth and crooked methods of acquiring it have long been
familiar, and do not disturb the popular complacency. Though
the publicity given to the formation of "combines" during the
last few years, and the appearance of trusts as an issue of party
politics, are slowly educating the nation in the real significance

60 J. A. HOBSON

of the new capitalism, it cannot be said that any fixed general
feeling of hostility against the power of the triangle of capital-
ist forces — railroads, finance, industrial trusts — exists in the
general body of the people. A considerable insurrection
against the dominion of local corporations handling municipal
monopolies is everywhere on foot in the larger cities; spas-
modic revolts against railroad monopolies or discrimination
over wider areas occur, but no clear signs of a steady settled
determination to break the power of the great national trusts
are yet visible. There is indeed a sort of socialist party,
broken into many groups, which takes as one of its mottoes,
"Let the nation own the trusts." In the municipal and state
elections of 1902 some 300,000 votes were cast throughout
America for "socialist" candidates, and the rise of a numeri-
cally powerful party in the future must be regarded as a pos-
sibility. But for the present this definitely socialist senti-
ment and policy are not a serious factor in the situation. The
feeling is rather one of growing disquietude and perplexity
than of urgent alarm. There is a growing recognition among
thinking persons of all classes that trusts have come to stay,
that they are capable of using anti-social powers, and that it
will be necessary to find public methods of restraining them.
So far as any policy is developing in the general mind it is
temperamental individualism of the American, and is directed
towards a restoration of the competition which trusts seek to
destroy, rather than at the socialization of industries from
which competition is recognized to have disappeared.

If some sort of semblance of competition is retained, if
good wages are paid and employees are fairly treated, if no
considerable actual rise of prices oppresses the consumer, the
general temper of Americans favors a policy of laissez faire.
A trust may be a virtual monopoly, it may regulate produc-
tion and control local markets, it may take for itself all the
economies of improved methods of production, and of the
elimination of expensive competition, distributing them in
dividends on watered stock, but these things will arouse no
effective sentiment of animosity in the public mind. The real
danger arises when some great corporation opposes a large
organization of labor, as in the Homestead and the Pullman

CONCENTRATION OF INDUSTRY 61

strikes; still more when a rise of price or a stoppage of supply
of some necessary or convenience of life for ordinary citizens
is attributed to the machinations of a combine or a trust.
The rise in prices of bread, meat, and other foods during the
last few years, popularly attributed to the action of trusts
and rings, has probably done more to arouse a common feeling
against combines than any other incident save one. The
anthracite coal struggle of the winter of 1902 was a dramatic
representation of the entire movement of capitalist control, so
clear and full in its outlines as to furnish a national education
in the economics of capitalism. Cheap foreign labor, illegally
imported so as to depress domestic wages; illegal ownership
of coal mines by railroads; absolute control of output and of
prices by the carrying companies acting in secret but effective
concert; long protracted defiance of public convenience and
public opinion by the corporations, accompanied by a refusal
to submit to arbitration, broken only by threats of coercion
from the federal government — such was the picture presented
to the eye in the highly colored press. The result was a curious
revelation of that ground swell of revolutionary feeling which
always lurks in the recesses of the easy going American nature.
Spasmodic local riots were taking place, coal trucks were seized
and emptied by the people, merchants suspected of holding
back supplies were in danger of their lives, and state con-
ventions were passing resolutions in favor of the nationaliza-
tion of coal mines. President Roosevelt, interfering in the
capacity of peacemaker, effected his end by threatening to
march United States troops into the mining district, in order
to take forcible possession of the mines, and to secure their
operation.

It is not theoretical objections to trusts, nor any plain
condemnation of their practices, but these uncalculated inci-
dents that are likely to imperil the peaceful development of the
great monopolist corporations. The knowledge of this grow-
ing suspicion of the trusts, and of the sudden outburst of popu-
lar passion which may at any time be directed against them,
has rapidly forced the trust issue on to the stage of party poli-
tics. Neither party has any direct definite policy to offer. For
the radical difficulty consists in the fact that the great majority

62 J. A. HOBSON

of the trusts are not directly amenable to federal legislation
or administrative control. America is brought up suddenly
against the essential inefficiency of her federal constitution.
The British parliament is competent to pass any measures it
deems necessary to control, to nationalize, or to destroy any
trusts or combinations that might arise in our dominions;
railroads, mines, manufactures are all amenable to its supreme
control. Not so the government at Washington. The only
great industry the regulation of which is clearly within its
competency is the railroad, and even there its powers are
limited by the Supreme court's interpretation of the passage
in the constitution which gives power to congress "to regulate
commerce among the several states." It is improbable that
so drastic a step as the nationalization of railroads would
be approved as constitutional by the Supreme court. As for
the manufacturing, mining, and financial corporations, they
are properly amenable only to the government of the state in
which they are registered. In their actual economic structure
and operations most of these " trusts" are federal businesses,
but in their legal structure, they are state creations, and are
only amenable to state control. In theory the concurrence of
several states could doubtless establish a fairly substantial
body of control, though even then their efforts might be re-
duced to naught by the absence of any machinery for common
simultaneous administration. In point of fact such common
action of states is impossible; states like New Jersey, Illinois,
and West Virginia make a large part of their state revenue
by enticing trusts to register in their limits upon conditions
of loose legal regulation. Voluntary state co-operation is no
practicable substitute for federal control.

THE INTEGRATION OF INDUSTRY IN THE
UNITED STATES.

BY WILLIAM FRANKLIN WILLOUGHBY.

[William Franklin Willoughby, economist; born Alexandria, Va., July 20, 1867;
graduated Johns Hopkins, 1888; appointed special agent of the United States com-
mission to the Paris exposition, 1900; appointed, 1890, expert in the United
States department of labor and has represented that bureau at several international
congresses and has conducted several investigations abroad in its behalf; author of
Workingman's Insurance and contributed the following article to the Quarterly
Journal of Economics.]

The tendency toward what may be designated as the
integration of industry is a tendency which, though it has
been at work for some time, has only in very recent years
become one of marked prominence. At the present time, how-
ever, it constitutes the fundamental force now at work for the
reorganization of our industrial system. Through it alone can
be established the significance of recent important happenings.

By integration of industry is meant the knitting together,
so as to form one compact, harmonious whole, of all the related
branches, or all the necessary processes, of any great depart-
ment of industrial work. As such, it is evidently a movement
quite distinct from that of concentration of industry. Concen-
tration indicates the bringing together of likes under central
management, as where all the coal mines or all the blast fur-
naces or rolling mills are brought under the control of one or
a few parties. Integration indicates the bringing together of
dissimilar, but interdependent, branches of an industry, so that
complete harmony may be obtained among them, and the
undertaking contain within itself a complete control of all the
factors necessary for the successful and uninterrupted prose-
cution of its work. This is what takes place when the same
management acquires control of such widely dissimilar, but
essentially dependent, branches of industrial work as the min-
ing of coal and ore, the operation of railways and steamships
for its transportation, the extraction of lime, the working of
coke ovens, the manufacture of pig, its conversion into billets,
bars, sheets, and what not, and from them the manufacture of

63

64 WILLIAM FRANKLIN WILLOUGHBY

wire, nails, rails, tin plate, structural material, or even bridges
ready for final consumption. We have given as an illustra-
tion probably the most perfect example of integration that has
yet taken place, and we shall have occasion to consider it more
in detail in another place. The operation of this force, how-
ever, can be seen in almost every branch of industrial enter-
prise. Wherever a brewer decides to make his own barrels or
to raise his own hops, wherever a bicycle manufacturer under-
takes the manufacture of his own tubing or tires, this tendency
may be seen at work.

A study of this movement, if it is to be at all adequate,
should include the three points of: first, a description of the
extent to which it has advanced and an account of its more
important manifestations; second, an examination of the
motives that are responsible for its rise and progress; and,
third, an attempt to determine — as far as conditions will per-
mit— its probable effect upon efficiency of production and
the general welfare of society. Of recent examples of integra-
tion in this country, far the most important and striking is
the iron and steel industry through the creation of the United
States Steel corporation. In no other case can we find such
a perfect working of the forces of integration. In other
cases, integration has taken place almost unconsciously, and
as the result rather than the object of the steps taken. Here
we have an instance where the benefits of integration were
clearly seen in advance, and an enormous combination brought
about for their realization. No greater mistake could be com-
mitted than that made by most writers on this corporation,
who have seen in it but a combination on a larger scale sim-
ilar to those of its constituent companies. The latter, with
the exception of the Carnegie company, were pure types of the
concentration of industry. The former is a pure type of in-
tegration of industry. As the creation of this corporation
represents in such a complete way this whole movement of
integration, the motives or causes responsible for it, the con-
ditions making it possible, and the probable results of its ac-
tion, it is worth while to describe its rise with some degree of
particularity.

INTEGRATION OF INDUSTRY 65

Until 1895 or 1896 the development of the iron and steel
industry in the United States may be said to have followed
the normal course of most expanding trades. It was marked
by the gradual concentration of work in fewer and larger
establishments and a parallel geographical centralization in the
more favored localities. While it was evident that a domi-
nant position was being attained by certain establishments,
this dominance was due almost entirely to the natural advan-
tages that they enjoyed and the skill with which they were
managed. Their growth, in a word, was one of natural expan-
sion through the addition of new mills and the development
of established lines of work. Only to a limited extent was
increase in size obtained by the absorption of hitherto inde-
pendent plants. There was little or no idea of one or a few
establishments reaching such a strength as to be able to
exercise monopolistic powers and fix prices without regard to
active competition.

This was the condition of affairs up to the closing years of
the last century. Suddenly a new means of building up huge
concerns was adopted. The possible economies resulting
from centralization of work in large plants and production
upon a large scale had nearly been reached as regards the
actual operations of manufacture. It was now seen that there
lay a great field for economies outside the work of production
proper, through a better control and organization of the fac-
tors of distribution. If a union of the forces of all or a con-
siderable number of manufacturers of the same product could
be secured, it would be possible to obtain raw materials at a
more advantageous rate or with greater certainty, production
could be made to correspond more nearly to demand, markets
could be reached more directly, and new ones opened up where
existing outlets were insufficient, transportation charges could
be reduced, and, finally, if a sufficient control of output could
be secured, a more positive influence could be exerted upon
the fixing of the prices at which the commodities manufac-
tured would be marketed.

It was the effort to realize these considerations that led to
the second phase in the history of the organization of the iron
and steel industry in this country. This phase is the one

Vol. 3-5

66 WILLIAM FRANKLIN WILLOUGHBY

marked by the formation of the great national companies, or
so-called iron and steel trusts, through the merging of hitherto
independent concerns. In rapid succession there were organ-
ized the Federal Steel company, the National Tube company,
the American Steel and Wire company, the American Tin
Plate company, the American Steel Hoop company, and the
American Sheet Steel company, to mention only those which
afterwards went into the United States Steel corporation,
each with its forty, fifty, or hundred millions of capital. Now
the characteristic of this period of transformation was that,
in the formation of these huge concerns, the motive was the
union of likes; that is, the bringing together under the same
management of plants manufacturing the same products. It
was as if a vessel of several classes of dissimilar particles had
been suddenly agitated, and the members of each class had,
on the instant, rushed together to form single independent
homogeneous aggregations. There was thus constituted a
great company for the manufacture of tin plate, another for
the making of steel hoops and related articles, another for
sheet steel, etc.

For a time it seemed, to the outside public at least, that
this was the final step in the evolution through which the
industry was passing, and that the immediate future would be
devoted to the strengthening of the position obtained by each
of the companies. But no sooner was this movement accom-
plished than new forces were seen to be at work. As field
after field came under the central or unified form of organiza-
tion, the companies in which this organization was vested
came more and more into direct contact with, and depend-
ence upon, each other. The finished product of the one was
the raw material of the other. One company was the chief
purchaser of the products of another, taking in cases a quar-
ter, a half, or even a greater proportion of the entire output of
the latter. One company was thus in a position powerfully to
control the operations of the others. In numberless ways this
dependence of one field upon another led to friction and diffi-
culties whose seriousness was proportionate to the size of the
companies concerned.

INTEGRATION OF INDUSTRY 67

This condition of affairs could not last long, and signs soon
began to be manifest that great plans were on foot for its cor-
rection. To do this, there were but two lines of action open.
One was that each of the companies should seek to gain its
independence of the others by the enlargement of the scope
of its operations, so that it would itself mine or manufacture
the materials used in its operations. The other was that the
different companies could make some arrangement among
themselves by which their interests would be harmonized.

Efforts were at first directed towards the first named
method. One after another the different companies began to
formulate plans for the erection of mills to manufacture prod-
ucts embraced within the field of operations of the other
companies. It needs but a casual study of the situation of
affairs to see where this policy, if adhered to, would have led.
It meant a gigantic struggle between the companies. The
company manufacturing sheet steel, for example, could not
see with indifference the companies which took almost its
entire product reach a position where they were no longer its
customers. If they succeeded in doing this, the former com-
pany had but one alternative, if it was to remain in the busi-
ness— that of itself building mills for the conversion of its
products into articles ready for final consumption. The an-
nouncement by one company that it intended building mills
for the production of articles which it had formerly purchased
from a second company was consequently immediately fol-
lowed by announcements of the second company that it would
retaliate by entering the field of the first, and erect mills for
the conversion of its products for which it could no longer
secure purchasers on an adequate scale. These were no idle
threats. It is well known that definite plans for such action
were, in many cases, formulated, and the preliminary opera-
tions for their execution begun. The tremendous danger to
all parties, if this movement had been allowed to continue,
was quickly seen. Efforts were, therefore, turned to the
second method of bringing about harmony — that of uniting the
interests of the companies in some way. The powerful firm
of J. P. Morgan & Co. was appealed to. The result was the

68 WILLIAM FRANKLIN WILLOUGHBY

formation of the United States Steel corporation, with its
billion, one hundred million, dollar capitalization.

With the formation of this corporation the evolution in
the organization of the iron and steel industry entered upon its
third, and as yet final, phase. It constitutes, if the expression
may be permitted, combination carried to its second power,
being, as it were, a combination of combinations. That in
character it is essentially different from previous combina-
tions, which had in view merely the concentration of indus-
tries for the purpose of controlling production and prices, is
manifest in the view of the conditions leading to its founda-
tion. The motives that were at work were purely those for
bringing about an integration of related interests. It must be
remembered that the companies which were united were not
essentially competing concerns, as regards the disposition of
their products. Had the motive been primarily one to lessen
competition, the union would have taken place along different
lines. The insistence that Mr. Schwab lays upon this point,
in his testimony before the industrial commission, must be
taken as a sincere expression of opinion, and not one dictated
by business policy.

Mr. Schwab, moreover, has brought out this point with
great clearness. "The iron industry," he says, "was kept
back in this country for many years, because there was no
connection between the various industries on which it de-
pended. The ore deposits were owned by one set of men.
The coal deposits were owned by another set. The coke was
made in a hundred different places, scattered throughout
several states, under different management. The mills and
furnaces, in turn, were owned separately; and, when these
mills and furnaces, having bought their iron here and their
coke there and their other products elsewhere, finally produced
their iron and steel, there were still other processes that the
product had to go through before it could be finally landed in
the market. Everything was disconnected and disjointed.
It was not until the whole process was welded into a continu-
ous chain under one management that the American iron
industry began to make its giant strides which have now car-
ried it into a position where it dominates the whole world."

INTEGRATION OF INDUSTRY 69

If there was any doubt in this matter, one has but to fol-
low the subsequent policy of this corporation to have a verifi-
cation of the position that has been taken. The new corpora-
tion has spared no expense or effort to acquire certain proper-
ties, such, for example, as ore deposits and facilities for lake
transportation, which were essential for the complete rounding
out of the scheme of controlling all of the factors entering into
the production of finished articles from the raw materials. It
is strictly in line with the same policy that the American
Bridge company and the Shelby Tube works were acquired,
as through them the products of its other departments can
be directly marketed as finished products.

On the other hand, the corporation has looked with perfect
equanimity upon the building up of other strong properties in
fields in which it already had a sufficient number of mills, such
as is seen in the combination of steel properties under the con-
trol of the Pennsylvania railroad, the Colorado Iron and Fuel
company, the Republic Iron and Steel company, and scores
of others that might be mentioned. Were the crushing out of
competition in view, these would be the properties that would
have been sought.

In our account of the formation of this corporation we
have spoken as if it were a union of concerns, each having its
special field of operations. To this, however, there was one
important exception. The Carnegie company occupied a
unique position in the iron and steel trade in the United
States. It was, in the first place, much the most important
concern in the trade. Roughly speaking, it made from 25 to
30 per cent of the finished iron and steel product in the country.
It mined all the ore that it used, or over four million tons
annually, and owned a large percentage of what is known
as the old range ores. It did not sell any ore to outside parties,
believing it to be the better policy to preserve it for its own
use. It transported a large percentage of it in its own boats
over the lakes, and carried a large percentage of it on its own
railroad to its Pittsburg works, where it manufactured a
greater variety of steel articles than almost any other manu-
facturing concern. It made almost everything pertaining to
the iron and steel trade. In structural materials of all descrip-

70 WILLIAM FRANKLIN WILLOUGHBY

tions it made 50 per cent, in rails 30 per cent, and in armor
50 per cent of the production of the country.

It was in the theory or principle of its organization, how-
ever, that the Carnegie company was unique. With an in-
sight into the requirements of a scientific organization of the
iron and steel industry that amounted to genius, Mr. Carnegie
had twenty-five years before his competitors begun the organ-
ization of his undertaking upon the principle of the accurate
integration of all the branches of the industry under a unified
control. He was thus working out in theory and practice a
plan of organization which the great steel corporation was to
adopt in toto. Mr. Schwab, the president of the company,
gave an exceedingly interesting account, in his testimony
before the industrial commission, of the development of the
Carnegie company and its policy. He said in part :

"The original Carnegie Steel company was a partnership.
When it went into the mining of ores, it formed a separate
organization for that purpose, and so with almost every other
branch of its business. Its shipping industry on the lakes
(the Bessemer Steamship company) was a separate organiza-
tion ; the railroad (the Bessemer & Lake Erie railroad, running
from Conneaut harbor to the works in Pittsburg, about one
hundred and fifty six miles) was a separate organization; its
coke interest, limestone interest, all those various companies
numbering some twenty six or twenty seven, were all separate
organizations. But the controlling interest of each was held
by the Carnegie people. In fact, Mr. Carnegie himself retained
a controlling interest in all, owning something over 50 per cent
in each of the companies.

It was then found that this partnership had grown so
large and the business was of such a varied character, there
were so many companies to control and so many partnerships
holding varied interests, that for the sake of harmony among
our partners it was decided to put all in the control of one
corporation, to be known as the Carnegie company. One of
the chief reasons for that was Mr. Carnegie's idea that a partner
in the coke interest, for example, should not have a greater
interest in coke than he had in steel, as it might affect the
contracts between the two companies ; or that a partner should

INTEGRATION OF INDUSTRY 71

not have a greater interest in shipping than in the steel com-
pany. So he put these interests all into one company, so that
each partner's interest was as a whole."

Something of a diversion has been made in order to give
this account of the Carnegie company, because it constitutes
such an important step in the evolution of the iron and steel
industry in this country, because it affords an unusually defi-
nite presentation of the reasons dictating the consolidation of
allied interests into a single corporation, and because it un-
doubtedly pointed the way and furnished the model for its
great successor, the United States Steel corporation.

Returning now to a consideration of this latter combina-
tion, it is, of course, too early to attempt a forecast of what its
ultimate influence will be upon the industn^ and upon the
public welfare. If our position in the matter, however, is
correct, there seems to be no reason to apprehend anything
like an effective monopoly of the trade being organized by the
corporation. Practically, all of the testimony before the in-
dustrial commission, including that given by independent
operators, was against any such idea. There are now, as we
have seen, a large number of plants outside of the corporation ;
and the building of new mills seems, if anything, to have been
stimulated by the events of recent years. It is, of course,
quite possible, if other iron and steel companies pursue the
same policy of building up self-contained organizations, as
indeed a number of them are already doing, that the time will
come when the competition between them and the steel cor-
poration will be a serious matter. When that time arrives,
the old tendency of combination to restrict competition will
again become dominant.

The formation of the United States Steel corporation is by
no means an isolated example of integration on an extensive
scale in this country. In the transportation industry can be
found evidences of the working of the force of integration in a
great variety of ways. Several of them have been mentioned
in the preceding paragraph. Of others, the most important
is that whereby a close community of interests is being estab-
lished between railroad and ocean transportation. The pur-
chase of the Leyland line by J. P. Morgan & Co. was for the

72 WILLIAM FRANKLIN WILLOUGHBY

purpose of permitting a closer relationship between the busi-
ness of the railways bringing freight to the seaboard and its
subsequent carriage to foreign parts. Another example in
which this purpose of bringing together related interests
rather than concentration in a distinct field is peculiarly
manifested may be found in the control recently obtained by
the Standard Oil company of the American Linseed Oil com-
pany. The Standard was already in control, through its
directors, of the National Lead company. There were thus
brought under the same general management, or at least under
sufficient control to insure that they would work in harmony
with each other, the concern having the larger proportion
of the output of linseed oil in the United States, and the com-
pany controlling the greater part of the production of white
lead, or the product in which linseed oil finds its chief employ-
ment. There are also strong indications that the Union Lead
and Oil company and other concerns will also be taken in,
and all run in relation to each other.

Still another example of the bringing together under one
management of all the different branches of a trade, which
has taken place during the past year, is the merging of the
American Tobacco company, which had the largest production
of cigarettes in the country, the Continental Tobacco company,
the leading manufacturers of chewing and smoking tobacco,
the American Snuff company, the most important of the snuff
concerns, the American Cigar company, the International
Cigar Machine company, and the Havana American company
in a single corporation, the Consolidated Tobacco company.
The magnitude of this combination may be seen from the fact
that the capitalization of the companies taken was over two
hundred million dollars. It will scarcely be necessary to
multiply examples further. If a careful analysis of all the
recent important considerations be made, it will be seen that
in almost all cases the essential purpose in view has been the
merging of related interests rather than the taking over of
distinctly competitive concerns.

Of integration in the distributive branch of industry, the
chief example is, of course, that of the familiar department
store. Here, however, the real forces of integration are not

INTEGRATION OF INDUSTRY 73

present to the same extent that they are in the other examples
that we have mentioned. The gathering together in the same
establishment of the numerous branches representing as many
branches of trade is not the result of any integral relation of
independence between the different departments. Their union
is rather to obtain the advantages resulting from centralization
of management, and of ministering to the convenience of
customers by making it possible for them to find many of the
articles they desire under one roof. The scale on which these
stores are conducted, however, makes it possible for them to
establish closer and more immediate relations with producers,
and thus bring about a real integration. Many of the stores
maintain not only extensive repair and custom making depart-
ments, but to a considerable extent engage in the direct manu-
facture of articles handled by them. Where this is not done, the
stores often enter into such close relations with manufacturers
that the arrangement is almost one of partnership. The jobber
and other middlemen are eliminated to a considerable extent.

Another example of the integration of industry, though it
has not yet reached a position of great importance, is that of
the union of the work of production and distribution in the
same hands, as is seen in the practice, now quite common, of
manufacturers of shoes, such as the Douglas, the Regal, the
Crawford, and other companies, to open retail stores of their own
in the chief cities of the country for the disposal of their prod-
ucts. In Great Britain the Mansfield Shoe company has carried
this system to a high development. Not only has the company
one or more stores in each of the chief cities of Great Britain,
but its stores are found in many of the cities of the continent.

This tendency which we are considering can also be seen
in fields in which its occurrence would not at first be antici-
pated. The rise within recent years of the great trust and
security companies is an example of pure integration. Here
we have one big corporation performing a great variety of
functions, which were formerly distributed among as many in-
stitutions. It is not unusual for the same company thus to act
as a bank, as the administrator of estates, as real estate agent,
as guardian of valuables, as bonding agency, as conveyancer
of properties. Either itself, or through companies acting in

74 WILLIAM FRANKLIN WILLOUGHBY

close relations with it, it also examines titles, places insurance,
and performs other duties of fiduciary or legal character.

Turning now to a consideration of what will probably be
the effects, good and bad, of this movement, we shall have to
limit ourselves to a very general examination. The movement
is as yet too young to permit of any accurate forecasting of the
ultimate results as regards the details of our industrial system.
It is scarcely necessary, however, to comment upon its pos-
sible overwhelming significance. There are definite limits
to the progress of concentration, and these seem to have been
reached in a number of cases. There are practically none to
that of integration. It has already given us a billion dollar
corporation, although its influence as a definite force has only
recently begun to be distinctly felt.

In the future progress of this movement there is one
industry in which it would seem that the conditions are pecu-
liarly favorable for its operation. This is the great industry
of railway transportation. The peculiarity of this industry is
that it is at once dependent upon all the other industries for
its successful exploitation, and all the other industries are in a
like manner dependent upon it. We have given above one or
two instances where this interdependence has led to integra-
tion. These cases, however, are insignificant in comparison
with what might take place. The railroads, to an extent
equalled by almost no other undertaking, are enormous pur-
chasers of certain articles, such as rails, cars, structural ma-
terial, and other supplies. These articles, moreover, are ones
for which a steady and certain demand exists year after year.
The time may very easily come when the roads will abandon
the policy of depending upon outside concerns for the supply
of the materials and equipment of which they have need, and
undertake, as is now done in isolated cases, their direct manu-
facture. With their lines reaching all the mines or other
sources of supplies of which they have need, and with the
possession of certain markets for what is produced in their
own needs or the ability effectually to distribute any surplus,
the roads are in a peculiarly favorable situation for the manu-
facture of a large number of products. If their charters will
not permit this to be done directly, the same result can be

INTEGRATION OF INDUSTRY 75

accomplished through closely affiliated companies, as is now
done by the Pennsylvania company through the Conemaugh
Steel company.

The question may legitimately be asked why, in view of
these circumstances, if integration is such a strong force, the
roads have not already entered these fields; why, as regards
their most immediate needs, such as cars, direct manufacture
has not been more resorted to. The explanation lies in the
fact that the evolution of the railway systems in this country
has not yet advanced far enough to make this desirable. Dur-
ing the past as well as at the present time the great problem
confronting the railroads is the building up of systems through
which effective control can be obtained of particular territories
or lines of traffic. So overwhelming in importance is this con-
sideration that all other considerations have for the time to
be left in abeyance. In the contest for supremacy the great-
est arm is the possession of capital with which other railroad
property needed for the rounding out of the systems can be
acquired. It is thus the height of folly for any considerable
sum of capital to be devoted to other purposes, unless an abso-
lute necessity for such expenditure exists.

The time is now rapidly approaching, however, when
these systems will be comparatively perfected, and the greater
part of the country be divided up among a few great systems
of railroads. When this is accomplished, a radical change may
be looked for in the policy governing railroad administration.
Energies will then be turned exclusively to the efficient equip-
ment and operation of the properties. The different lines of
the systems must be reconstructed, so that they may be welded
into one harmonious whole. The matter of securing supplies
and equipments at the best possible rate will receive the most
careful attention, and the time will then have been reached
when the desirability of the roads themselves manufacturing
the articles of which they have need will be considered purely
as a problem in the cost of production and control over a nec-
essary element in the operation of their properties.

To what extent the railroads will ever become manufac-
turers on a large scale it is now impossible to predict. That
they will do much more than they are now doing would, how-

76 WILLIAM FRANKLIN WILLOUGHBY

ever, seem extremely probable. Should, moreover, the time
ever come when there will be an integration of industries, as
well as an integration of related branches of an industry, the
railroads of the country would furnish the connecting links
binding the different departments together.

It would be a hardy prophet who would seek to follow out
all the consequences of the continued operation of this ten-
dency. Especially would it be futile to attempt to weigh the
social effects that would result from the concentration of such
enormous power in the hands of a few individuals. Of one
result, however, we may speak with comparative certainty.
Each step in the direction of integration implies a lessening
of possible friction and a substitution of a direct for a more
indirect method, and both of these mean greater economy and
increased efficiency of production. With this will also come
an enormous strengthening of control over the factors of in-
dustrial operations. That the greater control resulting from
the concentration of industry would have as one of its most
important consequences the steadying of production and the
resulting lessening of industrial depressions, so it is believed
that the far greater control that will follow from integration
cannot but work in the same direction. Here, however, we
are treading upon more uncertain ground. The causes of in-
dustrial depressions are too complicated and too little un-
derstood to permit of confident statement.

In conclusion, it is of not a little interest to note how per-
fectly this tendency towards integration fits in with the theory
of evolution as applied to industrial progress. Evolution as a
method of progress, stated in the simplest terms, may be said
to be the differentiation of functions and the concomitant
integration of parts. With the rise of the modern industrial
system began that differentiation of function which is known
as division of labor. Particular duties or operations were
assigned to particular units. In the beginning this was the
most important feature of the changes that were taking place.
With this diffusion of duties largely accomplished, there now
rises, as the factor of prime importance, the second element
of evolution, that of integration, by which the various inter-
dependent parts are being knitted together into a more har-
monious whole.

THE GREAT CONSOLIDATIONS CALLED
"TRUSTS."

BY PETER S. GROSSCUP.

[Peter S. Grosscup, judge United States Circuit court of appeals; born Ashland, O.,
Feb. 15, 1852; graduated Wittenberg college, 1872, and Boston Law school, 1874;
city solicitor Ashland, O., 1876-82; practiced law in Chicago, 1882, until appointed
United States judge for the Northern district of Illinois, in 1892; appointed to the
Circuit court of appeals, 1899; president of the John Crerar library of Chicago.]

It is the fashion, nowadays, to point to our place as a
people, industrially and politically, among the nations of the
earth; to take a just pride in the leadership acquired; and to
exploit the belief that it is not only secure now, but will remain
secure for a long time to come. We are told that our manu-
factures go to every land; that our harvesters are to be seen
in the grain fields of Asia Minor; our locomotives drawing
trains in Russia; our machinery bringing out gold from the
mines of South Africa; our bridges spanning the rivers at
Khartoum; and the sultan of Turkey preparing to defend his
sovereignty by battleships built in American shipyards. All
this, it is said, is still on the rising tide, so that when the flood
is reached, the United States will have become the richest and
most powerful people on the face of the earth. Her political
power and influence, we are told, have kept equal pace. She
is present, physically and politically, not only throughout
North America, but at the outposts of the western hemisphere
in the Caribbean sea and at the outposts of the far east in the
islands of the Pacific. Her views are consulted by the cabinets
of Europe and her armies aid in keeping the peace of the
world.

Gratifying as this outward spectacle is, it should by that
very token lead us to inquire, how goes the life within? Dur-
ing these same years, one third or more of the industries of the
United States have passed from the ownership of individuals
or local corporations into the great bodies of property known
as the trusts. Should the process go on until all our industries

77

78 PETER S. GROSSCUP

are thus consolidated, as many well informed men now think
probable, the so-called trusts will have absorbed nearly one
sixth of all the wealth, of all kinds, in the United States.
Nothing in history, outside the rise of the feudal system, has
left so striking a change in what may be called the personnel
of ownership. As a mere right to hold and control, ownership
remains, of course, unchanged, but if the process of the last
few years goes on unchanged the universality of ownership
that characterized our past — an ownership of our industries
widely spread among the people — will be all but lost.

Accurate statistics show that the former owners of the
industries now consolidated have put their mone}r, or the bulk
of it, in the banks ; the workman declines to invest his surplus
wages; and with them, also standing aloof, is the ordinary
man, possessing ordinary means. It is certain that, as never
before in our history, there are several millions of men and
women brought up in the industrial trades who are now with-
out proprietary interest in the trades they follow. No less
a man than Webster said that the freest of governments will
not long be acceptable if the tendency of the laws be to create
a rapid accumulation of property in a few hands, rendering
the majority of the population dependent. If this be truth,
it has come about that the same years that brought us riches
and greatness as a nation have brought with them an internal
disorder, which, if allowed to go on, will endanger the stability
of the government itself.

The men and women who, two generations ago, came
over the Alleghanies into the Ohio and Mississippi valleys;
the children of these, who, abiding with their fathers until
wild nature had been tamed, faced wild nature again on the
trans-Missouri plains; our earliest forefathers, who threw
themselves on the ocean to be cast up in the wilderness; the
men and women, who every year have braved something, to
gain something they might call their own; these, and these
alone, are the true types on which our institutions thus far
have found secure foundation. It was not civil and religious
liberty alone these fathers sought. The spirit of adventure
does not, alone, account for the courage of their children.
They sought, one and all, opportunity as well; the indcpend-

THE CONSOLIDATIONS CALLED "TRUSTS' 79

ence of individual ownership; the fulfilment of an instinct,
born with the beginnings of property itself, and without which
property would not have been. This instinct it is that has
kindled, at all times, the genius of the inventor; that makes
strong the arm of the laborer ; that brings companionship into
the field with the farmer; that sets before us a prize, nerving
our resolution to its attainment; and that, turning us aside
from frivolous lives, makes us useful helpers in the progress
of mankind. Along with love of liberty, and reverence for
the rights of man, this innate desire to acquire and possess
constitutes a cornerstone in the fabric of our civil government
— is, indeed, the spirit and soul of our civil institutions. And
what shall it profit our country if it gain the whole world and
lose its soul?

I do not expect the soul to be lost; I do not expect the
tendency toward consolidation — a natural economic law — to
cease; but I do expect that the present consolidations, and
those that come after them, will either cease to exist or will
be put on such firm ground, in matters of obedience to law,
fairness in organization, honesty of management and per-
manence of reasonable success, that the average man and
woman, who by birth or inclination seeks a place in industrial
life, may safely become part owners in their securities, and
in that way co-sharers in the advancing prosperity of the land.
This, in my judgment, states the core of this whole vexed
subject of the so-called industrial trusts.

But before proceeding to state the salient facts and
reasons upon which my judgment is based, I wish, if possible,
to arrive at a common understanding of what we mean by the
word " trusts" and what are more or less fanciful objections
to their existence. I exclude from the purpose of this discus-
sion the railroads of the country. They may or may not be
trusts ; it is enough that they are commonly in mind when we
think of the so-called industrial trust. Besides, the considera-
tions that should control our judgment in their case are so
different, in many respects, from those relating to the -indus-
trial trusts, that an attempt to discuss both, indiscriminately,
would bring confusion. I exclude also the large private enter-
prises such as department stores. The attitude of the general

80 PETER S. GROSSCUP

public toward these, though interesting, is fundamentally
different from its attitude toward the so-called trusts. Large
private enterprise is the legitimate fruit of the freedom of the
individual — a freedom as ancient as society — a freedom that
the public, even when most over heated, has never yet seriously
challenged. The so-called trusts are, on the other hand, the
offspring of our own times, created under corporation statutes
framed by our own legislatures, and dependent for their ex-
istence upon the continued existence of the corporate power
thus given. Nor do I seek, on this occasion, a definition ap-
plicable to trusts that would be accepted in a court of law ; nor
one that would meet the mind of industrial experts. My sole
purpose is to meet and discuss the subject, not as it lies in the
mind of the specially informed, but as it lies in the mind of the
public at large.

When I was a boy in Ohio, we baked our bread on our
own hearth or got it from the town baker ; the flour came from
the town mill ; our shoes were made by our neighbor, the shoe-
maker; from a loom turned by the town creek came the cloth
that covered our backs; a nail mill in an adjoining town sup-
plied us with nails and other metal implements. We were with-
out radiators; but our stoves were made in the next county;
our houses were built by the town carpenter, of lumber sawed
in the town mill; on every hand was the hammering, the hum,
and the bustle of the individual artisan. The community
might have existed as an inaccessible island; it was so well
equipped to take care of itself. Of course, beyond the circle
where the earth and sky met, was the great world; but it was
an almost unknown world.

The years crept away, and with them went the shops
with the familiar signs. The shoemaker took down his wooden
boot; our shoes came from Massachusetts. The nail mill
turned a ruin; nails were now made in some far away shop in
Pennsylvania. Our wheat flour came from Minnesota; stoves
gave place to radiators bearing foreign names; the saddler dis-
appeared; the bricklayer disappeared; the man who supplied
our wants was no longer the man we bowed to as our neighbor.
The horizon had lifted, and out into the mist slipped our old
world, and in came the great world. All this was a step in the

THE CONSOLIDATIONS CALLED "TRUSTS" 81

march of industrial development. Its results seem to }^ou not
abnormal, for you were born into the world as things now are.
But in its elimination of the individual from the mechanical
trades ; in its change of the whole face of town and country life,
in its so-called factory questions, it kindled anxieties that un-
settled the confidence of your fathers, as much as our later
anxieties have unsettled yours.

The change of which I have just spoken did not bring in
the trusts, but it was the beginning of the so-called trust. It
created the conditions and furnished the constituents on which
the trust was subsequently builded. The process we called
consolidation is a continuation only of the processes that set
in when our neighbor the shoemaker took down his sign and
closed up his shop.

One day there entered the industrial world a new kind
of craftsman. Looking about, he saw that the needs of man-
kind were supplied from mills and factories, great and small,
scattered over the land. He measured the wastes of their
rivalry and the economies possible under single management.
He then did a thing, simple enough in conception, though dif-
ficult to execute — he proceeded, without changing them in
any other respect, to join these mills and factories, or the
greater of them, into single ownerships. Not a factory was
removed or demolished, not a fire put out nor a sign changed.
But the new joinery, though invisible to the eye, was as effect-
ive for the purpose in mind as if all the scattered mills had
been torn down and then rebuilt on a single site under a single
sign. The conception thus set on foot presented itself to the
financial world in the form of stocks, preferred and common;
the former theoretically covering the present value of the
property, the latter the expected increase of value to be
brought about by the craftsman's joinery. The old owners
stepped out, except as they retained some portion of the stock
of the consolidated companies. The new ownership was
financed by syndicates and banks. And thus set in the
development that is rapidly taking away from the people at
large the ownership of the properties we call the industries

of the country.

vol. s-a

82 PETER S. GROSSCUP

Other craftsmen came. Other workshops, great and
small, without an outward sign of change, surrendered their
individuality for a place in one of the great industrial families.
The secret was out, the fashion set, the noise of the new car-
pentery was heard in the land, and the day of the so-called
trusts had opened. This was nothing less than industrial
revolution, not only in semblance, but in deeper significance.
Revolution always excites concern. Where — the inquiry
pressed home — where will this all end? Have we come to this,
that the few will be masters and the many servants? Where
will I be left? Am I to be oppressed — to find still harder con-
ditions added to those already borne as the price of liveli-
hood? Where will it leave the artisan, the merchant, the
small manufacturer, my neighbors generally? Is industrial
liberty for them gone? Are they henceforth — they and their
children — sentenced to hard service with no hope of eventual
emancipation?

The answer to these questions was the act of congress of
July 2, 1890, commonly known as the Sherman anti-trust law.
As interpreted by the supreme court, that act embodied a
public purpose, unwisely formed, I think, to deal with the so-
called trusts on no basis other than that of extermination —
to cut them out root and branch — to sweep the lands with a
decree like Herod's, that no child of consolidation should be
found to have escaped. We are now well into the fifteenth
year since the passage of the Sherman act. In its means of
enforcement, as well as in its purpose, the act was as compre-
hensive as language could make it. It withheld no power,
civil or criminal, that the lawmakers thought would contribute
to the complete eradication of the supposed evil. It had been
preceded, in Texas, Kansas, Michigan and Maine, by state
laws directed to the same end, and was quickly followed by
like laws in one half the other states, including New York,
Ohio, Indiana, Illinois, Wisconsin, Iowa and the west gen-
erally. Thus, so far as enactments make law, the law, both
national and state, has for a period three times longer than it
took to put down the rebellion, been in battle line against the
so-called trusts.

THE CONSOLIDATIONS CALLED "TRUSTS" 83

Have these organizations been extinguished? Has the
trust idea abated? Let me answer by calling but a partial
roll of those organized since the Sherman law went into effect.
There is the American Window Glass company, created in
1895, five years after the Sherman act. There, too, is the
Continental Tobacco company, 1898 ; the Tin Plate company,
1898; the Amalgamated Copper company, 1899; the American
Radiator, 1899; the National Salt, 1899; the International
Plate Glass, 1900; the International Salt, 1901; the Consoli-
dated Tobacco, 1901; the United States Steel, 1901; the Corn
Products, 1901, and many others that come readily to mind.
An inspection made for me of a list of 112 of the leading so-
called trusts in the United States shows that all but thirteen
have been created since the passage of the Sherman act.
May we not, confronted b}r such a spectacle, pause to inquire
if this method of dealing with the so-called trusts — this policy
of extermination or nothing — is, after all, on solid ground?
Can a development so persistent be entirely unnatural? Can
we by law of congress successfully repeal what appears to be
a fixed law of industrial economy? Is this instinct of the
time, properly safeguarded, really in conflict with the public
welfare?

It is urged sometimes that the consolidation idea, when
fully attained, will make harder the conditions of ordinary
life. Is that true? If true, the indictment should stand. But
I can only judge the future by the past; and, seeking some
specific analogy, I know nothing in the past so nearly anal-
ogous as the beginnings and growth of the railroad sj^stems of
the country. Railroads began as small local enterprises. In
the start they were the steam highways between neighboring
towns and cities, resembling in that respect the present in-
terurban trolley systems. For example, what constitutes
now the trunk line of the New York Central, from New York
to Buffalo, was, originally, seven or eight independent lines;
one between New York and Albany; another from Albany to
Schenectady; another from Schenectady to Utica; another
from Utica to Syracuse; another from Syracuse to Canan-
daigua; another from Canandaigua to Rochester; and still an-
other from Rochester to Buffalo. The time was when their

84 PETER S. GROSSCUP

consolidation was thought both impracticable and unwise.
Laws were passed to forbid it. Public opinion was against
it. But one day, under a hailstorm of public anathema, a
hand reached out and, gathering up the local roads, joined
them in a single road reaching from the sea to the lakes. Then
the idea took root elsewhere. One by one the roads were con-
solidated, the shortest lines becoming the trunks and the ad-
jacent lines the branches; until, as they exist now, a single
railroad carries us from Chicago to New York, another from
Chicago to New Orleans, others from Chicago to every point
on the Pacific Coast; and at rates, both for passengers and
freight, less than are charged by any railroads in the world.
Who of this generation would now go back to the railroads of
our fathers? Who, except the irresponsible agitator, stops to
question even the private fortunes picked up in the process
of consolidation? Who, indeed, looks upon the railroad sys-
tem, thus consolidated, as other than the normal state of such
affairs — the necessary and beneficial outcome of railroad
evolution?

This is a specific instance, but, wherever we turn, in the
survey of development under economic law, it will be found
that mankind has always been helped. There are men now
living who were alive when the Duke of Wellington was the
first citizen of the world. They have lived through the in-
dividual changes, many of them bitterly opposed, out of
which have come the present day conveniences of life-— con-
veniences that in the matter of substantial comfort give to
the well paid American workman more than the Duke him-
self possessed. The Duke had finer mahogany and better
plate; but the breakfast table of the American has fruits and
cereals, meats and coffees, that all the ships of England could
not have gathered for her great soldier. The Duke had robes
and sashes such as the American perhaps has never seen, but
in the quality that gives comfort the Sunday suit of the Amer-
ican surpasses any clothes the Duke put on. The Duke had
all England to choose from in the selection of his dwelling.
He built it in a public park— a park free alike to the eyes and
feet of the commonest Englishman— a park not surpassing
in beauty those of a hundred cities in America; not the equal

THE CONSOLIDATIONS CALLED "TRUSTS" 85

of the natural landscapes that by rail or street cars are open
every hour of every day to him who has eyes to see and a
heart to enjoy. We are all heirs, in almost equal portions
too, not only to what God has given, but to what the genius
of mankind can add.

It is sometimes urged that the growth of the so-called
trusts shows a tendency to lessen wages. On the contrary a
paper prepared by Professor Jenks, and issued by the depart-
ment of labor in July, 1900, shows that wages in general had
in 1900 reached and in some cases passed the former high level
of 1892, and that the wages paid by the so-called trusts were
not exceeded by those paid by the large private manufactur-
ing corporations. I think it can be fairly added, from a study
of the tables furnished, that the wages paid by the so-called
trusts are, in fact, larger than those paid by private enter-
prises. Since 1900, wages have been still further advanced,
while the hours of toil have been lessened.

Perhaps the chief objection urged is, that the consolida-
tion idea increases the cost of living. The cost of living has
unquestionably increased; and it is but natural to put the
blame on the most likely culprit in sight. But let us look
again at the facts. I go to the bulletin of the department of
labor for March, 1902, to find a comparison of prices between
1901 and the average preceding ten years. In clothes there
was an average increase of but two tenths of 1 per cent, in
foods of 5 per cent; in metals and ordinary implements 10
per cent; in house furnishing goods 10 per cent; and in the
other ordinary commodities about the same proportion. But
let the increases be what they may, the question is not, have
prices advanced; but, have they advanced to figures that in-
dividual manufacturers would not, under the law of supply
and demand, have exacted? My own belief is, that under the
increased consumption always attendant upon the coming on
of good times, prices would have gone up fully as much, and
perhaps more, under the old system of individual manu-
facturers. Indeed, in one of the largest of our industries, as
well informed men know, prices have been kept down, by a
so-called trust, as a matter of business policy. The motive,
of course, was to discourage the coming in of competitors, as

86 PETER S. GROSSCUP

well as to equalize consumption, but the effect is, none the
less, smaller prices to the public than individual manufac-
turers would have exacted. But, take the argument at its
worst, and assume that certain trusts have put up prices.
What then? Should all the so-called trusts be exterminated
because here and there one has offended? Should the wheat
be destroyed with the tare? Why not— here as elsewhere—
apply to the offender, and to him alone, the correctives of the
law? I see no obstacle, myself, in the way of effective legisla-
tion, or of effective execution of the common law, that will
adequately protect the public against prices that are artificial
—prices made possible, either by a cornering of the supply,
or by conspiracies in restraint of competition.

We often hear, as an objection, that the capital of the so-
called trusts is large; that such concentration of capital, in
one control, unsettles our conception of what a single in-
dividual may own; that, as in the case of one of the so-called
trusts, its fiscal transactions measure, in volume and impor-
tance, with the fiscal transactions of the government itself.
To my mind, this is largely an inherited bugbear, brought over
from the days of smaller things. We live in an age of large
things. If we wish to go back to the day of small things, we
must be prepared to put up with the inconveniences and
limitations of those days. In the nature of things, great en-
terprises must be under a few controlling minds; and, I may
ask, who so worthy of power — here or elsewhere — as the man
who, by sheer buoyancy of talent, has come to the top? By
what safer guide could the controlling hand of a great indus-
try be selected? Whom, for instance, could the 27,000 men
employed in the establishment of the late Philip Armour have
found so well equipped by experience and genius to direct
their establishment? What would have been the outcome,
had the owner of that establishment turned it over to his em-
ployees, to be their own in equal parts, and managed there-
after as an industrial democracy? Set apart to some work for
mankind, we all are; and though some rise to an ownership
and responsibilities that appear vast, they are in the last
analysis trusteeships only— trusts that can not be resigned
unless the power that goes with them is also relinquished. But

THE CONSOLIDATIONS CALLED "TRUSTS" 87

though the objections reviewed be untenable, it does not fol-
low that the so-called trusts, as they now exist, are without
menace to our welfare. Indeed, the real danger, as I have
already indicated, lies deeper than any consideration of prices
charged, or distrust aroused. It goes to the foundations of
our society as a republican people. Unless, by timely and
courageous measures we undo the danger, the danger will, in
my judgment, go far toward undoing us, and our present in-
stitutions.

When the baker sold out his business to the Biscuit com-
pany, he invested little, if any, of the purchase money in the
Biscuit company's securities. He did not purchase another
bakery. Having deposited the larger portion of his capital
in some bank where it drew a small but steady interest, he
remained, in most instances, an employee of the purchaser.
So with the tanner, who sold to the Leather company; the
cigar maker, who sold to the Tobacco company; the sugar
manufacturer, who sold to the Sugar company; the whole
scattered legion of individuals, whose holdings have been
swallowed up by the great concerns. A table prepared by
the United States bureau of statistics shows the deposits in
the banks — national, state and savings banks — by the people
of the United States to be now in excess of $8,500,000,000.
This is the sum of money that the people of the United States,
including those who were the former individual owners of our
industries, deem it better to loan, than to invest. It is equal,
almost, to one dollar in nine of the whole remaining wealth of
the United States. It exceeds, by $1,000,000,000, according
to a recently prepared table, the combined par value of the
principal stocks listed on the New York stock exchange, in-
cluding railroads, street railways, express companies, gas and
electric light companies, telegraph and telephone companies
and the so-called trusts. It is nothing short of amazing that
a property loving people like ours could have so much money
left over, after having made all desired investments. But
the significance of the fact is not yet fully stated. Twenty
years ago the moneys thus deposited were a little in excess
of $2,000,000,000. By the growth of population and of
wealth, there would, of course, be a corresponding normal

88 PETER S. GROSSCUP

increase in the people's bank deposits; but neither wealth nor
population has grown at anything like the pace taken by the
deposits. In the ten years following 1880 — a period during
which wealth and population had increased possibly 25 per
cent — the deposits had doubled. In the ten years following,
they have doubled again ; three quarters of the accretion — or
more than $3/250,000,000— being added since 1897.

These figures show, of course, that as a people, we have
been prosperous — that the farmer, the merchant, the work-
man, have as never before, had out of their earnings a liveli-
hood and a large sum over. But this does not explain it all,
or nearly all. The men of this day are not less keen than those
of yesterday to make good bargains, to increase their posses-
sions, to share in the advancing prosperity of the land. They
know, too, as well as did their fathers, that it is not from idle
capital, but from invested capital, that any increases must be
looked for. They stand aloof, it is plain to me, not from lack
of wish, but from lack of desirable opportunity. It means,
if it go on, that the people at large will cease to be proprietors
in the industries of the land, and in thus ceasing, exchange the
active interest of proprietorship for the idle curiosity of the
bystander.

A widespread withdrawal by the people at large from
general ownership in the properties of the country, cannot but
be fraught with the gravest dangers. A few of these are so
obvious that I need only indicate them. Such withdrawal
will diminish, if not destroy, popular interest in national pros-
perity; for, from those only who have a stake in prosperity,
can we expect great interest. It will kill off competition; for
the competitor of the trusts must itself be a trust, and there
will be no independent field from which to recruit the means
to create such competitor. It will discourage still further
the wage earner in any hope of becoming part owner; and
thus deepen and widen the existing gulf between wealth and
labor. It will sap to its foundation the real strength of gov-
ernment; for government must be built on the interests, as
well as the affections, of the people governed. An industrial
system subject to such indictment is a rising menace to free
government itself.

THE CONSOLIDATIONS CALLED "TRUSTS" 89

The remedy, in general terms, it is not difficult to state.
The first thing to do is to abandon the present policy of out-
lawry and extermination. That policy has failed. It has
failed through conditions that cannot be removed by law.
Replace the old policy by a new, under which industrial cor-
porations subjected to restraint against artificial prices,
will be made, in organization and management, to invite, and
worthily invite, the confidence and copartnership of all the
people of the country. To suggest concrete legislation is
perhaps more difficult. It should include the repeal of the
Sherman act. Logically and impartially enforced, that act
forbids two grocers, on opposite corners of the street, from
forming a copartnership to save expenses; partially enforced,
it puts the industries of the land at the mercy, not of the law,
but of the officers of the law. The legislation that replaces
it should provide against artificial prices, brought about either
by a cornering of the supply, or by conspiracy; and also
against discrimination in prices as to either buyers or places,
except as affected by actual transportation rates. There
should be a provision for open books ; for stated examinations
by some department of the government and for periodical
statements to the public, as in the case of national banks
and many of the railroad companies.

The new legislation should forbid the issue of primary
stock in excess of the cash paid in, or the real value of property
contributed, to make up the company's assets. Some de-
partment of the government should be charged — as between
the company and the public — with the duty to see that this
limitation was enforced. Provision should, of course, be
made for further issues of stock as the value of the property
increases; but such issue as is based not on subsequently
acquired property, but upon increased value due to manage-
ment and operation, should be secondary, always, to the first,
and should be put out only after judgment, by the appropriate
department, that it was justified by the earnings and standing
of the company. To the extent that such subsequent issues
represent increased value, due to management and operation,
I would encourage, by every feasible method, its division in
fair proportions between those who have furnished the capital

go PETER S. GROSSCUP

and those who have done the work. I would embody the
basis of such division in the contract of incorporation, so that
it would operate as a contract right, and not as a mere bonus.
Experience has shown that there is no way to so satisfactorily
mitigate the struggle between capital and labor, and none so
just as a fair division of the harvest after both the reapers —
capital and labor — have each had their reasonable hire.

A programme such as this is not, in my judgment, either
radical or impracticable. It will be opposed, however, by
those who look upon corporations of any kind as a menace
to public liberty and by those who look upon restraint of
corporations of any kind as an invasion of industrial liberty.
It will be opposed by the men who are temperamentally appre-
hensive, by the men who believe the present good times to be
due to present conditions and deplore interference, and by
the men who still wait their opportunity to get rich out of
present methods of trust organization. It will be opposed
by those who have given to the subject no study, by those
who are incapable of giving it a candid study, and by those
who thrive in practicing frauds on public opinion. It will fail
until public opinion is reached and educated. But public
opinion will, in the end, be reached and educated. It will be
made to see that a country is not made great by becoming rich;
that a government is not secure whose sole policy is to realize
large dividends to capital and a large wage to laborers and to
keep the peace between them; that there must be found firmer
depths than these for the foundations of permanent security.
We will then begin, in reality, to rebuild the industrial edifice
— a new edifice made necessary by the change of time — but
on the old foundations. We will anchor it, where our fathers
anchored theirs, in a general proprietorship, so widely spread
among the people and thus securely buttressed against hate
and envy, that time and change will thereafter dash in vain
against the security of the state.

THE COMBINATION OF LABOR, INTELLIGENCE

AND MONEY.

BY CHARLES R. FLINT.

[Charles R. Flint, merchant; born Thomaston, Me., Jan. 24, 1850; graduated Poly-
technic institute of Brooklyn, 1868; became engaged in the South American trade,
and in 1878 organized the Export Lumber company, and in 18S1 the Crude Rubber
company; has represented the United States at various international conferences
dealing with trade and commerce; organized in 1892 the United States Rubber com-
pany which controls that industry, and in 1899 the United States Rubber company,
American Chicle company, American Caramel company, National Starth company,
and several other industrial combinations, and also several steamship lines; director
in several banks and a score of industrial companies. The following article appeared
originally in Cassier's Magazine and is published by special arrangement:]

A combination of labor is a trades union; a combination
of intelligence, a university; a combination of money, a bank;
an industrial combination is a combination of labor, intelli-
gence, and money. There seems to be much confusion in
the minds of the people as to the difference between a trust
and an industrial company, due to the fact that those who
talk most about them are not yet well informed, either as to
their organization or operation. A trust was a syndicate of
men who held stock certificates of several corporations and
issued trust certificates therefor. Now, industrial interests
are represented by shares of stock in regularly organized
companies. Although strenuous efforts were made to develop
the trust system, it was found to be imperfect. It was adopted
when industrial combinations were in their infancy. They
were not required to have any by-laws or keep any official
minutes of their proceedings, or to make any official reports.
The Supreme court of New York declared them illegal,
and that decision has been accepted as final throughout
the United States. But the word " trust" has since been
applied to great industrial corporations, and as the word
represents all that is best in human character, I see no reason
why the word " trust" should not be adopted as a short name
for industrial combinations; and may every officer and wage
earner in every "trust" realize that the shares of stock are

91

92 CHARLES R. FLINT

widely distributed among widows, orphans and others depend-
ent on its dividends for support, and live up to the true mean-
ing of the word.

In studying the evolution of industrial life, we find that
combination is coincident with civilization. Savages have
little power to combine, because combination depends on
trust in our fellowman, and in primitive life it is fear that
rules. One of the first steps in industrial evolution was to
subdivide production into trades. Each did what he could
do best, settling accounts by an exchange of products. Later,
those engaged in the same trade formed partnerships, then
corporations, and finally consolidations of corporations.
Against this march of industrial progress there has always
been opposition. There have always been those who, appeal-
ing to special interests, to the unsuccessful, the discontented,
and the misinformed, have endeavored to obtain political
favor by opposing progress, by endeavoring to prevent the
natural, and mutually beneficial, co-operation between capital
and labor. Centralized manufacture permits the highest
development of special machinery and processes. The factory
running full time, on large volume, reduces the percentage of
overhead charges. Direct sales on a large scale minimize the
cost of distribution. Centralization of manufacture and dis-
tribution reduce aggregate stocks, and therefore save shop
wear, storage, insurance, and interest. Consolidated man-
agement results in fixing the standards of quality, the best
standards being adopted; in avoiding waste and financial
embarrassment through overproduction; in less loss by bad
debts through comparisons of credit, and in securing the
advantages of comparative accounting and comparative
administration. Industrial evolution, which is as inevitable
and as unalterable as the law of gravitation, has attained its,
as yet, highest development in the United States. Every
unprejudiced man must recognize its advantages, and that it
is because of them that that country is taking so important
a position in the world's markets, increasing its national
wealth, furthering its welfare, and increasing the prosperity
of its people.

LABOR, INTELLIGENCE AND MONEY 93

The great problems of the economics of production have
been solved. What interests us most to-day is the question
whether the advantages of the prosperity secured are equitably
divided among the contributors to it: — (1) capital; (2) super-
intendence; and (3) labor.

1. The share to capital takes the form either of interest
or dividends. Now, we find that the rate of interest paid to
those furnishing money to industrial enterprises is decreasing.
Fifty years ago the average rate throughout the United States
was 8 per cent per annum. Now it is less than 5 per cent.
This general rule can be laid down, that the greater the con-
fidence, the higher and more perfect the industrial organiza-
tion, the lower the rate of interest. During the year 1896
the stability of American currency and the fundamental con-
ditions of American industrial development were regarded by
many with doubt; and money loaned as high as 20 per cent.
The investor is ever willing to take lower interest in exchange
for greater security and for a steadier and less precarious de-
mand for his funds, — and so that form of industrial organiza-
tion which furthers careful financing, opens wider markets,
and guarantees greater confidence and stabihty, is directly
in the interest of capital, although the rate of return on capital
is thereby steadily reduced. The dividends received by share-
holders are larger than the interest rates, because the risk is
greater, and, moreover, being partners and shareholders, they
are entitled to a larger share in the advantages of combina-
tion. Still, it is doubtful if the aggregate of dividends is
as large as the aggregate of interest. Moreover, dividends
are never absolutely certain, and they are never paid until
labor and superintendence have first had their share.

2. Now, what is the position of the man of superior
intelligence ; for superintendence stands midway between capi-
tal and labor? Highfy developed organizations, resulting in
enormous volume of business, have increased the necessity for
intelligence, and as the supply of brains is not equal to the
demand, the price of brains is high. The turning over of in-
dividual businesses to combinations has caused the retirement
of old men to the advisory board for judgment and has made
way for young men for action. You ask, "What chances

94 CHARLES R. FLINT

have our young men?" While you arc asking the question,
those of ability and energy have already started on a career
of successful industry. If the student will leave his books
and the orator the stump and go to our factories, to our great
farms, to our mines, to our lines of railway, they will find
ten times as many men receiving over $3,000 per annum as
there were thirty years ago. Mr. Schwab, of Pittsburg, is a
type. He started as a stake driver of an engineering corps;
though under forty years of age, he rose to be president
of the largest iron company in the world, and I can point
out a hundred successful men to-day where you could not have
named ten under old conditions. But it is said, they are
dependent. Dependence upon one another is, however, a
condition of civilization. The very word civilization implies
community life, and community life means mutual dependence.
Complete independence is found only in the wigwam of the
Indian. There the young man builds his own home, makes
his own clothes, gets his own meat, and keeps his bank account,
if he has any, in his pocket. The best opportunity he has
for distinction is in showing superior prowess in hunting, or
superior strength in paddling his own canoe. In civilized
life, interdependence is more profitable than independence.
But let us not spend more time in considering who will take
care of these young men of superior intelligence ; they will take
care of themselves.

3. Let us now consider the interests of the workingman
in this economic evolution which has produced the perfect
machinery and giant factories, supported by great aggregates
of capital represented by shares which enable all to become
investors. It is a fundamental fact that the man of superior
ability cannot accumulate for himself without giving to the
wage earners an opportunity to earn the larger share, and it is
always an increasing share. The tendency is to-day to a mini-
mum of profits and to a maximum of wages. When profits
become abnormal, they invite competition, and are immedi-
ately reduced; in that case, the consumer solely is benefited.
If they are not sufficiently abnormal to invite competition,
then labor demands a larger share of the profit in the form
of increased wages, and it is either voluntarily or necessarily

LABOR, INTELLIGENCE AND MONEY 95

agreed to, in which case the body of wage earners reaps the
advantage. And, inasmuch as the body of wage earners is
the great body of the community, it necessarily reaps the
advantage in any case. Employees know almost as promptly
as do the employers whether a mill is earning an extravagant
profit. If it be, they at once demand their share, and the
employer must, and inevitably does, succumb. It is thus that
wages always tend to a maximum, and profits to a minimum.

The maintenance of the high standard of wages now paid
in the United States is absolutely dependent upon our realiz-
ing the advantages which come through superior organization.
We are to-day shipping manufactured goods to countries
where the rates of wages average 40 per cent less than our
wage earners are receiving. Of our exports of manufactured
goods, 80 per cent are produced by large industrial corpora-
tions. Articles of manufacture which we do not produce
through consolidations are being almost entirely supplied to
the neutral markets by the cheap labor countries, — Germany,
Belgium, and Great Britain. The centralization of manu-
facture and consequent use of special machinery have eman-
cipated the slave, — have raised the American workman to
the position of overseer, not of pauper labor, but of its pro-
ductive equivalent, machinery. And he is receiving, and is
entitled to, the wages of superintendence.

Now, the intelligent labor leaders understand this per-
fectly. It was my pleasure to entertain at my home some
of the best known of these. Speaking of labor conditions, I
asked one of them to define the difference between his organi-
zation and that of the professional agitators. He replied:
"We hope to bring^ about by evolution what they claim
should be accomplished by revolution." They said that they
"welcomed new machinery, because it did the work which
had heretofore degraded labor."

The wage earners of the United States are to-day enjoy-
ing a higher standard of living and a larger measure of well
being than wage earners have ever enjoyed in the history of
the world. They are the real money power. The railroad
managers have rails and rolling stock; the miner has mines;
the manufacturer has bricks, mortar, and machinery, and

96 CHARLES R. FLINT

most of them have debts, and many are mortgaged to the
banks for savings; but the wage earners in the United States
have on deposit in cash in the savings banks, subject to call,
$3,060,178,611. Thus through co-operation and combination
every interest is being benefited, but labor most of all. As
wage earners become more intelligent, as they become over-
seers of machinery, they better understand these conditions.
They have the intelligence to recognize that their greatest
comfort and happiness is in furthering the industry of which
they are a part. To-day one of the great advantages that
the United States has over Europe is that its laborers are the
more intelligent, are the healthier and happier. The Euro-
pean wage earner, instead of welcoming labor saving mac ninety,
as workingmen in the United States have done, has tried per-
sistently to retard its general use, and the result has been that
wages have been lower in Europe. The American workman
has received more because he has produced more, and this
is the great reason why, notwithstanding our high wages, we
are so rapidly extending our trade with foreign markets. The
best factory inevitably gets the most work. There is a con-
tinued struggle for existence between good factories and poor
factories, and the good factory invariably wins.

The law of consolidation of capital and division of labor
holds as good in the field of distribution as in that of pro-
duction. It is inevitable, and it is profitable. The depart-
ment stores and the mail order stores sell for 10 per cent
instead of 30 per cent profit, and the consumer thus saves 20
per cent. The profit obtained by the distributer of staples,
on the way from the farmer to the consumer, is less than one
quarter what it was thirty years ago. The farmer secures a
wider market, the consumer gets his staples just so much
more cheaply, and the enterprising middleman avails himself
of improved banking and transportation facilities to do a
larger business. This is why he has adopted as his motto,
" Quick sales and small profits." The real benefits of "capi-
talistic production," as compared with production on a small
scale, are twofold. The first and greatest benefit of industrial
combinations goes to the whole body of the community as
consumers, through reduction in prices. The next benefit,

LABOR, INTELLIGENCE AND MONEY 97

and that next most largely distributed, goes to the workers
through increase of wages, and thus it happens that the work-
ingman gains simultaneously in two ways. He gets more
money for his work and more goods for his money.

Having reviewed the position of our great consolidated
corporations as the result of an economic evolution, some-
thing should be said with regard to their capitalization. In
general there has been much greater conservatism in the capi-
talization of industrials than there was in the original capi-
talization of railroads. Our railroads were built principally
for the amount of the bond issues, and the stock represented
the capitalized hopes of the projectors. The issues of indus-
trial bonds have been considerably below the actual value
of the tangible assets, and industrial stock issues have gen-
erally been based on actual earning capacity. Still it is un-
doubted that there has been more than one instance of marked
over-capitalization of industrials, and no proper legislative
measure to remedy this wrong or prevent its recurrence
should be neglected. Fortunately, the evil caused by careless
investing and unwise capitalization tends to correct itself by
natural laws. Investors, confused by the few inflated in-
dustrials which were put out simultaneously with the sound
ones, are afraid to buy, and the organizers, unable to sell
their securities, now realize that sound capitalization is the
best policy.

In organizing industrial companies, preferred stock, which
is intended for an investment security, should not be issued in
excess of tangible assets, except in special cases, where there
is a very large earning capacity, protected by very valuable
patents or trade marks. Verified earnings and regular divi-
dends will establish confidence, and the prices of the shares
in the well organized and well managed industrials will ad-
vance, as did the stocks of railroad companies which were
originally issued for good will. In reviewing the evolution
of industrial combinations I have taken a general and com-
prehensive view. In this evolution, as in all human affairs,
there are imperfections and abuses for which it is our duty to
find remedies. The man of narrow view to whom the imper-
fections are pointed out loses sight of the great benefits. He
Vol. a— 7

98 CHARLES R. FLINT

sees a dead tree in the landscape instead of looking all around
the horizon. While believing in great organizations; while
knowing that they are a necessity in order that this country
should become a great power in the economic world and there-
by continue the prosperity of the wage earners of the land, I
do not believe in large aggregations of wealth in the hands of
individuals unfitted to wisely administer them. Wealth is
a serious trust, and when left to those who lack experience in
the use of it, is often a curse instead of a blessing. Money
does us good only as we part with it, and there could be no
great gifts without great fortunes. After providing a rea-
sonable competency for the family, in my opinion the greatest
satisfaction that can be obtained with money is to build up
educational institutions, to facilitate aspiring young men to
help themselves. Fortunately, under corporate ownership
this can be done without liquidating or contracting great
business organizations whose influence is so far-reaching that
the}^ may properly be called great business universities,
and in justice to the wage earners and managers who have
assisted in building them up, and to the investors who are
dependent on their dividends for support, such organizations
should be sustained and improved.

One of the features of our industrial situation is that-
many of the men who have built up these great organizations
are retiring. Those men who have blazed the way in this
new and rapidly developing country have been the ablest
industrial leaders the world has ever known; such men as
Carnegie and Huntington, Rockefeller and Field, Armour
and Vanderbilt, — the thinkers, the doers, the organizers, —
men whose creations are the great landmarks in American
industrial history. It is fortunate that we have had such
leaders. They did their work with the aggressive force that
comes of natural energy and temperate living, and with
the judgment that comes of experience. They have under-
stood and have been in sympathy with the people because
they have been of the people, and the example of those men,
rising from the ranks, gives impulse, encouragement, and high
aspirations to every working man in the land. They made
their fortunes by reducing the percentage of profits and in-

LABOR, INTELLIGENCE AND MONEY 99

creasing the volume of business; by reducing the rate of
freight on a barrel of flour to the Atlantic from $3.00 to 45
cents; by reducing the price of steel from $100 per ton to $20;
by improving the quality and reducing the price of provisions
and of by-products, while paying a higher price to the farmer
for the animal; by reducing the price of oil from 30 cents to
10 cents; by reducing the price of cotton cloth from 20 cents
to 5 cents. They realized that in order to make their combi-
nations a grand success, they must increase consumption by
reducing prices. Thus they not only helped to develop a
great home trade, but enabled us to open the door of foreign
markets, which has resulted in the enormous trade balance
in our favor, on which American prosperity so largely depends.
The industrials to-day are owned by the many. While
economic evolution is centralizing production in large corpo-
rations, decentralization of ownership goes on simultaneously
through the rapid distribution of shares. There are many
hundred times more partners in manufacture, mining, and
railways than there were thirty years ago, and the number
is rapidly increasing. Women rarely had an opportunity of
obtaining an interest in business organizations, but now they
are large shareholders of corporations, and as such they have
the full right of suffrage. Under the old conditions of private
ownership, the control of many of our industrial enterprises
would have been inherited by one individual or family.
Now the control is subject to the rule of the majority. It is
seldom, and fortunately so, as preventing great aggrega-
tions of wealth in the hands of individuals or families, that
the heirs of the industrial giants have the capacity to succeed
to the direction of gigantic enterprises. Many inheritors of
great fortunes, enervated by ease and luxury, prefer a life
of indolence, or to chase the will-o'-the-wisps of society; others
prefer to devote their time to literature or art; others to enter
upon scientific pursuits. Under the old conditions they
would have inherited the control of industries, but under the
present conditions of industrial consolidations the majority
of the stockholders — for, generally speaking, the numerical
majority is also the majority in interest — elect as officers
aspiring young men who, through years of application to a

ioo CHARLES R. FLINT

particular industry, have proved their ability and judgment
to assume the responsibilities of leadership, and owing to
the higher evolution of our industrial organizations, these
men are developing greater intelligence and superior ability
to those who have preceded them. Thus the fittest survive.

In life nothing is stationary; contraction or expansion
goes on continuously, and if you do not expand, you contract.
It is so with nations, and it is so with industry. There are
periods of expansion when the mills are running full, and
there are periods of contraction when the number of unem-
ployed is large. Confidence is at the foundation of expanding
business activity. The amount of business transacted on
credit is over two thousand times that transacted in exchange
for gold or silver. If there is confidence, the manufacturer
employs many hands, the laborers purchase more, the retailer
buys more goods, the jobber orders more from the manu-
facturer, the manufacturer, to still further increase his output,
employs more hands, and every man who wants work can
find it. This is prosperity. Lack of confidence causes con-
traction— the manufacturer is afraid to make many goods;
discharges some of his laborers; they purchase less; the jobber
cancels his orders ; the manufacturer must still further reduce
his payroll. The result is "hard times."

In view of the fact that the maintenance of high wages
in the United States is largely dependent upon our increasing
exports, the question is asked whether we could sustain them
in competition with the cheap labor of China, were China to
become a manufacturing country. The best answer is that
among our other exports, we have shipped 200,000,000 yards
of cotton cloth to the Chinese. The average rate of wages
paid by us in its manufacture was seven times the average
rate of wages prevailing in China. The Chinese, like the peo-
ple in our own country who have a Chinese cast of mind, do
not recognize the advantages of combination. Industrially,
they are living in the land of yesterday, instead of in America,
the land of to-day and to-morrow. Notwithstanding her
great agricultural and mineral wealth, notwithstanding the
fact that she has the largest body of cheap labor in the world,
China is not an efficient competing factor in the field of pro-

LABOR, INTELLIGENCE AND MONEY 101

duction, because, in spite of all these facilities, she has none
of the antecedents, intellectual, political, financial, or me-
chanical, for large scale production under modern conditions,
since she possesses none of the instruments of commercial
greatness and social well-being. Twenty centuries of sta-
tionary policy and of looking backwards have made political
progress and economic development impossible for China.
She has remained in industrial infancy. Lacking organiza-
tion and all that goes with organization, production on a large
scale, aided by large aggregations of capital, and under con-
ditions which attract and ennoble the greatest abilities, her
agricultural and mineral wealth and her cheap labor cannot
save her. She is left utterly behind in the economic race.

Our contractionists would practically have us put a wall
around the United States which would reduce wages and
prevent the working out of our destiny as a world power in
commerce, in finance, and in the great and nobler field of doing
our part in the advancement and civilization of mankind.
Situated as we are, between the great oceans, combining the
strength of a great land power with that of a great sea power,
we are pushing our way across the Pacific as we have already
done across the Atlantic. But this increase is small com-
pared with the increase that is destined to take place when no
question is being raised as to the stability of the foundations
on which rests this great industrial prosperity. With our
untold natural resources, with our inexhaustible supply of
metals and coal, with our great forests, with every variety of
soil and climate, with the most industrious, most intelligent
and most contented of peoples, working under the best con-
ditions of modern methods, we are destined to become the
economic masters of the world.

INVESTIGATING THE TRUST PROBLEM.

BY MAURICE H. ROBINSON.

t Maurice H. Robinson, economist; born in New Hampshire in 1865; his special
branch of economics has been industrial conditions and he has been employed as an
expert in that connection, by the United States government. He is professor of
industry and transportation in the University of Illinois and is the author of History
of Taxation in New Hampshire and many magazine articles on ihe subjects in which
he is an authority.]

During the last decade there has been much danger
that the trust problem would become a political issue; that
the parties would become either champions or defenders ; that
legislation relating to the trusts would be political rather than
economic ; that partisan prejudice rather than judgment would
be used in the solution of the problem that the growth of the
trusts has raised. It is not too much to say that the report of
the industrial commission has been the largest single influence
in snatching the trust problem from the political arena and
laying the basis for a permanent solution upon economic and
social grounds. This result was partly due to the importance
of the issue, partly to the organization of the industrial com-
mission itself. All interests have felt that a question of such
vital importance must be settled, not upon political, but upon
economic principles. The organization of the commission,
made up of representatives of both the great political parties,
together with representatives of the leading industries and
organizations of the country, made it almost impossible to use
the report of the commission for partisan purposes. Still, not-
withstanding these conditions, there may be discerned at in-
tervals a slight tendency to justify by the course of events the
policies of the respective political parties. This tendency,
most observable in the discussion of the effect of the protec-
tive tariff upon the formation and operation of the trusts, is,
however, so vague that it may be almost entirely disregarded
in judging the value of the work.

The importance of the subject for which the commission
was created, to ''collate information and to consider and

102

INVESTIGATING THE TRUST PROBLEM 103

recommend legislation to meet the problems presented by
labor, agriculture and capital," justified the time and expense
necessary for the preparation of such a report. The manu-
facturing interests of the United States are of vast and in-
creasing importance. According to the twelfth census, the
total capital invested in manufacturing amounted in 1900 to
almost $10,000,000,000. The increase in invested capital
from 1850 to 1900 was over seventeen fold. The value of
products turned out by the manufacturing industries has in-
creased during the century from about $100,000,000 to a little
over $1,000,000,000 worth in 1850 and over $13,000,000,000
in 1900. This increase in the capital invested and the value
of products in manufacturing may be compared with the value
of farm property and the value of farm products. The value
of farm property, according to the census returns, has in-
creased from about $4,000,000,000 in 1850 to a little over
$20,000,000,000 in 1900; the value of farm products from a
little less than $2,000,000,000 in 1870 to a little less than $5,-
000,000,000 in 1900. It will thus be seen that while the value
of the product in manufacturing has increased about twelve
times, that of agriculture has increased only three times dur-
ing the last half century. During this same period the in-
crease in population has been only two and one fourth fold.
The capital invested in transportation, while less than in farm
property, may possibly exceed that invested in manufactur-
ing. The total capital liabilities of the railroads of the country
were in 1900 almost exactly $12,000,000,000; their gross earn-
ings $1,500,000,000; their net earnings $500,000,000. Thus
considered from the standpoint of capital invested and the
value of the products, making due allowance for the duplica-
tion of the costs of production in passing from stage to stage,
it is evident that the manufacturing interests of the country
are nearly co-ordinate in importance with either the farming
industry or that of transportation. Added to this, it must be
noted that the manufacturing industries are increasing more
rapidly than the others and likely to continue their progress
at a somewhat faster rate in the near future.

In connection with this rapid growth on the material side,
important changes are being effected in the manufacturing

I04 MAURICE H. ROBINSON

industries from the standpoint of business organization. For-
merly nearly all manufacturing was done by the individual
entrepreneur, later by the partnership, now by the corpora-
tion; of the total production in the year 1900, nearly $8,000,-
000,000, or almost 60 per cent of the total output, was the
work of the corporation. Out of over 500,000 independent
establishments in the United States, 40,000 in round numbers
were in corporate form. The corporations were 12 per cent
in number and produced 59A per cent of the output. The
partnerships were 18TV per cent of the total number of estab-
lishments, producing 19 A per cent of the total production.
Individuals owned 78A per cent of the number of establish-
ments and produced only 20TV per cent of the total amount of
production. In certain lines the progress of the corporation
has been particularly rapid, viz., in the manufacture of iron
and steel, agricultural implements, coke, gas, electrical appara-
tus, manufactured ice, rubber goods, photographic goods, etc.,
etc. This concentration is accomplished through the cor-
poration, and to-day, in a word, the corporation problem has
to all intents and purposes superseded the trust problem of
the previous decade.

With this vast increase in the manufacturing industries
of the country and the concentration of the management under
a comparatively small number of corporations, the public, the
investors, the economists and the statesmen have become
vitally interested in their management. The public has in
the past been startled, statesmen anxious, economists in
doubt. Investigations have been pushed by interested stu-
dents with vigor and earnestness ; interested parties have been
active in the defense of the so-called trusts; information has
been meagre and often misleading; legislation has been
enacted which is the natural outcome of the uncertainty and
ignorance. Even the managers of the corporations them-
selves have, in some cases, expressed their own doubts as to
the future of the corporations which they have created.
Under these circumstances there are certain questions which
ought to be answered. These questions are: First, to what
extent are the manufacturing interests becoming consolidated
in large establishments, usually under the corporate form?

INVESTIGATING THE TRUST PROBLEM 105

Second, what are the causes and the economic conditions to
which this movement may be attributed? Third, what forms
of organization have been adopted by the consolidations, the
reasons for the different forms in the different countries, the
economics and dangers of each? Fourth, what elements of
monopolistic power do these corporations possess? what are
the methods by which they attain their monopoly? are these
monopolies built upon government statutes, as, for example,
patents, tariffs, franchises, or upon the aid of other interests,
such as railroad discriminations, rebates, the factor system,
local cuts in prices; that is, is the monopoly power of the large
corporations based upon internal power or external favors?
Fifth, what measure of public regulation is desirable in order
that other interests may be safeguarded, that neither the con-
sumer nor the wage earner shall be unjustly oppressed by the
huge corporation?

The act of the congress of 1898, establishing the indus-
trial commission, gave that body ample power and provided
it with the means and equipment necessary to accomplish its
purpose. The commission as appointed by President Mc Kin-
ley comprised an able body of men, all of whom were interested
in the work of the commission; they employed a competent
staff of experts in the several lines of inquiry, and were equip-
ped with facilities, clerks, and stenographers. The work is
therefore to be judged by its results with due regard for the
magnitude of the problem. What light has it shown upon
this question? Has it contributed facts that justify its exist-
ence; facts that are sufficient to furnish the basis for the
proper solution of the problem?

The report of the industrial commission relating to trusts
comprises four volumes directly bearing upon this subject;
volumes one and thirteen upon the American trusts; volume
two upon trust and corporation laws; volume eighteen upon
European trusts and the laws relating to their regulation and
control. In addition to these volumes the commission has
published a large amount of matter bearing indirectly upon
this subject; thus, volumes seven and fourteen furnish infor-
mation in regard to the relations of capitalistic combination
to labor; volume twelve, to the great mining corporations;

106 MAURICE H. ROBINSON

volume seven, those dealing in agricultural products, like
milk and grain; volumes four and nine, relating to transpor-
tation, furnish information in regard to the discrimination
of railways as they affect the great corporations; volume
eleven, a report on the taxation of corporations. In addition
to these volumes, the final report comprises a summary and
the report of the experts employed, on (1) mining combi-
nations, (2) railroad combinations, (3) industrial combina-
tions, and (4) the taxation of corporations. It also contains
an appendix, showing the volume of production in various
lines, price statistics for various commodities, a list of indus-
trial combinations with their capitalization and dividends,
and the amendment to the anti-trust act of 1890 introduced in
the fifty fifth congress by Mr. Littlefield of Maine. In the
volumes relating to trusts, in addition to the testimony, there
are found two papers of exceptional value, both by Professor
Jenks, the expert of the commission, the one relating to prices
of commodities dealt in by trusts and, second, to the character
of the securities of certain railways and the more important
combinations. The value of the testimony is largely enhanced
by the very complete indices prepared and, for the use of the
public at least, by the digests and reviews prepared by the
experts of the commission. The matter relating to trusts
comprises about 3,500 pages, of which about one half is testi-
mony and the remainder reviews, digests, special report,
indices, lists of witnesses, etc., etc. Over 100 witnesses ap-
peared before the commission and testified in regard to over
fifty of the larger and more important combinations. In
some cases the value of the testimony regarding a certain
trust was lessened by the fact that only one witness appeared,
usually some one intimately connected with the organization
of the corporation in question.

Having outlined the organization of the commission, the
nature of the problem before it, and the general character of
the report, we are now in a position to inquire, what light has
the investigation thrown upon the questions involved in the
trust problem?

I. The Extent and Rapidity of the Consolidation
Movement. Upon this point the report throws little light.

INVESTIGATING THE TRUST PROBLEM 107

The table of consolidations which appears in the appendix of
the official report is contributed by the census, not by the
commission. In the final report, Professor Jenks dismisses the
subject with two pages and concludes that the figures "give
no clue as to the extent to which such combinations are able
to monopolize any industry." The subject is one of great
difficulty; no individual is able to solve it unaided. The
government alone can furnish sufficient facts upon which any
adequate judgment might be based. The census of 1900 gives
a large amount of such data and draws certain conclusions
which are of value. A study of the census data would enable
one to show the extent to which corporations are superseding
partnerships and individuals in the management of business,
and to what extent they have, up to the present time, suc-
ceeded in organizing the various great industries under a con-
centrated management. This question is yet unsolved, not-
withstanding that it is the center of the trust question. If
large combinations are growing no faster than the industries
in which they exist, if individual enterprises keep pace with
the large corporation, the consolidations will not be able to
attain a monopolistic position. Legislation ought to be very
different when large corporations are working side by side
and merely keeping pace with individual enterprises, from
that which might be required under a regime in which all
industries are becoming fast consolidated into capitalistic
monopolies

II. The Causes of Consolidation. Assuming that it is
proven that there are large consolidations growing up in many
branches of industry; that, temporarily at least, the great
consolidations possess powers different from those possessed
by corporations twenty five j^ears ago; they are able to dis-
regard to a certain extent the laws of competition, — the in-
quiry naturally arises as to the causes at work, or the under-
lying industrial conditions which are producing them. Upon
this point the report of the commission gives considerable
testimony of value. The men who are inside the trusts, who
were with independent companies before consolidation, who
have been instrumental in bringing independent companies
under the consolidation form, understand from experience

108 MAURICE H. ROBINSON

the causes or conditions which have impelled them to unite.
It is doubtless true that these witnesses, in their testimony,
have not always told the whole truth; nevertheless they throw
a flood of light upon the inside history of the formation of
the great combinations. Taking the testimony as a whole,
collating facts from one point with those from another, com-
paring these facts with each other and with the testimony of
independent interests, a reasonably accurate diagnosis of the
causes can be made. The men inside the great corporations
emphasize the impelling power of competition as a cause.
They call it destructive competition. They sometimes do not
understand that the presence of a large fixed capital, useful
for certain purposes but much less useful for any other,
changes radically the nature and working of the laws of com-
petition. The trained economist, however, is able to read
into their testimony the underlying conditions which they
often fail to see. On the other hand, the independent opera-
tors emphasize just as strongly the power of discriminations,
of favors from railways to large corporations with which they
have to deal. They are even inclined to think that, if railway
discriminations could be prevented, if the smaller concern
could be put upon a level with the larger one in buying its
material and selling its products, that the progress of consoli-
dation would at least proceed with much less rapidity. Those
who read the testimony presented, therefore, must use judg-
ment and compare these two sides of the story in order to
get at the exact truth. Again, those interested in the con-
solidations are inclined to make light of the attractive influ-
ence of monopoly, while the outside interests are apt to empha-
size its power. In this connection one needs to remember the
large place given to the possibility of a monopolistic position
for a consolidated corporation that one almost invariably
finds in the prospectus presented to the independent inter-
ests when urging the desirability of combination. The inside
interests again emphasize the possibilities of large economy
in production sufficient to pay dividends upon the common
stock issued as a bonus, without any advance in prices. The
testimony on the whole shows, however, that in most cases
the predicted economies have not been fully attained and that

INVESTIGATING THE TRUST PROBLEM 109

often certain expenses incident to the management of business
upon a large scale have crept in which partially offset the
economies that have been effected. Upon the basis of the
facts disclosed, as summed up by the commission, the causes
of combination are, first, competition; second, economy of
production and distribution; third, the hope of monopoly
power. The first and third of these forces, the former com-
pelling consolidation, the latter drawing business interests
together, are permanently active. The second certainly will
be at work until the united establishments have attained that
size which will give, under a given condition of the arts and
experience in business management, the maximum economy.
With the increased experience in dealing with great business
interests, there seems to be no possible limit to their size,
so long as men can be found of sufficient caliber to organize
and manage the consolidated corporations. If then the three
causes named above are the only ones answerable for the great
combinations, it would seem that the dream of the socialists
might after a time be realized through the evolution of the
partnership into the corporation, of the corporation into the
corporation of corporations, until it should finally embrace
all interests which might in any way, if left independent, com-
pete with each other.

In opposition to this view there are many witnesses who
testified to the power of other forces. It will be admitted that
whatever contributes to the growth of the large establishment,
causing it to grow faster than its smaller neighbor, must be
considered in connection with the causes that lead to the
formation of the modern trusts. It is affirmed by witnesses
that the policy of discrimination in freight rates, giving the
competitive centers lower rates than the noncompetitive
centers, giving the business man with larger resources lower
rates than his weaker neighbor, has contributed in many
cases to the growth of certain corporations and to the destruc-
tion of others. If this be so, and its truth can hardly be ques-
tioned, discriminations by the railroads must certainly be
placed among the powerful, though less permanent forces,
which have contributed to the formation of the great consoli-
dations. It is also a well known fact, to which the testimony

no MAURICE H. ROBINSON

in the commission bears abundant evidence, that once a cor-
poration has gained a position of strategic importance, due,
it may be, to favors from the railroads, operating over a con-
siderable territory, it may adopt a policy of cutting prices at
one point to drive out competition there while raising prices
temporarily at all others. If the competition at the given
point proves weak, this policy is almost invariably successful ;
even if competition is strong, it is often successful unless com-
petition springs up at other points. If competition springs up
at other points this policy almost invariably proves unsuc-
cessful and the consolidation in this case must make use of
large economies in order to maintain its existence. The his-
tory of the National Asphalt company, the National Cordage
company, and the National Wall Paper company proves con-
clusively that where economies of production are not for any
reason attained, such a policy will usually prove unsuccessful
in the end. The profits that come from a policy of discrimi-
nation may furnish the basis of a consolidation, which after-
wards may be maintained by establishing large economies
in production.

It is also affirmed that the desire to take advantage of the
laws of the country, especially the protective tariff and the
patent system, has contributed to build up consolidations.
These influences are to be considered in connection with the
desire to attain a monopolistic position. Whatever may
give a monopoly will always prove an attractive force in draw-
ing conflicting interests together, provided that after consoli-
dation they are reasonably sure of attaining the fruits of such
monopoly. If the tariff wall or the possession of a patent
right will give a consolidation the exclusive control of a certain
line of commodities within the United States, it is evident that
such consolidation will be able to maintain prices above the
competitive level of the world. The opportunity for a monop-
oly will thus be present within the industry, and will always
hold out certain inducements to the interests which may prove
powerful enough to bring them together. To this fact, the
witnesses before the commission gave abundant evidence.

In addition to these causes one other ought to be men-
tioned which is perhaps not sufficiently emphasized in the

INVESTIGATING THE TRUST PROBLEM in

report of the commission. This factor was emphasized by-
President Hadley in an article on the " Formation and Con-
trol of Trusts." President Hadley calls attention to the fact
that the formation of a large company, placing its shares upon
the market, enables its owners to sell their interests to better
advantage than they were able to do as independent interests.
There seems to be a psychological principle operating which
attracts American investors toward the big concern; mere
bigness is considered to be a virtue and a small share in a big
concern is more highly esteemed than a large share in a small
concern; that is, the investor puts a premium upon the value
of a large enterprise and the men who have been most active
in the formation of the large corporations have discovered
this principle and have made use of it for their own profit.
Suppose a corporation is formed of several independent con-
cerns whose combined value is $10,000,000; let the promoter
capitalize it at $20,000,000 in shares of $100 each and sell it
out to the public. The history of recent consolidation shows,
in general, that he may sell the entire concern for considerable
more than he would have been able to obtain if he had capi-
talized it simply at its real value, $10,000,000. It is doubtless
true that this factor is not a permanent one, and with more
experience with the great corporation it will gradually lose
its force. At the present time, however, it is a factor that
must not be neglected in the summary of the causes at work
producing the great corporate consolidations.

The formation of consolidations in industry has often been
treated as an isolated phenomenon in the economic world.
This has led to much misapprehension. The forces at work
producing the industrial consolidations are the permanent
integrating forces that are at work in all society. These forces
differ somewhat from the forces at work in the political world,
or from those at work in the distinctly social world. They
differ, however, not so much in principle as in the specific
way in which they operate. The consolidation of industry
must be considered as a part of the evolution of society.
Society to-day differs from the society of yesterday chiefly
in point of organization. Permanent forces are at work in all
lines of human activity, organizing men's interests into higher

H2 MAURICE H. ROBINSON

and higher forms. This is seen in the progress of labor
unions, in the organization of business associations, in the
organization of governments, and at the present time, most
pronouncedly in the higher organizations of modern business.
III. The Form of Consolidated Industries. It has
often been stated that the form which consolidated industry
assumes is of small account, that it is the purpose rather than
the form that is of chief interest. It is entirely true that
form is of less importance than the character and working
of the consolidation. Still, when it is once recognized that
the modern trust is a business organization and that in each
organization of industry form is a factor of powerful influence,
this question will not be lightly passed over. It is certainly
true that the form under which business operations are con-
ducted determines to a large extent the economies possible
and to a certain degree the policy of the business. The part-
nership has certain advantages, the combination of interests
into a pool or the kartel certain other advantages ; the corpo-
ration still others. The form which the consolidation assumes
determines, to a considerable extent at least, the question of
whether it will find it desirable in its operations to aim at a
low cost of production or higher prices for its products. In
America, consolidated industry has finally taken the corporate
form; the same is true in England and to a certain extent
in Germany and Austria. In general, however, the German
form for the consolidation of industry is the kartel, or the
industrial combination proper. The testimony, and espe-
cially the report, of Professor Jenks on the European trusts
shows that there is a vast difference in the working and in the
effect within the industry itself and upon industries with which
it is brought in connection, of a trust under the kartel form
from that of a trust under the corporate form. The great
corporation is, of course, a higher form of organization than
the kartel. It harmonizes the entire interests of the industry
consolidated. Its permanent interests are always dependent
upon lowering the cost of production and increasing the out-
put. It thus tends naturally to reduce prices in order to in-
crease its market. The German combination, on the other
hand, depends largely upon its monopolistic position or at

INVESTIGATING THE TRUST PROBLEM 113

least upon a partial monopoly within its field. It is not so
much interested from the economic standpoint in lowering
the cost of production as in lessening the output or increasing
the prices of its goods. The question of form thus becomes
a factor of the first importance in relation to the subject of
international trade. The value of the corporation as a form
for conducting large enterprises is emphasized upon almost
every page of the testimony and especially by such witnesses
as James B. Dill, John R. Dos Passos, and by such corporation
leaders as Schwab, Flint, Thurber, Stetson, Gary, and others.
The form which consolidated industry assumes is not only
important from a political standpoint, it is of large importance
from the standpoint of the investor. The process of consoli-
dation, the formation of a huge corporation out of many small
ones, gives a large opportunity for inside manipulation and for
the operation of the corporation for Wall street purposes. The
question of capitalization thus becomes one of public impor-
tance, since it is likely to affect the policy adopted by the cor-
poration itself. The witnesses before the commission gener-
ally agree that the inflated capitalization has no effect what-
ever on the prices of the goods sold. It is assumed that in all
cases the corporation obtains as much as possible for its ser-
vices. The increase in the amount of capital then will not
enable the corporation to demand or receive higher prices;
if it asks higher prices, it will sell less goods ; and if, as it is
assumed, it was obtaining the maximum revenue, an increase
in price means a lessening of profits. Still there is evidence
in the report of the commission to show that while the amount
of the capital issued does not affect its ability to put up prices,
it does materially affect the policy of the directors in the con-
duct of its business. The amount of capital then is an im-
portant factor in determining whether the corporation shall
be conducted for the purposes of economy in production or
for stock speculation. The question of watered stock, which
affects primarily the corporation in its relation to the investor,
thus becomes a question in which the public are vitally inter-
ested. This constitutes the economic basis upon which
legislation may be asked to prevent the evils that come from
a flagrant watering of stock. The form of the union, too,

Vol. 3-8

ii4 MAURICE H. ROBINSON

determines the process of formation; that is, the promotion
and underwriting of the consolidation. The report of the
commission shows that at present the laws of the states in
which the corporations are chiefly formed, are singularly
defective in protecting legitimate business interests in these
points. Corporations are necessary for the permanent de-
velopment of the industries of the country, and the investors
in these corporations ought to be protected as a matter of
public policy, so that with reasonable care on their part their
investments may be attracted into those lines where capital is
most needed; that is, where the social demand for production
is most urgent. If the investors are not protected, it means
simply that the development of the industrial resources of the
country will be retarded, and the demand not satisfied, unless
the investors are able to protect themselves until public policy
provides sufficient regulation over the formation of corpora-
tions to allow investments to be made with reasonable safety.
IV. The Monopoly Power of Combinations. The
fourth question in the solution of the trust problem asks whether
any of the great corporations have a monopolistic charac-
ter, and if so, upon what basis this monopoly rests. The
testimony upon this point is interesting and instructive, if
not conclusive. The monopoly power of a combination is
shown in the control of prices, of wages, and of the rate of
interest. The first two are of more importance in this con-
nection, since the capitalist is usually combined with the
entrepreneur in the formation of the consolidation. Both
the consumer and the wage earner are outside. It is impos-
sible for the consolidations to form a union with the con-
sumers. It is not impossible for them to join with the wage
earners, especially where the wage earners are united into
some form of labor organization. The study of the monopo-
listic position of the great corporations ought to investigate
especially the question of the relation of the consolidations
to prices and wages. Professor Jenks's study of prices found
in the first volume of the report is an interesting beginning
in this line. If the consolidations are able to raise prices, this
will be shown in the increase of the margin of profit. Pro-
fessor Jenks's study shows conclusively that for a certain

INVESTIGATING THE TRUST PROBLEM 115

length of time at least the greater corporations have been able
to increase the margin of profits. This study ought to be
extended now that the way has been pointed out. The report
furnishes a certain amount of material upon which a study
could be based, and in addition material will be found in the
bulletin of the department of labor for July, 1900, in the re-
port of the senate committee on prices and wages, and in
the bulletin of the department of labor for March, 1902,
on the course of wholesale prices from 1890 to 1901. It
is possible to determine from a study of the available data
certain facts with regard to the control of prices by the con-
solidations, that are now mere opinion. The chief defect of
the report of the commission is that it often deals with opin-
ions when it might have given us facts. Possibly this defect
is incident to the method of the investigation, the examina-
tion of witnesses from all callings in life ; still it will generally
be admitted that the commission might have given the public
more of the kind of work that is included in Jenks's study
of prices. To illustrate: the report of the commission de-
votes a very large space, both in the testimony and in its
final report to the relation of the tariff and the trusts. The
question of the tariff has been made so much a political one
that the investigation is less valuable. It is everywhere
evident that party interests are attempting to justify party
policy or make political capital out of the interrelation of
the trusts to the tariffs. It is stated, for instance, that the
tariff "is the mother of trusts," that the tariff is responsible
to a large extent for the existence of the trusts in the United
States. In answer to this charge attention is called to the
fact that trusts exist in England. Therefore, the conclusion
is that the tariff is not responsible for the trusts. This is
nothing more nor less than an attempt to throw dust into the
eyes of the public. The whole question is not, does the exist-
ence of the protective tariff favor the formation of trusts,
but rather, under the protective regime are the trusts, after
their formation, able to increase the margin of profit, to raise
the level of prices above the competitive level? This is the
question at issue and one which cannot be answered by the
expression of opinion, but by a study of facts. How do the

n6 MAURICE H. ROBINSON

prices of trust made goods in England compare with prices
in other countries? How do the prices of trust made goods
in the United States compare with the same trust made
goods in England or in Germany? These questions are capa-
ble of solution by statistical methods. For example, it would
be possible to study the operations of the steel trust, and show
within reasonable limits what proportion of the profits of
the corporation is due to the fact that it operates within the
protection of the tariff wall. On the other hand, certain in-
dustries in this country have no protection whatever. Here
home and foreign competition tend to keep prices at the com-
petitive level. In the establishment of the protective system
it was assumed that while foreign competition would be
removed to a certain extent, domestic competition would still
be present to keep the price of the goods near the domestic
cost of production. The formation of trusts within the pro-
tected industries has changed the conditions and enables a
protected trust to permanently keep the prices for its goods
in the home market at a level with the prices at which goods
can be imported. Thus reduction of the cost of production
increases the profits of the trusts. With increasing prices
comes increased competition; with increasing competition
among the investors within this line, further consolidation,
increased cost of production, and permanently higher prices.
With the ability to maintain higher prices at home the temp-
tation is strong to sell the surplus product in the foreign mar-
ket at low prices in order to keep up the prices at home. This
means that the protective tariff, which was originally adopted
to encourage the growth of domestic manufactures, has be-
come, under changed industrial conditions, the means by
which consolidated industries are able to deflect a certain
proportion of the social product from other lines into their
own treasury. The report of the industrial commission fur-
nishes a large amount of evidence to substantiate these views.
The testimony also shows that the monopolistic position
of the great corporations have been aided by railway discrimi-
nations, by the use of the factor system and by the policy of
destructive competition at certain points in order that the
great companies might be freed from the annoyance of local

INVESTIGATING THE TRUST PROBLEM 117

competition. All these systems have been used to build up
and maintain monopoly prices.

The influence of the factor system has undoubtedly been
too much emphasized. The testimony before the commission
shows that while the factor system may aid the trusts in
maintaining prices slightly above the competitive level, it is
very seldom able to secure a permanent increase in price.
Nevertheless, its use may supplement the great forces that
have been called in to aid the great consolidations in their
attempt to gain supremacy within their own domain.

In every line of industry one fact of utmost importance
stands out clear and bold, that is, the vitality of competition.
In the sugar industry, in the iron and steel industry, in the
tobacco industry, in the rope and twine industry, in the
asphalt industry, in fact everywhere, competition, notwith-
standing consolidation, is a factor that the modern business
man may neglect only at his peril. The rapidity with which
capital has been accumulated within the last few years, the
abundance of talent in the administrative work of the corpo-
ration, make it impossible to crush competition except by de-
pending upon the lowest cost of production. Railwa}^ dis-
criminations may favor consolidation, the tariff and patent
monopolies may contribute to their support; still wherever,
for any length of time, any one of the corporations has at-
tempted to maintain prices above the competitive level, the
inevitable result has been the attraction of new capital and
brains. The modern corporations, therefore, have gradually
been forced to realize that safety lies only in securing the
lowest cost of production and maintaining prices at a level
which will not attract new capital into the industry. The
sugar trust has found this in the competition with the Ar-
buckles. The steel corporation meets competition at every
point, and even the Standard Oil company has a powerful
competitor. The course of events seems to be everywhere the
same. The trusts when formed usually consolidate about 90
per cent of a given industry. Under these conditions it is
not difficult to keep up prices for a time.

The high rate of prices attracts new capital; soon the
trust controls not 90 per cent but 70 per cent or even 60 per

n8 MAURICE H. ROBINSON

cent or less of the production. The facts showing the devel-
opment of new competition side by side with the great con-
solidations, are perhaps the most important ones that the
report of the industrial commission has given the world.
These facts ought to be recognized both by the consolidations
and by the legislators ; by the consolidations, since their exist-
ence depends upon observing the course of events in this par-
ticular; by the legislators, since laws are unnecessary to pro-
tect the public so long as the competitive forces are able to
work.

Upon the subject of wages, there is a large amount of
testimony, the most of which is of small value. It is generally
shown that the consolidations have not reduced the wages of
labor. It is not shown, however, what is the effect of consoli-
dations on the growth of labor unions and the consequent
ability of labor unions to protect themselves. There is a cer-
tain amount of evidence at least to show that so far the ten-
dency has been to unite the forces of the consolidations with
those of the labor unions to secure higher wages for the mem-
bers of the union and somewhat higher prices for the products.
This simply means that the added profits have been main-
tained with the aid of the laborers employed, at the expense
of the public and the outside laborers. If this be the fact, it
is evident that the union of the trusts with the labor unions
constitutes one of the most dangerous features in connection
with the consolidation of industry.

V. The Public Control of Consolidations. This sub-
ject, which ought to be considered only after a full investiga-
tion of the four preceding ones, is treated by the commission
with considerable fullness. John R. Dos Passos and Charles
C. Allen testified at length on this subject. Professor Huffcut
treats the subject in its legal aspects, and it is considered in
the final report by both Professor Jenks and Mr. Stimson,
the legal representative of the commission. Much attention
is also given this subject in the examination of witnesses.
The general source of information upon this topic is furnished
by volumes two and eighteen. Volume two gives the anti-
trust legislation both of the United States and of the states
and the decisions of the courts, together with a summary of

INVESTIGATING THE TRUST PROBLEM 119

the corporation law of the various states in the United States.
The report of Professor Jenks in volume eighteen gives the
laws relating to corporations in foreign countries, especially
England, Germany and Austria. Professor Jenks's report is
especially valuable, showing, as it does, the effectiveness of
foreign legislation in checking the growth of speculative cor-
porations, limiting their power, and directing their activities
within legitimate channels. The examination of the wit-
nesses who testified in regard to the corporation law of New
Jersey, Delaware and West Virginia, shows the weakness of
our present corporation law under changed economic condi-
tions. The present law was formulated and enacted for the
government of small corporations, working under the laws of
competition. These laws are entirely inadequate to govern
the large corporations, some of which have a certain degree
of monopolistic power. This investigation of state corpora-
tion law calls attention to two aspects of the problem that
ought not to be neglected. First, the control of the corpora-
tions by means of improving the statute laws of the various
states, and, second, the control of corporations through a fed-
eral corporation law. The testimony regarding the corpora-
tion law of those states in which the great corporations are
chiefly formed show how inadequate are the present laws to
control corporations whose business is world-wide. Both the
public and the lawmakers are beginning to see the folly of
granting charters with no restrictions upon the operations of
the giant corporations and afterwards filling the statute books
with drastic laws attempting to curb the creatures which have
grown strong on the favors given them. If the report of the
commission should have no other effect save that of calling
attention to the absolute necessity of revising the corporation
laws to fit the changed economic conditions, it would be justi-
fied in its existence. The investigation of the Industrial com-
mission directs attention to the desirability of changes in the
state laws or to the adoption of a federal corporation law.
The difficulties of the latter step are fully discussed by Pro-
fessor Huffcut in his paper "on the constitutional aspects of
the federal control of corporations." Its advantages and dis-
advantages are considered by such attorneys as James B.

120 MAURICE H. ROBINSON

Dill and John R. Dos Passos. The commission itself recom-
mended a federal corporation law, only in case federal super-
vision and taxation proved inadequate, "to properly control
the great corporations and combinations." Such action, in-
volving, as it would, radical changes in the government and
the courts, it hopes may be avoided by federal supervision
and taxation. To accomplish this it is proposed to establish
a bureau of the treasury department, to register all corpora-
tions engaged in interstate commerce, to secure the reports
necessary to tax their franchises, to inspect their books, to see
that their accounts are properly kept, and to collate and pub-
lish information in regard to their operations for the use of
congress. It is thought by the commission that such pro-
vision "will be sufficient to remove most of the abuses which
have arisen in connection with the industrial combinations."
In addition to this recommendation and to those formulated
in the preliminary report, the commission further recom-
mends, (1) that the anti-trust laws be strictly enforced; (2)
that the policy of making local cuts in prices and discrimina-
tions to individuals be made a penal and criminal offence;
(3) that provisions similar to the anti-stock-watering laws of
Massachusetts be enacted and enforced. On the whole, the
recommendations of the commission are less radical than
might have been expected. It is improbable, however, that
the program proposed will be adopted by congress. The chief
value of the recommendations consist not in themselves, but
in their effect upon the public mind and upon future legis-
lation,

THE GOOD AND THE BAD OF TRUSTS.

BY CHARLES J. BULLOCK,

[Charles Jesse Bullock, economist; born Boston, May 21, 1869; graduated Boston
university, 1889; instructor and later professor in economics in Williams college until
1904, when he became a member of the faculty of the department of economics in
Harvard. Author of The Finances of the United States, 1775-89; Introduction
to the Study of Economics, Essays on Monetary History. Contributor to the
Quarterly Journal of Economics in which the following article originally appeared.]

Since most writers recognize that the recent combina-
tions of capital have developed monopolistic tendencies to
a considerable extent, the outlook for the future becomes
a most interesting and important problem. Under all the
circumstances, it is not surprising that recent years have
witnessed numerous attempts to bring the control of various
industries into the hands of single corporations of colossal
magnitude, which possess and exercise the power of monopoly.
But the reader of recent trust literature finds that many
writers of recognized authority contend that these conditions
of centralized control are to be permanent in industries that
require heavy investments of capital for their successful
prosecution, and that competition is a thing of the past.

In considering this proposition, careful discrimination is
necessary at the very outset. There are three possible condi-
tions under which industries may be conducted — production
upon a small scale, production upon a large scale, and cen-
tralized management by a single company or combination.
Every student of economic history knows that production
upon a small scale was long ago superseded in most important
branches of manufactures by undertakings of a large size.
The combinations of recent years have sought to replace these
large establishments by single consolidated enterprises; and
this is the real meaning of the trust movement and the argu-
ments advanced to prove its natural and desirable character.
No one wishes to revert to the stage when production was
carried on by small establishments. Controversy exists only

121

122 CHARLES J. BULLOCK

concerning the advantages of superseding large scale produc-
tion by combinations that include all important establish-
ments in a single line of business. The "industrial combina-
tion," which those who take a generally favorable view of
trusts are upholding, must mean the replacement of inde-
pendent enterprises already conducted on a large scale by a
single centralized management. To combinations of this
character writers may or may not apply the term " monop-
olies;" but the real issue, nevertheless, is the alleged superior-
ity of a single body of producers over independent rival con-
cerns.

When it is contended that combination means not " neces-
sarily one great trust, comprising one great industry," but
merely "an enlargement of capital," we must insist that this
is not what the arguments in favor of centralization are con-
sidered or designed to prove. When another writer tells us
that combination may be contrasted not with competition,
but with " isolation "—by which, probably, production in
small establishments is to be understood— we may properly
remind him that in his own works combination is used as the
opposite of competition, and that he says that sometimes "in-
dustrial units which are necessary for proper utilization of
labor become so large as to produce actual monopoly." When
others tell us that the trusts have seldom secured that im-
munity from competition which monopoly implies, it must be
replied that this fact serves merely to discredit some of the
arguments intended to prove the superiority of consolidation,
and does not alter the purpose for which these arguments are
advanced.

If the tendency towards combination means anything,
it means the substitution of centralized and consolidated
management for the rivalry of independent concerns; and
this may fairly be termed monopoly. If, furthermore, the
advocates of combinations intend to defend nothing more
than production upon a large scale, they should revise their
list of arguments designed to prove that competition is
"wasteful," "destructive," "suicidal," and "a thing of the
past;" and should make it clear that they do not uphold the
action of most of our trusts in consolidating all establish-

THE GOOD AND THE BAD OF TRUSTS 123

merits of a given class, in order to " regulate production" or
to " remove the evils of competition." We may advise the
reader, therefore, to grasp firmly the distinction between
large scale production and monopoly, and to note carefully
whether the arguments advanced in favor of combination
relate to the one thing or the other. Unless this is done,
clearness of thought becomes impossible.

Does the trust movement, then, mean a permanent
regime of monopoly in industries where large amounts of
capital must be employed? Some writers who consider
the movement to be, upon the whole, a desirable develop-
ment in industry, answer clearly in the negative. Thus
Professor Sherwood says that the dominant position which
trusts now enjoy depends mainly upon "monopoly of under-
taking ability," and that this is "in its nature temporary
and the result of a competitive process." The large gains
that now accrue to these monopolistic enterprises are merely
a temporary reward for the development of a superior form
of business organization. And Mr. Carnegie, Mr. Dill, Mr.
Wanamaker, and others insist that "every attempt to monop-
olize the manufacture of any staple article carries within its
own bosom the seeds of failure," or that "no men, or body
of men, have ever been able, or will be able, permanently to
hold control of any one article of trade and commerce." But
the arguments of most of those who take a favorable view
of trusts cannot be given such interpretation. Some writers
state clearly and frankly that "the competitive system of
industry is fast passing away," and that all lines of business
"are, or soon are to be, monopolized;" that "monopolies of
every sort are an inevitable result from certain conditions of
modern civilization;" "that experience seems to justify the
belief that monopoly within certain limits . . . may be
secured simply by the possession of large capital;" or that
trusts represent "a vast accumulation of productive resources
which renders the competition of small concerns hopeless."
And this is the view, of course, which is entertained by persons
of socialistic tendencies. Sometimes it is attempted to add
force to such arguments by calling combination the result of
an evolutionary process of survival; and one writer remarks

124 CHARLES J. BULLOCK

that the trust is "an evolution from the heterogeneous to
the homogeneous," — a statement which will interest those
who happen to remember the Spencerian formula. But
other economists are less explicit. Writing of the trusts,
von Halle says that "in the manufacturing industries, the
victory of production on a large scale seems assured;" and
he concludes his work with the somewhat oracular remark
that "the future belongs neither to the prophets of individu-
alism, nor to the ideals of the social democrats." Mr. Brooks
thinks that "practical monopolies" have been formed, but
that they can be permanent only in case "they put some kind
of economic superiority upon the market." Mr. Collier,
rather inconsistently, says that competition is "business
committing suicide," and then thinks that the trusts will be
controlled by potential competition. Professor Bemis looks
upon a trust as "virtually a monopoly of large capital,"
possessing "vast possibilities of social advantage;" but thinks
that we cannot pronounce a final judgment "until we have
first removed all special privileges." And, finally, President
Hadley believes that modern conditions "work in favor of
those who advocate combination, and make it harder for
independent competitors to resist it, or for the law to prohibit
it on grounds of public policy;" yet he holds that, if prices
are raised unduly, "new capital will come into the business."
But, if the advantages of industrial combinations, in both
producing and marketing their products, are as great as
most of these writers affirm, it is hard to see how unity
of management can fail to secure ultimate control of most
branches of manufactures. The lack of explicit forecasts
of the future need not, therefore, prevent us from concluding
that the general position of these economists is that a tendency
to prevent monopoly may be clearly recognized. But econo-
mists who think that, for the future, monopoly is to be the
order of the day, generally consider that this control of
industry will be limited by what is termed potential com-
petition Thus they do not affirm that absolute monopoly
will prevail, but merely such a control of production and
prices as will not tempt new capital into the field. To this
subject we shall return in our later paragraphs.

THE GOOD AND THE BAD OF TRUSTS 125

Attention may now be directed to the reasons for this
belief in the tendency of large scale production to pass over
into monopoly, and to the criticisms which such views evoke
from writers who deny the existence of such a tendency.
In favor of this proposition three general lines of argument
may be distinguished : (a) the contention that a consolidated
enterprise possesses advantages over independent companies
in producing and marketing its goods; (b) the claim that
mere mass of capital confers powers of destructive warfare
so great as to deter possible competitors from entering the
field; (c) the belief that modern competition between large
rival establishments, representing heavy investments of fixed
capital, is injurious to the public, ruinous to the producers,
and in its final outcome self destructive. As our discussion
proceeds, it will become evident to the reader that ail of
these arguments can be employed, with consistency, only
by those who believe that the competitive regime is to be
replaced by an era of monopoly.

First in this list is the contention that a consolidated
concern is a more efficient agent of production and exchange.
It is claimed that a combination can effect a saving in no less
than twenty different directions; and the economy arising
from such sources is declared to be great enough to give the
trust a control over the market based solely upon superior
efficiency, and to make competition " hopeless." For this
reason it is held that such combinations may confer "enor-
mous" benefits upon society. The critic may well entertain
the suspicion, however, after reading what is said upon this
subject, that these arguments prove almost too much; for,
if in twenty directions substantial economies may be realized
by a combination, it would seem that the utter futility of
competition would have been recognized by the business
world long ago. If these arguments be altogether true,
how is it that the trusts find competition so troublesome,
and consider it "good business" to resort to the most dis-
agreeable means of driving "interlopers" out of the field?
Such tactics are decidedly "bad business," if they are needless;
and we can hardly think that the shrewd managers of the

126 CHARLES J. BULLOCK

trusts would care to arouse public resentment by unneces-
sarily harsh methods.

To consider this line of argument in any complete man-
ner would expand this article into a volume; and we can
discuss, therefore, only some of the more important savings
that trusts are believed to realize. Of the twenty specific
economies that have been enumerated, we shall take no notice
of eleven, five of which may be considered either doubtful
or of minor importance, and the others of which represent
no substantial advantages which large independent companies
cannot secure. Three more may be set aside for incidental
discussion in connection with the views of those who deny
the tendency to monopoly. Of the remainder, three items
relate to advantages in the manufacture and three to econo-
mies in the exchange of products.

Thus it is claimed that trusts, by filling orders from the
nearest plant, can effect a great saving in cross freights. But
data upon this question show comparatively small results.
The reason for this is not difficult to discover, and has been
recently explained by a writer who has heretofore emphasized
most strongly this particular economy of consolidation.
When the monopolized product is of a bulky sort, the industry
is already localized pretty thoroughly before combination
takes place; and, since most of the former independent estab-
lishments were producing chiefly for their natural local con-
stituencies, the trust can save little in cross freights. When,
however, the product is light, transportation charges become
a matter of small moment. In either case the room for
saving in cross freights is not nearly as large as has been
represented, while often it does not exist.

Then it is urged that a trust can draw upon all the
patent devices of the constituent companies, and employ
only those that are most efficient. But advantages accru-
ing from this fact will in most cases prove to be of a tem-
porary nature, as trusts that have tried to base a monopoly
upon the control of all available patents have learned in
the past, and will learn in the future. Moreover, a simple
reform in our patent laws will make the best processes
available for all producers at any time that the public finds

THE GOOD AND THE BAD OF TRUSTS 127

such a measure to be necessary for protection against mono-
poly. Here, then, we find no natural law working resistlessly
towards combination, but a man made device which can be
regulated as public policy may dictate.

Again, we are told that a trust can produce more cheaply
than separate concerns, because all the plants utilized can
be run at their full capacity; whereas, under competition,
many establishments can be kept in operation but a part of
the time. Two observations may be made concerning this
claim. First, the extent of the economies thus realized is
grossly exaggerated. The whiskey combination furnishes the
stock illustration employed to enforce this argument; and we
are told that this trust was able to close all but twelve out
of the eighty constituent plants, and yet produce almost the
same quantity of spirits that formerly had been put upon the
market. But the distilling industry is a highly exceptional
case. For twenty five years prior to the formation of the
trust the federal tax upon whiskey had been so manipulated
by the distillers as to call into the industry enormously exces-
sive investments of capital. Competition, of itself, would
never have produced conditions even remotely resembling
those that prevailed in this business from 1865 to 1887.
The sugar refining industry is another stock illustration,
but here, it is conceded, the tariff had given an undue stimulus
to investments ; and the same thing is true, probably, of many,
if not most, of the trusts that have been able to close up a
considerable number of plants. In general, it may be denied
that, whenever governmental interference has not produced
unhealthy and abnormal conditions, competition has led to
such absurdly excessive investments as is commonly assumed.
We must concede, however, that under normal conditions
some reduction can be made in the number of plants required
to supply the market at ordinary times; but this does not
dispose of the matter. If a trust is to be prepared for sup-
plying the market promptly in times of rapidly increasing
demand, it is necessary that some surplus productive capacity
must exist in periods of stationary or decreasing demand ; for
as believers in the tendency to monopoly often remind us,
many months, or even one or two years, are required for

i28 CHARLES J. BULLOCK

the construction of new plants. When this fact is taken
into account, the case will stand as follows: except where
the action of government has produced abnormal condi-
tions, the capacity of competing establishments does not
exceed the requirements of the market to any such degree
as is commonly assumed; even a trust must provide for
periods of expanding trade, and this fact diminishes mate-
rially the margin for saving by avoiding the burden of idle
factories; even then, not all rival establishments suffer seri-
ously from inability to find continuous employment for their
plants, so that probably the advantages secured by the trust
are of consequence only when the least fortunate or least
efficient independent concerns are made the basis of com-
parison. In those cases, however, where abnormal conditions
have been created by the operation of our tax laws, we need
entertain no surprise at the appearance of consolidated com-
panies. But in the future, it may be asserted, this particular
force will not prevent rival companies from competing for a
share of an increasing trade.

The last three economies relate to advantage in buying
materials or selling products. It is urged that a combination
can purchase its raw materials more cheaply than separate
concerns. This would probably be interesting news to many
large companies not connected with trusts, and Professor Ely
is undoubtedly right in remarking that all ability in bargaining
is not controlled by combinations. No one doubts that a
large company can often secure better terms than a small
establishment ; but it is not so clear that every trust can secure
supplies more cheaply than large independent enterprises,
unless it is true that all combinations can arbitrarily depress
the prices of the materials which they consume. Undoubt-
edly, this has been done by some of the trusts, although
their partisans deny it; but such a saving represents no
social gain, and sometimes it may be possible for would be
competitors to profit by the depressed condition of the market
for raw materials. We do not need to deny that any com-
bination can gain an advantage in the purchase of supplies,
in order to support the contention that no general advantage
accrues to the trusts from this source. On this point a

THE GOOD AND THE BAD OF TRUSTS 129

majority of forty one combinations recently investigated
"did not answer this question specifically/' while the rep-
resentations made by the minority claimed no great economy
in purchases except in a few cases. Even when considerable
savings are realized, it is always possible that these represent,
chiefly or wholly, gains on that part of the aggregate pur-
chases which was formerly made by the smaller and weaker
establishments; so that the realizing of a net gain does not
establish the existence of an advantage over the largest com-
panies that entered the combination.

Finally, we come to economies in advertising and in
soliciting business, where the wastes of competition are cer-
tainly serious and the room for improvement correspondingly
great. Those who deny the tendency to monopoly generally
admit that a trust can have a material advantage here, while
those who affirm the existence of such a tendency evidently
realize that their case is strongest at this point. Yet an
opportunity for saving in these departments does not always
exist, and the extent of the economy is easily exaggerated in
other cases. Mr. Nettleton is right when he says: "But to
whatever extent the trust organizers have counted on prac-
tically cancelling expenditure for these two items, on the
ground that buyers will be obliged to come to the sole manu-
facturers, they are likely to be surprised. Those trusts that
have tried this experiment have discovered that demand for
commodities falls off with remarkable rapidity as soon as
effort in pushing sales is materially reduced. To an extent
which few appreciate, the buying public has become accus-
tomed to being reminded of its needs before making purchases.
The country merchant often has more inertia than enterprise,
and, with the periodical visits of his favorite drummer dis-
continued, his orders dwindle or are delayed until unseason-
able. Except in staple and absolutely necessary commodi-
ties, demand is largely created and maintained by advertising
through periodicals, catalogues, or traveling salesmen. Hence,
the trust that expects to save the bulk of this important item
must also expect to lose through diminished sales more than
the economy represents. This is not theory, but the testi-
mony of leading dealers in many lines."

Vol. 3-9

i3o CHARLES J. BULLOCK

Moreover, those who believe in the permanence of com-
petition will not lose sight of another consideration which is
advanced by Professor Marshall, who writes concerning the
economies accruing from these sources: "But its weakness in
this regard lies in the fact that to keep its monopoly it must
be always bargaining and manoeuvring on a large scale.
And if its monopoly is invaded, it must bargain and manoeuvre
widely in matters of detail as well as in larger affairs.' '

The result of our discussion up to this point would seem
to be that any advantages of a monopoly over independent
concerns of a large size are but slight, except in the single
matter of effecting sales. We must now take into account
certain counteracting forces, upon which some writers rest
their belief that competition will ultimately prevail. These
economists contend, in the first place, that, outside the field
of the natural monopolies, the growth of a business enterprise
is limited by the fact that companies of a certain size will
secure "maximum efficiency" of investment, and that beyond
this point concentration brings no increase in productive
capacity. Without introducing the arguments of professional
economists upon the subject, it may be pointed out that this
view is entertained by many men who have a practical ac-
quaintance with our large manufacturing industries. This
position is based upon the belief that a factory of a certain
size will enable machinery to be employed in the most ad-
vantageous manner; that a reasonable number of such plants
will make possible all needful specialization of production;
that allied and subsidiary industries can be, and are, carried
on by large independent concerns; and that the cost and
difficulties of supervision increase rapidly after a business
is enlarged beyond a certain size, especially when it is at-
tempted to unite plants situated in different parts of the
country. For this reason, increased output does not decrease
the burden of fixed charges after a company attains a certain
magnitude; but, on the contrary, new charges arise. Among
such new expenses, not the least important are the cost of
employing the most skilled legal talent to steer the combina-
tion just close enough to the law, the expenses necessary for
"legislative" and "educational" purposes, and the outlays

THE GOOD AND THE BAD OF TRUSTS 131

for stifling competition or the continual "buying out" of
would be rivals.

Not only is it denied that consolidation secures no
decrease of fixed charges over independent concerns possessing
sufficient capital, but it is argued that an established monop-
oly will suffer actual loss from listless and unprogressive
management. As the New York Journal of Commerce rightly
insists, "it is not to be denied that such concentrations of
management will be subject to countervailing offsets from
the absence of the stimulus of competition; from the uncer-
tainty about the management falling into the best possible
hands; from the discouragement to invention which always
attends monopoly ; and from the possibility that the adminis-
tration may be intrusted to 'friends' rather than to experts."
And the existence of such drawbacks is admitted by many
of those who believe combination to be desirable and inevit-
able. As Professor Clark suggests, an established monopoly,
secure in the possession of the markets of a large country,
"would not need to be forever pulling out its machines and
putting in better," so that, as compared with countries where
industry is upon a competitive basis, such a combination
would fall behind in the struggle for international trade. In
ruthlessly and unceasingly displacing expensive machinery
with newer and better appliances, American manufac-
turers have probably led the world; but monopolies will
inevitably feel reluctant to continue such an energetic policy
of improvement. As combinations obtain a greater age,
they will persist in old and established methods; while nepo-
tism and favoritism, tending towards hereditary office-
holding will replace the energetic management that some
of the trusts now display. Andrews is correct in holding
that the quest for able and progressive management, which
often marks the efforts of existing trusts to make their domi-
nating position secure, is no argument against the probability
of future apathy when monopolies have been long established.

Here we may refer to two of the alleged advantages of
trusts. It is said that combinations develop abler manage-
ment through the opportunity they afford for a specializa-
tion of skill upon the part of their officials, and that efficiency

i32 CHARLES J. BULLOCK

is increased by a comparison of the methods and costs of
production in the various plants. The first of these advan-
tages may be open to question, since it is not clear that large
independent concerns do not afford sufficient room for spe-
cialization of talent; while it may be denied that, in the long
run, any possible gain from this source will suffice to counter-
balance the apathy begotten by monopoly. Concerning the
second it may be remarked that, at the outset, this gain would
accrue only to the least efficient plants, and would not make
the combination superior to the best of the original estab-
lishments ; while, after a time, although all the factories might
be brought up to the same level, the lack of competition would
retard the rate of future improvement.

When it is contended that the " strength of the trust is
that it gives the opportunity for the exercise of these high-
est qualities of industrial leadership,'' and that it gives us
"a process of natural selection of the very highest order,"
we may question whether stock speculation and other causes
lying outside the sphere of mere productive efficiency have
not had more to do with the formation of recent combina-
tions than demonstrated superiority in business management.
And, even if it be admitted that dominating powers of leader-
ship have played their part in the movement, it may be
asserted that the establishment of permanent monopoly
will interfere seriously with the future process of selection.
Professor Lindsay has remarked very justly that the " de-
velopment of a high order of undertaking genius in the few
seems .... to depend upon a wide range of undertaking
experience in the many," and that under a regime of trusts
"we would in the course of a few generations have very
little available material from which to make selections."
It must be remembered that the able leaders now at the
head of the successful trusts were developed out of a field
which afforded the widest opportunity for creative ability
and independent initiative. These are the supreme qualities
requisite for great industrial leadership; and they are not
likely to be fostered by a regime which, if the believers in
monopoly are to be taken at their word, closes each impor-
tant branch of manufactures to new enterprises, and renders

THE GOOD AND THE BAD OF TRUSTS 133

hopeless all competition with a single consolidated company.
Will successive generations of bureau chiefs or heads of
departments in long established corporations be able to con-
tinue the race of masterful leaders, which freedom in origi-
nating and organizing independent industries has given us in
the present age?

This leads to another consideration. In an industry
organized upon a national scale, under the control of a sin-
gle company, there must arise an "irrepressible conflict"
between that central responsibility necessary for intelligent,
unified management and that individual freedom and energy
requisite for the healthful life of the separate members.
For centralized control, elaborate and costly administrative
apparatus is absolutely essential; and this mechanism of
superintendence soon becomes fixed and bureaucratic in its
methods, so that it bears heavily upon the individual parts.
President Hadley has said recently that, as trusts gain in
age and experience, good private business will become so
similar to good public business that it will make little differ-
ence whether an enterprise is carried on by the public or by
individuals. In one respect, at least, his argument is well
founded. Governmental enterprises usually suffer, at least
when conducted upon an extensive scale, from the lack of that
stimulus which only competition can give and from the
growth of fixed bureaucratic methods of control. A private
monopoly that engrosses an entire branch of industry must
develop inevitably, in the course of time, the very charac-
teristics that impair the efficiency of a public undertaking.
Both will exhibit the tendency to unprogressive management
which comes from the absence of competition and the weight
of centralized administrative machinery.

When all the arguments are sifted, and the balance of
advantage or disadvantage is determined, there is reason
for thinking that the losses due to monopoly will more than
offset occasional slight gains in the work of manufacture
and the more substantial savings in placing products upon
the market. This conclusion is strengthened by the showing
which most of the trusts have made in the payment of divi-
dends upon their securities. As is well known, the preferred

134 CHARLES J. BULLOCK

shares have usually represented the amount paid in cash or
securities for the plants that have been purchased and for
the working capital supplied by the financier. The common
stock represented nothing more than "the substance of
things hoped for" in the way of alleged economies of opera-
tion. Although times have been unusually prosperous, and
prices, already high, have often been increased by the trusts,
dividends on the common stock have almost universally
disappointed the expectations of those who invested with the
hope of securing a part of the "enormous" savings of com-
bination.

The second argument advanced to prove the tendency
to monopoly is the claim that mere mass of capital confers
such powers of destructive warfare as to deter possible com-
petitors from entering the industry, at least until prices
have long been held above the competitive rate. It is said
that a large combination can lower prices below the cost
of production in any locality where a small rival concern is
established, thus driving it out of the field. If, on the other
hand, a large rival company attempts to compete in all mar-
kets, this will mean an investment of capital in excess of the
needs of trade, with a consequent depression of business and
loss to all concerned. Without doubt the destructive com-
petition waged by combinations is an important consideration,
and it may well enough re-enforce monopoly where other
attendant circumstances favor consolidation. But a monop-
oly based solely upon this power would be, confessedly, a
temporary affair; for probably no one would claim that all
capitalists would be intimidated permanently by such cir-
cumstances. This argument, therefore, may be used properly
enough to strengthen the conclusions drawn from the alleged
economies in production; but it does not of itself establish
the existence of a permanent tendency to monopoly. Of
this truth, any one who observes the trouble which trusts are
having with new enterprises at the present moment may ob-
tain sufficient evidence.

It should not be forgotten, furthermore, that this argu-
ment depends upon the fact that combinations at present
are allowed to employ the weapons of discriminating prices

THE GOOD AND THE BAD OF TRUSTS 135

and other tactics, which violate every one's sense of fair
play although they may be difficult to suppress. If uniform
price lists could be made obligatory, then this power of intimi-
dating rivals would largely disappear; for, if a trust must give
its product away in all markets in order to ruin a competitor
who enters a portion of the field, then its losses would be
proportionate to the mass of capital, and the advantage over
the independent concern would disappear. Without doubt
the prevention of price discriminations would be a work of
great difficulty; but, if this must be done in order to prevent
the abuses of monopoly, then some way of accomplishing the
result can and will be foimd. Such a remedy will be less
difficult than the elaborate schemes which those who believe
in trusts advocate in order to remove admitted abuses in
other directions. The menace of mere mass of capital is at
the most a cause of temporary monopoly, and its potency
can be destroyed by depriving the trusts of their favorite
method of "sand-bagging" competitors.

The final reason for the belief that combinations must
ultimately prevail is found in the character of modern com-
petition in those industries which require heavy investments
of fixed capital. Under such conditions the difficulty of with-
drawing specialized investments and the losses that are en-
tailed by a suspension of production, make competition so
intense that prices may be forced far below a profitable level
without decreasing the output; and industrial depression
inevitably follows. For such constant fluctuations in prices
combination is considered the natural and inevitable remedy.
Some writers allege, furthermore, that it "is not possible to
have competition without competitors, and, if there be com-
petitors, one must prevail," so that monopoly "is the inevi-
table fruit of competition."

The socialist who reads some of these arguments must
feel that at last many of the criticisms which he has long
urged against competition have been accepted by econo-
mists of the orthodox type. Certainly, few stronger indict-
ments of the competitive regime have been formulated by
socialistic critics of the existing social order. Thus the be-
lievers in trusts tell us that "individualism and the competi-

136 CHARLES J. BULLOCK

tive system have run their course;" that "the competitive sys-
tem of industry is fast passing away;" that competition is
" inadequate and wasteful," resulting in " general depression"
and "industrial loss;" that the competitive regime leads to
warfare that is first " intense," then "destructive," then " self-
destructive ;" that competition is not the "life," but "the
death of trade" and "a destroying force to those engaged in
it," so that it is termed "business committing suicide." Pro-
fessor Ely remarks, justly enough, that such contentions are
"a virtual surrender to the theory of socialism." In any
event, the reader will perceive that it is idle for economists
who hold these views to imagine that their theories do not
lead to the conclusion that competition is impossible and
permanent monopoly inevitable in the industries to which
the discussion relates.

In continuation of this line of argument, it is said that
trusts are beneficial, because they can "exercise a rational
control over industry," and "adjust production to consump-
tion." Thus it is believed that commercial crises can be
prevented, or, at least, that their worst effects can be avoided.
But such arguments overlook the facts that a restriction
placed upon production by a trust, especially if this is suf-
ficient to raise prices above the competitive rate, may react
injuriously upon other trades; and that monopoly profits,
accruing to a small body of capitalists for a long period of
time, must constitute a tax upon the body of the people that
will affect the distribution of wealth in such a way as to re-
duce the consuming power of the masses. A reduction in
purchasing power thus produced would render excessive the
existing investments in staple industries, and produce crises
in precisely the manner described by Rodbertus and Marx.
It remains to be seen how our own trusts will deal with the
almost inevitable reaction from the intense speculative activ-
ity of recent years in the United States. If trusts are unable
to destroy the competition that is now disturbing the serenity
of their managers, and must meet with continual interfer-
ence from " interlopers," it may turn out that combinations
professing ability to secure large profits on excessive capi-
talization are such a tempting mark for rival capital that

THE GOOD AND THE BAD OF TRUSTS 137

our new remedy for industrial depression will merely intensify
the evils which it was designed to cure.

Not only is it doubtful whether monopoly is a wise
method of regulating industry, but it is certain that the evils
of competition are greatly exaggerated in some cases, while
in others they are due to unhealthful conditions for which
an interference with industrial freedom is responsible. Men-
tion has already been made of the distilling industry, which
has served as a typical example of the evils of competition
and the benefits of combination. Here all will admit that
excessive investment was due to the unwise action of con-
gress in changing the rate of taxation in such a manner as to
benefit the distillers, and to lax enforcement of the revenue
laws, which enabled those who evaded the exciseman to real-
ize a profit of several hundred per cent. In this case, depres-
sion was not due to mere competition; and, moreover, the
formation of pools, and finally a trust, served merely to call
more capital into the industry and to intensify the evils.

In many other industries where trusts have been formed,
the excessive investment of which writers complain was
caused by the undue stimulus given by high protective duties
and by the restriction of foreign competition. Upon over-
investments caused by increases in the tariff, enough has been
said in a previous paragraph; but the second topic requires
further explanation. The iron and steel industries are the
best illustration of the periodic fluctuations of prices, of
which the believers in trusts complain; and Professor Taussig
has recently demonstrated that these phenomena are greatly
intensified by the operation of our tariff. He shows that in
times of rising prices the restriction of importation has thrown
upon domestic producers nearly the whole work of supplying
the expanding market. Since new plants cannot be erected
in a short time, prices increase enormously before domestic
production equals the demand. These high prices cause ex-
cessive investment, and hasten a reaction which results in a
consequent period of depression. During the recent "boom"
in the iron markets of the world, English prices rose from
$9.80 to $16.70 per ton for one grade of pig iron, and from
$11.70 to $18.60 for another, an increase of 70 per cent for

i38 CHARLES J. BULLOCK

the first kind and 59 per cent for the second. At the same
time American prices rose from $10.00 to $25.00 per ton, an
increase of 150 per cent, so that the absence of foreign compe-
tition made the fluctuations more than twice as great as they
were in the English market. This, he adds, "is but an illustra-
tion of the simple principle that, the wider the range of the
sources of supply, the greater the steadiness of prices." When
Mr. Carnegie complains, therefore, of the alternating periods
of expansion and depression that beset the iron industry, he
merely emphasizes the connection between our protective
tariff and the intensification of the causes that are alleged to
produce trusts. Since the range of our protected industries
is so great, the importance of the considerations just pre-
sented can hardly be overestimated. Competition is re-
stricted by protective duties in most of the industries where
combinations are formed; these duties increase the severity,
and perhaps the frequency, of the fluctuations from which
business suffers; then trusts, a further restriction of freedom,
are advocated as a remedy for the ills caused by the initial
interference with individual enterprise; and, finally, in order
to regulate the trusts, an elaborate system of public super-
vision is proposed. Would it not be well to make a genuine
trial of competition before condemning it for producing evils
which are greatly increased by governmental interference
with industrial freedom?

Competition cannot be proved a failure until it is given
a trial. The evils from which many economists would seek
refuge in industrial combination are greatly increased by un-
wise laws which have now outlived any usefulness that orig-
inally they may have possessed. If unhealthful conditions
produced by our own interference with the course of business
are ever removed, competition will probably develop no evils
which could not be borne, as vastly preferable to monopoly,
public or private. Indeed, even as things are, the short-
comings of the competitive system are exaggerated; and
attempted monopoly is more likely in the end to increase,
rather than mitigate, those periodic fluctuations from which
industry suffers.

THE GOOD AND THE BAD OF TRUSTS 139

Monopoly is not a pleasant word, and believers in the
wasteful and destructive character of competition prefer
to speak of trusts as combinations; or, when they use the
term monopoly, hasten to explain that this does not imply
the absence of all competition. Thus it is said that either
actual or potential competition will oblige the trusts to share
with the public the savings arising from consolidation, and
will protect the consumer from serious injury. Since this
argument has been allowed hitherto to pass without serious
criticism, the reader is asked to give it a moment's considera-
tion.

When Professor Clark says that the actual investment
of new capital is not always necessary in order to restrain
the power of a combination to raise prices, because the mere
possibility of rivals entering the field may suffice, his argu-
ment is not inconsistent or absurd, because he does not be-
lieve that a monopoly is a more efficient agent of production
than a large independent concern, or that the competitive
regime is necessarily destructive and suicidal. And, when
he shows that this " potential" competition of new capital
can be made more effective by abolishing railroad discrimi-
nations and discriminating prices, he makes a distinct contri-
bution to the discussion of the trust problem. But no such
argument can come, without manifest inconsistency, from
economists who believe that a trust is superior to independent
companies. The gulf between permanent monopoly and com-
petition cannot be bridged, even by appealing to such a sub-
tle agency as potential competition.

In the first place, competition, actual or potential, could
not distribute among consumers more than the most infin-
itesimal share of the alleged economies of monopoly. The
reader will remember that the advocates of combination
consider that it is proved that a single company can pro-
duce and market commodities at a much lower cost than
independent concerns. If this be true, we may assume
that, if the lowest price at which an independent company
can afford to sell a commodity be one dollar, a combina-
tion can afford to sell for still less, say eighty cents, and
that the difference of twenty cents represents the savings

i4o CHARLES J. BULLOCK

effected by monopoly. Now it is evident that competition
can never, except for relatively short periods when the
market is overstocked, reduce the price below one dollar,
and that producers will never enter the field unless they
hope to be able to secure at least these figures. A monopoly,
therefore, can maintain the price at ninety nine and nine
tenths cents without inviting competition; and the public
cannot hope to secure more than the most insignificant
fraction of the savings due to consolidation. Competition,
manifestly, can do no more than prevent prices from rising
as high as one dollar. Competitors might, at the outset,
enter the industry under a misapprehension of the situa-
tion; but it would soon be demonstrated that a price just
under one dollar would make competition hopeless. If,
moreover, as is alleged, mere mass of capital tends to deter
competition until prices are raised somewhat above the com-
petitive point, this argument becomes still stronger; and it
would seem that the monopoly might charge even one dollar
without holding out sufficient inducements to possible rivals.
Thus the whole saving, and possibly something more, would
go to the combination.

Secondly, even if competition could hold monopolistic
power in check, the remedy would be wasteful and uneco-
nomic, and would mark a return to the very evils which
combination is supposed to cure. The argument for monop-
oly is based upon the claim that competition is wasteful,
destructive, and productive of all the evils in the calendar.
To remedy the evils of competition, it is proposed to resort
to combination: then, to cure the wrongs of monopoly, it
is argued that we can return to competition. Indeed, the
evils of renewed competition after monopoly has once been
established are more intense, since the chances are that
the high profits of the combination will call too much capi-
tal into the field; so that the last state of the industry that
has been regulated " rationally" and "scientifically" by
a single company will be worse than the first. Moreover,
if combination possesses all the advantages that are claimed
for it, wise public policy would necessitate the adoption of
some method of preventing waste from the useless duplica-

THE GOOD AND THE BAD OF TRUSTS 141

tion of manufacturing plants. In public service industries,
where all people have become convinced that competition
does result disastrously both to producer and consumer,
such a restrictive policy has been followed. We no longer
think of paralleling existing lines of railroad in order to
remedy the evils of extortion, and few cities will in the future
permit their streets to be torn up in order to install unneces-
sary gas or water mains. If, in manufacturing business,
consolidation has all, or nearly all, of the advantages which
it possesses in the railway, gas, or water industries, public
policy will dictate that the evil results of competition be
recognized and that future waste of capital in rival establish-
ments be prevented. The arguments in favor of combination
suffer from a superabundance of proof that monopoly is more
efficient in production and more healthful and rational in
seeking for public favor. Those who accept these argu-
ments as correct should carry them to their logical con-
clusion, and admit that competition is an undesirable remedy
for whatever evils monopoly may develop, and that public
regulation is the only available method of correction short
of socialism.

Finally, it should be remarked that competition is not
only an undesirable, but an impossible remedy, if the ten-
dency to monopoly is as strong as represented. If compe-
tition with consolidated concerns is hopeless on account of
advantages in producing and marketing goods, capital will
soon find this out, and refrain from further meddling with
enterprises that are foredoomed to failure. If the business
world becomes convinced that competition inevitably leads
to suicidal warfare when large investments of capital are
involved, then public opinion or positive restraints of law
will demand that further criminal waste of capital and
energy shall cease. Potential competition will lose all of
its virtue when the futility and folly of actual competition are
once forced upon the convictions of those who possess capital ;
and, when this happens, the monopolist will soon forget that
the danger of rivalry ever existed. If experience ever demon-
strates that the arguments of many economists are correct,
then we shall be confronted by the grim fact that competition

i42 CHARLES J. BULLOCK

is dead and that monopoly is inevitable in most important
branches of manufacturing industry. Remedy there will
be none, save public ownership or public regulation; and
past experience raises uncomfortable doubts whether, under
the second method, the government or the trusts would be
the regulating power.

Most of the questions raised by this survey do not admit
of the application of precise methods of determination,
and all that can be done is to weigh opposing forces and
form a rough estimate, based upon general impressions
oftener than exact measurement, of the relative strength
of the advantages and disadvantages of consolidation. While
conclusions thus reached fall far short of certainty, and pre-
diction is dangerous, this is due to the fact that data for a
more exact investigation are denied to economists, who can,
at the best, secure but occasional glimpses into the inner
workings of great business corporations or draw what infer-
ences seem warranted by the facts that come to the attention
of the public. This examination of the recent drift of opin-
ion concerning trusts would seem to have established only
two conclusions: first, it will be wise to maintain a position
of skepticism concerning the alleged advantages of combina-
tions; and, secondly, it is very important to notice that the
alleged tendency to permanent monopoly is irreconcilable
with the continuation of anything that properly can be called
competition.

If we adopt the conclusion that it is improbable that
trusts are caused by superior efficiency in production, we
are not, of course, without assignable reasons adequate to
explain the movement towards consolidation in the United
States. Control over limited supplies of natural resources
is the strength of some combinations; railway discrimina-
tions, patent rights, and the shelter of protective duties have
given material comfort and support to others. The oppor-
tunity to secure fancy prices for manufacturing plants, which
could then be capitalized at still higher figures for the profit
of the promoter and financier, is another explanation of vast
importance. With so many premiums offered for combina-
tions, the only cause for wonder is that any industries have

THE GOOD AND THE BAD OF TRUSTS 143

escaped consolidation. Finally, the losses that competition
often entails, which have been made worse by unwise laws,
have furnished a pretext of no little plausibility for attempts
to form monopolies. It is at this point that the arguments
in favor of trusts possess most weight.

Yet, with all the strength that the movement towards
combination has acquired, competition has always vexed
the would be monopolist, and is especially active at the
present moment. As this is written, one trust is already
confronted by fourteen independent companies, while an-
other rival enterprise with a capital of $1,000,000 is in process
of formation. Another combination owning 290 mills was,
in October, confronted by independent companies operating
seventy four mills ; and in December a new concern with a
capital of $5,000,000 was formed. Almost every day brings
word of the appearance of new competitors for various trusts,
and that the revival of competition may be considered a
general movement. Some of the independent enterprises
may have been started with the purpose of selling out to the
trusts; but, if combinations have the superior efficiency that
is claimed for them, they are under no obligation to purchase,
and the investors in rival concerns would be taking incon-
ceivable risks if competition were really useless. Trusts pur-
chase rival concerns because competition from such com-
panies is dangerous, and not hopeless; and the revival of
independent enterprise is a reason for believing that the
business world has not accepted the theory that a combina-
tion possesses material advantages over separate companies
of a large size. Experience may yet demonstrate that the
attempt to " regulate" industry by consolidated enterprise
is the surest method of producing over investment and de-
pression.

If one concedes that competition is attended with real
evils, he is admitting nothing that economists have not
known for a long time; and, if it is denied that combination
is a good, or even possible, remedy for the ills from which we
occasionally suffer, all hope of escape does not disappear.
The growth of fixed capital has undoubtedly introduced into
industry a disturbing element, productive sometimes of flue-

i44 CHARLES J. BULLOCK

tuating prices and excessive investments of capital in certain
directions. The situation can be improved by the repeal of
unwise laws that intensify whatever unhealthful tendencies
competition may have; and, beyond that, relief can be found
in measures that will raise business management to a higher
plane. The moral and legal responsibility of our captains
of industry must be made commensurate with the enormous
powers that they wield; and the same moral restraints to
which, in the last analysis, even believers in combination
appeal, would prove a solvent of the very ills which monopoly
is supposed to remedy. Then sound judgment can be fostered
by the further development of industrial statistics; and,
finally, the substitution of a moderate policy in the place of
monopoly hunger, would be more helpful than all else. It
may be found, in the long run, that a willingness to allow one's
neighbors to five not only possesses more solid advantages
than the " economies of combination," but is the only basis
upon which private ownership and control of industry can
continue. As corporate enterprises in America grow older,
each company may cease to be dominated by a few men;
and the management may come to represent the average
opinion of the stockholders. Such conditions would prob-
ably favor the development of a "live and let live" policy.
In any event, it will prove easier to impress upon independent
business firms the saving grace of moderation than to per-
suade the monopolist to exercise his powers in a wise and
benevolent manner. Good despots there have been, un-
doubtedly ; but we have had no experience with human nature
that goes to prove that autocratic control is generally safer in
industry than in politics.

TRUSTS AND PRICES.

BY I. A. HOURWICH.

[Isaac A. Hourwich, statistician; born Wilno, Russia, April 27, 1860; his life has been
devoted almost entirely to statistics, and for the past fifteen years he has done much
of the most important statistical work for the United States government, and is
statistical expert for the bureau of the census; he has also written many articles on
copper, gold, silver, lead, and zinc mining, and is author of The Economics of the
Russian Village.]

We propose to consider in the following pages the effect of
combination on the prices of raw material and finished prod-
ucts. The United States industrial commission concludes,
in its review of evidence on the subject of combinations, that
the latter are in a position to buy their raw material cheaper
than their competitors. The commission is inclined, how-
ever, to minimize the effects of this advantage. It is shown,
e. g., that the saving of the sugar trust on this item does not
exceed one sixteenth of a cent per pound ; it appears, however,
from the testimony, cited further, that if the competitors of
the trust find it "difficult to secure a customer, they will cut
the price perhaps one sixteenth of a cent per pound. One or
two of the chief competitors seem to be forced to put their
prices quite frequently at one sixteenth of a cent below that
of the American Sugar Refining company." It would follow
that this saving of "not more than one sixteenth of a cent per
pound" would enable the American Sugar Refining company
to meet the cut and still retain the former advantage over its
competitors. The difference is, accordingly, one not to be
treated as a negligible quantity.

The figures published on the subject of the prices of crude
materials by the commission relate only to the oil combina-
tion and have been furnished by Mr. Archbold, vice-president
of the Standard Oil company, and Mr. Boyle, editor of the
Oil City Derrick, a witness friendly to the company. The
tables confine themselves to Pennsylvania oil, which is a high
grade product, and give the total amount of crude oil pro-
duced annually from 1860 to 1898, the total annual valuation

Vol. 3-10

145

146

I. A. HOURWICH

of the product, the number of wells drilled by decennial peri-
ods and the estimated cost per well, from all of which the
sum of $263,968,413.75 is obtained "as the profits of the pro-
ducing business for the last thirty nine years, or an average
of $6,768,420.86 per year." The result appears to be quite
satisfactory, compared with the annual valuation of the prod-
uct, which averaged, for the period from 1870 to 1890, in
round numbers $20,000,000, and from 1890 to 1898, about
$28,000,000.

These results are obtained, however, by combining the
early period of oil production, when prices were generally
high, with the later years, following the organization of the
oil combination, which were marked by low prices of crude
oil. Whether this was a mere coincidence, or there was a
casual connection between the combination and low prices,
can be ascertained only by treating each period separately.
An element of uncertainty in estimates of this sort is the
landed interest, which has varied, since the beginning of oil
production, from one half to one eighth of the output. Mr.
Boyle's calculation is made upon the basis of an average rental
of one fourth for the whole period 1860-1898; Mr. Archbold

1860-69

1870-79

1880-89

1890-98

I. Averages per well:

5,589
$22,228.00

4,000.00
1,397.00
5,557.00

$10,954.00
11,274.00

5,427
$10,395.00

3,000.00
1,357.00
2,599.00

7,548
$6,457.00

2,000.00
1,887.00
1,619.00

6,819

$5,886.00

Cost:

Land interest, 25 per ct . .

2,000.00
1,705.00
1,472.00

$6,956.00
3,439.00

$5,506.00
951.00

$5,177.00

715.00

II. Averages per bbl:

$3.98

$1.92

$0.86

$0.87

$0.99
.96

$0.48
.81

$0.21
.52

$0.22

.54

Total cost

$1.95
2.03

$1.29
.63

$0.73
.13

$0.76

Profit

.11

adopts the present rental of one eighth throughout the period.
The tendency of this assumption is to give the total an appear-
ance more favorable to the oil producer.

TRUSTS AND PRICES

147

As totals do not lend themselves to comparison, the
figures must be reduced to averages. We first take the tables
furnished by Mr. Boyle and calculate from them the averages
per well drilled and per barrel of crude oil.

In this calculation the bonus, or rental paid for holding
the ground, is not considered at all. Mr. Boyle concedes that
"it operates against the profits;" he concedes also that it is
necessary to pay this bonus in order to pursue the business,
but he thinks that "the lease is speculative" and should
therefore not enter into the cost of operating.

Granting, for the sake of the argument, the contention to
be correct, it appears nevertheless that within the last two
decades, i. e., since the organization of the oil combination,
the average profits of the producer have been reduced from
$3,439 to $715 per well, or from 63 cents to 11 cents per barrel.
The average price has for the last two decades remained con-
stant, as well as the average cost of operating; that is to say,
in the long run, the fluctuations within each decade, extreme
as they were, affected neither the average price, nor the
average cost. This stability points to an equalization of
supply and demand, when taken for periods of sufficient
length. The inference is sustained by a comparison of the
average annual production with the total stocks on hand
before and after the organization of the trust. In the follow-
ing table the year 1882, in which the trust was organized, is
excluded and the averages are taken by eight year periods.

Average Annual Production.

Average Stocks.

Period.

1000 bbls.

Percentage of

increase over

preceding

period.

1000 bbls.

Percentage of

annual

production.

Average
price.

1874-81

14,307
23,448
32,894

.64
.40

8,660
25,832
11,029

.60

1.10

.33

11.40

1883-90

.86

1891-98

.86

During the first period following the organization of the
trust the production of crude oil increased by 64 per cent as
compared with the period next preceding, which resulted in an
increase of the stocks slightly above the amount of the annual
output. The oil combination justly claims the credit for
having brought American oil into every nook of the world;

148

I. A. HOURWICH

in view of this fact an increase of the output by about three
fifths, while the population of the United States increased by
one fourth, could not be termed overproduction. During
the next eight year period, however, the average annual pro-
duction increased only by 40 per cent, whereas the population
of the United States, according to the twelfth census returns,
increased by about one fifth; at the same time the average
stocks of oil were reduced to 33 per cent of the annual produc-
tion, which is equal to the output of four months; still this
contraction of the output had no effect on the price. There
is no evidence of either overproduction, or reduction of cost
of operating. But the price of crude oil was during these
years made by the trust, — this was admitted by its represen-
tatives who testified before the industrial commission. There
is no escape from the conclusion that the fall of nearly 80
per cent in the profits per well must have come from the
efforts of the trust to keep the price of crude oil down.

The average profits per well, taken for an eight year
period, do not tell the whole story, however, since a well be-
comes dry, as a rule in about six months. To form a better
idea of the condition of the oil producer, we shall compare the
average cost of operating per barrel with the prices ruling for
shorter periods. Taking the average monthly prices up to
1894 and the daily prices since 1895, as given in the report of
the industrial commission, and converting gallons into barrels
(42 gallons — 1 bbl.), we obtain the following table:

Date.

Averages per barrel.

Net loss

Price.

Rental
(=30.

Drilling

and lifting

Total cost.

July, 1884. ..

$0.63

.67

.62

.67
.59
.67

.71
.51

.71
.63

$0.16

.17
.15

.17
.15
.17

.18
.13

.18
.16

$0.52

.52
.52

.52
.52
.52

.54
.54

.54
.54

$0.68

.69
.67

.69
.67
.69

.72
.67

.72
.70

$0.05

June to October, 1886:
Highest

.02

Lowest..

.05

February to September, 1887:
Highest

.02

Lowest

.08

December, 1890

.02

April, 1891, to October, 1893:
Highest

.01

Lowest

.16

August, 1897, to February, 1898:
Highest

.01

Lowest

.07

TRUSTS AND PRICES

149

Thus, relying upon the figures furnished by the editor of
the Oil City Derrick, we arrive at the conclusion that within
nine years out of seventeen since the organization of the trust,
the average monthly price of crude oil fell at times below the
average cost of operating; such a condition continued in 1886
for five months, in 1887 for eight months, and in 1891-93 for
two years and seven months in succession. Even amidst the
prosperity of 1897 and 1898 the price of crude oil was for more
than half a year below the cost of operating.

In the preceding table the rental is figured at one fourth
of the gross product, as estimated by Mr. Boyle ; the result is
not materially changed, however, if Mr. Archbold's estimate
is accepted, as shown by the following table, where the rental
is figured at one eighth :

September to December, 1891:

Highest

Lowest

February, 1892, to February, 1893:

Highest

Lowest

May to August, 1893:

Highest

Lowest

Averages per barrel.

Price.

$0.60
.58

.60
.51

.59

.58

Rental
(= Vt).

i.07
.07

.07
.06

.07
.07

Realized.

.53
.51

.53
.45

.52
.51

Net loss

(cost = 54

cents).

$0.01
.03

.01

.09

.02
.03

Thus, according to the showing made by a vice president
of the Standard Oil company, there were within the space of
two years, from September, 1891, to August, 1893 (both in-
clusive), just three months when the average price of crude
oil repaid the cost of operating, viz., January, 1892, and
March and April, 1893; during the rest of the time the price
was from 1 to 9 cents per barrel below the cost of operating.
The question naturally arises, why did the producer supply
the market for two years in succession at prices which did not
cover the cost of production? The answer is given by Mr.
James W. Lee, of Pittsburg, Pa., president of three independ-
ent oil companies, and attorney for the fourth. The follow-
ing is taken from his testimony before the industrial com-
mission :

150 I. A. HOURWICH

Q. Perhaps you might explain to the commission why
the production could keep up under these circumstances.
A. It is a speculative business. One man would come in
and drill awhile, get a thousand barrel well and grow rich.
The hope of that sort of thing led men to put a great deal of
money into drilling these wells. They all hoped to get large
wells ; they did not find them. More money has been put into
the business in ten years than has been taken out of it. Still
people make money often, though prices are low. There are
wells that run as high as 15,000 barrels a day. Of course a
man who has a well of that kind will make a large amount of
money.

Thus, average prices do not repay the average cost of
production, which is considered by the economist ; a speculator
is not guided, however, by school books on political economy,
he figures upon exceptional gains and the improvement of
prices. The policy of the trust has largely contributed
towards making the oil business a lottery. Says Professor
Jenks, the expert of the industrial commission :

"The independent oil producers have said much about
the arbitrary acts of the Standard in fixing the prices of crude
oil. The charge of arbitrary action is conceded by the Stand-
ard to be true in special cases. That organization has at
times in special localities raised the price of crude oil till it
has ruined a rival pipe line, which was also a buyer, and then,
on the absorption of the line, has lowered it again to the great
disadvantage of the oil well owners. At times, too, where it
has been almost the sole buyer of crude oil, it has kept prices
so low that well owners were practically compelled to sell out
to it; then it has raised the price."

A few instances of price fluctuations are quoted here from
the tables compiled by Professor Jenks. From January to
July, 1884, the price per gallon of crude oil at Oil City fell
from 2.65 cents to 1.51 cents; from January to October, 1885,
it went up again from 1.69 to 2.50 cents; towards the month
of August of the next year it fell again to 1.48 cents. From
November, 1889, to December, 1890, the price fell from 2.58
to 1.60 cents. From November, 1894, to April, 1895, it rose
from 1.97 cents to 4.22 cents. From January to December,

TRUSTS AND PRICES 151

1898, the price went up from 1.50 cents to 2.79 cents, and
towards December of the next year it rose as high as 4.13
cents. The average price for 1880-89 is obtained by com-
putation at 2.04 cents per gallon, and that for 1890-99, at
2.19 cents. Thus the fluctuations within a few months ran
at times as high as 90 per cent above the average price. This
would leave little room for sound business calculations, since
it was a mere matter of chance with the oil producer, in under-
taking to drill a well, whether the price of crude oil would be
doubled or cut by one half.

It is the opinion of Professor Jenks that arbitrary inter-
ference with prices by the trust was limited to special locali-
ties and on the whole " produced no great effect on the entire
market. . . . The greater general changes seem to have been
due to the changes in supply brought about by other causes."
His figures, however, justify a different conclusion. To con-
fine ourselves to the period following after the organization
of the Standard Oil company, the depression in 1891 to 1893
is ascribed to the discovery of a new field in Pennsylvania
with some of the largest wells ever known in this country.
Still referring to the tables, we find that the stocks of Pennsyl-
vania oil in 1892 were one half those in 1882, and yet the
average price in 1882 was 78£ cents, while in 1892 it was 55^-
cents. In 1893 the stocks were only 5 per cent above those in
1898, and the production was 1 per cent less than in 1898, and
yet the price in the latter year was 91 £ cents, while in 1893
it was 64 cents. In 1895, "the market was largely specula-
tive for a time," and it was claimed "that the advance in crude
oil was largely arbitrary" and intended to overthrow the
independent refiners; the contention is not disputed by Pro-
fessor Jenks. The decline in 1897 is ascribed to the opening
of the West Virginia fields ; yet the annual output was affected
only to the extent of 1,200,000 bbls., an increase of 3^ per
cent, — and the stocks on hand were increased by a like
quantity; so whereas in the preceding year they had been
equal to the output of fourteen weeks, in 1897 they reached
the output of sixteen weeks; this could hardly be spoken of
as oversupply of the market, and yet the price fell from
$1.19 to 78| cents per barrel. These are all the cases cited

152 I. A. HOURWICH

by Professor Jenks in support of the proposition that the
greater general changes in prices have been due to changes
in supply, and from these cases, at least, it does not appear
that supply and demand had any part in determining the
price within the periods referred to.

To sum up, the fact is established by the testimony on
behalf of the Standard Oil company that the trust at times
depressed the price of crude oil below the cost of production;
in so far as this was done only in special localities it added to
the profits of the trust, without benefiting its competitors.
This answers the familiar argument that no special advan-
tage accrues to an industrial combination from reducing the
cost of raw material, since the benefit would be shared by
the independent producers alike.

We come next to the price of products made by trusts.
The complaint against the trusts is that they have raised the
prices of manufactured products and introduced the practice
of local discrimination to kill competition. The answer is
a " general denial."

The industrial commission made a thorough study of
prices, confining itself to but a few articles. The civic federa-
tion of Chicago, in 1899, sent out interrogatories to a number
of persons who were thought competent to speak on the sub-
ject. The answers received were tabulated by Professor
David Kinley, of the University of Illinois; the results are
reproduced in the following table:

Prices after consolidation. Number of answers.

Increased 452

Decreased 24

No change reported 15

Fluctuating 15

Total 506

It is claimed in justification of the general rise of prices of
finished products, that it is due to a rise in the prices of raw
materials; thus, e.g., the rise in the price of tinplate is ex-
plained by the rise in the prices of steel and tin. While the
explanation may hold good in many cases, it merely shifts the
blame from one trust to another, since the production of raw

TRUSTS AND PRICES 153

materials is also largely controlled by trusts; the fact still
remains that about nine tenths of trust made articles increased
in price. The exhaustive study made by Professor Jenks
for a few selected articles leaves no doubt that the margin
between the selling price and cost of material has been raised
by combination. If the conditions were exceptional in these
cases, it would have been easy for the combined producers of
other articles to demonstrate it before the commission by
figures drawn from their books. No such testimony has been
offered and the conclusions of Professor Jenks stand uncon-
tro verted.

On the subject of local discriminations an abundance of
figures is presented by the industrial commission. There is,
in the first place, a table of monthly prices of standard white
illuminating oils at New York, Chicago, and Cincinnati for
the fifteen year period 1885-99 ; the table is given with the
testimony of Mr. Archbold, and is thus above suspicion of
prejudice against the Standard Oil company.

An examination of the table shows that, as a rule, the
price at Cincinnati is lower than at Chicago, and at Chicago
lower than at New York, which must be accounted for by
some permanent reason. Still it appears that on many
occasions the situation was reversed.

Thus, oil sold cheaper at New York than at Chicago: in
November, 1887, in February and August, 1888; from May
to July, 1889, and in November of the same year; from March
to June, 1890, and in November of the same year; in September
1891, and from November of the same year to January, 1892;
in January, May, and October, 1893, and from December of
the same year to February, 1894; in September of the same
year.

The New York price fell below the price at Cincinnati :
in September and October, 1888; from August to October,
1889, and in December of the same year; in February and
March, 1893; in March, 1894, in May and June and from
August to October, 1895.

The Chicago price was below that at Cincinnati : in May,
June, and September, 1892; from April to October, 1895; in
July, August and October, 1897; and in March, 1898. These

154 I- A. HOURWICH

fluctuations cannot be adequately accounted for by any other
agency but local fluctuations of supply and demand.

In addition to this study of three important markets,
extending over a number of years, the industrial commission
has also a contemporaneous survey of over fifteen hundred
local markets, representing every state in the union and com-
ing from towns of all varieties and size and characteristics.

The information was received in reply to a schedule of
inquiries which had been addressed to retail grocers through-
out the United States. Four articles were selected, because
of the fairly uniform quality of the product — illuminating
oil, sugar, salt, and Royal baking powder, and the grocers
were requested to give the prices paid on February 15, 1901,
or on the nearest day when purchases of these articles had
been made. Taking illuminating oil, variation in price may
proceed from one of the following causes: (1) difference in
cost of production at different sources of supply, (2) freight
rates, (3) cost of distribution, which is likely to be in inverse
ratio to the quantity sold in any given market, (4) cartage,
which is presumably higher in a great city like New York,
than in a small hamlet. The following table is constructed
from the data of the commission, with a view to eliminating
the first two causes of variation; all cities enumerated in the
table are supplied by the Standard Oil company from the
same refinery, located at Whiting, Ind. ; the last column shows
the net price, after deducting freight charges; the cities are
arranged in the order of their population.

It is evident from this table that neither the size of the
market nor the cost of cartage offers a satisfactory explana-
tion of the variations in the net price of oil. Here are two
cities, Indianapolis and Kansas City, substantially alike in
population, and yet the price at the latter is 36 per cent above
that at the former. Little Rock, Ark., and Dubuque, Iowa,
have also substantially the same population, and yet the price
at Little Rock is 1.55 cents per gallon above that at Dubuque.
Vicksburg, Miss., and Cheyenne, Wyo., are also equal in rank,
and yet there is a difference of 3.1 cents per gallon, or nearly
40 per cent.

TRUSTS AND PRICES

155

Cities.

Population,
1900.

Gross price
per gallon.

Freight per
gallon.

Net price per
gallon.

San Francisco, Cal

342,782

204,731

169,164

163,752

163,065

133,859

90,426

80,671

62,139

40,169

38,307

36,297

19,164

15,729

14,834

14,087

10,266

9,589

$0.13
.07
.05.5
.08.5
.08
.16
.14
.13.5
.08
.10
.11.5
.09
.08
.09.5
.09.5
.16
.10.5
.12.5

$0.05

.00.74

.00.5

.01.7

.01.3

.04.9

.05

.05

.01.5

.01.9

.01.9

.00.95

.00.8

.01.7

.01.5

.04.9

.01.8

.03

$0.08

Louisville, Ky

.06.26

.05

.06.8

St. Paul, Minn

.06.7

Denver, Col

.11.1

Portland, Oregon

.09

Seattle, Wash

.08.5

Des Moines, Iowa

.06.5

Lincoln, Neb

.08.1

Little Rock, Ark

.09.6

Dubuque, Iowa

.08.05

Madison, Wis

.07.2

Atchison, Kan

.07.8

Vicksburg, Miss

.08

Cheyenne, Wyo

.11.1

Sioux Falls, S. Dak...

.08.7

.09.5

On the other hand, the price at Denver is precisely the
same as Cheyenne, Wyo., though the population of the former
is nearly ten times as large as that of the latter. San Fran-
cisco and Vicksburg, Miss., are charged the same price,
though the former has a population twenty three times as
large as the latter. Indianapolis pays the lowest price; if
the increase in the size of the city carries with it increased
cost of distribution, then there are at least thirteen cities,
beginning with Denver, where the price ought to be lower
than at Indianapolis; if, on the contrary, the larger the mar-
ket, the lower are the selling expenses, then one would ex-
pect the price at San Francisco to be the lowest, whereas in
reality it is 60 per cent above the minimum. The difference
in population and size between Indianapolis and Denver
does not seem to be such as to account for the fact that the
net price at Denver is more than double what it is at Indian-
apolis, while the price actually paid is nearly treble.

Let us now take at random a few instances within the
same states. In Arkansas the highest price, 15 cents per gal-
lon, is charged at Hot Springs, with a population of 9,973, and
the lowest, 11 cents per gallon, at Helena, with a population
of 5,550. The former, with a population nearly twice as
large as the latter, ought to have the advantage coming from
larger sales, while both are so small in size that there can be

i56 I. A. HOURWICH

no material difference in cartage. Oil is supplied in both
cases by the Waters-Pierce Oil company, a branch of the
Standard. The freight rate from Whiting to Little Rock,
Ark., is 1.9 cents per gallon; the local difference in freight
between Hot Springs and Helena cannot explain a difference
in the price as high as 4 cents.

For New Jersey we have the following figures :

City.

Hoboken . .
Jersey City
Bayonne. . .
Newark

Population.

59,364
206,433

32,722
246,070

Gross price per
gallon.

► .07
.08
.08
.08%

Why is the price not affected by the distance between
Jersey City and Bayonne, whereas the same distance between
Jersey City and Hoboken results in a difference of 1 cent on
the price, and the greater distance between Jersey City and
Newark adds only \ cent? Why is the difference between
the price at Hoboken and that at Newark as high as 1| cents
per gallon, exceeding the freight from Buffalo to points in
New Hampshire or Vermont? These are queries for which
neither the cost of cartage nor the size of the market seems to
offer an adequate answer.

Taking the state of New York, at Buffalo, which is one
of the great distributing centers, the price is 8 cents, whereas
at Cohoes, a town with a population of 23,910, a few miles
from Albany, it is 6 J cents. Albany is supplied from Buffalo,
the freight rate is f cent per gallon. Thus the reduction in
favor of Cohoes amounts to 2J cents per gallon, or to more
than 25 per cent of the price at Buffalo. It does not seem
clear why the cost of distributing oil within the city of Buffalo
should be as high as 2J cents per gallon, while the variation
between Jersey City and Newark is only \ cent.

In Virginia, the price at Norfolk, a seaport with a popu-
lation of 46,624, is 9 cents, while at Winchester, an inland
town with a population of 5,161, it is 6 cents per gallon. A
difference of 3 cents could not well be accounted for by the
cost of cartage within the city of Norfolk, when it is con-

TRUSTS AND PRICES 157

sidered that the highest price in New York City, 9 cents, is
only 2 cents in excess of the price at Rensselaerville, Rens-
selaer county, which, like Winchester, enjoys the privileges
of the "most favored" towns. The examples might be in-
creased at pleasure.

The reason for these variations is evidently to be sought
in local fluctuations of supply and demand. This explana-
tion is directly corroborated by the testimony of Mr. Mon-
nett, former attorney general of Ohio. He submitted a table
showing the Standard Oil company's prices of kerosene from
tank wagons on the same day in thirty towns in Michigan and
Ohio, of which there were twelve where the Standard Oil com-
pany had competition, and eighteen where it had the local
market all to itself. In the former towns the price varied
from 4| to 6^ cents per gallon, whereas in the latter it stood at
from 7f to 8f cents.

An examination of the prices of Royal baking powder
would simply duplicate what has been stated above. It is
needless to inquire into the figures relating to sugar and salt,
since it has been candidly admitted before the commission
on behalf of the American Sugar Refining company and the
National Salt company that local discriminations are prac-
ticed to meet competition. The foregoing data seem to indi-
cate that the prices charged by trusts for their products have
little or no relation to the costs of production and distribu-
tion.

Where the combination controls the bulk of the output,
competition as a rule will be only local. Within the domain
of monopoly the level of prices will be determined by the
mathematical rule of maximum and minimum; the price may
be high or low, according to whether greater net results could
be secured by smaller sales at higher prices, or by larger sales
at lower prices. In markets of equal size, it would seem, the
net price (i.e., the selling price less the cost of transportation)
would tend towards uniformity. Within the competitive
field prices ought to be regulated, in the long run, by cost of
production. The combination, however, enters as a disturb-
ing factor. On the one hand, monopoly profits secured in
some markets enable it to cut the prices below the normal

i58 I. A. HOURWICH

competitive level in others. On the other hand, to recoup
for the loss in the competitive market, the price may be raised
even above the normal monopoly level where the market is
controlled by the combination. The raise may perhaps re-
duce consumption; still a part of the supply would probably
have to be diverted, in any event, from the non-competitive
market, in order promptly to meet the increased demand at
abnormally low prices in the competitive market; so the ele-
ments of the calculation being changed, the maximum re-
turns would be produced by a new price.

Thus where a combination is in practical control of the
output, competition of independent producers will not steady
prices, but on the contrary will widen the range of price
fluctuations beyond what they would be either under free
competition or under unrestrained monopoly.

"TRUSTS" IN THE LIGHT OF CENSUS RETURNS.

BY WILLIAM R. MERRIAM.

[William Rush Merriam, statistician and financier; born Wadham's Mills, Essex
county, New York, July, 1849; graduated Racine college, 1871; began his business
career as a clerk in the Merchants National bank in St. Paul in 1871, became cashier,
1873, vice-president, 1880, and since 1882 president of that institution; elected mem-
ber of the Minnesota legislature 1882, and speaker of that body in 1886; governor of
Minnesota, 1889-1892; director of United States census, 1898 to 1903.]

The discussion concerning industrial combinations has
been so active, not only through the ordinary channels of
the newspaper press and the monthly magazines, but also
in lectures, political speeches, and public debates, that I
should feel some hesitation in touching upon this topic were
it not for the fact that the manufactures division of the census
office has prepared some very interesting data concerning
this much agitated question. It is a source of regret that
many persons, when considering the effect upon society at
large of the vast aggregations of capital so common in our
day, are quite apt to discuss the subject from a sentimental
standpoint and without an adequate knowledge of the facts.
To become' hysterical over imaginary difficulties, rather than
to approach an important social problem from a temperate
and unbiased point of view, seems to be a common fault even
with a people so practical as the Americans. The arguments
advanced from either side of this controversy are entitled,
however, to the fullest consideration.

Those immediately concerned in the formation of enor-
mous corporations insist that they are simply the natural
evolution of the ordinary commercial life of the nation; that
they arise from perfectly natural causes; and are the logical
outcome of machinery production, improved transportation
facilities, plentiful capital, and of increased competition which
has forced the managers of industrial enterprises to reduce
the cost of production to the minimum. It is further con-
tended that the expense of the distribution and sale of products

159

160 WILLIAM R. MERRIAM

is much less under the industrial combination plan than under
the former system, a great saving being effected in the cost of
administration and general plan of operation; that such com-
binations, conducted under a common oversight and control,
make it possible to dispense at will with the active use of those
plants which, because of their geographical situation, are not
best adapted for the production of the articles to be sold.
Another advantage arises from the fact that the several proc-
esses involved in the production of the article in question,
instead of being carried on together in each of a number of
independent establishments, may be localized in separate
mills. This specialization introduces a uniformity in the
operations of each mill which is conducive to economy. It is
urgently maintained, in view of all these considerations, that
under combinations the wants of the consumer are satisfied
at a lower price than under the old competitive plan.

Those who oppose the formation of industrial combina-
tions are very strenuous in their efforts to secure such legisla-
tion as will materially restrict the operation and management
of these vast corporate enterprises. They maintain that the
" captains of industry," who, with their mighty power of con-
centrating wealth, are constantly extending the field of their
operations, are a menace to society, not only in an industrial
way, but also from a social standpoint. They declare that
these enterprises are veritable monopolies, with the power of
compelling the people to pay higher prices for the necessities
of life than would obtain under the competitive system; that
they stretch out their mailed hands to reach the very sources
of government itself, controlling legislatures, congress, the
courts, and great civic bodies; in short, that they are an in-
cubus on the whole social structure, endangering the very
existence of the republic.

There is no doubt that certain of the industrial combina-
tions do control a large proportion of the output in their
various lines of business, and that the conditions of produc-
tion are such as to give them some advantage over their com-
petitors. Their power of influencing prices is very great, and
may at times be used to advance them arbitrarily, or, what
is perhaps worse from an economic point of view, actually

"TRUSTS" IN LIGHT OF CENSUS RETURNS 161

reduce them, temporarily, below the cost of production, with
a view to driving competitors out of the field. This has been
a powerful factor in the development of the industrial combi-
nation. Undoubtedly it is a distinct evil. As yet, no ad-
equate remedy has been devised to meet it. In considering
this argument, however, it must be remembered that the
apparent rise in prices of many of the products controlled by
these combinations is the result of increased demand, due to
the prosperous condition of the country rather than to any
particular advantage afforded by monopoly. The ability to
list upon the stock exchange of the country enormous amounts
of securities for which there is an insufficient basis of value
is another great evil. This invites the unwary and inex-
perienced to invest in stocks and bonds which have been
issued upon a small proportion of actual invested capital.
With these lines of popular argument clearly before us, it is
interesting to observe the facts which have been developed
by census investigation ; for, after all, our conclusion regard-
ing these industrial evolutions of our national life should
be based upon an unprejudiced study of facts.

The officials of the census office, in order to prevent mis-
conceptions and insure consistency in the plan and sj^stem of
tabulation, formulated the following definition of the term
"industrial combination":

"For the purpose of the census, the rule has been adopted
to consider no aggregation of mills an industrial combination,
unless it consists of a number of formerly independent mills
which have been brought together into one company under
a charter obtained for that purpose. We therefore exclude
from this category many large establishments comprising a
number of mills, which have grown up, not by combination
with other mills, but by the erection of new plants or the pur-
chase of old ones."

The word "trust," although it has the sanction of popular
usage, was avoided in this definition, because, technically, it
applies to only one form of industrial combination ; and while
this form was at one time prevalent, it has been rendered
illegal by act of congress, so that the term has become a mis-

Vol. 3—11

162 WILLIAM R. MERRIAM

nomer. The above definition is not perhaps broad enough,
as it does not recognize a class of corporations known as "hold-
ing concerns," which are organized for the purpose of acquir-
ing the stock of other corporations, and do not directly operate
plants. Several such corporations are, however, included in
the data referred to later on. It may be said in passing that
there are a considerable number of independent organizations,
created for the purpose of selling goods at uniform prices, of
which no cognizance has been taken in this article.

So far as can be ascertained from the data in the census
office, the number of these industrial consolidations is 183.
They control 2,203 separate plants, scattered throughout the
United States, 2,029 being active and 174 idle during the
census year. For 56 of the idle plants no returns could be
obtained, making the total number of reporting plants 2,147.
The 183 combinations extend to almost all lines of industry,
producing articles of luxury, materials essential to the up-
building and growth of the country, and even the very neces-
sities of life. Fully 50 per cent of these combinations were
chartered just prior to or during the census year; and it is
noteworthy that the epidemic of industrial consolidation, as
far as the so-called monopolies are concerned, has been practi-
cally confined to the past seven years. It is evident, there-
fore, that the disease — if it be regarded as such — has spread
very rapidly.

Naturally enough, iron and steel, with 69 combinations,
heads the list. The number of reporting plants engaged in
this industry is 469, and the capital invested, consisting of
land, buildings, machinery, tools and implements, and cash
and sundries, is valued at $348,000,000. Since the census
reports were received last year, there has been a reorganiza-
tion of certain corporations engaged in the manufacture of
iron and steel products, by which a number of them have been
merged into the United States Steel corporation. The stock
and bonds issued by the constituent combinations up to the
time of reorganization are shown below, together with a state-
ment of the securities issued by the United States Steel cor-
poration :

"TRUSTS" IN LIGHT OF CENSUS RETURNS 163

CAPITAL STOCK AND BONDS ISSUED.

Total.

Bonds.

Preferred.

Common.

United States Steel corporation.

$ 1,005,351, 740

¥301, 000,000

$340,726,670

$363,635,070

707,163,740

2,811,000

340,726,670

363,635,070

The Carnegie company. . .

156,800,000
61,055,600

29,435,940
99,745,300

90,000.000
80,000,000
61,811,000
49,000,000
46.335.000
33,000,000

78,400,000
30,537,800

14,713,970
53,260,900

40,000,000
40,000,000
27,000,000
34,500.000
18,325,000
14,000,000

78,400,000

American Bridge company. . .

30,527,800

Lake Superior Consolidated
Iron mines

14,713 970

Federal Steel company . .

46,484,300

American Steel and Wire com-
pany of New Jersey

50,000,000

National Tube company

40,000,000

National Steel company

American Sheet Steel company.

2,811,666

33,000,000
34,500,000

American Tin Plate company . .

38,000,000

American Steel Hoop company.

19,000,000

Shelby Steel Tube company

It can readily be seen that the amount of securities issued
by the steel corporation in return for the property acquired
was quite liberal. Iron and steel can fairly be regarded as
the predominant industry of the United States. The value
of the output during the census year was something like
$500,000,000. The steel concerns employed during the year
146,000 wage earners including piece workers, and paid
$81,000,000 in wages, to which should be added about 6,000
officials receiving $7,500,000 in salaries. Of the total number
of wage earners in the employ of industrial combinations,
more than one third were engaged in the production of iron
and steel. From these figures the importance of this industry
can be readily inferred.

It is a matter of vital interest to wage earners and the
public generally to know that 23 combinations are engaged
in producing articles of food, their total annual output, $282,-
000,000, being second in importance to that of the iron and
steel industry. The list includes such corporations as the
National Biscuit company, the American Sugar Refining com-
pany, and the California Fruit Canners' association. The
number of reporting plants in this industry is 277, and the
capital — by which is meant land, buildings, machinery, tools,
implements, cash and sundries — is valued at $247,000,000.
There are 29 combinations engaged in the production of beer,
liquors, and beverages. The total output is $93,000,000.
These products cannot be considered as prime necessities of

164 WILLIAM R. MERRIAM

life. They are generally regarded, indeed, as mere luxuries.
The number of reporting plants is 236, and the capital em-
ployed is valued at $120,000,000. A division of combina-
tions interesting to the general public is that of textiles.
Seventy two reporting plants engaged in this industry are
controlled by 9 of these corporations, and their capital is
valued at $92,000,000. Lumber and its allied industries are
represented by 18 combinations. There are 65 reporting
plants, representing a capital of $25,000,000. Six combina-
tions relate to leather and its finished products. The number
of reporting plants is 100, and the capital amounts to $63,-
000,000. One hundred and nineteen papermaking plants
were reported, which were under the control of 8 combina-
tions, and represented a capital of $59,000,000. In the line
of chemicals and allied products there are 287 reporting plants,
controlled by 19 combinations, and having a capital of $187,-
000,000. The clay, glass, and stone industry, which includes
cement and brick companies, and others of like character,
comprises 201 reporting plants, controlled by 17 corporations.
The capital is $49,000,000. Under the division of metals
and metal products, other than iron and steel, are included
the Amalgamated Copper company, a brass company, a shot
and lead company, a smelting and refining company, a metal,
a lead, and a zinc company — 16 combinations, representing
94 reporting plants, with a capital of $120,000,000. The to-
bacco industry, with 5 combinations, controls 41 reporting
plants, with a capital of $16,000,000. Six combinations are
interested in the manufacture of vehicles for land transporta-
tion. They control 66 reporting plants, which represent a
capital of $86,000,000. Their output during the census year
was also valued at $86,000,000. In this census classification,
30 combinations, organized for various purposes and operat-
ing a total of 120 reporting plants, have been grouped under
the head of miscellaneous industries. They include a glue
company with 6 plants ; a hard rubber company with 3 plants ;
an ice company with 14 plants; a shipbuilding company with
1 1 plants ; a soda fountain company with 7 plants ; a fireworks
company with 6 plants; a roofing company with 6 plants; a
railway, electric lighting and equipping company with 3 plants;

"TRUSTS" IN LIGHT OF CENSUS RETURNS 165

one electric boat company with 3 plants ; and 6 other combina-
tions carrying on various industries, such as the manufacture
of carbon, whips, rubber goods, etc. These corporations were
reported as employing $45,000,000 of capital in the specified
industries.

No statement has here been made of the capital stock
issued upon the property represented in the plants and other
assets employed in these several classes of industry. The rea-
son for this is that, owing to different methods of tabulation,
the capitalization statistics presented by the census office are
not comparable, by classes of industry, with the statistics of
property. In a number of instances combinations operate
plants engaged in different industries. In the tabulation of
the statistics of property and other assets, all plants en-
gaged in a given industry are gathered together without re-
gard to the nature of the combinations controlling them,
while in tabulating the capitalization statistics each combina-
tion has been placed in the group of industries to which it
would be assigned according to its product of chief value, and
with it have been gathered all the plants over which it exer-
cises control, without regard to the nature of the work
carried on by them. The method of treating property in-
volves considerable duplication in the number of combina-
tions, and this the reader may have noticed, as the sum of
the combinations enumerated considerably exceeds 183, the
actual total number. The capitalization of the industrial
combinations— that is, the par value of stocks and bonds
actually issued — is shown below by classes of industry:

COMBINATIONS CLASSIFIED BY PRINCIPAL PRODUCTS, WITH NUMBER OF PLANTS

AND CAPITALIZATION.

Number of
combinations.

Number of
plants.

Capitalization:
amount issued.

Iron and steel, and their products
Food and allied products

40
21

14
11
28
6
4
8
5
7
15
8
16

489
277
295
113
258
72
41
72
108
119
203
59
97

$784,420,295
290,344,200
287,651,295
212,070,600
248,830,300
199,980,000
197,184,628
146,458,175
197,820,200
172,467,717
69,464,358
39,809,400
238,699.700

Chemicals and allied products

Metals, etc., other than steel

Liquors and beverages

Vehicles for land transportation
Tobacco

Textiles..

Leather and its finished products

Paper and printing

Clay, glass, and stone products

Lumber and its manufactures

Miscellaneous industries

Total

183 2,203

$3,085,200,868

166 WILLIAM R. MERRIAM

Attention has already been called to the lack of com-
parability, by industries, between these figures and those for
property holdings. The totals for all industries, however,
are entirely comparable, and an idea of the relation of cap-
italization to the property of the combinations may be ob-
tained by a consideration of these totals.

The total property of the 2147 reporting plants con-
trolled by the various combinations, including land, buildings,
machinery, tools and implements, cash, bills receivable, etc.,
etc., is valued at $1,458,522,573, of which $24,717,653 repre-
sents the property of the reporting idle plants. The entire
capital issued by the 183 combinations which operate these
plants is as follows:

Bonds $ 216,412,759

Preferred stock 1,066,525,963

Common stock 1,802,262,146

Total $3,085,200,868

To this should be added the capital stock issued by the
United States Steel company over and above the capital
stock of those of its constituent companies which were in-
cluded in the census statistics. This additional sum is $484,-
414,940, comprising $298,189,000 of bonds, $93,112,970 of
preferred stock, and the same amount of common stock.
This makes a total capitalization of $3,569,615,808. The
valuation of the land, buildings, and other assets, upon which
this capitalization is based is $1,458,522,573. This figure
does not include the value of property owned by two combina-
tions in the United States Steel company which do not receive
consideration in the census statistics, but the fact will have to
be ignored. It will be noted that the total property value
lacks $216,000,000 of equaling the value of the bonds and pre-
ferred stock, so that this sum, plus the value of the common
stock, a total of $2,018,000,000, seems to represent good will,
franchises, and other intangible assets. Probably a good
deal of this is what is known as "pure water." The public
will be expected to pay more or less interest on this watered
stock, but to what extent time alone will determine. In
many cases there never will be any interest. In other in-

"TRUSTS" IN LIGHT OF CENSUS RETURNS 167

stances a fair dividend undoubtedly will be paid. The census
office did not make any estimate of the value of certain prop-
erty incidental and necessary to the carrying on of the various
industries noted above; for example, there was no way to
ascertain the value of mines, steamboats, and railroads owned
by some of the larger corporations. Such necessary adjuncts
of business should be set off at full value against the common
stock. The real value of the various plants seems to be about
41 per cent of the amount of stocks and bonds issued.

While it is within the power of the promoters of consolida-
tion to set their own valuation upon the face of securities, the
market value is ultimately determined by the public. It is
especially interesting, therefore, to observe the attitude of
the public toward the huge volume of securities which has
been placed upon the market with all the advantages of ex-
ceedingly skillful manipulation. Exclusive of the Standard
Oil company and the Pullman Car company, which should
be regarded as exceptional, the par value of the preferred
and common stocks of 50 "industrials" listed among active
or inactive securities on the New York Stock exchange is
$2,463,553,708. The market value of these stocks, computed
at the prices current December 7, 1901, was $1,506,743,990.
It appears, therefore, that the public has promptly discounted
the- face value of the promises of these leading industrials by
the enormous figure of $956,809,718, and that it purchases
this class of securities (par $100) at the average price of 61.8.
This significant fact indicates that, with the lapse of time and
increase of knowledge due to increasing publicity, that part
of the problem of industrial combinations which relates to
overcapitalization is likely to become less important by reason
of the caution of investors. This will have an important bear-
ing on the consolidation of industrial interests in the future.
Already so much publicity has been given to the subject of
industrial combinations that investors who plunge into this
class of securities without due investigation and caution are
entitled to little sympathy.

The total industrial combinations employed 23,000 man-
agers, superintendents, clerks, etc., and 399,000 wage earners,
including piece workers. They paid out during the census

168 WILLIAM R. MERRIAM

year, in salaries, $195,000,000, and the value of their entire
output was $1,661,000,000. Contrary to the general impres-
sion, these great combinations do not control a very large pro-
portion of the industrial output of the country. In 1890 the
entire output of manufacturing industry was about $9,000,-
000,000, The total product of the manufacturing industry
for the year 1900 was in round numbers, $13,000,000,000, so
that the output of these combinations, although it seems
enormous, does not represent much more than one tenth of
the total industrial product of the United States.

It is interesting to note the different localities which
seem to afford the most advantageous abiding places for these
various combinations. There are certain states which appar-
ently offer special attractions as the normal homes of these
combinations. We find that 358 plants are located in Penn-
sylvania, 227 in New York, 225 in Ohio, 163 in Illinois, 123 in
Massachusetts, 100 in Indiana, while the rest are scattered
through other states. Nearly all are organized under the
beneficent laws of the state of New Jersey.

Such an array of statistics may be somewhat dry, but
there seems to be no better way of giving a clear idea of the
real condition of these industrial enterprises. Unquestionably
they constitute a difficult problem in civic control. If they
are enabled, by the advantages coming from the concentra-
tion of immense wealth and the existence of liberal laws in
different states of the union, to secure and maintain a monop-
olistic control of prices, there can be no doubt that they are
harmful, and deserve the attention of the legislative branch
of the government. It is clear, however, that these industrial
concerns have not been in operation long enough to demon-
strate just how far they will prove to be monopolies. Their
growth is an evolution in our commercial life, and a few years
must elapse before experience will enable us to determine
whether they are dangerous, and if so, what the proper remedy
will be.

I think it is undeniable that great wealth in the hands of
a few men, and especially in the hands of bright and able men,
such as these leaders in industry have shown themselves
to be, is always more or less dangerous to the state. Even

"TRUSTS" IN LIGHT OF CENSUS RETURNS 169

though they may be men of high character and personal in-
tegrity, they will probably hold that efforts to influence by
improper inducements the action of legislators and assessors
and of men in authority who may, under certain circumstances,
have the power to do things adverse to their interests, are per-
missible, on the principle that the end justifies the means.
The political influence of these large aggregations of capital
is the chief danger, and the one which will be the hardest to
eradicate. It may safely be predicted that there will be some
sort of supervision over them sooner or later. This super-
vision ought not to be such as to interfere with the pursuit of
the business for which they were incorporated; but it ought
to give their transactions such publicity as will not only pro-
tect the investors who buy their securities, but also convey
to the great mass of consumers some conception of the profits
which arise from the existence of industrial combinations.
There can be no doubt that many of the thoughtful men of
the country look with much suspicion and anxiety upon the
influence being exerted by these vast corporations in the
United States. The heads of these institutions are men of
experience and wide influence, who stop at hardly anything
which is to their own advantage. Many years ago, the late
Senator Cushman K. Davis, then a rising young lawyer in
St. Paul, delivered a very interesting address to the students
of the university of Minnesota, entitled Modern Feudalism.
The lecture attracted a great deal of attention, and led to his
entering public life as a candidate for governor of the state
shortly thereafter. At the present time, Senator Davis's ad-
dress reads like prophecy. The concluding paragraphs were
as follows:

" Feudalism, with its domains, its untaxed lords, their
retainers, its exemptions and privileges, made war upon the
aspiring spirit of humanity and fell centuries ago with all its
feudal grandeur. But its spirit walks the earth to-day and
haunts our institutions, in the great corporations with their
control of the national highways, their occupation of great
domain, their power to tax and to escape taxation, their
sorcery to debase most gifted men to the capacity of most
splendid slaves, their pollution of the ermine of the judge and

170 WILLIAM R. MERRIAM

the robe of the senator, their aggregation in one man of
wealth so enormous as to make Croesus seem a pauper.

"The poor fisherman, told of in the Arabian Nights,
threw his net into the sea, and drew up a casket covered with
rust and slime and closed down with the seal of Solomon. He
took it in his hands, and, holding it to his ear, he heard the
voice of a spirit imprisoned within, telling in tones of enchant-
ing sweetness how he, the poor, miserable fisherman, if he
would release the prisoner, might sway the scepter of power,
might revel in all sensuous delights, might command all the
riches hidden by earth or sea. The foolish fisherman broke
the seal by which the wisest of men had confined the enemy
of mankind, and lo! there rose from the casket a cloud un-
formed, which towered to heaven, and which, at last, con-
densed into an awful malignant demon, who stood dilated to
the skies. The fisherman lured the devil into his prison,
closed the seal upon him, and threw him back into the depths.
A similar task is laid upon the present generation."

THE RISE AND SUPREMACY OF THE STANDARD

OIL COMPANY.

BY GILBERT HOLLAND MONTAGUE.

[Gilbert Holland Montague, lawyer and economist; born Springfield, Mass., May 27,
1880; graduated from Harvard university and Harvard Law school; began the prac-
tice of his profession in New York city immediately after graduation; author of
several contributions to the study of trusts in economic reviews, the article printed
below having appeared originally in the Quarterly Journal of Economics. Author
of Trusts of To-day.]

The rise and progress of the Standard Oil company, from
its inception in 1865 till its control, in 1878, of 95 per cent
of the oil business of the United States, has presented itself
to different critics in somewhat different characters; certain
conservative writers think it was largely the result of dis-
criminations in freight rates, extorted by more or less ques-
tionable practices from the easy virtue of the railroads. But
just why the railroads found it expedient to grant such un-
usual favors, and why this particular group of men, above
all others, proved best able to extort such favors, no one
has satisfactorily explained. Corruption of the railway of-
ficials has been vaguely suggested; but it has not been shown
whence this group of men had the means to suborn the rail-
ways, and no writer has been able to point to a piece of precise
evidence, found by any court or investigating committee in
the United States, which proved such subornation of rail-
way officials, though it is not inconceivable that some evidence
may exist. Congressional and legislative committees, on the
other hand, and the more cautious writers on trusts, have
been equally put to it to find in those acts of the railways
which eventually made the Standard Oil company supreme
any self interested motives. The fact of the discrimination
in freight rates seems to account for the supremacy of the
Standard Oil company. But why those refiners identified
with the Standard Oil company, instead of some other group
of refiners, should persistently have obtained the best rates,
has been, to these investigators, a baffling mystery.

171

172 GILBERT HOLLAND MONTAGUE

The secret of this strange success with the railways is not,
however, completely insoluble. If the episodes in the progress
of the Standard Oil company from 1865 till 1877 be carefully
studied, the motives of every act, both of the company and
of the railways, will certainly be revealed. The materials
for this study are not lacking. A vast amount of evidence
showing the ability of the Standard Oil company to turn
these possibilities to advantage has been gathered by vari-
ous commissions and investigating committees. With such
sources of information as these available, an intelligible nar-
rative may readily be put together. Not only may each act
of the company and of the railways be authenticated, but also,
at each step in the progress, the increasing efficiency and im-
portance of the company may be estimated, and the mo-
mentary opportunities of railway and industrial conditions
may be gauged. And so in what seems at first sight an un-
accountable and suspiciously rapid growth may be discerned
signs of inevitable development — the operation of motives
which are, at any rate, explicable.

In 1865, when Mr. John D. Rockefeller began in a small
way to refine petroleum at Cleveland, Ohio, the oil industry
was in a singularly inchoate state With the success of Drake's
oil well at Titusville, Pennsylvania, in 1859, refiners had been
released from the necessity of distilling coal into petroleum
before refining petroleum into kerosene; and at the same
time the sources of petroleum were shown to be enormously
greater than they had ever before been guessed. This dis-
covery stimulated consumers to increased use of lubricants
and burning oils and in this way rapidly increased the de-
mand in the arts for the refined product. In even greater
measure it encouraged the production of crude petroleum.
Within a year after Drake's success, wells had been sunk all
around Oil City and along the Allegheny river. In 1864 had
occurred the Cherry "run," followed by the Benninghoff and
the Pioneer "runs," and the sensational exploitation of Pit-
hole creek. While Mr. Rockefeller was erecting his little
refinery, Pithole City — now a field sown with wheat — had
a postoffice nearly as large as that of Philadelphia. From
Manitoulin island to Alabama and from Missouri to Central

RISE OF THE STANDARD OIL COMPANY 173

New York, wells had been bored for oil. So rapid had been
the increased demand for the products of petroleum, and so
unexpected had been the increase of supply, that in 1865
existing refineries proved quite inadequate to the business
suddenly thrust upon them.

The difficulties besetting refiners in 1865 were chiefly
such as could be cured by an increase of capital. In 1861 the
best wells had been thirty miles from the railroads. Because
of the lack of barrels and the difficulty of transportation,
petroleum had fallen from $20 a barrel to almost nothing. By
1863 boats had begun transporting petroleum down Oil creek,
and small pipe lines and branch railway lines had been built.
In 1866 a more efficient cylinder refining still was invented,
casing and torpedoes were coming to be used in drilling, the
tank car began to replace the clumsy flat car with its wooden
tubs, and pipe lines regularly transported petroleum from the
wells to the railroads. To secure these economies in refining,
small concerns must either increase their capital to about
$500,000 or else combine into this larger and more efficient
unit of production. Mr. Rockefeller was among the first to
see the exigency; and in 1867 he united into the firm of
Rockefeller, Andrews & Flagler the refineries of William
Rockefeller & Co., Rockefeller & Andrews, Rockefeller &
Co., S. V. Harkness, and H. M. Flagler. The reasons for
this union, as he afterwards stated them, must even then
have been evident: "The cause leading to the combination
was the desire to unite our skill and capital, in order to carry
on a business of some magnitude and importance in place of
the small business that each had separately heretofore car-
ried on."

With the reorganization of the firm of Rockefeller, An-
drews & Flagler, in 1870, into the Standard Oil company of
Ohio, with capital stock of $1,000,000, the first period of the
oil industry may be said to close. No company had sought,
or, indeed, has since sought, to control the oil fields. So far as
may be known, no refiner had yet organized the pipe lines to
his exclusive advantage or exacted of the railroads better
freight rates than were granted to his competitor. The trans-
portation of oil by rail and by pipe line was left to independ-

174 GILBERT HOLLAND MONTAGUE

ent companies, and it was only by the competition and by
the improvements of such companies that the cost of the
transportation had been reduced. Till 1870 the competition
of refiners was solely concerned with efficiency of production;
and, since this was to be gained only by refineries of $500,000
capitalization or more, there was concentration among the
stronger concerns and extermination of the weaker. By its
process of concentration, and solely on account of its superior
efficiency, the Standard Oil company of Ohio became in 1870
larger than most of its competitors, and produced 4 per cent
of all the oil refined. After 1870 the progress of the oil in-
dustry, generally, and the precedence of the Standard Oil
company, in particular, was to lie in the direction of cheaper
transportation exacted of the transportation companies by
the refiners.

Opportunities for discriminating freight rates presented
themselves early. How the Standard Oil company availed
itself of the unique railway conditions and of the practices
common in the freight traffic of that time is one of the most
sensational episodes in the history of American railroads. By
1871 the New York Central, the Erie, and the Pennsylvania
railroads had completed connections that afforded them en-
trance to Chicago, and the great struggle for the traffic of the
west had set in. The roads were so poor, and the necessity
for revenue so great, that rate wars had begun as early as
1869, when the New York Central and the Pennsylvania roads
had secured connection with Chicago. With the entrance of
the Erie road, and, in 1874, of the Baltimore and Ohio, into
Chicago, the competition for traffic throughout the region of
the trunk lines became more imbittered. During the years
from 1869 till 1873 the agents of the roads met annually at
New York to agree upon freight rates; and afterwards, in
order to get traffic, they regularly broke their agreement.
Every year during this period fourth class rates from Chicago
to New York fell from about 80 cents per 100 pounds in Decem-
ber to about 25 cents in August and September. This reck-
less competition for traffic was extended to the oil regions.
The Pennsylvania railroad, which had the earliest and closest
connection with the center of petroleum production at Oil

RISE OF THE STANDARD OIL COMPANY 175

City, hauled oil to Pittsburg, a distance of eighty miles, and
to Philadelphia, a distance of four hundred miles. The Erie
railroad, which had no direct communication with the oil
country, effected an entrance by a connection with the Atlantic
& Great Western road, and hauled oil from Oil City to New
York, a distance of five hundred and fifty miles. The New
York Central railroad entered Oil City b3^ connections at
Cleveland, and hauled oil to New Y^ork, a distance of seven
hundred and forty miles. Just as agents of the roads had
annually agreed upon a rate from Chicago to the seaboard,
making the charge 80 cents by each road with a differential of
5 cents in favor of Baltimore and Philadelphia, so in the case
of the oil traffic the same rate was charged by each road on
oil moving from Oil City to the seaboard. The effect of this
" group rate" was naturally displeasing to refiners at Pitts-
burg; it deprived them of all geographical advantage, and
enabled their competitors at Cleveland — among others, the
Standard Oil company — to ship oil seven hundred and forty
miles by the New York Central railroad at precisely the rate
they were charged for a haulage of four hundred miles.

Cleveland not only enjoyed the same railroad rates that
Pittsburg had, but also had water communication to the east
by way of the great lakes and the Erie canal. Pittsburg de-
pended almost entirely for transportation upon the railroads.
Cleveland, however, could at any time avail herself of the
competition of rail and water transportation by taking to
lake vessels whenever the charges of the New York Central
railroad were unsatisfactory.

Cleveland, as a competitive point, therefore, had the oil
traffic of the New York Central at her mercy. Unless the
refiners at Cleveland were allowed low freight rates, the New
York Central must see its traffic directed to lake vessels. As
the danger of such loss became more imminent, the New York
Central was obliged to grant greater and greater favors to the
refiners. And when, in 1871, an unexpected shift in the center
of oil production threatened the entire refining business at
Cleveland, the railroads dependent on this business were
stirred to unusual action.

176 GILBERT HOLLAND MONTAGUE

Beginning in 1871, at the Clarion river, remarkable dis-
coveries of petroleum had been made throughout Butler and
Clarion counties, in the region extending five miles beyond
Antwerp, and southwestward a distance of fifteen miles to
Millerstown and Greece City. "The development south-
ward," says the editor of the Oil City Derrick, "brought about
conditions through which some of the most important rail-
roads of the country might be deprived of a share of the oil-
carrying trade. The Pennsylvania railroad, however, was
not affected by the transfer of activities from the Venango
region to that of Butler and Clarion counties. The northern
railway lines — namely, the Erie and New York Central —
were naturally affected by the transfer of operations to dis-
tant fields, which they could not reach with their existing con-
nections. The first named road was materially aided by the
gathering lines of the Pennsylvania Transportation company,
operated by Henry Harley; but the New York Central and
its connections were left without petroleum feeders of any
description." As usual in new developments of territory,
the increase in production due to the large capacity of the
wells, the overcapacity of the pipe lines in the older oil fields,
and the overproduction of refining plants which had taken
place in the last two years — all these had conspired to make
the transportation and refining of oil unremunerative through-
out the petroleum country, and especially unprofitable at
Cleveland.

To remedy this situation, a combination of the railroads
and certain refiners was planned. "It had its inception," to
quote again the editor of the Oil City Derrick, "with certain
Philadelphia and Pittsburg refiners, with an agreement for
co-operation with certain Cleveland refiners. But philosoph-
ical minds, viewing the subject from this distance, are agreed
that it had its origin, as a matter of fact, with the railroad
interests rather than with the oil interests." The form which
this combination took was a contract between the railroads
and certain refiners of Pittsburg, Philadelphia, and Cleveland
organized into the South Improvement company.

By an act of the Pennsylvania legislature on May 1, 1871,
the South Improvement company had been created and vested

RISE OF THE STANDARD OIL COMPANY 177

with all the powers conferred by the act of April 7, 1870, upon
the Pennsylvania company. The powers of the company in-
cluded authority "to construct and operate any work or
works, public or private, designed to include, increase, facil-
itate, or develop trade, travel, or the transportation of freight,
live stock, passengers, or any traffic by land or water, from or
to any part of the United States." Of the 2,000 shares of this
company, 900 were owned by Messrs. H. M. Flagler, O. H.
Payne, William Rockefeller, H. Bostwick, and J. D. Rocke-
feller, who later were to become prominent in the Standard
Oil company.

On January 18, 1872, the South Improvement company
effected the desired combination by completing contracts with
the Pennsylvania, the New York Central, and the Erie rail-
roads. According to the contracts the South Improvement
company agreed to ship 45 per cent of all the oil transported
by it over the Pennsylvania railroad, and to divide the re-
mainder equally between the Erie and the New York Central
railroads, to furnish suitable tankage facilities for shipping
petroleum and receiving it at its destination, and to keep
records of the amount of petroleum and its products shipped
over the railroads both by itself and by other parties. The
railroads in return agreed to allow the South Improvement
company rebates on all petroleum and its products carried
by them, to charge all other parties not less than the full rates
specified in the contract, to furnish to the South Improve-
ment company way bills of all petroleum or its product, trans-
ported over their lines by any parties whatsoever, and, finally,
"at all times to co-operate, as far as it legally may, with the
party hereto of the first part, to maintain the business of the
party hereto of the first part against loss or injury by compe-
tition, to the end that the party hereto of the first part may
keep up a remunerative, and so a full and regular business,
and to that end shall lower or raise the gross rates of trans-
portation over its railroads and connections, as far as it legally
may, for such times and to such extent as may be necessary
to overcome such competition." The aim of the railroads,
as avowed in the preamble, was plainly an increase in traffic;
"whereas the magnitude and extent of the business and opera-

Vol. 3—13 r

178 GILBERT HOLLAND MONTAGUE

tions to be carried on by the party hereto of the first part will
greatly promote the interest of the party hereto of the second
part, and make it desirable for it by fixing certain rates of
freight, drawbacks and rebates, and by the other provisions
of this agreement to encourage the outlay proposed by the
party hereto of the first part, and to facilitate and increase
the transportation to be received from it, . . . the party
hereto of the second part covenants and agrees." And for
the attainment of that end, the railroads reserved the right
to grant similar rebates and advantages to any other party
who should furnish an amount of transportation equal to that
furnished by the South Improvement company and equal
facilities for promoting the petroleum trade.

In general outline the contract was very like those subse-
quently made with the grain elevator owners in the north-
west, and with the cattle shippers of Chicago. Throughout
this period it was the policy of the railroads to bind to them-
selves growing businesses, in which, as in the elevator and re-
fining industries, considerable capital and much enterprise
were necessary in order to succeed, and by granting to these
concerns special rates to build up trade for the industries and
traffic for themselves. By this form of personal discrimina-
tion the railroads entering New York had built up traffic for
themselves and business for A. T. Stewart, who was compet-
ing for the market in the central west with Field, Leiter & Co.
of Chicago. Where the competition for traffic was keen, the
railroads usually contracted with the strongest shipper or
group of shippers to carry freight at a special rate, or else —
as in the case of the large cattle shippers at Chicago and the
South Improvement company in the oil regions — appointed
the group "evener," and in return for a special rebate required
it to apportion traffic among the roads according to a fixed
ratio.

Such are the economic grounds on which to judge this
contract. Popular judgment, however, was much less delib-
erate. On January 18th the contract was signed; and, on
February 27th, the day after the contract went into effect, an
excited mass meeting was held at Titusville and an organiza-
tion to oppose the new company hastily effected. At once a

RISE OF THE STANDARD OIL COMPANY 179

complete embargo was placed on the sale of oil to the South
Improvement company. Committees were hurriedly de-
spatched to the railway officials, to Harrisburg, and to Wash-
ington. On March 15th a resolution was introduced into
the house of representatives at Washington to investigate
the South Improvement company. On March 25th, in an
agreement signed by the independent refiners, the railroads
publicly abrogated their contract with the company, and an-
nounced that "all arrangements for the transportation of oil
after this date shall be upon a basis of perfect equality to all
shippers, producers, and refiners, and that no rebates, draw-
backs, or other arrangements of any character shall be made
or allowed that will give any party the slightest difference in
rates or any discrimination of any character whatever; and,
with this announcement, they issued new rates about 40 per
cent lower than those provided by the contract. On April
6th, before it had the opportunity to do any business, the
South Improvement company was summarily deprived of its
charter by the Pennsylvania legislature. The company has
never since had an apologist. The Standard Oil company, in
spite of its part in the unfortunate combination, has always
disapproved of the contract. And the bitterest reproach
which opponents of the Standard Oil company heap against
it is the taunt that the contract of the South Improvement
company was renewed with the Standard "alliance," which
was then forming.

The panic caused in 1872 by publishing the contract of
the South Improvement company, though never more than
fright — for the contract was never kept — still seemed to
make the situation more acute. Under the stress of such
difficult conditions, small concerns gave place to large, and
large concerns combined into yet greater ones. Throughout
1872, 1873, and 1874 small refiners were driven into insolvency
or forced into selling. The causes assigned for this are two.
"The overproduction of 1873, 1874, and 1875," explains a
leading opponent of the Standard Oil company, "and the
consequent almost entire destruction of petroleum values gave
the Standard Oil company, with its organization and capital,
almost the desired monopoly." Discrimination in freight rates

180 GILBERT HOLLAND MONTAGUE

in favor of the large refiners was the other and more aggravat-
ing cause. For, though they never resumed the contract of
the South Improvement company, nevertheless, at the solicita-
tion of refiners who had signed the agreement of March 25,
1872, the railroads soon resumed the practice of increasing
traffic by giving special rates to the large shippers; and,
though their motives were — so far as evidence is shown —
thoroughly self interested, they hastened the absorption of
the small refineries by the larger, and especially the expan-
sion of the Standard Oil company, which was the largest of
all. To profit by these discriminations, and immediately by
the advantages of concentrated capital, the Standard Oil com-
pany of Ohio increased its capital stock in 1872 to $2,500,000,
and in the same year combined with the Standard Oil com-
pany of Pittsburg, the Cleveland Standard refinery, the Pitts-
burg refinery, the Atlantic Refining company of Philadelphia,
and Charles Pratt & Co. of New York — all leading independent
refiners — into the Standard "alliance," which ten years later
was to be the basis of the Standard Oil trust. "It was a union,
not of corporations, but of their stockholders,' ' says the solic-
itor of the Standard Oil company. "The several companies
continued to conduct their business as before. They ceased
to be competitive with each other in the sense of striving to
undersell each other. They continued to be competitors in
the sense that each strove to show at the end of each year the
best results in making the best product at low cost. From
time to time new persons and additional capital were taken
into this association. Whenever and wherever a man showed
himself skillful and useful in any branch of the business, he
was sought after. As business increased, new corporations
were formed in various states, in the same interest, some as
trading companies, some as manufacturing companies." The
motives of the combination, as stated by Mr. Dodd, were all
owing to conditions prevalent in the period from 1870 till
1874. "Railroad rates were excessive and lacking in uni-
formity. When refiners were able to combine and throw a
large volume of business to any particular road, they would
get favorable rates. The rebate and drawback system was
then universal, and was not confined to oil. Undoubtedly,

RISE OF THE STANDARD OIL COMPANY 181

this fact had much to do with the combination of refiners
above referred to, and which came to be known as the Stand-
ard

By its economies in refining — attained as early as 1870 —
and in freight rates — the reward of its predominance in the
industry in 1872 — the Standard Oil company in 1873 escaped
in great measure the depression which harassed its competitors.
This depression, if continued, promised to be disastrous both
to the newly formed " alliance" and to its dwindling com-
petitors. In the interest of both parties, therefore, relief was
sought in the restriction of the oil production. Throughout
1873 there was a disposition on the part of the producers out-
side the region of the great wells to suspend operations. In
1874, because of the small inducement to continue, there was
an important shutdown in Clarion county. But these methods
of relief were unavailing. Throughout 1874 the weaker re-
fineries were forced to sell to the stronger, who reduced the
overproduction at once by dismantling their works, so that
in 1874 there were "in the oil regions proper but few refineries,
and those universally owned by the Standard Oil company,
those at Pittsburg being owned or controlled by that combi-
nation or by the conduit and empire fines. By its supremacy
in the oil regions, then, the Standard Oil company in 1874 had
added, to its economies in efficiency and in transportation by
rail, the advantage of restricting overproduction, and in the
period from 1874 till 1877 was ready to add the advantage of
controlling the pipe lines.

In 1869 the first extended system of pipe lines — the
Mutual Pipe Line — was laid in Clarion county. At the same
time William H. Abbott and Henry Harley, with a capital
of $2,000,000, were organizing into the Pennsylvania Trans-
portation company the five hundred miles of pipe centering
at the Miller farm. Vandergrift & Forman were establishing
in Butler county a system which was later to be the nucleus
of the United Pipe Line system, and the American Transfer
company and the Empire Transportation company were form-
ing. Such systems, however, were rare until 1874. Most of
the pipe lines were scarcely ten miles long, and extended from
Clarion river to some common point of shipment, where stated

182 GILBERT HOLLAND MONTAGUE

freight rates were given. Their overcapacity had become so
excessive, their competition so ill considered, and their sol-
vency so much a matter of doubt that by 1874 most of them
had been united into the system of Vandergrift & Forman,
the Pennsylvania Transportation company, the Columbia
Conduit company, or the American Transfer company. Van-
dergrift & Forman at that time controlled 25 or 30 per cent
of the pipe line traffic in the oil regions, and the five companies
together controlled by far the greater part of the traffic. Such
was the situation when the Standard Oil company took a hand
in the business.

In 1874 the firm of Vandergrift & Forman was reorgan-
ized. Its name was changed to the United Pipe Line com-
pany; and its officers were Mr. Vandergrift, president, and
six officials of the Standard " alliance" among its nine direct-
ors. In the same year the five great systems of pipe lines
agreed upon a uniform schedule of charges, and the patrons
of these systems were allowed no special discriminations by
the railroads. This new adjustment contained in the Rutter
circular of September 9, 1874, raised the charges for trans-
portation of oil nearly to the rates fixed by the contract of
the South Improvement company, and allowed a rebate of
22 cents on all oil coming from the five great systems of pipe
lines which maintained the uniform schedule of charges. By
this new tariff the organization of the remaining lines into one
or another system was considerably hastened; and in this
process of bringing order into the confused network of pipe
lines the Standard "alliance," the United Pipe Line company,
owned by the Standard Oil company, and the great systems
and their patrons were greatly benefited. With the railway
companies the purpose was merely to put an end to the un-
reliable service of the small pipe lines, and to secure for them-
selves a larger and more certain traffic. With the pipe lines,
however — though each of the allied pipe lines and every re-
finer who was served by them shared impartially in the rebate
— the effect was particularly to build up the larger pipe line
and the larger refiner at the expense of the smaller. For this
reason the economies in transportation by rail and pipe line
effected in 1874 tended greatly to increase the predominance

RISE OF THE STANDARD OIL COMPANY 183

of the United Pipe Line company and the Standard
" alliance."

In the year following the United Pipe Line company ac-
quired, by purchase, the greater part of the pipe lines which
had not participated in the agreement. Combinations among
the large systems — the United Pipe Line company, the Co-
lumbia Conduit company, and the Empire Transportation
company — gradually absorbed all the others. Meanwhile the
pipe lines enjoying the discriminations so abused their priv-
ilege by high charges that in 1875 competition from without
and suspicion within broke up the agreement. In 1874 the
Baltimore & Ohio railroad had entered Chicago, and was
making advances to the Columbia Conduit company. The
railway situation was uneasy; and when, in 1875, the Erie
railroad accused the Pennsylvania railroad of granting secret
discriminations to the Empire Transportation company, the
agreement among the pipe lines was immediately broken.
The Columbia Conduit company attached itself to the Balti-
more & Ohio railroad; the Empire Transportation attached
itself to the Pennsylvania railroad ; and the United Pipe Line
company, through its owner, the Standard Oil company, com-
pleted an agreement with the Erie and the New York Central
railroads, according to which it gave to each road 50 per cent
of its traffic, guaranteed to the Erie railroad 27 per cent of
the entire oil traffic in the oil regions, and received in return
upon all shipments a rebate of 10 per cent. The motives of
the Erie and the New York Central railroads were plain.
Entering the oil regions by connections from the north, these
roads depended entirely for their traffic upon the Standard
Oil company at Cleveland. Accordingly, for the guarantee
that its oil traffic would not be diminished, the Erie railroad
could afford to pay roundly; and for the maintenance of the
oil industry at Cleveland, and for the privilege of handling
all its traffic, the New York Central railroad was ready to
grant a liberal discrimination. Therefore, throughout the
rest of 1875 all the pipe lines in the oil regions arrayed them-
selves with one or another of the three rival pipe lines and
their allied railroads; and the armed peace thus maintained
continued throughout 1876.

184 GILBERT HOLLAND MONTAGUE

In 1877, with the aid of the Pennsylvania railroad, the
Empire Transportation company secured control of a refinery
at Communipaw, and began constructing others at Phila-
delphia. The roads in alliance with the Standard Oil com-
pany were the first to discover the encroachment, and resented
it before the Standard Oil company had time to act. "Un-
less checked," said Mr. Blanchard, of the Erie railroad, "the
result would be a diversion largely of the transportation of
oil from our roads. The New York Central road and our own
determined that we ought not to stand by and permit these
improvements and arrangements to be made, which, when
completed, would be beyond our control. We determined,
therefore, to make the issue with the Pennsylvania Railroad
company.'' At the suggestion of the railroads, accordingly,
the Standard Oil company, by ceasing on March 18, 1877, to
send freight over the Pennsylvania railroad, precipitated a
war between the great pipe lines and their allied roads.

The suddenness and fury of the war for the oil traffic
which followed is explained only by the strained relations of
the trunk lines at that time. Since 1874, when the Baltimore
and Ohio railroad entered Chicago, there had been a ruinous
war of rates. Freight charges during this period from Chi-
cago to the seaboard had fallen from $1 to 10 cents. New
York Central and the Erie railroads had lost millions, and the
Baltimore & Ohio and the Pennsylvania railroads had
ceased to pay dividends. The struggle in the oil region was,
therefore, merely part of a contest extending half across the
continent. Beginning fully a month before the larger con-
test approached settlement, it continued bitterly for six
months until the very last agreements had been signed. In
this struggle the Columbia Conduit company connected with
a branch of the Reading railroad, and controlled the traffic
in the newly discovered Bradford district. The Empire
Transportation company meanwhile, aided by the Pennsyl-
vania railroad, sought by a tremenduous effort to crush the
United Pipe Line company and the Standard Oil company.
The Pennsylvania railroad carried oil at eight cents a barrel
less than cost, and ordered the refineries of the Empire Trans-
portation company to sell oil in the territory of the Standard

RISE OF THE STANDARD OIL COMPANY 185

"alliance" at any price. But the Standard Oil company,
with its high degree of mechanical efficiency, its well organ-
ized United Pipe Line system, and its firm alliance with the
Erie and the New York Central railroads, proved superior.
On October 17, 1877, the Pennsylvania railroad was forced
to abandon the struggle, and to sign a contract which gave
the Standard Oil company practically the monopoly of the
production and transportation of oil in the United States.
According to this contract the Standard Oil company was ap-
pointed "evener," to apportion oil traffic in the following
ratio: 63 per cent of the oil traffic was to go to New York
city and 37 per cent to Philadelphia and Baltimore; of the
traffic going to New York city, the New York Central, the
Erie, and the Pennsylvania railroads were each to carry one
third; of the traffic going to Philadelphia and Baltimore, the
Pennsylvania railroad was to carry 70 per cent and the Balti-
more and Ohio 30 per cent. By the terms of the contract the
Pennsylvania railroad was guaranteed an annual traffic of
not less than 2,000,000 barrels; and the Empire Transporta-
tion company was purchased for $3,000,000 by the Standard
Oil company and the United Pipe Line company. The
Standard Oil company, meanwhile, for its services as "evener"
was remunerated in the following fashion: After May 1,
1878, when the contracts between the Pennsylvania railroad
and its shippers expired, the Standard Oil company received
a rebate of 10 per cent on all its freight. In addition to this
it was allowed, with other shippers, a rebate of 68^ cents in
order that it might be on an equality with those refineries who
shipped by the Erie canal; and the American Transfer com-
pany, which had now been united with the United Pipe Line
company, was allowed 22^ cents as its share of the through
rate.

The Pennsylvania railroad offered to carry oil for all
shippers on these terms, except that for the 10 per cent rebate
it asked such considerations as the Standard alone could fur-
nish; and, indeed, for those refiners who made all their ship-
ments over its line, it continued to give rates as low as those
of the Standard Oil company. On December 8, 1878, how-
ever, when the Erie canal was closed, the railroad ceased mak-

i86 GILBERT HOLLAND MONTAGUE

ing such favorable rates for independent refiners; and on
March 31, 1879, all payments of rebates ceased.

In view of the bitterness of the war which it settled, this
agreement was very favorable to the defeated party. The
Pennsylvania railroad had gone out of its way to strike at the
power of the Standard "alliance/' and after expensive fight-
ing had been completely beaten and forced to sue for such
terms as might mercifully be granted it. The Standard Oil
company, however, required of it only such favors as it al-
ready received of the New York Central and the Erie rail-
roads, and, in return, guaranteed its oil traffic, purchased its
interest in the Empire Transportation company, and advanced
the money to buy oil cars. It was, indeed, shrewd magnanim-
ity; for, in advancing the money to complete the sale, the
Standard Oil company became the mortgager of the oil cars of
the railroad, and by aid of the discriminations provided in
the contract it was able, in a few months, to drive the Colum-
bia Conduit company into selling. So that in 1878 and 1879
the Standard Oil company owned or controlled by contract
every transporting agent in the oil regions.

The achievement of this supremacy marks the close of
the first phase of the Standard Oil company. It owned the
terminal facilities of the New York Central for handling oil at
New York. It leased the terminal facilities of the Erie rail-
road at New York. It owned or leased almost all the oil cars
on the Erie, the New York Central, and the Pennsylvania
railroad. Through the United Pipe Line company and the
American Transfer company, it purchased, one after another,
twenty six pipe lines that threatened competition. And
vhen, in 1879, the Tidewater Pipe Line company was built
;o the seaboard, in order to evade the discriminations of the
railways, the Standard Oil company was able, after a struggle
of four years, to defeat that, also. The dominance of the
Standard Oil company in the refining industry was even more
:iking. In 1879 it controlled 95 per cent of the refineries in
the oil region, and at one time during this period there were
scarcely a dozen independent refiners in business.

The organization of the Standard "alliance," which in
1879 controlled the transportation of oil by rail and by pipe

RISE OF THE STANDARD OIL COMPANY 187

line and produced 95 per cent of the refined oil of the country,
was an informal substitute for the modern trust. The bond
of unity was common ownership of stock in the various com-
panies of the " alliance" and personal agreement between the
officers of the respective companies and the officers of the
Standard Oil company. The Standard alliance included
the Standard Oil company of Cleveland, the Standard com-
pany of Pittsburg, the Acme Oil company of New York (lo-
cated at Titusville), the Imperial Oil company at Oil City, the
Atlantic Refining company of Philadelphia, the Camden
company of Maryland, Charles Pratt & Co. of New York,
J. A. Bostwick & Co., Sone & Fleming Manufacturing com-
pany, Warden, Frew & Co. of Philadelphia, and the Balti-
more United Oil company of Baltimore.

In 18S1 the Standard Oil company of Ohio, the nucleus of
the Standard "alliance," was a corporation capitalized at
$3,500,000. Since the formation of the "alliance" it had
maintained connections with its allies by a union, not of cor-
porations, but of stockholders. "Then," as the solicitor of
the Standard Oil company explains, "for convenience of con-
trol and management the Standard Oil trust was formed. It
was simply an agreement, placing all the stock of these vari-
ous companies in the hands of trustees, declaring the terms on
which they were held, and providing for the issuance of a
certificate showing the amount of each owner's interest in the
stock so held in trust. This agreement did not in any essen-
tial manner change the character of the association previously
existing. Its essential character was simply a common owner-
ship of stock in various corporations. If they had so preferred,
the owners of these several associated companies could have
organized — in the state of New Yrork, for example — with any
capitalization desired. Each could then have lawfully com-
bined with all the other companies, forming one corporation to
transact business wherever desired. But it seemed preferable,
instead of organizing one corporation in New York, to organ-
ize a corporation in each state where business was being car-
ried on, so that the business transacted in each state might
be conducted by a home corporation, subject in all respects to
the law of the state where located. Accordingly, we organ-

188 GILBERT HOLLAND MONTAGUE

ized a Standard Oil company in New York, in New Jersey,
in Kentucky, in Iowa, in Minnesota; and similar corporations
already existed in Ohio and Pennsylvania."

As the first " trust" form of combination, the agreement
under which this union was brought about deserves atten-
tion. There were three classes of parties to the contract:
first, all the stockholders and members of the Standard " alli-
ance," together with members of some other companies; sec-
ond, all the more important officers and stockholders of these
several companies; and, third, a portion of the stockholders
and members of some additional corporations and limited
partnerships. Provision was made for the admission of new
companies and individuals and for the formation, whenever
advisable, of a Standard Oil company in any state or terri-
tory in the union. The parties of the several classes were to
transfer all their property to the Standard Oil companies in
their several states, in consideration of which they should
receive stock equal at par value to the appraised value of the
property so transferred. This stock — and here is the signifi-
cant feature of the new organization — was to be delivered to
trustees, and held by them and their successors thereafter; and
no subsequent issue of stock should be made by the companies
except to these trustees. In return for the stock intrusted to
them, the trustees were to deliver trust certificates, equal to
the par value of the stock of the several Standard Oil com-
panies to be established and to the appraised value of the
stocks of other companies delivered to the trustees. The
trustees provided for were nine in number. They were John
D. Rockefeller, O. N. Payne, and William Rockefeller, elected
to hold office till 1885; J. A. Bostwick, H. M. Flagler, and
W. G. Warden, to hold office till 1884; and Charles Pratt,
Benjamin Brewster, and John D. Archbold, to hold office till
1883. At each annual meeting the certificate owners elected
three trustees, for three years each, to fill vacancies due to
expiration of term. Such was the "trust" as formed by the
agreement of January 2, 1882.

Four years before the formation of the trust, two pipe
line companies, the Seaboard Pipe Line company and the
Equitable Petroleum company, projected to afford an outlet

RISE OF THE STANDARD OIL COMPANY 189

to the seaboard, had been organized by oil producers. Upon
their failure, the producers organized the Tidewater Pipe Line
company, which ran from the Bradford region to Williamsport,
a distance of 110 miles; and thence, by a connection with the
Philadelphia and Reading railroad, the oil was carried a dis-
tance of 250 miles to Philadelphia. On the 1st of June, 1879,
this company commenced the shipment of oil. The railroads
were not content to see the oil traffic slip through their hands ;
and on the 5th of June, at a conference between the four trust
lines at Niagara Falls, resolute measures were adopted to drive
this rival transportation agent from the business. The rate on
crude oil per barrel was lowered to 20 cents on all oil of the
Standard " alliance" moving from the oil regions to New York,
Philadelphia, and Baltimore. A corresponding reduction of
the rate to the general public was made from $1.15 to 30 cents.
These rates took effect at once; and, as competition contin-
ued, a further reduction was made on August 1 to 15 cents
per barrel.

Throughout the period of the organization of the trust,
and for a full year after, this fierce contest between the rail-
roads and the Tidewater Pipe Line company continued. The
immediate effect, of course, was to benefit the shippers, and
particularly the largest shipper, which was the Standard. The
ownership by the Standard of the terminal facilities and of the
greater number of the oil cars of the railroads now became a
fact of importance. In consideration of its heavy investments
in these interests, and of its agreement to ship and to unload
its oil at its own risk, the Standard had already been allowed
rebates. But now the Standard began the building of pipe
fines to the seaboard and the formation of the National Transit
company. As pipe lines were a cheaper mode of transporta-
tion than railways, the building of these lines made necessary a
readjustment of freight rates; and, as the pipe lines then build-
ing could not carry the oil the entire distance, contracts for
joint carrying had to be made with the railroads. The first
contract — made between the National Transit company and
the Pennsylvania railroad on May 6, 1881 — related to the ap-
portionment of the freight when the haul was partly by pipe
line and partly by rail. The Pipe Line company guaranteed

igo GILBERT HOLLAND MONTAGUE

the railroad one-third of the transportation of oil to the sea-
board. The Standard was to pay exactly the same rate as
other shippers over the railroad. On such oil as was carried
partly by pipe line and partly by rail, a through rate was
made, of which the pipe line naturally received a share; and,
finally, the Pipe Line company agreed to remit part of the
charge to its local pipes to the railroad. Instead of a contract
for rebates to the Standard, this was a contract for rebates
to the railroad. The reason for this contract was that the
seaboard pipe line of the Standard did not extend beyond
Hamilton, Pa.; and to compensate the railroad for its low
rate of freight and for its grants of rights of way — no free
pipe line law then existing in New Jersey — these rebates were
provided.

Strengthened by these mutually helpful contracts, the
National Transit company and railroads were meanwhile
wearing out the Tidewater Pipe Line company, and in 1883
forced it to cease its opposition. The company was never
absorbed by the Standard Oil trust; but on October 9, by an
agreement with the National Transit company, it agreed to
accept as its share of the oil traffic 11 J per cent of the total
pipe line transportation of petroleum to the seaboard, and
was guaranteed $500,000 in annual profits for fifteen years.
With this settlement the war of the transportation agents
ceased, and the Standard Oil trust established itself in the
strategic position which substantially controlled the transpor-
tation of oil to the seaboard. By the early seventies the
Standard had attained the pre-eminence in mechanical effi-
ciency which it has ever since maintained; by the agreement
with the Pennsylvania railroad in 1878 it had gained a dom-
inance over transportation which it never since has lost;
and by its contract in 1881 it made possible the completion
of its pipe line to the seaboard and its independence of rail-
roads. Such contracts as the Standard subsequently made
with the Pennsylvania railroad were agreements by which
the railroad got some part of the freight, though it did no part
of the carrying. The Standard Oil trust now gave rebates
instead of receiving them. Over every branch of the industry,
in 1883, it was supreme.

RISE OF THE STANDARD OIL COMPANY 191

From the very beginning of the oil industry in Penn-
sylvania, movements for the restriction of oil production had
been frequent. Restriction had been the aim of the Petro-
leum Producers' association at its organization in 1869.
The association had maintained an agency to store all oil
above a certain amount and keep it from the market. This
early "shut down" failed because of the enormous produc-
tion in Butler county. Succeeding "shut downs" in 1872,
1874, 1876, and 1878, met with similar fate. In 1884 there
was another general movement among producers to restrict
drilling; but, through the refusal of the operators who were
running large wells in the new Thorn Creek district, the
movement was only partially successful. It led, however, to
the organization of the Producers' Associated Oil company,
with a capital stock enabling it, when necessary, to purchase
oil property in order to curtail production

On the 1st of October, 1887, this new organization, em-
bracing 85 per cent of the 14,000 producers in the oil regions,
agreed with the Standard Oil company to restrict production.
From June to October the Producers' Protective association,
by various secret and public meetings, had encouraged the
movement. The conditions of the industry favored the organi-
zation. The accumulated stock of oil was 31,000,000 barrels,
prices were below the remunerative point, and the Standard
was losing by the deterioration of oil in its store. After
conference between the Standard and the associated producers,
it was agreed that the producers should restrict their pro-
ductions one third during the following year, in consideration
for which the Standard turned over to the producers 6,000,000
barrels of oil, at the market price at the time of the contract,
and secured to the producers the profit from the anticipated
rise in price.

By this bargain the producers immediately profited.
On the oil they received from the Standard they made nine
cents a gallon. Encouraged by their success, they made
agreements during the next year with the well drillers' union
to equalize the amount of oil produced by each individual.
Although it was not possible to bring all the producers into
the agreement the price of crude oil was advanced by this

192 GILBERT HOLLAND MONTAGUE

restriction 29 cents per barrel. Although the Standard Oil
company had entered into the agreement only at the urgent
request of the producers, as the chief refiner it bore the burden
of the advance; and when the "shut down" was found to be
injuring the laborers employed in the drilling of wells, and
the producers' association set aside 1,000,000 barrels of oil for
their relief, the Standard added another million for the same
purpose. This philanthropy, in the end, proved not un-
profitable. The Standard benefited by the harmony it had
established; and the producers, by relieving the well drillers,
prevented them from working for producers outside the
agreement.

As was expected, the results of this movement were only
temporary. In time the "shut down" was abandoned, but
not until it had gained a great though transient benefit, and
had given the impulse to the building of several pipe lines.

The passing of the interstate commerce act, in 1887,
makes a natural division in the record of the railroad arrange-
ments made by the Standard. By the terms of that act, dis-
criminations were forbidden, and such contracts with shippers
as had been the rule since the late sixties were made illegal.
The interstate commerce act seems to have been observed by
the Standard Oil company. "Little testimony," says the
industrial commission of 1900, "was brought forward to prove
that it still actually receives lower rates for shipment over the
same tracks than its competitors." In the testimony before
the commission, on this latter point, the opinion was ex-
pressed by witnesses testifying in opposition to the Standard
Oil company that direct discriminations and rebates are still
received by the Standard; but the evidence adduced in proof
of this opinion was unsatisfactory, and was considered entirely
inconclusive by the commission.

In other ways than by discriminations in actual rates the
Standard Oil company, after 1887, secured special advantages
in transportation. The shipments of oil from those localities
which it chose for distributing points were so large that the
freight rates for that locality were naturally most favorable to
this chief commodity of shipment. Competitive points, points
where several railroads compete, or where water transportation

RISE OF THE STANDARD OIL COMPANY 193

competes with the railways, were generally fixed upon as dis-
tributing centers. Accordingly, lower freight rates prevailed
at the large shipping points of the Standard than prevailed
at places where its competitors made most of their shipments.
The Standard Oil company located its refineries at points
nearer the place of consumption, and so economized in ship-
ping distance. Thus it transferred most of its business from
Cleveland to Whiting, Ind., in order to be nearer the south-
ern market and to the west, and began to supply the east-
ern market from its refineries at Bayonne, N. J. By wise
distribution of its refineries the Standard became largely
independent of the changing freight rates that distressed those
independent refiners who shipped their oil long distances. A
less honorable advantage, it has been alleged, accrued to the
Standard by the practice, among the railroads, of under billing
the weight of the contents of the tank car.

With nothing more exciting than an occasional case before
the interstate commerce commission regarding shipments by
tank car, the Standard Oil trust continued from 1887 until
1892. Its growth and prosperity had been steady. The prop-
erty of the various companies that entered the trust in 1882
was valued at $75,000,000. In 1892 the value was estimated
at $121,631,312; and 50 per cent of this increase had come
from profits invested and the remainder from additional capi-
tal subscribed. The dividends meanwhile had risen from 5^
per cent in 1882 to 12 per cent in 1891. During the ten years
following 1882 there had been a gentle decrease in the price
of refined oil, and a slight decrease in the difference between
the price of refined and the price of crude oil — a difference
which measures the charge for refining. The attitude of the
Standard Oil trust during these years was one of quiet domi-
nance. It was now to meet an unexpected difficulty in the
courts, which rendered necessary a complete change of organi-
zation.

In 1891 the state of Ohio, by its attorney general, began
action to oust the Standard Oil company of its corporate
rights, on the ground that it had abused its corporate fran-
chises in becoming a party to an agreement against public
policy. The petition averred that in " violation of law and

Vol. 3-13

194 GILBERT HOLLAND MONTAGUE

in abuse of its corporate powers and in the exercise of privi-
leges, rights, and franchises not conferred upon it," the de-
fendant company had become a party to the trust agreements
of 1882. "All the owners and holders of its capital stock,
including all the officers and directors of said defendant com-
pany, signed said agreements without attaching the coiporate
name and seal." Prior to the dates of the trust agreement
aforesaid, the petition continued, the defendant's capital stock
consisted of 35,000 shares. Upon the signing of said agree-
ments, 34,993 shares of said stock, belonging to the persons
who signed the agreement, were transferred upon the defend-
ant's books to the nine trustees appointed and named in the
agreement, by virtue of which "the nine trustees have been,
ever since the signing of said agreements, and still are, able to
choose and have chosen annually such boards of directors of
said defendant company as they (said nine trustees) have seen
fit, and are able to and do control the action of the defendant
in the conduct and management of its business."

In answer to this petition the Standard Oil company de-
nied that it had become a party to either of the agreements in
said petition set forth, or that it had at any time observed or
carried out those agreements. "Said agreements," continued
the answer, "were agreements of individuals in their individual
capacity and with reference to their individual property, and
were not nor were they designed to be corporate agreements,
and defendant denies that said agreements have illegally
affected its corporate capacity or that defendant has per-
mitted its corporate powers, business, and property to be
exercised, conducted, and controlled in an illegal manner."

By a demurrer to the defendant's plea the issue was
squarely raised whether the act of all the stockholders, officers,
and directors of a corporation may rightly be called the act
of the corporation. "It seems to us," the plaintiff argued,
"impossible to read the agreement and consider the proceed-
ings which confessedly have taken place under it, without
reaching the conclusion that there has been a studious design
and effort on the part of the promoters of the trust scheme
to obtain all the advantages of the actual presence and par-
ticipation of the defendant corporation in the objects and pur-

RISE OF THE STANDARD OIL COMPANY 195

poses of the agreement without formally making it a party to
it. But is substance to be sacrificed to shadow? Have we
not shown sufficient actual corporate conduct to obviate the
necessity for formal corporate action, such as the adoption of
resolutions or the signing of a name?"

The court adopted the argument of the plaintiff, and
not only forbade members of several corporations to combine
as such and merge their interests in a trust, but it also de-
clared such combination a restraint of trade, illegal, and quite
opposed to public policy, and by the force of its decision put
an end to the trust as a form of business combination.

Accordingly, in 1892, the Standard Oil trust was dissolved,
and the separate establishments and plants reorganized into
twenty constituent companies. The trust certificates, when
surrendered, were replaced by a proportion of the shares of
each company, properly divided. By the form of transfer
adopted, the trustees placed in the hands of their attorney the
amount of shares held by the trustees in the several companies
of the trust, and authorized the attorney to secure from each
of these companies transfer upon their corporate books of
stock certificates for whole shares, and scrip for fractional
shares thereof. Although the trust was formally dissolved,
the men who were the trustees hold a majority of the stock in
all the different companies which composed the trust, so that
they work together as harmoniously as before. The replace-
ment of trust certificates by proportional shares of stock in
the separate companies continued slowly, and is not yet com-
plete. Substantial unity of action among the several com-
panies was not changed.

Meantime the Standard Oil company bought a large pro-
portion of the stock of the Producers' Oil company, with a
view, as it would appear, to securing a controlling voice in
its management; but it was so opposed in its ownership that
it transferred its shares to a certain Mr. John J. Carter. Mr.
Carter brought suit to be allowed to vote his stock ; but, as the
organization was a limited partnership, the courts upheld the
company in denying him admission. With the United States
Pipe Line company the National Transit company was more
successful. It secured $383,000 out of a total of $1,119,000

i96 GILBERT HOLLAND MONTAGUE

of stock; and, after permission to attend the meetings of the
company and to vote the stock had been refused by unani-
mous vote of the other stockholders, the courts decided in
favor of the National Transit company. The purchase of
stock was made, says Mr. Archbold, "with a view to having
such knowledge as we could have rightfully through such
ownership — as we should acquire in the progress of the
affair;" and this information the National Transit company
gets from its one director upon the board of the United States
Pipe Line company.

To prevent the Standard Oil company from obtaining
control of these independent organizations, the Pure Oil com-
pany was projected in June, 1895, to secure control of the
other independent companies. In 1897 the Pure Oil company
was organized as a New Jersey corporation with authorized
capital stock of $1,000,000. In its structure this company
is curiously like the former Standard Oil trust. The holders
of 66,000 shares in the company, being more than a ma-
jority, vest the voting power of such shares in fifteen per-
sons for twenty years; and it is agreed that one half of all
shares hereafter subscribed shall similarly be transferred to
the trustees. The ownership of the shares may be trans-
ferred, but purchasers have no rights other than those
provided by the trust agreement. The trustees are to vote
as a unit, to the full number of the shares they hold at
the election of directors. One third of the trustees retire
annually, and their successors are elected by the general stock-
holders. By a vote of three fifths of both classes of stock-
holders, on the redemption of the preferred shares at $110,
the trust may be cancelled. The formation of the voting
trust, it was claimed, was made necessary by the attempt of
the National Transit company to secure control through the
purchase of shares of the Producers' Oil company and the
United States Pipe Line company. In order to keep the con-
trol of the latter company in hands friendly to the independent
interests, there was devised a voting trust agreement, accord-
ing to which the signers vested their interests in the stock in
a certain Mr. A. D. Wood as trustee for five years from the
1st of April, 1893, unless sooner terminated by a vote of three

RISE OF THE STANDARD OIL COMPANY 197

fourths of the stock so held in trust. Mr. Wood was al-
lowed full power to elect officers, but was bound to vote for
persons interested in the business as independent refiners.
It is the purpose of the Pure Oil company, at the expiration
of this trust agreement, to anticipate any attempt of the
Standard Oil company to control the company.

While the independent refiners have been seeking security
in the trust form of organization, the Standard Oil company
has adopted the contrary policy. In 1892 the trust dissolved
into its constitutent companies, the former trustees holding a
majority of the stock in each corporation and the holders of
trust certificates exchanging them for the stock of the several
companies in agreed proportion. By purely informal har-
mony, a unity of action among these corporations was main-
tained. A large quantity of trust certificates were still out-
standing; and the dividends, when declared, were at a certain
percentage upon these outstanding certificates and at a prop-
erly adjusted rate upon the capital stock of the different com-
panies, so that the rate of dividends might be considered as if
it were entirely on the trust certificates at their former full
amount. In order to secure more complete unity and to pro-
vide for the claims of smaller holders of trust certificates, the
Standard Oil company was organized under the laws of New
Jersey in 1899. This corporation, though practically a new
organization, was in form a continuation of the old Standard
Oil company of New Jersey, with an amended charter and
capital increased from $1,000,000 to $110,000,000. This cor-
poration was authorized to own the stock of any of the differ-
ent corporations connected with the Standard Oil company,
and to buy from all parties who own such stock whenever they
desired to sell. "The new Standard Oil company of New
Jersey," said the industrial commission in 1900, " has recently
been formed with the intention of transferring the stock of the
different corporations into the stock of the new company, so
that, when the transfer is finally made, one single corporation,
the Standard Oil company of New Jersey, will own outright
the property now owned by the separate companies which are
commonly known and mentioned together under the name of
the Standard Oil companj^. This combination at present has

198 GILBERT HOLLAND MONTAGUE

no formal unity. It has a practical unity as great as it will
have probably after the complete change into the New Jersey
company is effected." Since 1900 about $97,000,000 of the
capital stock of this company has been used to purchase at
par the stocks and properties of the other Standard companies,
the capitalization of which was approximately $97,000,000,
but whose good will and earning power, as represented by the
market value of the stock, aggregates $650,000,000.

Interesting as they are, the particular forms which the
corporate organization of the Standard and of its competitors
assume are the least important phase of their competition.
The progress of both the Standard and the independent com-
panies has been most marked in recent years in foreign coun-
tries. To place American oils in eastern markets has required
constant cheapening of production and transportation. An
immense outlay for additional pipe lines, more and larger
steamers for ocean transportation, and the adoption of the
tank car and tank wagon system of delivery have been made
necessary, so that to-day crude oil is carried almost exclu-
sively by pipe lines, railroad transportation is confined to the
products of crude oil, and the Standard has no arrangement
apportioning to the railroads any share of the crude oil traffic.
At present it is in its methods of marketing, by which it meets
competition at home and abroad, that the real interest lies.

Until 1895 the sale of crude oil by the producers had been
on the exchange at Oil City. Throughout the eighties the
market in the exchange had been wildly speculative, but,
gradually, less and less oil came to be sold on exchange; and,
finally, on January 23, 1895, the Seep Purchasing agency of
Oil City, on behalf of the Standard Oil company, posted a
notice that thereafter the prices paid by it to oil producers
"will be as high as the market of the world will justify, but
will not necessarily be the price bill on the exchange for certifi-
cate oil." The Seep Purchasing agency purchases for the
Standard Oil company 80 per cent of the crude oil produced in
Pennsylvania and Ohio, and by its action it fixes the price of
crude oil in the oil regions. "We have before us," says Mr.
Archbold, "daily the best information obtainable from all
the world's markets as to what the offerings are and as to

RISE OF THE STANDARD OIL COMPANY 199

what it is possible to sell for ; and we make from that the best
possible consensus of prices, and that is our basis for arriving
at the current price." In the period from 1895 to the pres-
ent, it may be added, the difference between the price of
crude oil and the price of refined oil has remained almost con-
stant, which shows that this power of fixing the price of
crude oil has not been abused, in spite of the fact that the
Standard Oil compan}^ during these years refined over 80 per
cent of the output of oil.

By its control of the pipe line systems the Standard Oil
company maintains its advantages over the independent re-
finers of the oil regions. The practice of the pipe line com-
panies is to receive all oil produced in the wells with which
their pipes are connected, gauging the amount and recording
the quantity received from each producer. The producer may
then receive from the company at any time the value of his
oil in store at the price for that day, or, instead, may receive
pipe line certificates which are negotiable in the open market.
The company lays pipes without extra charge to new wells,
though they be fifteen or twenty miles distant. In the proper
management and extension of the pipe lines, more than in
any other branch of the business, is the necessity for large in-
vestments of capital apparent. In the early days of the in-
dustry the absence of these facilities completely demoralized
the business; and for the adequate management of the lines
no company except the Standard has been ready and able to
make the necessarily enormous investment of capital. With
their scant resources the smaller companies were unable to
respond to the slightest sudden demand for new facilities. The
Superiority of the Standard Oil company, in this particular,
was clearly shown in the sudden development of the McDon-
ald field in 1891. In July of that year the output of the
McDonald field was 3,000 barrels daily. By the middle of
August it had reached 15,000 barrels. By the first of Sep-
tember the Standard Oil company, through its ally the Na-
tional Transit company, was able to handle 26,000 barrels a
day; by the first of October it could handle 40,000 barrels a
day; and, when in November the production of oil reached
nearly 80,000 barrels per day, the capacity of the pipe lines had

200 GILBERT HOLLAND MONTAGUE

risen above that figure. Iron tankage of the capacity of
3,000,000 barrels was erected during these months, and fifty
three miles of pipe laid in a territory of twelve square miles.
Had the National Transit company, with its $30,000,000 of
invested capital, not been in control, it may be seriously
doubted whether local enterprise could ever have effected so
remarkable an extension of pipe lines in so short a time.

Associated with its advantages in transportation is the
advantage the Standard Oil company has in distributing its
refineries in strategic locations. Not only is a saving in trans-
portation charges thus effected, but advantages accruing from
cheaper land, labor, and fuel, are also secured. To gain this
economy, the Standard Oil company spent millions in new
plants near New York and Philadelphia. It bought the
entire output of the refineries in the newly discovered oil
region in Colorado, and secured control in 1898 of 75 per cent
of the refining business in Canada; and for the same purpose
it has recently rebuilt refineries in Pennsylvania, in order to
profit by the cheapened fuel.

The vexed question of the effect of the Standard Oil com-
bination on the price of refined oil will probably never be
settled. Opponents of the Standard Oil company declare
that the Standard has not reduced the price of refined oil as
compared with crude oil to any such degree as would be the
case under open competition. The effect of the combination,
they point out, is to be gauged only from the margin between
the prices of refined and crude oil; and the reduction of this
margin, though steady, is, in their opinion, by no means com-
mensurate with the improvements in the processes of refining.
In reply, Mr. Archbold of the Standard Oil company has
declared that his company is unable permanently to exact ex-
cessive prices. Temporarily, it might have such power; but,
if it used this power arbitrarily, it would provoke heavier com-
petition. There is, he admits, a certain amount of monopolis-
tic power, coming from the aggregation of capital itself, which
keeps prices higher than they would be under severe compe-
tition; but, at present, this power and its effect upon prices are
very slight, and the lessened cost of doing business on a large
scale more than compensates in lowered prices for the slight

RISE OF THE STANDARD OIL COMPANY 201

monopolistic power of getting higher prices. Perhaps the
most significant criticism which the independent refiners pass
upon the price which the Standard Oil company gets for its
oil is that the improved methods of utilizing by-products in
recent years have made by-products as remunerative as the
refined oil itself; and yet the margin of price between refined
oil and crude oil during this period has only slightly decreased.
The statement has frequently been made that the Standard
has reduced its prices in the territory of its competitors, and
maintained prices at more profitable rates as non-competitive
points. Such a practice, as an instance of ordinary business
competition, is not extraordinary. A similar charge could be
brought against most large businesses; and, as those who
bring the charge seldom take into account the varying cost
of transportation to markets of varying means of communi-
cation, small probative value can be attached to their bare
statement of difference in price. Of more serious nature are
the charges that the Standard Oil company suborns the
employees of its competitors to secure information as to
their shipments and customers, and that it resorts to unfair
tests and adulteration of its oils and to the copying of brands
with the design to deceive purchasers. On all these points
the evidence is at best vague and inconclusive. The officials
of the Standard Oil company testify that it is their practice
to ask their salesmen to keep their eyes open, and to inform
the company as to those from whom different dealers are
buying; but they flatly deny the charge of suborning the em-
ployees of their rivals, and very conclusively explain away
the charge of fraud in the copying of brands and in the tests
and adulteration of their products. The energy of the Stand-
ard Oil company, in developing new departments of the in-
dustry, and its enterprise in undertaking the production of all
the chemicals and materials incidental to the process of refin-
ing, has been recognized, even by independent refiners, as
truly great, and quite beyond what smaller competitors could
have attempted. The leading by-products are gasoline,
naphtha, paraffin, lubricating oils, and vaseline products.
In addition to these, fully 200 other by-products are extracted
and used for medical purposes and for aniline dyes. To

202 GILBERT HOLLAND MONTAGUE

utilize all these by-products requires the greatest specialization
of methods, encouragement of invention, investment of capi-
tal, and extension of plant. A refinery of a capitalization of
$500,000 cannot realize such economies. The undoubtedly
large profit accruing to the Standard Oil company from the
utilization of by-products is owing entirely to its superior
mechanical efficiency and organization.

Aggregation of capital has brought to the Standard Oil
company its greatest advantage in the development of foreign
trade. In its contest on the continent, and especially in Rus-
sia, with the great oil interests of the Rothschilds, of the Nobel
Brothers, and of prominent England capitalists, its success
has been entirely due to its great capitalization. Since 1871
the export of petroleum products has increased seven times,
and of the present exports the Standard Oil company ships 90
per cent. In Russia the competition between the Standard
and the Nobel Brothers is keen. The price of Russian crude oil
is lower than that of American oil ; and the Nobels are at pres-
ent shipping it in tank steamers to India, China, and Japan.
To meet this competition, the Standard Oil company has es-
tablished agencies all over the world, and has built bulk tank-
ships for transporting its product. With the exception of the
trade in the far east, where Russian competition is especially
keen, the export price of oil has always been kept above the
American price.

The present position of the Standard Oil company is one of
abundant prosperity and power. It is opposed by a combina-
tion— the Pure Oil company — which works in harmony with
an independent seaboard pipe line — the United States Pipe
Line — and with 66 independent refineries. The Standard
controls 90 per cent of the export trade and 80 per cent of
the domestic trade. By its control of the pipe line situa-
tion it has become quite independent of the railroads. By its
preponderant purchases of crude oil it has been able to steady
and roughly direct the course of prices of petroleum. By its
advantages in locating its refineries near their several markets
and in utilizing by-products it has effected enormous econo-
mies in transportation and manufacture, and increased its
dividend from 12 per cent in 1892, when the Standard Oil

RISE OF THE STANDARD OIL COMPANY 203

trust was dissolved, to 48 per cent in 1901. The power of
the Standard Oil company is tremendous, but it is only such
power as naturally accrues to so large an aggregation of capital ;
and in the persistence with which competition against it has
continued, in the quickness with which that competition
increases when opportunity for profit under existing prices
appears, and in the ever present possibility of competition
which meets the Standard Oil company in the direction of
every part of its policy, lie the safeguards against the abuse of
this great power.

THE RIGHT OF CONGRESS TO CONTROL THE

TRUSTS.

BY PHILANDER C. KNOX.

[Philander C. Knox, United States senator from Pennsylvania; born Brownsville, Pa.,
May 4, 1853; graduated Mount Union college, O., 1872; three years later admitted
to bar, and in 1876 appointed United States district attorney for the western district
of Pennsylvania; since 1877 has practiced law with James H. Reed, under thefirm
name of Knox & Reed, devoting attention especially to corporation law; appointed
attorney general of United States April 9, 1901, by President McKinley; elected
senator from Pennsylvania, 1904.]

The people by common consent have denominated the
great industrial and other corporations now controlling many
branches of commercial business, trusts. The technical accu-
racy of the term is unimportant, but indeed it is much more
apt than might be supposed, when it is recalled that the essen-
tial difference between the old industrial trusts and the
great corporations owning and controlling subsidiary ones is
that in respect to the former the shares of independent
corporations agreeing to act in harmony were lodged with a
trustee who received the separate earnings and distributed
them among the holders of trust certificates, while as to the
latter, a corporation is created to take over the title to the
stock or properties of the constituent companies and issue its
own shares as the evidence of interest in the combination. The
corporation owner of corporations invokes specific legal
authority from the legislature of the state under which it is
created.

President Roosevelt, in his first message to congress, said :
There is a widespread, settled conviction in the minds of
the American people that these trusts are, in many of their
features and tendencies, hurtful to the general welfare. This
springs from no spirit of envy or uncharitableness, nor lack of
pride in the great industrial achievements that have placed
the country at the head of the nations struggling for commer-
cial supremacy. It does not rest upon a lack of intelligent
appreciation of the necessity of meeting changing and changed

204

CONTROL THE TRUSTS BY CONGRESS 205

conditions of trade with new methods, nor upon ignorance of
the fact that combination of capital and effort to accomplish
great things is necessary when the world's progress is demand-
ing that great things be done. It is bottomed upon sincere
conviction that combination and concentration, while not to be
prohibited, is to be controlled, and in my judgment this con-
viction is right.

These great combinations, now numbering thousands,
are the instrumentalities of modern commercial activity.
Their number and size alone appall no healthy American.
We are accustomed to large things and to do them in a large
way. We are accustomed to speak with a justifiable pride of
our great institutions and what we have fairly accomplished
through them. No right thinking man desires to impair the
efficiency of the great corporations as instrumentalities of
national commercial development. Because they are great
and prosperous is no sufficient reason for their destruction.
If that greatness and prosperity are not the result of the
defiance of the natural rights or recorded will of the people,
there is no just cause of complaint.

That there are evils and abuses in trust promotions, pur-
poses, organizations, methods, management, and effects none
questions except those who have profited by those evils. That
all or any of these abuses are to be found in every large or-
ganization called a trust no one would assert who valued his
reputation for sane judgment.

The conspicuous noxious features of trusts existent and
possible are these: Overcapitalization, lack of publicity of
operation, discrimination in prices to destroy competition,
insufficient personal responsibility of officers and directors for
corporate management, tendency to monopoly and lack of
appreciation in the management of their relations to the
people, for whose benefit they are permitted to exist. Over-
capitalization is the chief of these and the source from which
the minor ones flow. It is the possibility of overcapitaliza-
tion that furnishes the opportunities for most of the others.
Overcapitalization does not mean large capitalization or
capitalization adequate for the greatest undertakings. It is
the imposition upon an undertaking of a liability without a

206 PHILANDER C. KNOX

corresponding asset to represent it. Therefore overcapitaliza-
tion is a fraud upon those who contribute the real capital
either originally or by purchase, and the efforts to realize
dividends thereon from operations is a fraudulent imposition
of a burden upon the public. When a property worth a
million dollars upon all the sober tests of value is capitalized
at five millions and sold to the public, it is rational to assume
that its purchasers will exert every effort to keep its earnings
up to the basis of their capitalization. When the inevitable
depression comes, wages must be reduced, prices enhanced, or
dividends foregone. As prices are naturally not increased
but lowered in dull periods, it usually resolves itself into a
question of wages or dividends.

While this condition may exist under any circumstances,
it is exaggerated by overcapitalization in the illustrating case
five to one. The overcapitalization securities enter into the
general budget of the country, are bought and sold, rise and
fall, and they fluctuate between wider ranges, and are more
sensitive in proportion as they are further removed from in-
trinsic values, and, in short, are liable to be storm centers of
financial disturbances of far-reaching consequence. They
also, in the same proportion, increase the temptation to mis-
management and manipulation by corporate administrators.

Corporations and joint stock or other associations, de-
pending upon any statutory law for their existence or privi-
leges, trading beyond their own state, should be required to
do business in every state and locality upon precisely the same
terms and conditions. There should be no discrimination
in prices; no preferences in service. Such corporations serv-
ing the public as carriers and in similar capacities should be
compelled to keep the avenues of commerce free and open to
all upon the same terms and to observe the law as to its in-
junctions against stifling competition. Moreover, corpora-
tions upon which the people depend for the necessaries of
life should be required to conduct their business so as regularly
and reasonably to supply the public needs. They should be
subject to visitorial supervision, and full and accurate infor-
mation as to their operations should be made regularly at
reasonable intervals. Secrecy in the conduct and results of

CONTROL THE TRUSTS BY CONGRESS 207

operation is unfair to the non-managing stockholders, and
should, as well for reasons of state, be prohibited by law. If
these serious evils were eradicated and a higher measure of
administrative responsibility required in corporate officers, a
long step would be taken toward allaying the reasonable ap-
prehension that the unchecked aggression of the trusts will
result in practical monopoly of the important business of the
country.

Less difficulty is encountered in describing the mischief
of trusts than in suggesting a rational and practical remedy.

The constitution provides (section 8, article 3) : The con-
gress shall have power to regulate commerce with foreign na-
tions and among the several states and with the Indian tribes.
Congress, July 2, 1890, enacted that every contract, combina-
tion in the form of a trust or otherwise, or conspiracy in re-
straint of trade or commerce among the several states is ille-
gal, providing punishments and conferring jurisdiction upon
federal circuit courts to prevent and restrain violations of the
act. It was commonly supposed at the time of the passage
of this act that its provisions forbade the existence of trusts
that were engaged in monopolizing the production through-
out the country of various articles of general consumption,
and the government shared in this view. Action was begun
by the United States against what was known as the sugar
trust. This was a corporation of the state of New Jersey,
which had acquired the stock of a number of sugar refining
corporations in another state by an exchange of its own
shares for the shares of the vending stockholders of those
companies. It was formed, as its charter stated, for the
purpose of . " buying, manufacturing, refining, and selling
sugar in different parts of the country."

The government's contention was that the purpose of
the purchase was to acquire a substantial monopoly of sugar
refining, and as the product was for sale and distribution
among the states and to foreign countries, that the arrange-
ment was a violation of the law cited. The contract chal-
lenged was one vesting in the trust the last of the independent
refineries but one in the United States, thereby giving it the
almost complete monopoly of a necessary of life. Its control

2o8 PHILANDER C. KNOX

was 98 per cent of the whole. The Supreme court decided
that as the monopoly was in the production or manufacture
of sugar, and its sale or distribution among the states and to
foreign countries was but incidental thereto, it was not within
the prohibition of the law, saying that manufacturing, al-
though it precedes commerce, is not a part of it, and that
the act only applied to restraints of commerce.

This distinction is easily understood when it is recollected
that commerce means intercourse, transmission, communi-
cation, transportation; and commerce among the states, the
regulation of which rests in the federal power, means, as the
term implies, that this intercourse shall be between or among
the states. Manufacturing, on the other hand, does not
imply or necessitate intercourse among the states, but implies
a situs or place for its operations. In a subsequent case the
government destroyed a combination known as the Addyston
Pipe combination, but upon the ground that it was a con-
spiracy among independent producers of pipe to restrain its
sale and distribution among the states. The combination in
this case operated directly upon interstate commerce.

These cases seem to define the scope of the anti-trust law
and show how little there is now left for the statute to operate
upon. It is not enough, it seems, that a trust or corporation
owning corporations exists, or that it is engaged in interstate
or foreign commerce, for its mere engaging in commerce is
not prohibited, or that it monopolizes production throughout
the country, or that it is formed to restrain or monopolize
business within a state, or destroys competition in buying or
selling within a state, or that by any of these things it indi-
rectly affects interstate commerce with a practical restraint
or monopoly, to bring the corporation or its particular trans-
action within the emphatic clauses or under the drastic penal-
ties of the anti-trust law. What seems to be necessary is to
establish by legal proof in court a combination for the direct
monopolizing or restraining of what is strictly interstate com-
merce, and to prove this against combinations whose affairs
are conducted upon the best legal advice as to what is and
what is not obnoxious to the law, by methods secret or ingen-
iously contrived to avoid the letter of the law.

CONTROL THE TRUSTS BY CONGRESS 200

I want to call attention to this law, not in a spirit of
criticism, but to show you clearly how far it went and where
it stopped. It undertook to invalidate all attempts to mo-
nopolize interstate commerce, which includes, among other
things mentioned, transportation, but it did not invalidate
monopolies of production or regulate commerce in such a way
as to free it from the restraints such monopolies directly im-
pose. The court did not say that these indirect effects upon
interstate commerce could not be prevented by congress. It
is earnestly contended by many that as it stands this law ex-
presses the limit of federal power in that direction. But has
not congress the power by its regulation to protect commerce
between the states from being restrained by state corporations
and combinations engaged in interstate trade, when their pur-
pose or effort is to destroy the freedom of such interstate
trade, and when their operations are besides injurious to the
general public? Regulation under such a power would not in-
terfere with mere production or the power of the state over pro-
duction. It would only affect them remotely and incidentally,
just as a monopoly that produces all or most of a certain line
of goods affects commerce indirectly. If it be true that a
state can authorize or permit a monopoly of production with-
in its borders because it has the power over production as
such, although it indirectly affects interstate commerce, may
not the United States regulate interstate commerce, over
which it has exclusive control, even though it indirectly affects
production, over which, as such, it has no control?

If congress, under its power to regulate interstate com-
merce, may utterly destroy a combination and forfeit its prop-
erty in interstate transit, as the Sherman act provides, be-
cause it restrains such commerce, it seems reasonable to say
that it can in the exercise of the same power deny to a combi-
nation whose life it cannot reach the privilege of engaging in
interstate commerce, except upon such terms as congress may
prescribe to protect that commerce from restraint. Such a
regulation would operate directly upon commerce and only
indirectly upon the instrumentalities and operations of pro-
duction.

Vol. 3-14

210 PHILANDER C. KNOX

If the Sherman act exhausts the power of congress over
monopolies, the American people find themselves hopelessly
impotent, facing a situation fraught with the most alarming
possibilities, with which neither the federal nor state govern-
ments can deal. While states may regulate the production
and sale of articles within their own borders, at these borders
their authority ceases. Jefferson, in his letter of March 15,
1789, to Madison, says of the constitution: "This instrument
forms us into one state as to certain objects, and gives us a
legislative and executive body for those objects." One hun-
dred years later the Supreme court of the United States de-
clared "that in the matter of interstate commerce the United
States are but one country, and are and must be subject to
one system of regulations, and not to a multitude of systems."

These are illuminating and vital statements of the origi-
nal purpose in founding this government to provide for na-
tional control of intercourse and of the extent of the national
power over it. These statements were made, respectively, by
that great leader of the constructive period who was most
jealous for the reserved rights of the states against the en-
croachment of the new national sovereignty and by one of the
wisest judges who have interpreted the constitution's pur-
poses and meaning. In the light of such statements, then,
can it be possible that the people of the United States, feeling
the pressure of undoubted evils, are nevertheless totally
powerless? Is it true that although they know with growing
certainty the nature of the wrong and are seeking a remedy,
the constitution as it stands does not permit them to pursue
it ; that amendment to that charter is first necessary ; that the
power of congress does not now extend over detriments injur-
ing the entire body of citizens in their most vital concerns be-
cause these detriments originate in the states, although the
states in the aggregate, and by the co-operation which is
essential, do nothing effective to remove them? I do not be-
lieve that we find ourselves so helpless. When the currents
of monopoly evil obviously flow out over state lines and cover
the country, not only entering, but largely filling the channels
of interstate and foreign trade, it will not do to say that the
evil is beyond the national reach, and that because the first

CONTROL THE TRUSTS BY CONGRESS 211

step which may lead to the evil is production, which must
have a fixed situs within a state, the states alone may deal
with it.

If the states are a nation for some purposes, as Jefferson
said, with full legislative and executive power, and exclusive
regulation of interstate commerce is one of these purposes, as
the Supreme court has decided, it would seem monstrous to
urge that congress and the executive under its authority are
powerless and must sit idly by and see the channels of inter-
state commerce made use of to the injury of the people by
monopolistic combinations. Plainly the power must reside
somewhere, either in the nation or in the states' reserv ations ;
but the effect of present doubts is to create a dilemma under
which, apparently, all power vanishes, the states saying, some
of us do and some of us do not approve or permit monopo-
listic production; that is our concern, but when the products
cross our borders the problem passes beyond us and becomes
a matter of national regulation and control; and the nation
appearing to reply, I can deal with commerce passing beyond
any one state, but effective regulation here may indirectly
interfere with production, and that is a state matter which I
may not touch. And so the national and local sovereignties
halt and the delictum escapes. The Supreme court has char-
acterized the power of congress to regulate interstate com-
merce, like the related and sometimes auxiliary power to tax,
in terms broad and absolute; it has defined this commerce in
language which is inclusive of all phases of interstate inter-
course, exchange, and trade; it has merely said that produc-
tion, imder an initial phase of modern consolidations which
primarily, at least, regards production alone, is not such com-
merce. I do not think it can be said that the court has gone
beyond this point.

Conceding that the present law is not effective through-
out the situation, we come to the final alternative: May not
congress, under the existing constitutional grants, amend and
extend the law, and thus remedy its defects and so effectively
regulate national and foreign commerce as to prevent the
stifling of competition, the regulating of output and price,
and the restraining of national and international trade? If

212 PHILANDER C. KNOX

the answer to this question should be in the affirmative, a
second question follows : How might congress so amend the
present law?

I do not scruple to say that in my judgment the more a
thoughtful mind reflects on the first question, the more un-
hesitatingly will an affirmative answer be returned. That
regulation by congress in this way would indirectly or re-
motely affect production would be no bar. The very point
of the sugar trust case was that a consolidated scheme of pro-
duction might lead to commerce, or might indirectly or re-
motely affect commerce, but did not for that reason invoke
the federal power over commerce; and the illustration from
the converse of the situation is significant on the point just
stated. Congress under this power prevents the importation
or transportation of articles deemed injurious to the general
welfare. Thus the laws subject the movement of explosives
to safeguards and burdens, absolutely excludes impure lit-
erature and diseased cattle, convicts and contract labor, and
scrutinizes and prevents or checks many foreign and inter-
state movements, throughout the entire field of international
and national intercourse, in the interest of all the people, on
grounds of commercial, hygienic, or ethical policy. Who
shall set limits now, in advance of a carefully framed and
judicially tested law, to the competence of congress to reg-
ulate commerce in the way suggested in the exercise of the
legislative wisdom and in the wide discretion confided to it?
Who shall say that the power of congress does not extend so
far? I think it does. I am quite sure no one can now say
that it does not. Every constitutional question is an open
one until it is authoritatively closed by a decision of the
Supreme court.

And now a word as to what has been undertaken and
accomplished under many and peculiar embarrassments in
the way of executing existing laws.

In 1904 it came to the knowledge of the president that
great railway systems in the middle west, upon which every sec-
tion of the country is dependent for the movement of bread-
stuffs, had entered into unlawful agreements to transport the
shipments of a few favored grain buyers at rates much below

CONTROL THE TRUSTS BY CONGRESS 213

the tariff charges imposed upon smaller dealers and the general
public. This injustice prevailed to such an extent and for so
long a time that most of the smaller shippers had been driven
from the field, and the business formerly enjoyed by them ab-
sorbed by a limited number of persons, who received secret
and preferential rates. In a word, there was practically only
one buyer on each railway system, and the illegal advantages
he secured from the carrier gave him a monopoly of the grain
trade on the line with which his secret compact was made.

In the earlier period of this discriminating practice it is
probably true that the producer obtained a price for his grain
slightly in excess of its market value at the place of shipment ;
but that result followed only during the short time that the
non-favored dealer continued in business. When he was
forced to the wall, as he soon was, the only buyer whom the
producer could reach was the party who had bargained with
the carrier for an unlawful trade. Thus competition in the
grain business was destroyed and the price actually realized
by the farmer was frequently less than the proper market
value. A favored middleman, by connivance with the rail-
road, monopolized the grain products of a large area of coun-
try, and virtually fixed the price both to the producer and
the consumer.

It was an odious condition. Nor does this describe the
full measure of wrongdoing. It reached the centers of trade
and affected related industries with more or less disaster. In
Kansas City, for example, it was asserted that local dealers
had been excluded from participation in the grain trade ; that
their elevators for the storage and transshipment of grain,
built at great expense for the demands of an important market,
had been deprived of business, and that large numbers of
laborers had lost employment and remained in idleness, solely
because of the diversion of business from its natural channels
as the result of this forbidden monopoly in the purchase and
transportation of grain.

The board of trade of that city presented a complaint to
the interstate commerce commission, and that body con-
ducted an investigation which disclosed, with convincing
particularity and detail, the facts already summarized. That

214 PHILANDER C. KNOX

they are true in substance and effect is not seriously disputed
in any quarter. The commission also, about the same time,
held another investigation, and reported to the department
of justice that the six largest meat packing concerns, popu-
larly known as the "beef trust," were in a combination with
each other and with many great railway lines, whereby they
secured large secret concessions in rates for the transportation
of their products which enabled them to practically monop-
olize the fresh and cured meat industry of the United States.

Acting upon this information, which disclosed definite
and probable facts, bills for injunctions were immediately
filed against the principal railroads implicated, to restrain
them from giving preference to any shipper in the rates or
facilities of transportation. There were instituted by the
government in the United States Circuit court at Chicago, six
suits in equity against offending railroad companies; and
simultaneously, eight additional suits were begun against
other railroads at Kansas City. In each instance temporary
injunctions were granted, which are still in force, restraining
the defendant railroads from paying any rebates or granting
any preferences whatever to any shipper, so that all persons
should stand on an even footing in respect of transportation
over the enjoined roads.

It was not practicable, of course, nor desirable to bring
injunction suits against all the railroads in the United States,
but it was believed, in thus proceeding against fourteen of the
most influential lines and having the interlocutory decree of
two very eminent federal judges to the effect that the facts
alleged in the bills entitled the government to the powerful
remedy of injunction, that the other carriers would thereafter
conform to the law and abstain from illegal practices. How
salutary and wholesome the effect has been ask any fair-
minded railway manager who is now enabled to adjust his
business freed from the stress of competition with lawbreakers
or any honest shipper upon the defendant roads. It is be-
lieved that with few exceptions since the issuing of these in-
junctions the open tariffs have been applied and uniform rates
charged to large and small shippers alike. The small grain
buyers in the west have resumed operations, the elevators

CONTROL THE TRUSTS BY CONGRESS 215

that were closed are doing a profitable business, and the work-
men are again employed.

Another direction in which kindred effort has been made
to enforce the law and prevent the abuse of monopoly deserves
a word of comment. The cotton interests of the south, grow-
ers, buyers, and shippers, complained of the hardships and in-
jury suffered by them from the methods of the railroads in
that section in handling and transporting the cotton output.
These carriers by combined action denied the right of routing
to the shippers — that is to say, the right of the shippers to
prescribe over what route his goods should pass, and by agree-
ment with each other determined the lines which should move
this important product and the percentage of total shipments
which each line should transport. In other words, there was
a pooling arrangement between the railroads in respect of this
traffic, in distinct violation of the federal statute.

As the result of information, secured with much difficulty,
respecting this forbidden practice, a number of indictments
were obtained against the offending roads and their principal
traffic officers. At first the indicted carriers showed an inten-
tion to continue their unlawful combination, and steps were
taken by the department to institute similar prosecutions
against the same and other carriers for like misconduct at
other points in the cotton section. Since that time, however,
the roads have receded from their position. They now accord
to shippers the right to route their traffic, and avow their pur-
pose strictly to observe the law.

The remarkable advance in the price of meats, coupled
with the disclosures elicited by the commission respecting
secret rebates enjoyed by the great packing houses, and other
information obtained by the department of justice, induced it
to direct an investigation into the methods of the so-called
"beef trust," as a result of which bills were filed under the
Sherman anti-trust law and injunctions issued restraining each
of the six defendant concerns from combining or agreeing upon
the prices at which they would sell their products in states
other than those where it is prepared for market, and like-
wise restraining them from combining and agreeing upon
cartage charges for delivering their shipments at destination.

2i6 PHILANDER C. KNOX

The Northern Pacific and Great Northern railroads, hav-
ing their eastern termini at the head of Lake Superior, and
extending westwardly via Minneapolis and St. Paul to the
Pacific ocean, occasionally intersecting and again separating,
and generally no farther distant from each other than 100
miles, and being in 1901 practically the only competitors in
the transportation of traffic to and from most of the states
traversed by them, combined together and purchased the
capital stock of the Chicago, Burlington & Quincy railroad
system. Thus those two transcontinental lines became the
joint owners of another great system which was gradually
pushing its rails northwesterly into the territory occupied by
the purchasers, and westwardly to the Pacific ocean.

To effect this purchase the Northern Pacific and Great
Northern companies issued joint bonds for $200,000,000.
Shortly after the purchase of the Burlington road the prin-
cipal owners of the Northern Pacific and Great Northern roads
caused to be organized, under the laws of New Jersey, the
Northern Securities company, with a nominal capital of $400,-
000,000, of which $30,000 was paid in. That company was
organized to become the owner of the capital stock of the
Northern Pacific and Great Northern railroad companies, and
this was accomplished by an exchange of the stock of the New
Jersey corporation for the stock of the two railroad companies
at such a price that, if the securities company got all of the
stock of both roads, its entire $400,000,000 of capital would
be absorbed in the exchange.

At the time of the purchase of the Burlington road the
capital stock of the three railroad systems was about $390,-
000,000. That was the capital upon which the combined
traffic carried by those roads might, after paying expenses of
operation, reasonably be expected to provide dividends. By
the bond issue to secure the Burlington and the inflation of
the " securities" capital that same traffic was expected to
provide dividends upon more than two hundred millions of
stock in addition to the original $390,000,000.

When the department of justice came into possession of
these facts a suit in equity was at once begun to restrain the
operation of the proposed merger and to restore the independ-

CONTROL THE TRUSTS BY CONGRESS 217

ence of these transcontinental railroads as competing lines.
The United States Supreme court sustained the department's
contention and ordered the Northern Securities company
dissolved.

Here, then, are four phases of the attack on combinations
in restraint of trade and commerce — the railroad injunction
suits, the cotton pool cases, the "beef trust" cases, and the
Northern Securities case. The first relates to the monopoly
produced by secret and preferential rates for railroad trans-
portation; the second to railroad traffic pooling; the third to
a combination of independent corporations to fix and main-
tain extortionate prices for meats, and the fourth to a cor-
poration organized to merge into itself the control of parallel
and competing lines of railroad and eliminate competition in
their rates of transportation.

There appears to be no doubt of the facts as set out in
the bills filed in these various cases. The combinations pro-
ceeded against are in some respects different from those con-
sidered in cases that have been decided by the Supreme court,
and it is said by their organizers that they have avoided the
prohibitions of the anti-trust law. The department of jus-
tice, being of opinion that they are each in violation of that
law, found it to be its manifest duty to so advise the president,
with the result which is known to all.

My whole purpose in what I have said is to challenge the
proposition that we are hopelessly helpless under our system
of government to deal with serious problems which confront
us in respect to our greatest interests. Since the radical ques-
tions of human rights and human governments have been
settled, the production, preservation, and distribution of
wealth receive the chief attention of civilized peoples.

The extent to which legislative control over commercial
activities should be exercised is, of course, a question for legis-
lative wisdom. We have the experience of the other nations
to guide us in determining how far the delicate and mysterious
rules of trade can be interfered with by positive statutes with-
out injury. That experience teaches us that the least inter-
ference consistent with the preservation of essential rights

218 PHILANDER C. KNOX

should exist. Arbitrary regulations that restrain free inter-
course are usually found to be unwise.

Primarily it is for the congress to decide whether it has
the power, and whether and to what extent it will execute it
— what character of restraints, whether all or those only which
are unreasonable and injurious shall fall under the ban,
whether legislation in the first instance should extend to all
commerce or only to commerce in articles of vital importance
to the people. The time never was when the English-speak-
ing people permitted the articles necessary for their existence
to be monopolized or controlled, and all devices to that end
found condemnation in the body of their laws. The great
English judges pronounced that such manifestations of human
avarice required no statute to declare their unlawfulness, that
they were crimes against common law — that is, against com-
mon right.

It is difficult to improve upon the great unwritten code
known as the common law. Under its salutary guaranties
and restraints the English-speaking people have attained their
wealth and power. It condemns monopoly, and contracts in
restraint of trade as well. The distinction, however, between
restraints that are reasonable in view of all the circumstances
and those which are unreasonable, is recognized and has been
followed in this country by the courts. This distinction makes
a rule that may be practically applied, and preserves the ra-
tional mean between unrestrained commerce and the absolute
freedom of contract. A law regulating interstate commerce
for its protection against restraint, so broad as to cover all
persons whose business is conducted under agreements which
are in any way or to any extent in restraint of trade, might
exclude thousands of small concerns conducting industries in
one state from marketing their products in others ; but a law
which only covers contracts and combinations in restraint of
trade as denned by the common law would exclude all hurtful
combinations and conspiracies. Congress can, if it sees fit,
adopt the scheme of that law. In the enforcement of such
law each case as it arose would be considered upon its own
facts, and the rule of guidance would be as laid down by the
Supreme court of the United States — that is, "public welfare

CONTROL THE TRUSTS BY CONGRESS 2ig

is first considered, and if it be not involved and the restraint
upon one party is no greater than protection to the other party
requires, the contract may be sustained. The question is
whether, under the particular circumstances of the case and
the nature of the particular contract involved in it, the con-
tract is or is not reasonable.

Let me give an illustration showing the difference be-
tween a reasonable and unreasonable arrangement or contract
at common law. First, as to a reasonable one :

The case of a sale of a business and its good will is a good
illustration. Here a restricted covenant upon the part of the
vender not to engage in competition in a similar business is
often the main consideration for the transaction. This cov-
enant is, of course, in restraint of trade and interferes with
competition. But to make a contract such as this illegal is
not only restrictive of the liberty of contract, but it is depriv-
ing one of his property without due process of law. Good
will is property capable of being appraised, bought, and sold.
In many cases it is the main ingredient of value. It repre-
sents all the struggle, industry, tact, and judgment that
makes success. In estimating the worth of a business it is not
infrequently reckoned more valuable than the buildings and
machinery that make up the physical plant. Such a contract
has been held reasonable and valid.

Now as to an unreasonable agreement, let me quote
an illustration from the pen of a justice of the Supreme
court :

In Morris Run Coal company vs. Barclay Coal company
(in the Supreme court of Pennsylvania) the principal question
was as to the validity of a contract made between five coal
corporations of Pennsylvania, by which they divided between
themselves two coal regions of which they had the control.
The referee in the case found that those companies acquired
under their arrangement the power to control the entire market
for bituminous coal in the northern part of the state, and their
combination was, therefore, a restraint upon trade and against
public policy. In response to the suggestion that the real pur-
pose of the combination was to lessen expenses, to advance
the quality of coal, and to deliver it in the markets intended

220 PHILANDER C. KNOX

to be supplied in the best order to the consumer, the Supreme
court of Pennsylvania said:

"This is denied by the defendants, but it seems to us it is
immaterial whether these positions are sustained or not. Ad-
mitting their correctness, it does not follow that these advan-
tages redeem the contract from the obnoxious effects so strik-
ingly presented by the referee. The important fact is that
these companies control this immense coal field ; that it is the
great source of supply of bituminous coal to the state of New
York and large territories westward; that by this contract
they control the price of coal in this extensive market, and
make it bring sums it would not command if left to the natural
laws of trade; that it concerns an article of prime necessity
for many uses ; that its operation is general in this large region,
and affects all who use coal as a fuel, and this is accomplished
by a combination of all the companies engaged in this branch
of business in the large region where they operate. The com-
bination is wide in scope, general in its influence, and in-
jurious in effects. These being its features, the contract is
against public policy, illegal, and, therefore, void."

The question of reasonableness is thus one for the courts
to determine, and it is manifest that this doctrine gives play
to just considerations of the freedom and inviolability of con-
tracts with proper judicial safeguards against unconscionable
arrangements rightly void as contrary to public policy. The
Sherman act is entitled "an act to protect trade and com-
merce against unlawful restraints," etc., and the able dissent-
ing opinion in one of the leading cases in the Supreme court
argues from this indication and other considerations that the
restraints intended to be stricken off were only those un-
reasonable restraints as defined at common law. But the
law was authoritatively decided to include all restraints,
whether reasonable or unreasonable. Nevertheless, in ex-
tending the law it might be deemed wise by congress not to
import and impose this distinction clearly, for the following
reasons among others: Because the hard and fast extreme
rule may work injustice in various instances where a moderate
restraint is either not harmful at all to the general interests,
or only slightly so in comparison with the importance of the

CONTROL THE TRUSTS BY CONGRESS 221

freedom and sacredness of many contracts which public policy
does not manifestly condemn; because the question of reason-
ableness, as in the common law, should be for the courts —
surely the safest arbiter and reliance in human disputes — and
because, from the economic standpoint, freer play would thus
be given, and perhaps "a way out" indicated, in the conflict
between the important principles of free competition and
combination.

We have no certain knowledge of the nature and effect
of the natural laws which are carrying forward evolution in
economic and social phenomena as in all other branches of
biology. But we may be confident that in some sort and with
whatever perversions, public policies, constitutional charters
of government, and municipal laws roughly manifest these
natural laws and reflect their main tendencies. Proper free
play of forces might be maintained, by importing into the
situation the idea of "reasonableness" and judicial deter-
mination thereof, for the control of unnecessarily destructive
competition; and, for preventing the opposite danger, by de-
vising a system of regulation which would strike the evils of
combination at the heart and aid in the great object of re-
straining hurtful restraints and monopolies, especially as to
the prime necessities of life.

The conditions of our commercial life are, as I have said,
the result in part of an evolution of forces of world-wide opera-
tion. They have developed gradually and are not, perhaps,
fully understood. Laws regulating and controlling their
operation, before they ripen into a complete system of wise
jurisprudence, will be of gradual growth.

HOW CONGRESS MAY CONTROL TRUSTS.

BY JEREMIAH W. JENKS.

[Jeremiah W. Jenks, economist; born St. Clair, Mich., Sept. 2, 1856; graduated
University of Michigan, 1878; studied law and was admitted to the Michigan bar;
instructor in Greek, Latin, and German at Mount Morris college, 1881-85; professor
of political science, Knox college, 1886-89; professor of political economy and social
science Indiana university, 1889-91; expert agent of the United States industrial
commission for investigation of trusts and industrial combinations, 1899-1901,
since which time he has been consulting expert of the United States department of
labor on that subject; was sent by the war department of the United States as a
special commissioner to investigate economic policies and conditions in the Orient,
1901-02. Author of The Trust Problem, Trusts and Industrial Combinations, Vol.
VIII., Report Industrial Commission on Industrial Combinations in Europe, etc.]

It is generally conceded that state action to control trusts
is and must be ineffective owing to differing laws in separate
states. Congress, in the Sherman anti-trust law, has taken
one step toward their control. The best legal authorities who
have given special study to the question are of the opinion
that, without constitutional amendment, congress may now
take further positive and effective action. The question re-
mains, What action is wisest? Three important suggestions
have been made; we attempt to weigh briefly their relative
merits.

1. Attorney General Knox made a notable address at
Pittsburg, in which, with the acumen as well as the caution of
a great lawyer, he told what the present government had
done in restraining trusts, and indicated in general terms
what more congress might do. He seems to have amplified
the views of the president. Although his recommendations
were not specific, his suggestions seem to mean this:

(a) Under the Sherman act it has been decided that
combinations in restraint of interstate commerce, whether
reasonable or unreasonable, are illegal and punishable. In
his judgment — and in this judgment most thoughtful men
since the decision in the Addyston Pipe case agree — it is wise
to permit any partial or even complete restraints of trade
that are in their nature reasonable, while punishing severely
those that are unreasonable. The courts, as under the com-

222

HOW CONGRESS MAY CONTROL TRUSTS 223

mon law, should determine what is reasonable and what is
unreasonable.

(b) His chief recommendation, however, looks toward
extension of the scope of the Sherman anti-trust act. Follow-
ing a line of argument parallel with that used by Mr. F. J.
Stimson and Prof. E. W. Huffcut, as found in the reports of
the United States industrial commission, he expresses the
opinion that congress has the power to lay down the condi-
tions under which corporations may engage in interstate
commerce, and to prescribe penalties for the violation of such
conditions. The constitutional power seems to be clear; but
he does not state categorically what conditions he would im-
pose. The implication in his address, however, from the evils
enumerated and from the principles discussed, is that cor-
porations doing an interstate business ought to be required
(1) "to do business in every state and locality upon precisely
the same terms and conditions. There should be no discrim-
inations in prices, no preferences in service." (2) They should
be subject to "visitorial supervision;" secrecy in the conduct
or result of their operations should be prohibited by law.

These conditions might be enforced only by penalties
imposed b}^ the courts after a violation of the act had been
proved in a specific case brought by an injured party by a
government attorney, as the Sherman anti-trust act is en-
forced. This plan would be conservative; it would leave the
burden of proof on the prosecutor, and probably would not
be generally effective. It would, however, be certain, in
course of time, to give us some extremely important decisions
and indications for further action. Congress might, however,
following the plan of several states in dealing with insurance
companies, partly shift the burden by providing that before
any corporation engaged in interstate traffic it should procure
a permit or license from some authority duly established in
the act (a bureau of the new department of commerce, an offi-
cer of the treasury, or otherwise). It would then regularly
furnish such information regarding its business as the law
demanded; it could be regularly inspected to enforce com-
pliance with the conditions laid down; and any corporation
engaging in interstate commerce without such license would be

224 JEREMIAH W. JENKS

at once subject to penalty. The conditions could be made
whatever congress deemed wise. The important conditions
named by the attorney general which might be enforced by
either of the methods mentioned merit consideration from the
economic as well as from the legal point of view.

1. The publicity implied in the words "visitorial super-
vision" is a remedy which has been long and ably advocated,
and beyond question, if it could be properly enforced, would
be very serviceable. The corporations, however, which most
abuse their power would make every effort to evade such
supervision, and, as appears later, in many cases such evasion
would be easy.

2. Discrimination in prices between different customers
for the purpose of crushing rivals and strengthening monopoly,
as Professor Clark, of Columbia university, has ably shown,
is of three kinds: First, the great corporation sells at ruin-
ously low rates in localities where rivals are at work, while re-
couping itself for the loss by demanding high prices elsewhere ;
second, with many kinds of products at its disposition, while
its smaller rival has only one or two classes, it may, to destroy
the rival, make ruinously low though everywhere uniform
prices for these specific classes, while keeping high prices on
its other products; in the third place, it may grant especially
favorable terms to those purchasers who buy only its goods.
It is perhaps too much to say that it is impossible to stop these
practices, but any one who knows business will realize that it
is extremely difficult to stop any of them, especially the
second

Moreover, it is not absolutely clear that they should be
stopped; such discriminations may at times be beneficial to
society. A rival of a great combination often makes its way
by giving special rates on certain articles used as leaders and
by discriminations among customers. The principle of dis-
crimination in freight rates on railroads, it is generally con-
ceded, is evil, but railroads are natural monopolies. It is
useless to talk of encouraging competition among them. On
the other hand, the so-called trusts are in industries which
are normally competitive, and we wish to keep them so. If,
then, rivals in competitive trade against the great corporations

HOW CONGRESS MAY CONTROL TRUSTS 225

get their start by special rates to individual customers and by
making leaders of individual articles, to compel them to sell
to all customers at the same rate is against free competition,
as the word is ordinarily used. Will the limitation of free
action harm most the trust or its rival?

A small flouring mill in southern New York sells flour,
let us say, in its own town, in Owego and Elmira, N. Y., in
Wilkesbarre and Scranton, Pa., and in Phillipsburg and
Dover, N. J. It is engaged in interstate commerce. It must
sell in face of the competition of the great Minneapolis mills
and of the so-called flour trust. Freight rates from Minne-
apolis are substantially the same to all these points; in them
all flour of the same brand sells at practically the same price.
The local New York miller must meet these prices, freights
included. In consequence, as his freights differ, he sells to
each town at a different rate. His profits from each differ.
He does not sell to all at the same rate and then add the
freight, as does his great rival. If the law of no discrimina-
tion is enforced on him in the same way as on the trust — and
the law cannot be a respecter of persons — he is confined to
his local New York market, cannot sell enough to keep his
mill running, and stops. The act indicated, rigidly enforced,
would close hundreds of small mills in all sections of the coun-
try, and would stop thousands of men in other lines. Yet
possibly this may be a less evil than discriminations of the
trusts. We must, however, not blink the fact that in many
individual cases such a law may strengthen instead of weaken
the trust. It would be a practical impossibility for any exec-
utive body to grant exceptions in special cases. The ship-
pers are altogether too numerous. It is also true that a law
forbidding discriminations, as well as one requiring publicity,
can be easily evaded. It is impossible in many cases to get
evidence. But direct methods of evasion are also even now
employed.

It is proposed to make these laws apply only to interstate
commerce. A manufacturing corporation as such, however
large, is not engaged in interstate commerce. It is at times,
even now, the custom for a great manufacturing corporation,
in vSTs? t0 evade a state law against combinations, to sell its

226 JEREMIAH W. JENKS

goods in the first place to a subordinate corporation or to a
co-working individual, who then transfers them to real pur-
chasers. This second corporation might, of course, be so
organized as to be perfectly ready and willing to meet any
conditions, that of publicity or non-discriminations or other-
wise, without in any way opening the gate for inspection or
knowledge of the workings of the really monopolistic manu-
facturing corporation. It would even be possible, if desirable,
for a separate corporation to be formed for the selling work
of each several state, as has often been suggested. Of course
it is possible that the courts might hold in individual cases
that this method had been adopted simply for the purpose of
evading the law, and that for the purpose of that case the
transaction should be considered one. It is scarcely prob-
able, however, that this would be held unless in very rare in-
stances where the evidence was absolutely clear; and if the
separate corporations were organized and managed with en-
tirely separate accounts, as could readily be done, it does not
at present appear how the United States courts would obtain
by compulsion the jurisdiction necessary for the effective
carrying out of the law. The law would be still more difficult
of enforcement if the intermediate selling agent were a natural
person and not a corporation. Similar difficulties would ap-
parently be encountered in the enforcement of the law sug-
gested in a bill just introduced by Senator Cullom which bars
the transportation of trust made products from one state to
another.

(2) This brings us to the discussion of the second remedy.
The plan is to impose a tax upon corporations or individuals
engaged in interstate commerce, and thereby to secure a
supervisory control of such business. While there would
doubtless be difficulty in imposing a direct tax, it seems to
be the universal opinion among the most competent students
that a franchise tax, or, to use another expression, a license
tax, as a condition preliminary to engaging in interstate com-
merce, would be clearly constitutional. The act of imposing
a tax shows most strikingly the power of a government, and
the courts have been inclined, when a tax is in itself constitu-
tional, to give to the executive all the power needed to en-

HOW CONGRESS MAY CONTROL TRUSTS 227

force the tax. Were a franchise or license tax imposed an-
nually in proportion to, let us say, the net receipts from
interstate business, the investigation of the business of each
corporation would be of necessity so thorough that the gov-
ernment would readily obtain all the knowledge necessary
for holding the corporations rigidly to legal action, and for
prescribing what seemed to be wise measures for future
control.

In order to obtain these results, the tax need not be
heavy enough to be at all burdensome, although it would be
of such a nature that it might readily be made to yield a large
income in case of need, or even to impose positive limitations
in any direction desired if that should become necessary. The
tax might probably even be devised so as directly to check
stockwatering. The most important factor, however, would
be that when the machinery for the imposition and collection
of the tax was once thoroughly in order, the government
would have in readiness a power which could readily be
adapted to the needs of the case. It would naturally be en-
forced by a bureau as indicated above, in connection with
the plan of the attorney general. Were the tax made com-
pulsory and burdensome, efforts to evade it and the difficulty
of finding interstate commerce would be of the nature of those
indicated in the first plan ; but here again, as in the preceding
case, the decisions of the courts would ultimately doubtless
be of great assistance ; and if the corporations were compelled
to secure first their permit, evasion of the law would be more
difficult. Such a tax would fit well into our general scheme
of taxation, and would be a useful balance wheel in our entire
revenue system. The line of court decisions certain to be
made within a comparatively short time would aid congress
in future legislation. If need be, eventually the tax itself
might be a means of control.

(3) A third plan is the federal incorporation of corpora-
tions engaged in interstate commerce. This plan again is in
line with both plans preceding, but is one step further. There
seems to be little doubt that it would be constitutional.
Should congress make a corporation law too burdensome or
rigid, the manufacturing corporations would not organize

228 JEREMIAH W. JENKS

under it. If it were made compulsory, they would employ
every device to avoid doing interstate business, and com-
paratively little would be accomplished. Should congress,
on the other hand, make a law of such a nature that it would
be advantageous for corporations to organize under it, the
result would be quite different. The chief objections that
have been made to the plan are :

(a) That it would bring about a high degree of central-
ization in all of our important business, and that it would,
by the transference of much business from the state courts,
grievously overburden our federal judiciary; and

(b) That were congress to propose the enactment of such
a law, the influence of the corporations would be such that
the law, when made, instead of being restrictive, would prob-
ably be even more liberal than our present state laws. The
corporations, then, instead of being under better control,
would be practically placed beyond control.

If in such a federal corporation act, following the prec-
edent of the national banking act, provision were made, if
necessary, that suits might be brought in either federal or
state courts, there need be, and probably there would be, no
great increase in the activity or power of our federal courts.
If congress were to follow the precedents already established
with reference to corporations in Porto Rico and in the case
of the national banks, its law would probably not be too
liberal. It would be made of necessity under the pressure
of an awakened public opinion, and attempts to give too great
privileges would probably be checked. Such a law, if passed,
should provide for a high degree of publicity as regards the
organization and management of corporations, should im-
pose rigid provisions regarding capitalization and manage-
ment, and might readily, if it seemed wise, forbid discrimina-
tions in prices or make any other conditions that seemed
reasonable.

Compulsory severe legislation is always hard to enforce.
In the present difficult case it would be extremely desirable
so to legislate as to put on the side of the law the great cor-
porations which are trying to do a fair, honorable business,
which is in the public interest (the "good trusts")? while stop-

HOW CONGRESS MAY CONTROL TRUSTS 229

ping the evils of the others. An attractive measure would
be to combine with the rigid restrictions above mentioned,
which would destroy many if not most of the evils, a provision
that federal corporations should be exempt from state taxa-
tion except as to property actually situated within the several
states. Now the large corporations fear and oppose and evade
state corporation taxes. The variations and complications
arising from different systems are troublesome; in many cases
lawyers say, probably with some exaggeration, that corpora-
tions are subject to " strike" bills and to blackmail where dis-
cretion is left with minor officials. They would be willing to
pay a federal tax even heavier than their present taxes if it
were alike on all and fairly and honestly levied. Such an
exemption provision — and possibly others which might check
too hostile legislation by separate states — might easily prove
so attractive that the sound corporations would readily organ-
ize under the law and aid in its just enforcement. A federal
corporation law, if enacted, should certainly at first be made
permissive rather than mandatory. There would thus be no
danger of a revolution in business ; the courts and the business
community would adapt themselves gradually to the new line
of organization. If the law were reasonable, even though
very strict, the best corporations would come under it at once.
The others would soon feel the pressure of public disapproval,
if the federal law were distinctly the best. If experience
showed that it were necessary to extend the scope of the act,
though that is not probable, it would be comparatively easy
later on to force, by taxation or otherwise, other state cor-
porations engaged in interstate traffic to incorporate under it.
The three plans indicated are not contradictory; they
are rather progressive along the same line. Either act could
be passed alone, or all of them might be passed together. If
the first law discussed were enacted, it would doubtless give
us valuable experience and decisions, and would be, with the
exception of one point, a distinct step in advance, possibly
all that should be taken at first. But, so far as has appeared,
it is practically entirely compulsory in its nature, and could
be readily evaded. The other two measures seem more
drastic, and doubtless would be more rigid in many ways;

23o JEREMIAH W. JENKS

but, on the other hand, the last, at any rate, might contain pro-
visions which would remove the hostility of the better class
of corporations, which would then themselves readily aid in
the enforcement of the law, while if it were made optional,
even if combined with the others, there certainly could be no
charge of action which was hostile to the interests of capital
legitimately invested and properly employed for the welfare
of the public,

THE WORK OF THE PROMOTER.

BY EDWARD SHERWOOD MEADE.

[Edward Sherwood Meade, economist, born Medina, O., Jan. 25, 1S74; educated
at Oberlin college, DePauw university and the University of Chicago; fellow in
economics, University of Chicago and University of Pennsylvania; instructor in
commerce and industry, Wharton School of Finance and Economy since 1900.
Author of Trust Finance, and of many monographs and articles in magazines on
the economics of modern industry.]

Every week of the year deposits of minerals are dis-
covered, franchises are obtained, patents are granted. Rail-
way extensions are constantly bringing land, timber and coal
into the market — increasing population offers a basis for
water, light and transportation plants. New inventions
stimulate new wants and these wants in their turn produce
new means of satisfaction. The field for investment, either
in new enterprises, or in the extension and diversification of
established industries, is infinitely various. To take but one
field, the production of power, we find a vast range of oppor-
tunity for profitable investment. We have first of all the
mechanical draft and the mechanical stoke, the use of super-
heated steam to reduce condensation, the inside firing boiler to
prevent radiation through the fire box, the steam turbine to
Utilize the direct pressure of steam, and the various devices
which purify the water before it goes into the boiler, and to
cleanse it for future use by condensing the exhaust steam. In
other divisions of the field of power we have the development
of electrical power transmission, which is bringing into the
field of investment a large number of water powers which
until recently were worthless and wasted, and we have the
general introduction of the gas engine which promises not
only to solve the question of the small power plant, but to
double the efficiency of coal by using it in two forms, coke
and gas. In other fields similar opportunities are multiply-
ing. Improvements long since discovered are forcing them-
selves into general notice. New improvements are attract-
ing instant attention. Never before in the world's industrial

231

232 EDWARD SHERWOOD MEADE

history has man increased his conquest over nature at such
a rapid rate and simultaneously in so many fields.

These opportunities for production of wealth are oppor-
tunities for the investment of money, since the investment of
money is, in the vast majority of cases, either directly or in-
directly the production of wealth. The investor buys $50,-
000 of railway bonds. With the proceeds the railroad re-
places a wooden trestle with a steel bridge. Over this bridge
it can run a heavier train load, which it obtains by the lower
rate which the decrease in operating cost resulting from that
heavier train load makes possible. The lower rate enables
the farmer to turn a part of his grazing land into wheat, and
so eventually and indirectly the $50,000 which was invested
in the railway bonds has increased the supply of wheat on
the world's market. This increased production of wealth,
therefore, was made possible by the purchase of the bonds
which the investor bought; because of its increased earnings
the railroad could pay him 4 per cent. Without the invest-
ment of money increased production would be impossible.
Upon the investor rests the responsibility of increasing the
wealth of the world. As he directs his funds, this way or
that, to railroads, cotton mills, irrigation or shipbuilding, the
productive energy of society is exerted in this or that field
of enterprise.

This office of investment is variously performed. Men
may invest or capitalize their own savings. The farmer de-
votes $1,000, half the proceeds of his last wheat crop, to the
purchase of nitrate fertilizer. The New England cotton manu-
facturer invests his surplus earnings in a South Carolina mill
where cheap power, labor and material invite development.
The Bessemer steelmaker adds an open hearth furnace to his
equipment and takes advantage of a large supply of scrap
iron. The Pennsylvania coal operator or lumberman buys
the cheap coal and timber land of the south. Every pro-
ducer is continually devoting his surplus funds to enlarge his
enterprise along lines with which he is familar as the oppor-
tunity presents for greater profits or as competition forces.
He may occasionally branch out into other fields, as when the
farmers of a locality erect a flourmill or sawmill or open a

THE WORK OF THE PROMOTER 233

stone quarry, or where the carriage maker goes into the manu-
facture of automobiles, or a railroad may spend a portion of
its surplus in purchasing a coal property along its line. In
these investments, producers extend their business out of
their profits and with their own funds. More new wealth is
produced by this form of investment than by any other.
Every industry is constantly growing from within, as the
biologists would say, by intussusception, out of the profits of
the past, the individual producers are making innumerable
ventures of their money into untried fields in enterprises
where they alone stand to win or to lose, and where they act
from personal knowledge of the opportunity.

A second class of investors there is, which may include
the members of the first class, but who are actuated by differ-
ent motives and who act in a different way. These are also
in possession of surplus funds from the employment of which
they wish to obtain a profit and they are ready to buy the
stock of any corporation which gives them an assurance of
satisfactory return. They are in the market for any securities
which they consider to be a safe and profitable investment.
The members of this class are not, as a rule, in close touch
with the industries whose securities they buy. A leather mer-
chant invests in steel, a banker in railroads, a retail dealer in
mining stock, not usually because he desires to identify him-
self with the business in which he invests, so far as to give it
his close personal attention and to assist in its management,
but solely that he may share in its profits. Included in this
class are all investment institutions and managers of trust
funds, who take no active part whatever in the numerous
enterprises whose securities they hold. The importance of
this vicarious interest in industry is steadily increasing, as
production is carried on on a larger scale, and as it therefore
becomes increasingly difficult for a few men to combine a
sufficient amount of capital for the inauguration of a new
enterprise, or the development of an enterprise already estab-
lished. Twenty years ago timber was readily accessible and
a few thousand dollars would build a sawmill. A half dozen
farmers, by combining their savings, could start in the lumber
business. To-day, a well equipped sawmill may cost $100,-

234 EDWARD SHERWOOD MEADE

000 and added to this must be the expense of perhaps twenty
miles of railroad to reach the timber. The assistance of out-
side capital is becoming every year more essential to the
development of any industry or the exploitation of any re-
source.

The proprietors of this outside capital, as we just now
observed, know little or nothing about the technical aspects
of the industries into which they put their money. They are
acquainted with these industries merely as sources of profit.
If they can be given satisfactory assurances that profits will
be forthcoming from a proposed development, they are will-
ing to invest money to that end. They will not, however,
devote themselves to searching out and preparing the proposi-
tions into which, when once discovered and prepared, they
are willing to put their money. This attitude of mind of the
general investor necessitates the promoter. The promoter,
then, is the man who discovers and " assembles" the proposi-
tion for the investor, who then, if satisfied with the prospect
of profit, provides the fund for its development. The pro-
moter may be, and not infrequently is himself engaged in the
industry which he proposes to extend or to develop in some
other locality. In this case, his proposals are more favorably
regarded by the investor who justly considers that the pro-
moter is well qualified to judge of the merits of the proposi-
tion. Mr. John W. Gates, who was associated almost from
the beginning with the wire industry of the United States,
was a promoter of this class. In projecting the Federal Steel
company and the American Steel and Wire company, he spoke
with the voice of authority. On the other hand, and this is
more often the case, the promoter may not be particularly
conversant with the practical and technical affairs of the in-
dustry. The limitations of practical knowledge may be illus-
trated by those promoters who make a specialty of certain
lines of industry, for example, street railways. A successful
street railway promoter will usually have a very keen and
trained judgment regarding street railway statistics. He will
know the exact percentage which operating expenses ought
to bear to total income under given conditions, and of the cost
per mile for running cars, and he will be able to analyze with

THE WORK OF THE PROMOTER 235

intelligence the statistics of operation and construction, but
bej^ond this he would be unlikely to have any practical knowl-
edge, relying upon the judgment and estimates of reputable
engineers to supplement his more general information. Wil-
liam H. Moore, for example, who has within recent years pro-
moted several large steel corporations, is understood to have
had but little practical knowledge of the steel industry. The
professional promoter, and it is with him that this study is
chiefly concerned, in forming his judgment, relies largely upon
the trained judgment of experts, civil, mining, mechanical or
electrical engineers, lumber viewers, chemists, geologists,
metallurgists, machinists. These experts, whose income de-
pends upon their accuracy, give him the necessary technical
information about the proposition which he has in mind.
They tell him if the coal seam is regular or faulted, if the pro-
posed operation will be self draining or if pumping machinery
must be installed, if the coal is high or low in sulphur and
silicon, whether it will make a strong or a weak coke, or if
designed for steam purposes, whether it will be high or low
in ash. The professional promoter in the course of his busi-
ness, and from his association with technical experts, must
necessarily accumulate a great store of information, and his
ability to make a technical judgment should constantly in-
crease, but if he is in the promoting business, it is next to im-
possible that he should master all the sciences whose conclu-
sions are put at his service by the experts whom he employs,
and whose opinions he relies upon as an aid to convincing
the investor.

Given the technical information, there remains the field
where the promoter must rely more largely upon his own abil-
ity, the financial aspect of the proposition. Will it pay? In
the case of a coal mining proposition, he must determine the
price per acre at which the land can be purchased, the rates
of freight which will be charged and the price which can be
obtained at the different markets. He must consider the
labor conditions of the region, the laws of the state regulating
the company store, the attitude of the railroads toward an
independent enterprise. To spend but a moment upon this
last point as illustrating the supreme importance of the pro-

236 EDWARD SHERWOOD MEADE

moter's judgment — if his property is located on competing
lines, he can look for substantial concessions in rates, but on
the other hand, he knows that these favorable rates may
flood the markets with low priced coal in which there is small
profit. If he has the facilities of a single line, he must con-
sider whether either the company or its officials are interested
in coal properties whose product will compete with his own,
in which event in a slack market, his car supply may be sud-
denly abbreviated. He may also take into account the hold-
ings in this road by another coal road in its bearing upon
differentials. All these and a number of other points, the
promoter will take into account in forming his judgment as
to the probable success of his enterprise; he will be the more
careful if he has a record of successful enterprises to strengthen
his appeal to the investor.

Having formed a favorable judgment, having "discov-
ered" the proposition, the promoter now proceeds to "as-
semble" it. To this end, he must either purchase or secure
the right to purchase within a fixed time and at a fixed price
the property or privilege which he has determined to exploit,
whether mine, patent, timberland or franchise. As a general
rule, the method of option is the one usually followed as in-
volving a smaller outlay of cash by the promoter, and imply-
ing a smaller loss in case his flotation should be unsuccessful.
To continue our illustration: The promoter wishes to pur-
chase 5,000 acres of coal land owned by perhaps fifty farmers.
He goes into the district usually armed with a certificate of
reputability in the form of a local celebrity at $2.50 per day
and expenses paid, and visits these farmers at their homes.
He presents his purpose to them, assures them that he will
be able to raise the money to develop his proposition, and asks
them, for the sake of their mutual interest, and for a nominal
consideration in hand paid, to sell him an option to purchase
their property at any time within six months, at a price of
say, $20 per acre. Various arguments may be employed to
influence a general assent to this proposition. The landowners
may be shown that the value of the surface soil which will re-
main in their possession after the transfer of the coal, will be
increased by the demands which a coal mining community

THE WORK OF THE PROMOTER 237

will make for the produce of their farms. They may be offered
the advantage of a railway which the opening of coal mines
will bring. The hopelessness of developing their own prop-
erty may be pointed out to them, and as a last resort the pro-
moter may threaten to "sew them up" by refusing to trans-
port their coal over his roads. By employing these or similar
arguments, the promoter persuades the farmers to option or
" lease" their land. As far as possible he keeps each owner
in ignorance of the terms offered to his neighbors; a general
diffusion of such information would cause a general raising
of prices. In dealing with the well-to-do and intelligent
farmers, he must often pay a high price for the option; the
price named in the instrument is also high. The promoter
submits to these onerous terms not merely because he wants
the land of these hard bargainers who know just how indis-
pensable their coal is to him, but also because he desires to
use their names and influence with other owners. These
higher prices are recovered in dealing with the more ignorant
landowners who are greatly impressed with the representa-
tions of the promoter, and also by the fact that their richer
neighbors have joined the scheme. It may even be necessary
for the promoter to employ a little coercion in the way of an
alliance with the" general storekeeper who may hold chattel
mortgages and judgment notes against the recalcitrant, power-
ful arguments when skillfully employed.

The promoter has now " assembled" his proposition.
The owners have obligated themselves to sellto him at a price
until the expiration of six months. He knows exactly how
much the land will cost him and he has the land under con-
trol. The next thing is to " float" it, that is to say, to raise
the money necessary to develop it. To this end, the pro-
moter forms a corporation whose capitalization, if he is a con-
servative man, will be based on the probable earning power
of the property, say $100 per acre or $500,000 of stock. This
stock, to reserve the special details of the flotation to the dis-
cussion of the trust, he succeeds in placing at fifty cents on
the dollar before the six months of his option have expired,
either with investors who wish to hold the stock, or with
bankers and financiers who expect to sell at an advance. The

238 EDWARD SHERWOOD MEADE

investor and the banker purchase the stock because they have
confidence in the promoter's judgment, and are therefore in-
fluenced by his representations that the proposed undertaking
will prove profitable. They may take the trouble to examine
the expert reports on the property and will probably visit it
under the guidance of experts. Their inquiries, however,
are necessarily superficial, and they buy the stock either on
the representation of the promoter or of some friend or bank-
ing associate in whose judgment they have confidence and
who may have gone into the scheme on his own account.

Out of the $250,000 which he realizes b}r the sale of stock,
the promoter pays $100,000 for the land, $75,000 for develop-
ment and working capital, and either puts the $75,000 re-
maining into his own pocket or divides it with the financial
interests who have assisted him by advances. The foregoing
represents a typical promotion. Similar enterprises are con-
stantly being floated throughout the county, not only on
mines, but on real estate, manufacturing enterprises, on
patents, water power, irrigation, timber and a great variety
of resources. The details of each may vary from the form
presented, but the essential principles are the same: (1) the
securing of a right to purchase an opportunity to make money ;
(2) the capitalization of that opportunity at a higher figure
than the price to be paid the original owner plus the funds re-
quired for development ; and (3) the sale of this capitalization
to the investor either directly or through the agency of middle-
men for a sum of money exceeding the amount necessary to
purchase and develop the resource which it is intended to
exploit. This difference represents the promoter's profit, the
characteristic feature of corporation financiering.

What now has the promoter done to entitle him to this
large profit? He has produced no coal; that is done by the
company to which he turns over his options. Neither has he
risked an amount of money in any way comparable to the
profit which he has made. To obtain fifty options under the
circumstances described may not have required an outlay of
more than $5,000, and this is an outside figure. Judged by
the canons of what is generally considered to be legitimate
money making, the promoter has done nothing to entitle him

THE WORK OF THE PROMOTER 239

to the $75,000 profit which, out of a flotation of this size, he
frequently takes. And yet the profits of the promoter are
as legitimate as are the profits of any of the more familiar
professions. The promoter is a creator of value. He brings
into existence a means of producing wealth which did not
before exist. By combining the control of a number of
separate pieces of coal property into a fully equipped coal
mining enterprise, he is able to offer to the investor an oppor-
tunity to earn say 12 per cent on his money; in other words,
to sell to the investor $500,000 worth of stock which can be
depended on to pay dividends of 6 per cent, for $250,000.
Without this combination, in the hands of individual owners,
without transportation facilities, and without modern equip-
ment, the value of this coal, based on its earning power from
the small openings which produce for the local trade, did not
exceed $20 per acre. Combined under one ownership, con-
nected with a trunk line railroad, and equipped for large
operations, a value of $100 per acre is not excessive. This
increase in value of $80 per acre is the result of the invest-
ment of $35 per acre — $20 in the purchase of the coal and $15
in its development. In order to obtain the money necessary
to purchase and develop his proposition, the promoter has
been obliged to sell the opportunity which he controls at one
half its real value, i.e., at $50 per acre. Deducting the $35
which must be spent to put the coal on the market, there re-
mains $15 per acre, or in all, $75,000 as the promoter's profit,
a profit differing in no essential feature from the gains of the
manufacturer who contracts ahead for his pig iron and takes
advantage of a rise in the nail or wire market.

But it may be objected, why should the promoter be
allowed to make this large profit? Why should it not be
divided between the farmer who owns the land and the in-
vestor who furnishes the money? What is the justification
for the promoter's profit? The answer to these questions
lies in the nature of the transaction. The promoter is en-
titled to his profit because he has optioned coal at the value
which its owners placed upon it, and has sold his rights to
another set of persons who place upon these rights a much
higher value. The farmers, except in exceptional instances,

S40 EDWARD SHERWOOD MEADE

could not even organize their own proposition, much less
finance it. Mutual jealousies, local feuds, and overmuch
mutual information about the character and financial stand-
ing of local individuals who might undertake this work, would
interfere with any general agreement. It would be found,
for example, next to impossible to agree upon the proper price
for different pieces of coal. Farmer A, whose land lies near
the creek would insist upon a higher value for his property
than Farmer B, whose coal is less accessible, while B, on his
part, might cite, as a reason for disputing the justice of A's
claim, the fact that his coal had been opened in several places
while nobody knew that A had any coal on his property.
Farmer C, who owned land across the right of way of the
proposed railroad, and who, therefore, considered his co-
operation indispensable, might insist upon a price of $150 per
acre, which would probably disgruntle his less favored and
jealous neighbors and so defeat the scheme. The Brown
family might refuse to go into any agreement with the Jones
family, with whom one of the chiefs of the Brown clan has
had a lawsuit of some years' standing. Any one of a number
of similar causes which might be cited would be sufficient to
prevent the concentration of control of these separate prop-
erties, which are of small value unless combined. Some one
interest acting exclusively for its own advantage and dealing
independently with each owner, is essential to the assembling
of such a proposition. This interest may be local, and, as
already noted, by means of local alliances, the task of the pro-
moter is made easier, but in most cases, the successful coal
promoter is the outsider who can pose as the man of wealth
and connection, and who can reap his harvest of options dur-
ing the pleasant weather of a first impression. It is the gen-
eral experience of promoters that an outsider of imposing
personality, pleasing address and experience in handling men,
has usually much greater success in securing options than even
a local squire or other celebrity whose standing in the com-
munity is of the best, but who is too well known to be allowed
by his neighbors to make any money out of their property.
Even if the farmers succeeded in getting their proposition
together in the control of a selected committee or individual,

THE WORK OF THE PROMOTER 241

they would have great difficulty in securing a financial con-
nection. They would have to provide for expert reports on
the property, and then to open negotiations with some finan-
cial interest with whom none of their members would probably
be personally acquainted. After securing an introduction,
they would present their proposition, probably in a lame and
halting manner, which would not show that they possessed
a comprehensive knowledge of the importance of the property
in question to the general coal market. If the banker to
whom they would naturally apply for funds, since they would
have no connection with the investing public, was sufficiently
interested to examine the proposition and to determine its
value, he might take one of two ways to further his own ad-
vantage. He could either prolong the negotiations until the
local contingent lost heart and withdrew, trusting to his own
ability to obtain the options for himself, or he could compel
the representatives of the owners co-operating to accept a
price not greatly exceeding the face of their options, in which
event, the financier would be the promoter one stage removed,
and acting by deputy. It is evident, therefore, that the pro-
moter's profits on such propositions cannot be saved for the
original owners of the coal. It is the same with any other
proposition. The proprietor of undeveloped opportunity is
seldom in position to bargain to advantage for its sale. His
best course is to put his property in the control of some pro-
moter at a fixed price and for a definite time, contenting him-
self with effecting a sale not at a price which he thinks the
property is worth, but the price which will represent a fair
return on his investment of brains or money. Any attempt
on his part to promote his own scheme will probably end in
failure. The failure of inventors to make more out of the
sale of their patents is probably due more than to any other
cause, to the fact that they insist upon an excessive interest
for themselves and are unwilling to offer sufficient induce-
ments to those who might otherwise be disposed to promote
their schemes.

As for the investor participating in the promoter's profits,
this, in the nature of the case, is impossible. The investor is
looking for a security which will produce as large an income

Vol. 3-16

242 EDWARD SHERWOOD MEADE

as is consistent with the safety of his principal. As shown
above, he is not likely to concern himself with the active
management of those industries into which he puts his money.
How much less likely is he therefore, to abandon his regular
business or profession to roam about the country in search
of resources to develop. The investor of necessity assumes a
receptive attitude. He is the customer to whom the promo-
ter and the financier offer their wares. He buys on his opin-
ion not so much of the merits of the proposition as to the repu-
tation of those who offer it for sale. Even if the promoter
should be compelled to take a profit of only $10,000 instead of
$75,000 and should be required by law to leave $75,000 addi-
tional in the property, the investor would get no benefit.
Suppose that this should be done and note the consequences
to the investor. We must assume that the enterprise has
been fully equipped with machinery and working capital,
and with experienced and responsible promoters; in this class
of propositions this assumption would be generally correct.
We must assume, that is to say, that out of our 5,000 acres of
coal land, a well managed company is able to earn one year
with another, $50,000 per year, 10 per cent on the capital
stock, by an investment of $175,000. The law, however,
compels the promoter to invest $65,000 more for the benefit
of the company. This might be done in enlarging the scope of
the enterprise, taking in more land and working a second
shaft. The result of these enlarged operations, since the
same equipment could handle a larger output, might be a
total annual profit of perhaps $90,000 per year on the same
capitalization as before, viz., $500,000, or 18 per cent. If the
investor would pay — allowing the banker his profit — 70 for a
10 per cent security which the profit of $50,000 represented,
he will pay 126 for an 18 per cent security, represented by the
larger profit of $70,000 due to the sequestration for the benefit
of the company of the promoter's surplus. On the first in-
vestment, allowing the promoter to take what remains after
the proposition is fully equipped, the investor receives an
income of 14.2 per cent, and on the second investment, he re-
ceives the same amount, for the price which he will pay for
the stock rises with the rate of dividend which it yields. The
investor therefore could not profit by the curtailment of the

THE WORK OF THE PROMOTER 243

profits of the promoter. The only result of such action would
be that the net earnings and dividends of the company would
be increased. The investor, however, would receive the same
rate of income from investing $1,000 in a 10 per cent stock at
70, as he would receive from $1,000 invested in an 18 per
cent stock at 126. It is true that the community might be
the gainer because a larger amount of coal might be produced
from the larger investment. This conclusion, however, rests
upon two assumptions: First, that the original plans of the
promoter were not large enough, since he could probably have
capitalized his enterprise at $900,000 instead of $500,000 in
case he considered that market and mining conditions war-
ranted the larger output of coal and, that the promoter will
make an ineffective and wasteful use of the $75,000 profit
which lie takes out of the enterprise and will not employ these
funds in furthering new enterprises to which he may turn his
attention. Neither of these assumptions is apparently well
grounded. The promoter has, it is safe to say, if he is a con-
servative and intelligent man, provided for as large a produc-
tion as is warranted by the conditions surrounding the enter-
prise, and if his profits appear large, they are usually turned
back into new ventures whose success will increase the wealth
of the community. We must conclude, therefore, that the
promoter performs an indispensable function in the com-
munity by discovering, formulating and assembling the busi-
ness propositions by whose development the wealth of society
is increased. He acts as the middleman or intermediary be-
tween the man with money to invest in securities and the
man with undeveloped property to sell for money. In the
present scheme of production, the resource and the money
are useless apart. Let them be brought together and wealth
is the result. In most cases, the unassisted coincidence of
investment funds with investment opportunities is wholly
fortuitous and uncertain. The investor and the land or patent
or mine owner have few things in common. Left to themselves
they would never meet. But the promoter brings these anti-
thetical elements together; in this way utilities are created
which did not before exist, and which are none the less a social
gain because most of the advantage is taken over by the pro-
moter and the financier.

THE CAPTAIN OF INDUSTRY AND HIS
LIEUTENANTS.

BY W. R. LAWSON.

[W. R. Lawson, a London journalist, came to the United States several years ago and
in behalf of the London Daily News made an investigation of the industrial situation
in this country ; he had previously made similar investigations of Spain and Germany;
Mr. Lawson's shrewd observations were quoted so widely that a demand arose for
their publication in book form and the resulting volume "American Industrial Prob-
lems" is regarded in England as a standard book on its subject.]

The unquestionably strong point in American industry is
its organization. It admits of discussion whether the Ameri-
can workman under equal conditions is more efficient than the
British workman, but there can be little doubt that the United
States is exceptionally well provided with organizers of every
kind. They abound in all the staple industries as well as in
every important branch of commerce. How they come to
be so plentiful is a question which so far has received com-
paratively little study. It is in the stage which admits only
of tentative suggestions and not of a definitive solution.

There are three special schools for teaching organization —
war, mining, and railroading. In each and all of these schools
the present generation of Americans have had a severe train-
ing. A very large remnant of both the northern and southern
armies of the civil war still survives. The generals and
colonels, whom it trained by hundreds, as soon as the war was
over hastened back to civil life. They became distinguished
railroaders, financiers, manufacturers, and merchants. The
rough virtues they acquired in camp served them well in busi-
ness, and this element, though on the decline, is still strong
enough to give a decided tone to commercial life. Military
spirit continues to show itself in very odd ways.

Immediately after the Civil war a new school of discipline
and of organizing power was thrown open to Americans in
the mining camps of the far west. There was much more got
out of the Comstock lode than mere gold or silver. The old
timers who went through that experience, whether they

244

THE CAPTAIN OF INDUSTRY 245

became millionaires, like Flood and Mackay, or remained poor
men, derived from it a splendid education. Subsequently they
spread all over the west, and everywhere they proved them-
selves men of ready resource and strong character. Many
of them became managers of large mines and presidents of
mining companies. They are to be met with to-day in every
important mining district, and most of them can be recog-
nized at once by their quiet, authoritative way of doing things.
They can keep their finger on an army of ignorant Hungarian,
Swedish, and Italian workmen as if they were children. It is
a sort of magnetic power the}T appear to have acquired
through sheer force of governing. However turbulent and
unruly the men might be in weaker hands, they recognize
strength and dominant will when they feel them. They also
know when a firm hand is on the reins, making it useless to
kick or grumble.

Managers and mining captains of that stamp are all born
organizers. Likewise they are as a rule competent experts in
their special line. As such they know their business from
beginning to end. To them it is a huge machine, every wheel
of which they understand and every movement they can antic-
ipate. The writer has met in the far west several notable
examples of this class of manager — the organizing expert.
He has a vivid recollection of one in particular — a sinewy
silent Cornishman whom he encountered one day on the
Mesaba range. He had two mines in his charge, the second
being twenty miles away on a different iron ore formation.
Both were turning out six or eight hundred tons of ore per day,
and employing about six hundred men. Chance threw us in
the way of the silent but keen-sighted manager as he was
going his daily round of the shaft heads and the various work-
shops.

He drove up in a strong but light bugg}^ without any
groom or attendant. First he had a look at the ore wagons
coming up the shaft to see what kind of ore was being taken
out. From them he passed on to the " breakers" at the pit
head, where the ore is broken, sized, and classified. Thence
to the engine house, the machine shop, the air compressor,
and finally to the offices. In each place he walked quietly

246 W. R. LAWSON

round, asKing a question here, making a suggestion there;
now examining a new rock drill, now watching some experi-
ment or other. Having been years underground himself, and
through every department of the work above ground, he knew
at a glance when things were right. From end to end he had
planned the whole establishment, and in more senses than
one was its master. His rule was firm but just, and even
liberal. It extended not only over the mine but over the
adjoining town in which the men lived. Every cottage be-
longed to the company; so did the schools, the town hall, and
the free library. All were under the manager's rule, tem-
pered in some cases with the help of a committee. Above
ground and below the whole place was a model of organiza-
tion. In the long series of operations one succeeded another
with perfect regularity, until the ore was shot into the im-
mense ore cars and started off for its shipping place on Lake
Superior, where it dropped out of the cars into ore bins, and
from the bins was run into lake steamers.

What this kind of mine manager may do is to be seen not
only in the western states but in many other parts of the
world. It was conspicuously exemplified on the Rand gold-
field at a critical period of its history. At the opening up of
the Rand many costly mistakes had been made by the self
styled mining engineers, who always turn up in crowds on
such occasions and exploit them much to their own advantage
and the corresponding loss of their employers. The original
movement had in consequence collapsed, and it remained in
discredit until Cecil Rhodes had the happy thought of calling
in some American experts. It is needless to recall the won-
derful transformation they effected. Amateur muddlings
were replaced by scientific methods. Cheap inefficient plant
was cleared out to make room for machinery that would work.
Order and system were brought out of chaos. Profits began to
appear where hitherto there had been monthly deficits. The
Rand was, in a word, reorganized, or rather it was organized
for the first time.

The present generation of Americans contains a larger
number of great organizers than were ever simultaneously at
work before. They have distinguished themselves as railroad

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THE CAPTAIN OF INDUSTRY 249

exemplified in it. We fear that the American competitor
would come out well ahead, not only as regards speed but in
his general handling of the job. He would prove himself in
every way a superior organizer and a more resourceful engineer.
We have been reluctantly driven to this conclusion by
observation of the English and American systems. For an
English example we take a piece of work now actually pro-
gressing—if we may correctly use such a term — on a western
section of one of our main lines. It is a very simple straight-
forward job, but the country is too lonely for the engineering
staff. They have selected a lively seaside town about twenty
miles away for their headquarters. It is on a branch line of
their own railway, with very few trains, and they have to
change trains both going and coming. After a not too early
breakfast they catch a slow train, put in half an hour at the
junction station, and reach the scene of their labors about an
hour more or less before midday. This kid glove sort of rail-
way building would be an excellent joke out west. There the
engineering staff would in a similar case have a private car
allotted to them, and they would live beside their work till
it was finished. The rougher the country the greater hurry
they would be in to get away from it. But anyhow they
would put in a full day's work every day.

The American organizer always has subordinates, because
he insists on having them. He looks about for them till he
finds them, and when he gets the right men he binds them to
him by putting them in the way of advancement. If there
be a born organizer among them he too gets his chance sooner
or later ^ WTierever there are the makings of a man, of a great
mechanic or an able administrator, of an inventor or a finan-
cier, they are sure to rise to the surface among these seventy
odd million Americans. In other countries they might die
unhonored and unsung,— in fact undiscovered,— but there is
little danger of such a fate in the United States. The passion
for doing big things is so universal in all branches of American
activity that every eye is strained in that direction, and every
success is hailed with national acclamation. It makes little
difference what the big thing may be — whether a political, a
commercial, or a dramatic success. On that point the

250 W. R. LAWSON

Americans are very catholic minded. They can go into
ecstasies one day over the latest arrived billionaire, the next
over a base ball team, and the next over an Admiral Dewey,
or a " cowboy president." But he must always be a man, and
the most popular sort of man he can be is a great organizer.
There can be nothing big without special organization, and
though the craze for bigness may be in itself rather laughable,
it is also the possible parent of a great virtue. European
critics of the American people have perhaps overlooked, or
at least underrated, this fact. If they were less active, less
ambitious, and less given to rustling, they might better suit
our phlegmatic British temperament; but how much would
they lose of their practical genius, their gift of generally having
the right man for the place, and the proper tool for their work?

The lieutenant of the captain of industry is the boss.
The "boss" is an American institution. Both the term and
the thing are transatlantic. When the Americans boast of the
large amount of work got out of their workmen they do not
often explain how it is done. If they were to do so the boss
would figure considerably in the explanation. He is the man
who sees that everything is kept running at full speed. A
highly organized sj^stem of surveillance covers the whole field
of American industry. This may sound incompatible with
popular notions of the land of freedom, but it is the fact.
And when understood it will be found in the main quite
justifiable. In judging a matter of this sort we have to re-
member the immense diversity of American labor, — the fact
that it has many grades, is of many nationalities, and speaks
many tongues. Though highly skilled at the top, the mass
of unskilled labor below is enormous. Much of it is not merely
unskilled, but ignorant and half civilized. It has to be taught
as well as superintended. A sharp eye has to be kept on it
all the time, and that is the function of the boss, who occurs
in a great variety of forms and characters.

In American labor the boss is ubiquitous. He corre-
sponds to the ganger of a squad of navvies; to the foreman
in an engineering shop ; to the head of a department in a city
warehouse ; to the shop walker in Oxford street or Holborn ; to
the manager of a factory; to the superintendent of a railway

THE CAPTAIN OF INDUSTRY 251

division ; to the chief of a government office, — in short, to any
person exercising direct authority over others and acting as
watchdog toward them. We have him in England under
many different names, but he is never quite the same boss.
With us he is a more or less lenient taskmaster, a casual visitor
rather than a supervisor. In his higher forms he is a gentle-
man, or has to try to be, which is destructive of vigilance
and efficiency. There is no boss so strict as an Irishman
lording it over half a dozen other Irishmen. The Americans
begin with him, and rise through a long gradation of authority
to the boss with thousands of men at his call. Be the sphere
large or small, the authority is absolute. A man may "turn
up his job" at any moment, but while he is on it he must obey
his boss as implicitly as a soldier in the ranks.

In going through any large establishment in the United
States a close observer cannot fail to be struck by the order
and discipline maintained. Every man appears to be in his
place and to be attending to his duty. Every machine is
going at high speed, and the whole establishment runs smooth-
ly. If one stops in the street to watch the progress of any
large job — the building of a skyscraper, the laying of a street
railway, or the excavation of a sewer — he will receive the
same kind of impression. The work appears to be proceeding
on a general plan. It is well laid out, and a vigilant eye seems
to be over the whole of it. Close by every gang of laborers
may be seen a foreman. Dodging about all over the place are
keen looking men, who may be engineers or superintendents.
What one seldom or never sees is skulking or dawdling.
There is no leaning on shovels or studying the passers-by or
any other form of philosophic meditation permitted on an
American job. Above all, there is no eleven o'clock beer or
four o'clock beer. The boss has everywhere a strong objec-
tion to beer. On duty it is strictly tabooed, and even off
duty it is discouraged.

British trade unionists often complain of the shop rules
laid down by their employers, but they will not know what
rules are till they have been to the land of freedom. Neither
can they have any idea of the possibilities of supervision.
The writer has seen iron mines on Lake Superior, emplo}ring

252 W. R. LAWSON

six or seven hundred men each, where teetotalism was strictly
enforced. The miners had all to live in villages belonging to
the company in which not a single public house was permitted.
They had instead large temperance halls where amusements
and soft drinks were provided for the whole population.
They had free libraries and bath rooms, recreation grounds,
and small gardens if they wanted them. To Scandinavians
or Hungarians, fresh from their old world dirt and discom-
fort, these model villages by the shores of Lake Superior
should be a paradise. So far they have exercised a restrain-
ing charm on their rough inhabitants, but it remains to be seen
how long the charm will last. Just now it has zealous and
enthusiastic managers behind it whose personal example goes
a long way. How it will fare under less zealous and vigilant
disciplinarians is another matter.

Considering the chronic scarcity of labor and the pressing
demand for it all over the west, it is a marvel how the severe
discipline enforced can be maintained. In the railroad service
it is particularly strong, and ever growing stronger; neverthe-
less it is quietly submitted to. For a locomotive driver to be
seen in a saloon, whether on or off duty, would mean a bad
mark against him. To be seen a second time would produce a
sharp warning from the boss of his division, and a third
offence would be fatal. The same rule applies to firemen, and
in a slighter degree to all the rest of the train crew — conduct-
ors, brakemen, etc. Even clerks and other employees uncon-
nected with the operation of the road have to be very shy of
saloons and all other institutions of the kind, which if not
expressly tabooed would not figure well in the confidential
reports made periodically to the management on every em-
ployee. The careless maxim of some British masters, that
their men can do what they like in their own time, is never
heard in the United States.

American employers pay high wages and do not grudge
them. On the contrary, next to making millions for them-
selves they love to be able to boast that American workmen
are the best paid in the world. But high wages are not paid
for nothing. The employer intends to get the best possible
return for them, and the workmen admit that he is quite

THE CAPTAIN OF INDUSTRY 253

within his rights in so doing. Both parties understand each
other on the point. The personal authority of the American
employer has always been greater than that of British em-
ployers, who as a class are more easy going. It has also
been more directly and methodically exercised. An Ameri-
can workman is expected to give his very best service in
return for his liberal pay. He has to keep himself fit for his
work and to take a personal interest in it. He is paid for
good conduct as well as for honest labor, and the employer
is as exacting on the one point as on the other. There are
found to be two ways of insuring an adequate return for high
pay: one is for the employer himself "to keep close to his men
all the time;" the other is to employ vicarious methods of
supervision. In very large establishments only the vicarious
method is possible, and this is where the boss comes in. His
special duty is "to keep close to them all the time," and if
need be he also has his deputies. He likes to know not only
what the men are doing but what they are saying and think-
ing. No pains or expense is spared to keep in touch with
them. If things are not going well in a shop special measures
are taken to discover the cause. The great Pinkerton has a
detective service for this express purpose. One of his men
may be hired as a fitter or a mechanic, and he may be in the
shop for months without exciting the least suspicion of his
character. Every night he will send in a report of all he has
seen or heard during the day. When the employer has got
all the information he wants Pinkerton' s man will quietly
disappear from the shop and very probably from the district
also.

If the means used be rather invidious, they are generally
effective. Every suspected workman, especially if he be a
trades union delegate, can thus be closely watched. If there
be a strike brewing, the employer has early warning of it.
If it be only a case of shirking or scamping, the proper remedy
is soon applied. If the American employer had his way,
shirking would soon be made impossible. He is down on it
at the first scent. His motto is, that for every wrong there
is a remedy, and the sooner it can be applied the better. For
example, if a freight train gets into the habit of losing time

254

W. R. LAWSON

on the road and throwing out the whole of the train service,
prompt action ensues. The division superintendent has his
private car hitched on to the train and runs through with
it. He finds out whether or not the delay is avoidable, and
if avoidable, who is to blame for it. That is his method of
bossing, and the men, independent as they may be in other
respects, never object to it. They are not thin skinned and
touchy as British railway men might be under similar cir-
cumstances. They frankly recognize that the boss is only
doing his duty in seeing that they do theirs.

Another explanation may be suggested of the patience
with which American workmen submit to a system of close
supervision which at first glance may seem foreign to their
national character. They have faith in its being justly exer-
cised, and they know that the good workman is taken note of
as well as the bad one. Thanks to it, men are unexpectedly
raised from the ranks, and having got their feet on the lower
rungs of the ladder they will have a fair chance to rise to the
top. Such things rarely happen under England's happy-go-
lucky regime, where if men are less closely looked after than
in the states, they have all the more chance to be overlooked
when promotions are going.

American employers find it pays to raise deserving men
from the ranks. The best boss is invariably a man who has
worked himself, and knows all the peculiarities and foibles
of his class. An Irishman shines in bossing Swedes, Slavs,
Dutchmen, or other "furriners." Making him a boss is often
a cheap way to prevent him becoming a trades union leader,
in which character he can be very troublesome indeed to his
late employers. With philosophic impartiality the Irishman
seems to be equally ready for either office, and he can fill both
of them successfully. A large proportion of the bosses in
the Pennsylvania coalfields are Irishmen, and a large propor-
tion of the local leaders of the miner's union are of the same
nationality. Cornishmen make good bosses for mining work.
For skilled labor, as in engineering shops, Scotsmen answer
better. They are to be found in all large establishments as
foremen, head mechanics, and chief engineers. The native
American comes in higher up as manager, superintendent,

THE CAPTAIN OF INDUSTRY 255

or director. He brings education and science to his work,
combined with business capacity. He has all the finer
qualities of an ideal boss.

Whatever other gifts and advantages an American may
have, he is not likely to reach the front rank unless he is also
a first class boss — a born ruler of men. It would be difficult
to mention a railroad builder, an ironmaster, or an engineer
at the head of his profession who does not include that among
his strong points ; often they owe to it their first step upward.
Somehow they will get men to do things for them which they
would not do for an ordinary boss. They command their
confidence, and never abuse it. Sometimes they consult
them and get very useful suggestions for their pains. Presi-
dent Hill of the Great Northern railway, when he was pushing
his road across to the Pacific, owed a good deal to magnetic
influence discreetly exercised on his men. He knew most
of them personally, and seized every chance of a few minutes'
chat with them. They were encouraged to express their
opinions about the road and its affairs, which were not always
flattering. The engine drivers were valuable scouts, and Mr.
Hill would often stroll into the engine stables and have a talk
with any of them who chanced to be around. It was his way
of " keeping close to the men all the time." Now his assistants
do that for him, and find it still worth doing.

The boss is so interesting and important a figure in Ameri-
can industrial life that he would be seriously missed were he
to disappear from it. At the same time, such an event is not
at all impossible. Even now he may be in a state of transi-
tion, for the conditions which produced him are undergoing
rapid change. The uneducated, half civilized foreign laborer
over whom he lorded it so grandly is finding other rulers. He
is being drawn into the sphere of influence of another boss,
the trades union leader. Already a stubborn fight is being
waged over him by the employers on the one hand and the
trade unions on the other. There can be little doubt who will
secure him in the end, and what use will be made of him.
He is marked out as the spoil of the union leaders, and he
will be a prize for them not industrially only but politically
as well.

256 W. R. LAWSON

American employers are to-day fighting for independ-
ence— or, as they call it, "for the management of their own
business." It is the same fight that British employers had
to go through with the unions a few years ago, and from
which they emerged if not complete victors with at least a
moderate degree of success. They are now masters in their
own homes, which many American employers are not. In the
United States it is to be a harder battle than it was here, be-
cause on a larger scale and with a more doubtful prospect.
The stake is also much greater in the United States than in
our own case. It involves political as well as industrial mas-
tery. The fact of their having their workmen so well in
hand has been undoubtedly of great value to American em-
ployers, not only in the workshops but in other connections as
well. It made them good voters as well as good workmen.
But if they are going to break away in one capacity they may
do it also in the other. There may be an electoral revolt com-
bined with a labor revolt. In that case the reign of the boss
would be over. With "walking delegates" coming and going
all the time, and union rules drawn tighter every year, "boss-
ing" as hitherto practiced would soon become impossible.

The change when it arrives will be bad for the masters,
and in many ways for the men themselves. It will destroy
the wonderful discipline and method which are the glory of
American industry and the secret of its exceptional results.
Neither the boss nor "Pinkerton's man" will have an easy
life in the teeth of an organized labor party sending their own
representatives to congress and having laws made for them-
selves instead of helping to make laws to suit their employers.

ENGINEERING IN INDUSTRIAL WORKS.

BY WILLIAM D. ENNIS.

[William D. Ennis, engineer; born in New Jersey in the early seventies; apprenticed
to the Rogers Locomotive company; connected as engineer, salesman, and con-
struction superintendent, with various works, including the Passaic Rolling Mill
company, Walworth Construction and Supply company, Consolidated Gas company
of New Jersey; graduate of the Stevens Institute of Technology ; formerly engaged in
private and associate practice in connection with the installation and economical
operation of steam power plants; for some time located in the state of Washington
in behalf of the Everett Pulp and Paper company, where he was engaged in modern-
izing the power equipment of that and of several allied industries ; at present engineer
to the American Linseed company. A frequent contributor to technical literature,
British, American, and Continental, on subjects connected with steam and electrical
engineering chemistry. The following article is from the Engineering Magazine,
and is published by special arrangement.]

The supreme control of industrial enterprises, including
the general management of all phases from the purchase of
supplies to the sale and delivery of finished product, is classic-
ally in the hands of the expert accountant. The line of pro-
motion in the past has been usually from the bookkeepers'
desk toward the higher chairs. An innovation was practiced,
when instead of the clerk, the private secretary, or stenog-
rapher of higher degree, who of all others had opportunities
to become familiar with the motives and methods of his chief,
was marked as the legitimate successor of that chief.

A still more marked innovation has lately been evident.
The managers of to-day are technicists. Engineers — mechan-
ical and civil — make it their ambition to become, not consult-
ing experts, but executives. Among military and naval
cadets, the most brilliant and successful students enter the
engineering corps of the service, and become in after years
the most thorough and successful officers. The same ten-
dency is pervading commercial life. To refer to a single one
of the older American engineering colleges as an example —
the Stevens institute of technology, in New Jersey, founded
in 1872 by an engineer: of the 600 graduates prior to 1896,
230 (or 38 per cent) were in 1900 occupying positions not
technical but executive. The functions of many others who
fill nominally professional offices are in reality purely those of

Vol. 3-17 257

258 WILLIAM D. ENNIS

management. The chief engineer of a large manufacturing
company often becomes as little of an engineer (excepting in
his methods) as his typewriter.

This state of affairs is becoming more and more prevalent.
The managers of street railway, gas, electric lighting, and
similar companies are, in the main, men of engineering train-
ing. The general management of broader manufacturing in-
dustries is being concentrated in the same direction. The
departmental organization of commerce requires men who
shall be, first of all, able executives; second, experts in the
departmental work. In all excepting purely specialized
branches — such as the legal or financial — use is being made of
the trained engineer. Salesmen of mechanical goods, railway
transportation department officials, and incumbents of many
other apparently unrelated fields, are made from engineering
timber. The highest executive positions in the great indus-
tries are accessible to men of mechanical training and common
sense.

The United States are confronted with an era of industrial
consolidation, of which we have thus far seen but the incep-
tion. A line of succession must sooner or later be established,
leading to the posts of responsibility. These consolidations
may properly be viewed as just so much labor saving machin-
ery which, like similar developments of the past, have met
with much unintelligent condemnation, and which have been
rendered possible to no small extent, because of specialized
engineering talent. Much of this is due to the almost invaria-
ble consequences of engineering training. It gives thorough-
ness first of all, for no progress is possible in mechanical
operations without thorough mastery of each step. It gives
a command of details. It develops a graphic habit of thought,
an ability to picture abstract things, and to make mere con-
ceptions real. It emphasizes the necessity of recording,
transcribing, comparing, and perfecting one's observations
until the elementary facts have been clearly sifted out and the
basic principles mastered. And at no stage, especially if cou-
pled with rational and competent scientific study, is it other
than broadening to every faculty of the mind. More than all
these, it creates the courage and ability to grapple with new

ENGINEERING IN INDUSTRIAL WORKS 259

conditions with a confidence born of a thorough understand-
ing of the natural laws involved, that unerringly define, limit,
and control even uninvestigated phenomena.

The fundamental engineering concept is that of efficiency
— the quotient of work performed by work imparted, of value
by cost, of effect by cause. This concept is fundamental, not
in engineering alone, but in every phase of business manage-
ment. A cost keeping system may be never so accurate,
but if it stops short at dollars and cents on record, it lacks
life. Beyond this, where the analysis is of value only as a com-
parison, there is the question of what each particular cost
should be, or the question of a theoretical efficiency toward
which experimental efficiencies must constantly approach.
It is not sufficient to insist that costs shall bear a constant
ratio to output. The ratio under ideal conditions must be
determined by calculation, and should be gradually but
steadily approached in practice by bringing about conditions
resembling ideal ones. With a few conspicuous exceptions,
neither the expert accountant nor the stenographer is quali-
fied by his training to perform such calculations.

In the broadest sense, the efficiency of a manufacturing
industry is equal to its receipts divided by its expenses. This
industrial efficiency, is however, the product of the several
efficiencies of the departments in entire production, in each
of which there must be struck a balance between commodi-
ties furnished to and by it. With each department normal,
the combined efficiency is normal ; and an abnormal condition
of things shown by the sum total can only be satisfactorily
analyzed by one who can apply the touchstone of his own
training and experience to the offending element. The three
processes, — consumption, manufacture, disposition of prod-
uct,— form two gaps for loss. Incompetent superintendence
of plant makes the first element high, unintelligent sales keep
the third element low, both in proportion to the second. To
reduce both losses to normal (when that normal has once been
ascertained) there must be quantitative knowledge of the
operation of all three departments. This knowledge must
consider not only the bulk of commodities in each, but their
cost or value as well. The former data — consumption of raw

26o WILLIAM D. ENNIS

materials in pounds or feet, product in units of weight or
measure, sales in gross — furnish a key to the efficiency of the
department chief, the superintendent, and the salesman, re-
spectively; but the cost of raw materials, the value of product,
the profits on sales, are the measure of the individual compe-
tence of the purchasing agent, the manager, and the capitalist.
Into the problem enter at least six factors of personal effi-
ciency.

One of the first lessons in engineering training is that of
continuity of records. The operation and economy of machin-
ery must be measured from day to day — sometimes from
hour to hour. Wastes must be anticipated, and prevented
rather than cured. Possible economies must be perceived
sufficiently in advance to permit of making the proper prepa-
rations to realize them. No possible training could be more
typical of what is required from an executive head. The cost
clerk discovers these things only after they have passed into
history. His lessons are learned too late. If the engineer or
superintendent is pre-eminently obtuse, the cost clerk may be
able to tell him things that he has himself overlooked; but
the average competent man of the former class will have gone
through the battle and have gained his experience before the
figures reach the office. He learns, as well, the tangible value
of an experiment or a test. It may be worth a considerable
loss merely to know and recognize the conditions which make
for such loss.

In every industry, there must be an ability to retain a
constant record of, and acquaintance with, the variations in
efficiency. The yearly balance sheet is not sufficient. The
economy of the plant must be known for each month, each
week, and each day. This knowledge must include the con-
sumption, production, and disposition, in units of quality
and of value. The working day should not close without a
calculation of what the record of that day has been, in every
department. It is never impossible to obtain the data for
such knowledge, although at times it may be expensive and a
matter of some complication to do so. The system, if one of
approximation, must be fair, so that consumption of raw
materials can be apportioned pro rata with output without

ENGINEERING IN INDUSTRIAL WORKS 261

injustice. It must be reasonably accurate, so as to agree with
monthly cost statements; it must express and weigh all con-
ditions affecting the data obtained. For comprehensiveness,
simplicity, and accessibility, columns of figures cannot com-
pare with graphic charts, such as the engineer uses in record-
ing his experiments. These are sheets of ruled paper on
which a small circle may be marked to represent the figure,
in units of quantity or value, for the day. The horizontal in-
tervals of the chart represent intervals of time, the vertical
distances indicate amounts. The circles are joined by straight
lines, forming a broken thread which offers at a glance a de-
tailed history of the fluctuations of each item for the month
or year as the size of the chart may permit. Such a diagram
is familiar to every engineer ; but its value to him, while great,
is small in proportion to that which it may possess, under
intelligent adaptation, to the man who must know quickly
and accurately the entire structure and conduct of his busi-
ness.

The engineer is taught to maintain and resort to his note
book. Into this go his observations, experiments, rules,
tables, and data. It grows in value from year to year. He
finds in it records that save him useless experimentation and
prolonged investigation of once tried suggestions. The
executive, too, must have his note book, perhaps a thousand
times more expensive, possibly less convenient. It may take
the various forms of card indices, portfolios, scrapbooks, or
filing cases ; but if used as the engineer uses his records, it will
save time and money. It will prevent simultaneous or repe-
titional empiricism in all the lines of industry under control.
New methods and systems of production, new grades of mate-
rial, new schemes of extension, new policies and announce-
ments, can first of all pass inspection in the light of this
collection of facts.

The most elaborate command of details is weak without
rational classification. All the factors in the three assumed
departments must be grouped with regard to quantity, cost,
or value, relations with other commodities, and relations to
totals. Revenue or expense must be credited or charged to
the proper department, especially where there is an inter-

262 WILLIAM D. ENNIS

change of departmental services. Extraordinary revenues or
expense (all outside of the purchase of supplies and the sale
of product) should be justified by complete analytical figures
and data, showing the causes and consequences, not only for
memorandum, but as a possible factor in affecting the value
of the plant and good will as an asset in trade. These methods
of successful management are not dependent upon unusual
talents or abilities, but rather upon high and rigidly-adhered-
to ideals of conduct and usefulness. They involve a patience
with and command of details; the ability to grasp salient
points, to analyze and classify data; readiness for emergen-
cies and unfamiliar conditions; a progressive spirit; resource-
fulness, of self and in subordinates; and, more than all, the
faculty (and desire) to use men of ability by gaining their
interest and co-operation, and, having ascertained their most
efficient field, by trusting them without interference.

As an employer of labor, the engineer takes neither the
cold and heartless attitude of the old-school manufacturers,
nor the more modern and sometimes (on paper at least) ex-
cessive altruism of the theorist. He looks upon these sub-
jects with common sense. To him, his subordinates are
human, and interest him. He is frank and courteous among
them, but he measures their value, in the ultimate, as he
would that of a steam engine, by their efficiency. If they fail
to meet that test, his duty impels him to see that they step
down and out for more efficient and deserving men who will
add to the sum total of human wealth and happiness instead
of decreasing it. He rapidly learns, and never forgets, to
separate his business wholly from all relations — social or
otherwise — that interfere with or hamper him in its conduct.

One of the most striking of recent industrial developments
is that of the interchange of information. In this, the engi-
neer has been a leader. For many years his societies and insti-
tutes have formed meeting places for men who, while possibly
keen competitors in commercial life, have yet found it to their
mutual advantage to exchange views, records, and opinions.
No other profession has been so quick to overcome personal
and selfish motives in this respect. Manufacturing compa-
nies are beginning to share the same blessing. For many years,

ENGINEERING IN INDUSTRIAL WORKS 263

allied interests, those whose directorate to a large extent
may have been identical, have exchanged information regard-
ing common problems. In the United States, the Edison
electric illuminating companies have long maintained a society
for the specific purpose of effecting such exchanges; the fruits
of the work being (nominally at least) not for the benefit of
outsiders. More lately, interests which, while not allied,
were at least noncompetitive, have found it to their advantage
to confer with one another — principally, perhaps, with regard
to the purchase of machinery — so that at present it is quite
common for a firm to answer dozens of letters weekly from
parties who have been referred to them regarding their experi-
ence.

Still more recent is the development of a practice of ex-
change of information between competitive enterprises. A
striking example is in the well known American railway asso-
ciations, in which the motive power men meet yearly with
the full sanction and approval of their respective roads, and
confer freely with their business rivals regarding economical
methods of railroading. In other fields, too, the same prac-
tice is being followed with success. Even two adjoining
manufacturers — keen competitors for certain lines of trade —
will confer, with no intention or desire to agree upon prices,
but simply to compare notes regarding troublesome details of
the business. There is safety in this, as no man can have an
absolutely certain knowledge of his own costs, nor proof
positive that his customer may not be deceiving him. An
opportunity for competitors to compare may be of mutual
benefit in giving to the one information that will prevent him
from making an unprofitable quotation, and for the other
obviating the necessity of meeting an unprofitable quotation
in order to retain the business. In the development of a
spirit of co-operation such as has thus become prevalent, the
examples of the engineers' societies and of the personality of
their membership have played no small part. In the ulti-
mate fruits of this development it is probable that the engineer
will be a leading figure.

THE DRAMA OF FURNACE, FORGE AND SHOP.

BY DAY ALLEN WILLEY

[Day Allen Willey, editor and author; born Rochester, N. Y., Aug. 6, 1860; educated
at the University of Rochester; has written hundreds of articles chiefly on scientific
and technical subjects for American and English periodicals; his home is in Balti-
more.]

The names of a hundred Americans have become house-
hold words as illustration of one man power, but others there
are who also control trusts of wonderful force, unknown save
to the few who see them day by day in the garb of the machine
shop or foundry, yet actors in a play of thrilling interest. Long
before the term "trust" became so familiar to the people com-
binations of steam, electricity, and even the air itself had been
so perfected by human ingenuity that forces of marvelous
strength could be exerted to the utmost or held inactive by a
single intelligence.

When one realizes the mechanical perfection seen to-day
in the great plants of the country a striking parallel is found
between such merging of power and the welding of business
and financial interests. Economy is the main object of both —
economy of man's labor and economy of time — two principal
sources of wealth. Stroll through one of the industries where
the trainload of dingy brown rock, which they say is iron ore,
goes away in a fortnight in ordnance, building girders, or
armor plate, and what a series of pictures of mechanical com-
bination and control does it present !

Even the initial process has its display of force. When
the casting is to be made a gang of men scoop a pit in the earth
floor or the foundry so deep that, completed, a ladder is needed
for them to reach the top. This hole is beneath a railroad
track, which extends along the side of the building, and is lined
with fireclay and brick. Along the track come two iron
tanks on trucks, urged on by men who prod them with crow-
bars. They stop on either side of the pit, and you step back
as you wonder how the men, half naked as they are, can stand

264

DRAMA OF FURNACE, FORGE AND SHOP 265

the waves of heat that come from them. " All ready; let go,"
cries the foreman.

Attached to each car is a wheel. A hand from which the
perspiration is dripping grips the rim and from the bottom of
the tank issues a jet of white, out of which an occasional spark
shoots. It seems to be fire, but whiter than ordinary flame.
Liquid? Impossible, yet it is a liquid forming a molten lake
beneath. The light illumines the features of the men standing
rigid, motionless. It reveals every vein and every muscle of
their arms and breasts, the deep set lines of their faces. This
wonderful transformation fascinates them, too, without being
conscious of it, though they see it day after day and some year
after year.

Nearer and nearer the liquid approaches the top of the
pit. The foreman nods to the men at the wheels. The hands
which have never relaxed that grip move slightly and the jet
of light becomes narrower and narrower, and at last vanishes.
The "ladles" are moved away and the seething mass left to
turn into solid matter. But the picturesque display is not
ended. Gradually the white surface loses its vividness and
assumes a yellowish tint. In turn this changes to a light red,
then to a deeper cardinal, steadily growing darker and darker.
It seems to be losing its life with the variation of color and at
the last indeed assumes the grajdsh hue with which death is
associated.

Such is one scene in this theater where the drama of the
triumph of mind over matter is being enacted. As the metal
curtain is rolled aside, revealing another part of the stage, the
rush of light which comes from the opening blinds you for
the moment — only one thing that you can compare with that
glowing brilliance from which every second a jet of flame
shoots out. Dante has pictured it and Goethe has painted it
in words in " Faust." A hundred feet away the heat scorches
the skin as the sun on a noonday of July. Yet the half dozen
men flitting back and forth, their figures silhouetted against
the white, seem to dare the fire tongues to lick them, so closely
do they approach the opening.

The man who wears the dark glasses gazes into it for a
moment or two, then steps back, places a little tube between

266 DAY ALLEN WILLEY

his teeth, and from it comes a shrill whistle. Turn your head
and follow the glance. He is looking at what seems to be a
huge wheel suspended from a long rod which comes slowly
toward him. In front walks a workman to warn his fellows,
for below the wheel dangles a chain, a blow from which would
knock a man's brains out. You don't need to be told so — one
of its links is as long as your arm.

As it stops in front of the furnace two of the men spring
forward, catch the loose ends of the chain, and bolt them
under a cylinder as large around as a hogshead, resembling
the hub of a gigantic wheel, for to it is fastened a sort of axle.
Another man picks up a long rod, another a length of hose.
Those who wrapped the chain about the cylinder jump back
as the links tighten, and up it moves until opposite the fiery
opening. The man with the glasses blows his whistle and in
it goes. On either side a man with a rod guides its course as
it grasps a mass of something the outlines of which you can
just make out.

From the opening comes a shower of light — stars, dots,
dashes, even tiny balls of fire which fly high in the air, and,
descending in a miniature cascade, break into dazzling atoms
as they reach the ground. Some even strike the workmen,
but they do not wince from the bath of fire. The only danger
is to the eye, for they bound off the bodies like rubber balls.
It is a huge hand which has gripped the mass and is now
pulling it out inch by inch.

As fast as it appears the hoseman pours a stream of
water on it, which rims along the white hot surface, boiling
and bubbling like grease in a frying pan. Occasionally he
turns the stream on some of the panting figures, ready to
drop from the blistering heat which strikes them in waves as
they scrape the ashes and "scale" off the casting with their
"hoes." This is a case where one burns. Perspiration does
not relieve and heavy woolens wrap the men to the neck to
keep them from scorching.

Now the mass is swinging in the air as it starts off to an-
other part of the works. The steel door is rolled back in
place, shutting out the miniature hades from view. As the
eye becomes accustomed to the semi-darkness it watches the

DRAMA OF FURNACE, FORGE AND SHOP 267

fiery traveler moving majestically along, so slowly that you
can easily catch up with it. Above it is a long steel beam
stretching from side to side of the building, and you now see
that the little wheels supporting each end of this movable
bridge rest on an elevated railroad track the width of the
foundry.

Here is what the man who is going ahead of the casting
to warn everybody away from it says : "That thing on the top
with a lot of wheels and cylinders you see is what does the
lifting. It is the crab, and it is the biggest crab you ever saw
— runs by electricity. Why, it can handle this 'ere fifty tons
like you or me would toss up a pound weight. Notice that
fellow in the little cage? He does it — just has two or three
levers, that's all."

The man in the cage! Beside his leather covered bench
are the shining handles of the levers. The little house is just
large enough for him and them. Open on each side it hangs
beneath the crane in such a way that all he has to do is to look
at the man with the glasses or any other of the bosses. A
wave of the hand or the sound of a whistle and the nearest
lever moves a few inches, the wheels of the crab begin whirling,
and it " buzzes" as the electric current rushes through it with
noise like the trolley of the street car, forcing the weight,
whether fifty or a hundred tons or a single ton, up and up.
Another wave of the hand, the lever is pushed back, the buzz-
ing ceases, and the weight stops moving.

At another motion the motorman pulls the next lever
and the crab begins rolling side ways along the top of the crane
with its burden, for the man can work his mechanical muscle
in almost as many ways as his human brawn. When at last
he reaches the forging press you realize this fact, if you did
not before, for he holds the metal under it as easily as a boy
holds his jackknife. Here is another play of power, but
without the fire scene which so intensified that at the furnace
opening. It is less brilliant, less vivid, but the tragic is
developed by the somber massiveness of the mechanism.

The men seem dwarfed to pygmies beside the mechanical
giants lifting and pressing and shaping at their will. The
chunk of steel is still white, but has dulled in hue. The life

268 DAY ALLEN WILLEY

of its coloring has gone. Strike it and no sparks fly off in
protest. Thus it is held in the grasp of the chain and moved
forward until one end lies upon the ledge of iron below the two
great columns. Now the man in the cage becomes a spectator.
He looks down upon men with the scrapers and the men with
the calipers to measure the casting, and a group of others, each
at his place beside his lever.

The forgemaster resembles the director of an orchestra as
he stands where he can see every leverman and the casting as
well. He waves his hand to a man on a platform raised above
the others, who pulls his bar. Inch b}^ inch the cylinders
descend, pushing the jaws of steel to which they are bolted
down and down. He motions to another leverman and this
one pulls his bar. You cannot see what happens, but a creak-
ing and grinding sound shows some other force is at work.
Thus he continues, never taking his eye from the mass until
all of the machinery is at work.

The men themselves instinctively realize the hugeness
of it all, and though they may have pulled and pushed the
levers a thousand times in the year, the tense features and the
rapt gaze indicate their interest. Every eye is fastened on
the press as the space between the bars and the casting les-
sens, then disappears. A hand wave, and one of the levers
is reversed — the power lessened a few hundred tons — but the
movement decreases only a trifle.

Tighter and tighter the ponderous jaws grasp the steel.
Now turned to a red, it literally flattens and lengthens out.
A moment, and the master holds up his hand, all the levermen
pull back their handles, and the pressure ceases. The one on
the elevated platform has two bars. He moves the left
handle and upward rise the cylinders. This is the cue for the
man in the cage, and again he takes part in the scene to raise
the casting and move it farther into the press, so the jaws can
squeeze a thicker part until it is finally pulled from the em-
brace of the monster, flattened to only a fraction of its original
thickness and ten times its former length.

Who does not remember the days when school vacation
came and with it fishing time — how he took hunks of lead or
horse pistol bullets, and with pincers or hammer and stone

DRAMA OF FURNACE, FORGE AND SHOP 269

flattened and lengthened the lead into oblong sinkers for his
fish line. He needed no heat to forge them, but steel must
be heated to soften it. Then it can be lengthened and flat-
tened by the press. It is about the same principle as the boy
employed, only the press has the power of 14,000 tons.

When the man on the raised platform to the right pushes
his lever as far as it will go, a pressure equal to the weight of
some of the great office buildings in Chicago or New York is
placed upon the casting. Now is it any wonder that it flattens
out and lengthens, as the school boy's sinker. Electric power?
No — water such as children use to sail chips and from which
the maiden gathers lilies — yet when pent up by human in-
genuity can exert a force greater than any known save that of
explosives.

Yet this is not the climax of the play. That is reached
in the hammer chamber when the metal victim placed upon the
block succumbs to the blows of the executioner — a strange and
startling parallel to the scenes of '98 and of the later com-
mune as conveyed to us on the canvas wrought by the cun-
ning of the French artist. Some day such a masterpiece may
represent the manner in which steel beheads steel.

The prisoner in chains is moved to the front of this
guillotine of the foundry. There are the upright posts, the
resting place, the framework supporting the massive plate
which slides up and down in its groove, dripping with oil — all
bearing a sinister resemblance to the death weapon of France
but enlarged on a colossal scale. As the crane moves the
casting into the gap in the framework a man climbs the
circular stairway to the platform half way up one of the
great posts and seizes his lever. His fellows range them-
selves below with tools to clean the debris from the cooling
mass.

The hammer boss looks up the groove to see that nothing
has caught in it and scans the chain wrapping to make certain
that all is secure — that nothing will break from the strength
about to be exerted. For an hour steam has been crowded
and pressed into the cylinders on each side of the hammer by
force equal to that of a thousand horses. The boss takes a
last look at the thing on the block.

270 DAY ALLEN WILLEY

Above his head the man at the lever has bared his arm
to the elbow to give his human muscle full play and tipped
back his cap to cool his brow a little, if possible, for the heat
from that fifty tons strikes him in the face with suffocating
intensity. With eye fixed on his superior he awaits the signal.
Possibly a nod of the head, possibly a wave of the hand — it
is sufficient. Pushing down the lever he frees the pent up
force.

Silently as a feather floats downward this 125-ton knife
falls twenty feet in its groove, burying its edge in the dull red.
Out spurts a stream of fire on either side as a myriad of metal
particles white hot from the friction are forced into the air
by the blow. Despite the tons of iron and stone in the
foundation the concussion shakes the ground like a convulsion
of the earth. A pull at the lever and the executioner has
loosed his weapon to be raised to the top of the groove, leav-
ing a deep red cut in the object on the block. But the work
is not finished — another, perhaps two more blows are neces-
sary before the ton or so on the edge of the bed is completely
severed and falls on the pile of sand ready to receive it.

Later you may see it being bent like a sheet of paper
between huge rolls of steel having the power of 7,000 tons, or
pierced full of holes as a boy bores a piece of wood with his
gimlet, but impressive as are these scenes they seem insignifi-
cant beside that of the hammer.

Here is a tragedy of power, once witnessed, never to be
forgotten, yet a little later at the noon hour, and comedy re-
places it — the comedy of the clay pipe and the dinner pail.
For the time all this muscle of mechanism has become lifeless,
merely inert forms of metal.

On the bed of the hammer stretches the leverman,
directly under the knife which would crush him to pulp, as
he enjoys his after dinner smoke. Scarce stopping to wash
the grime from their hands a group are sprawled out on the
soot and earth floor, propped against the pillars of the press,
each with pail in lap, finishing its contents to the last morsel
and " washing it down" with the cold coffee in the top can.
They realize their mastery, and in their attitudes show their
contempt for the power they control.

DRAMA OF FURNACE, FORGE AND SHOP 271

The man in the cage joins the man of the bar, bites off
a quid from his plug of tobacco, and they talk of their charges
as if these were human. " She's contrary to-day," says the
man of the hammer. "I went all over every nut with the
wrench before we started up. They're all snug, but she
creaks as though she was racked to pieces. The bed shakes
so I am nearly knocked off my feet when I let the hammer go.
Probably to-morrow she'll be all right. Gets freakish."

"That was the way with mine last week," says the man
of the cage. "Couldn't stop the crab at the right time to
save myself — kept runnin' after I pulled the stop lever. Had
the electrician look it over. He says nothin's the matter. I
know there ain't either — just pure cussedness. It's a brute
sometimes that way. Now, Tom there has been workin' his
crane for a year, and he says it always goes wrong somehow
on Mondays — jest as if it had been takin' too much the night
before."

Strange, even grotesque, language to come from the lips
of men so dignified as you watched them in the scenes in
which they participated. But these men show their char-
acter in their vocation. Though they may not have the
faculty of expression, it only needs a glance at the stern, set
faces beside the hammer and press, reflected in the furnace
glow or revealed in the light of the white hot metal to realize
that they feel their responsibility, they appreciate the danger
of their work — but there is no sign of weakness, no hesitation
in doing their duty.

In this drama of the day's work, tableaux are not lacking
— statuesque groupings that would be the delight of the
sculptor. In the first transformation of the liquid to the
ingot you note how men remain rigid in their positions — not
a muscle moving until the time for action comes. Beside
the press and hammer, awaiting the master's signal, could
something of the supernatural change them to marble or
bronze, the strength, resolution, earnestness typified in their
positions alone would give that group a place of honor in
the salon.

You curiously regard the molder standing besides the
metal. Of your own strength you could not move the thou-

272 DAY ALLEN WILLEY

sandth part of its weight. Its ponderous unwieldiness im-
presses you with a sort of awe as you think that here is the
monster gun of some battleship or a part of its protection.
You have a respect for it — you realize the strength, the future
power it typifies. But does the man beside it feel the same?
Far from it. There is no awe or respect in the deep lined
features, in the resolute gaze, which the greatest tragedian
might envy. He is its creator, its master. He can work it
to his will — thanks to this trust of power.

THE ORGANIZATION OF MANUFACTURING
INDUSTRIES.

BY ANDREW CARNEGIE.

[Andrew Carnegie, capitalist, manufacturer, philanthropist j born, Dunfermline,
Fifeshire, Scotland, November 25, 1837; came to United States in 1848 locating in
Pittsburg; his first work was as weaver's assistant in a cotton factory at Allegheny,
Pa.; was messenger boy in Pittsburg office of Ohio Telegraph company, 1851 ; learned
telegraphy and entered the employ of the Pennsylvania Railroad company; became
telegraph operator, advancing by promotions until he became superintendent of the
Pittsburg division of the Pennsylvania system; assisted Mr. Woodruff, inventor of
the sleeping car, in organizing the Woodruff Sleeping Car Co.; served as superintend-
ent of military railways and government telegraph lines during the civil war; after
war organized Keystone Bridge works and Union Iron works located at Pittsburg;
introduced Bessemer process of making steel, 1868; became principal owner of Home-
stead and Edgar Thompson Steel works, and other large plants as head of the firms
of Carnegie, Phipps & Co. and Carnegie Bros. & company; interests consolidated in
Carnegie Steel company, 1899, which were merged in the United States Steel corpora-
tion in 1901 ; retired from business, 1901 ; has given libraries to many towns and cities
in the United States and Great Britain, and large sums in other benefactions; Lord
Rector university, of St. Andrew, Edinburgh, 1903. Author, An American Four-
in-Hand in Britain, Round the World, Triumphant Democracy, The Gospel of Wealth,
Empire of Business.]

I invite your attention to the important question of the
organization and management of that most complicated of
all pieces of machinery — man — which has been my province.

Speaking from experience, we had not gone very far
in manufacturing before discovering that perfect manage-
ment in every department was needed, and that this depended
upon the men in charge. Thus began the practice of inter-
esting the young geniuses around us, as they proved their
ability to achieve unusual results — the source of big dividends.
These received small percentages in the firm, which were
credited to them at the actual cash invested, no charge being
made for good will. Upon this they were charged interest,
and the surplus earned each year beyond this was credited to
their account. By the terms of the agreement three quarters
of their colleagues had the right to cancel it, paying the party
the sum then to his credit. This provision was meant to meet
possible extreme cases of incompatibility of temper, or if the
recipient should prove incapable of development, or of endur-
ing prosperity. At death the interest reverted to the firm at

Vol, 3-18 273

274 ANDREW CARNEGIE

its book value. The young men were not permitted to as-
sume any financial obligation, and not until their share was
fully paid by the profits, and there was no further liability
upon it, was it transferred to them. Thus thoughts of possi-
ble loss never prevented concentration upon their daily duties.
They were not absorbed in the daily quotations, for the shares
were not upon the stock exchage or transferable. This policy
resulted in making some forty odd young partners, a numbei
which was increased at the beginning of each year.

We did not fail to see, as the works enlarged, how much
success depended upon the mechanical men, the superin-
tendents and foremen, yet not one of these had up to that
time been admitted as partner. The business and the me-
chanical men — office and mill — were still widely separated.
Well do I remember the first attempt to bring these two
departments into closer relations. It was made with our
Captain Jones, well known and appreciated as being in the
foremost rank of managers, perhaps the foremost of his day
in America. He came to us as a working mechanic at 8
shillings per day. I explained to the captain how several of
the younger men in the business department had been made
partners and were actually receiving much greater rewards
than he, while his services were at least equally valuable,
and informed him that we wished to make him a partner. I
shall never forget his reply. "Mr. Carnegie, I am much
obliged, but I know nothing about business and never wish
to be troubled with it — I have plenty to trouble me here in
these works. Leave me as I am and just give me a thunder-
ing salary." "Hereafter," I said, "the salary of the presi-
dent of the United States is yours, Captain," and so it re-
mained till the sad day of his death. My seniors, the presi-
dents of the other manufacturing concerns, did not fail to
take me to task for ruining the steel business by paying a
mechanic more salary than any of them received. Being
much the youngest of these great dignitaries, I humbly con-
fessed my wrongdoing, not, however, failing to inquire if
they knew where we could find two or three more Captain
Joneses at double the price. We did not overpay the captain;
he was worth several ordinary salaried presidents. The cap-

ORGANIZATION OF MANUFACTURERS 275

tain's declination of partnership was the only one which ever
came within my experience. None of the other mechanics
ever preferred salary to partnership, and they were wise.
Nothing can compare with that form. From that time for-
ward the union of the mechanical and business partners went
steadily forward until no manager of a mill was without his
interest in the business, as pertaining to the position, and no
board of management, or important committee, was without
a mechanical representative. Thereafter mill and office con-
ferred upon all important sales or contracts. The mechanic
and the man of affairs were in constant consultation and
fellow partners — one of the most profitable changes that ever
we made.

There was another step taken in the same direction.
Men having others under their charge were given an interest
in the proceeds, or savings in cost, in their department. Where
it was impossible to decide the limits of a department, the
managers were rewarded by handsome bonuses beyond their
salary, based upon the general profits of the year. Thus, as
a rule, every man in authority became more than a mere wage
earner. He felt himself on the first step of the ladder which
led to partnership sooner or later, and was worth any two
mere employees paid only a daily or monthly wage and denied
special recognition.

This plan of reward according to results for heads of
departments has already become so general and is spreading
so fast we may be sure it has proved its efficiency. There
are few large department stores or important houses in retail
trade which have not been forced to adopt it.

This plan is probably bound to prevail to greater or less
degree in manufacturing concerns, and the sooner the better,
for the greater number of the workers capital can compensate,
and in one sense reward, by sharing its gains, the more har-
monious and therefore more profitable for both must the
relationship become.

The great secret of success in business of all kinds, and
especially in manufacturing, where a small saving in each
process means fortune, is a liberal division of profits among
the men who help to make them, and the wider distribution

276 ANDREW CARNEGIE

the better. There lie latent unsuspected powers in willing
men around us which only need appreciation and develop-
ment to produce surprising results. Money rewards alone
will not, however, insure these, for to the most sensitive and
ambitious natures there must be the note of sympathy, appre-
ciation, friendship. Genius is sensitive in all its forms, and
it is unusual, not ordinary, ability that tells even in practical
affairs. You must capture and keep the heart of the original
and supremely able man before his brain can do its best. In-
deed this law has no limits. Even the mere laborer becomes
more efficient as regard for his employer grows. Hand serv-
ice or head service, it is heart service that counts.

One of the chief sources of whatever success may have
attended the Carnegie Steel company was undoubtedly their
policy of making numerous partners from among the ablest
of their men, and interesting so many others of ability in
results. I strongly recommend this plan, believing that in
these days of threatened exhausting competition it will be
the concerns which adopt this plan, other things being equal,
which will survive and flourish.

In no field is the wise saying more amply verified than
in manufacturing: " There be those who gather, yet scatter
abroad, and there be those who scatter abroad, yet put into
barns."

If the managing owners and officials of great corporations
could only be known to their men and, equally important,
their men known to their employers, and the hearts of each
exposed to the other, as well as their difficulties, we should
have in that troublesome field such harmony as delights us
in the field of domestic employment. It is mainly the ignor-
ance of contending parties of each other's virtues that breeds
quarrels everywhere throughout the world, between individ-
uals, between corporations and their men — and between na-
tions. "We only hate those we do not know" is a sound
maxim which we do well ever to bear in mind.

In the progress toward more harmonious conditions be-
tween employer and employed we see that the system of pay-
ment by fixed wage has been largely supplanted by payment
according to value of service rendered by workmen in posi-

ORGANIZATION OF MANUFACTURERS 277

tions of authority over others, and by recognition not only in
money, but in position, which often counts quite as much as
coin, and not seldom much more with the ablest. There re-
mains still receiving the fixed wage the great mass of ordinary
workmen ; but we see in the history of the relation of employer
and employed that these have not failed to rise greatly also.
The movement tending to improve the position of the worker
has not passed over even the humblest, but has reached and
benefited all.

To-day we have reached the stage of perfect equality be-
tween the two contracting parties. Each is free to demand
terms or to terminate agreements. Labor is worthy of its
hire and is now paid this in coin, the law in many lands going
so far as to make its claim a first charge upon the employer's
property — a great advance. But the irresistible pressure
which has forced change after change in the relations of capi-
tal and labor still operates unchecked — a sure indication that
the final stage has not yet been reached. We have evidence
of this in another important advance, the sliding scale, which
provides not a fixed wage but in some degree settles by re-
sults. Increased demands bring higher prices and profits to
the employer, which in turn bring workmen higher returns,
so that as the employer's profits rise and fall, so do the work-
man's rewards. If I were asked what was the best service
the Carnegie company were ever able to render the wage
earner, next to giving steady employment of wages equal to
any, I should answer, by persuading them to adopt the sliding
scale, with a minimum insuring living wages, at their works
at Braddock fourteen }^ears ago, which has given perfect
satisfaction from that day to this and is still in force, and has
produced undisturbed harmony between capital and labor.
The sliding scale is a great advance over the fixed wage, not
only by securing the workman a prompter and more certain
share of the profits, but also because it raises his status. He
is something akin to a proprietor when he shares varying
profits instead of having merely a fixed wage. He has risen
in the scale and is more of a man, and the more of a man the
better and more valuable the workman.

278 ANDREW CARNEGIE

While the Carnegie Steel company interested their young
men as partners and were always anxious to reward excep-
tional service, and carried the bonus system to an extent,
perhaps unknown, in any similar organization, the masses of
the ordinary workmen could not be embraced under the limited
partnership form, even if it had been thought desirable that
their savings should be so invested. The objection to this
from the point of view of the workman, which always arose
in our minds and which we were never able to surmount,
was the sad and instructive history of the largest manufactur-
ing concerns, especially those of iron and steel.

More than once in the history of the Carnegie Steel com-
pany leading partners have been so doubtful of their future
as to beg their more optimistic senior partner to buy large
amounts of their interests at actual cost.

It is an instructive fact that the majority of the principal
of these in the United States have, at some period in their
career, either been in the hands of receivers, been mortgaged,
reorganized, or sold by the sheriff to the great loss of their
original owners. Indeed, those who have escaped financial
trouble are the exceptions. The great Cambria Iron company
were twice in trouble and once sold by the sheriff; Joliet works
were also sold; the Bethlehem company have twice been
n irtgaged ; the 6 per cent first mortgage bonds of the im-
mense Chicago works have sold for as low as 70 per cent, and
their shares at less than one half of their par value. The
Troy Iron and Steel company have lost heavily and undergone
several reorganizations. It may be said that these disasters
are of the distant past, but history has a way of repeating the
past which we do well to remember. The Pennsylvania Steel
company have in recent years been in the receiver's hands.
Their shares in demand at $300 in 1881, sold in 1893 as low as
$20. There was no over capitalization in any of these com-
panies. Only actual cash counted. In 1903 the Consolidated
Lake Superior company was embarrassed — after investing of
cash capital $34,000,000. Their preferred shares, which
recently sold for $80 per share, are quoted on the exchange
at $15.50. The common stock, last year at $36 per share,
sold for $4. Our oldest and largest shipbuilding company

ORGANIZATION OF MANUFACTURERS 279

must be reorganized, for which $7,500,000 are needed.
Their shares, which have sold above $85, are now at $38.
The vicissitudes of the leading iron and steel concerns of
Tennessee and Colorado are still in evidence. Our friends in
Canada have similar experiences. Shares of their large Do-
minion Iron and Steel company, which sold at $60 in 1901, are
quoted at $25.

Our experience in America has not been peculiar. In
1901 the iron and steel works of Germany were generally
in a depressed condition, and their shares suffered heavily.
I read a list of these losses at the time which impressed
me deeply. If I remember rightly, many declined one
half or more. Several important works were reported in
financial trouble. Experience in Great Britain is similar.
Not a few concerns, after vibrating between seasons of loss
and gain, have from time to time had to be reorganized, en-
tailing heavy losses upon shareholders. Uncertainty of re-
sults pertains not only to iron and steel, but to all forms of
business operations, and is inherent in them.

You know too well how the path of iron and steel is
strewn with financial loss in all countries, and that all forms
of business must encounter grave risks. Scarcely a week
passes without news of embarrassment or failure in the indus-
trial world. Thus it has ever been, and ever must be, wh'le
human nature remains unchanged.

Bearing all this in mind, the thought of asking the work-
ingman to risk his precious savings in the manufacturing or
any form of business was always discarded by us as too dan-
gerous for him. He was advised to buy a home instead and
save his rent. To facilitate this, money to build a home was
lent to any of the employees who had the ground clear of
debt. Their savings up to $2,000 each were taken by the
company and placed in a special trust fund, entirely separate
from the business. Interest at 6 per cent was allowed, to
encourage the workman to save part of his earnings for old
age. The funds received were lent upon mortgage on real
property, generally to such workmen as wished to build homes.
It was believed that this was the safest, and therefore the
wisest, use of their savings which workmen could make.

280 ANDREW CARNEGIE

The most convincing proof of the steady march of labor
to recompense more and more based upon profits, and in
forms drawing capital and labor into the peaceful bonds of
mutuality, is to be credited to the United States Steel corpora-
tion, the largest of all industrial corporations, and for which
they deserve unstinted praise, as proving a genuine interest in
the workmen and sagacious thought for their own.

It is in this form: 25,000 of the $100 shares of preferred
7 per cent stock were offered to their 168,000 employees at
$82.50 per $100 share, in different amounts according to their
earnings, which were subscribed for twice over; nearly one
sixth of the men subscribed — one half being salaried men.
Twenty thousand more shares of stock were afterward pro-
vided, making 45,000 in all, worth about $4,500,000. Monthly
payments are received. Another distribution of shares is in-
tended.

It will be noted that the investment is at the risk of the
men. This seems a feature which we may, however, expect
the corporation to change as experience is gained, as the plan
is most wisely stated to be subject to future changes. In
most of the states of the Union labor's precious earnings, surely
the most precious of all capital, are a first charge upon prop-
erty, and this I believe the only safe policy to follow. " Every
workman a shareholder" would end most of the conflicts
which sadden us between capital and labor. To effect this
every corporation could well afford to offer to distribute part
of their shares among the saving workmen, and in case of
disaster, give preference to repayment of principal as a first
charge. Any desired legislation with proper safeguards could
be readily obtained authorizing corporations to make savings
of employees up to a certain sum for each a preferred claim,
ranking before mortgage or ordinary debts or the claims of
shareholders, akin to the mechanics' lien and the homestead
exemption laws. This seems due to the workingman, who,
necessarily unacquainted with business, takes his shares upon
trust and becomes the beneficiary or the victim of his employ-
ers. He should be considered as an inexperienced youth in the
affair ; besides, he is asked to invest not solely for his own, but
at least equally for the advantage of his employer.

ORGANIZATION OF MANUFACTURERS 281

Thus we see that the world moves on step by step toward
better conditions. Just as the mechanical world has changed
and improved, so has advanced the world of labor from the
slavery of the laborer to the day of his absolute independence,
and now to this day when he begins to take his proper place
as the capitalist partner of his employer. We may look for-
ward with hope to the day when it shall be the rule that the
workman is partner with capital, the man of affairs giving his
business experience, the workingman in the mill giving his
mechanical skill to the company, both owners in the shares
and so far equally interested in the success of their joint efforts,
each indispensable, without whose co-operation success were
impossible. It is a splendid vista along which we are per-
mitted to gaze.

Perhaps I may be considered much too sanguine in this
forecast, which no doubt will take time to realize, but as
the result of my experience I am convinced that the huge
combination, and even the moderate corporations, have no
chance in competition with the partnership which embraces
the principal officials and has adopted the system of payment
by bonus or reward throughout its works. The latter may
be relied upon as a rule to earn handsome dividends in times
of depression, during which the former, conducted upon the
old plan, will incur actual loss and perhaps land in financial
embarrassment. In speaking of corporations we must not
forget, however, that there are many who are corporations in
name only, their management being the life work of their few
owners. These rank with partnerships, having all the ad-
vantages of this form. The true corporation is that whose
shares are upon the stock exchange and whose real owners
change constantly and are often unknown even to the presi-
dent and directors, while to the workmen they are mere ab-
stractions. It is impossible to infuse through their ranks the
sentiment of personal regard and loyalty in all its wonderful
power.

The idea of making every workman a capitalist and of
sharing large percentages of the profits among those rendering
exceptional service will probably encounter the opposition of
the extremists on both sides, the violent revolutionist of

282 ANDREW CARNEGIE

capitalistic conditions, and the narrow grasping employer
whose creed is to purchase his labor as he does his materials,
paying the price agreed upon and there an end. But this
opposition will, we believe, amount to little. It will even
speak well for the new idea if it be scouted by the extremists
and commended by the mass of men who are on neither dan-
gerous edge, but in the middle, where usually lies wisdom.

Meanwhile, here is the germ of a promising plan offered
as a solvent for one of the pressing problems of our age, which
may prove capable of development. Human society bears a
charmed life. It is immortal and was born with the inherent
power or instinct, as a law of its being, to solve all problems
finally in the best form, and among these none more surely
than that vexed question of our day, the relations between
these Siamese twins, which must mutually prosper or mutually
decay — capital and labor.

CAUSES OF THE SUCCESS OF AHERICAN
riANUFACTURERS.

BY JOHN FOSTER FRASER.

[John Foster Fraser, economist, is one of the most popular of British writers on indus-
trial and economic topics. He has made first hand investigations of the industrial
situation in the United States and in European countries and the results of such in-
vestigations have been embodied in newspaper and magazine articles and in lectures.
Their popularity and value have been heightened by his bringing to his investiga-
tions not only the sound judgment of the scholar, but the experience of the business
man.]

Some time ago I held conversation with a Spanish gentle-
man who had been making a tour of England. "Yes," he
said, in reply to an inviting question of mine, "I have seen
many things that have filled me with wonder: the rush of
business in London, the magnificence of your buildings, the
keenness in trade. I have seen your great steelworks in
Sheffield, your busy black country about Birmingham, your
shipbuilding yards on the Clyde side, and your great cotton
factories in Lancashire. It is all marvellous. But I wouldn't
like to be an Englishman. I am glad to be going back to my
own sunny Spain. We're a poor people, but we get some
brightness out of life. We've got no great commerce to be
proud of ; but then we've got no country bleached of all beauty,
as I've seen in your black country; we've got no crowds of
young men and women in consumption from working in mills,
as in Yorkshire and Lancashire. You're a great people, a
mighty industrial nation. But what a price you are paying
for it! I'm going back to my orange trees and sunshine and
happiness."

At the time I thought little of my friend's outburst.
Recently I have been recalling it every day. For I have
returned from a mission of inquiry into industrial conditions
prevailing in the United States. I have been coming in con-
tact with many British manufacturers, and the reply they
have invariably given, when I have pictured to them the
dash, the sweeping success of industrial America, has been,
"Oh, yes, the Americans are a great people, But we in

283

284 JOHN FOSTER FRASER

England don't live to work: we work to live. What is the
good of being alive if you have to slave from morning till night
as those Yanks do? Look at the price they are paying ! They
are old men before they are forty. They are all anxious and
careworn. They can talk about nothing but money making.
We've no city of suicides, as Allegheny is, outside Pittsburg —
where the life is sapped out of the workpeople — and, thank
God, we have no hustling commercialism as in Chicago. We
can do without the rush the Americans think so necessary.
We haven't got so many millionaires, but we've got healthy
men. Old England is good enough for us."

As I have heard something like this from manufacturers
in all parts of Great Britain, my recollection has skipped back
to what the Spaniard said. The thought has crept into my
mind that the Spaniard was a little envious of England's com-
mercial greatness, and yet made himself quite happy by giving
a modern turn to the old story of the fox and the grapes. And,
honestly, I have not yet convinced myself that the average
British manufacturer — in his inclination to suggest that he
could do as well as the American if he were disposed, but that
he does not simply because he doesn't think it worth while —
is not taking up a point of view regarding America the same
as the Spaniard took regarding England. It is a happy but
dangerous point of view, because it is so plausible, because
is produces a placid contentment and a serene, superior smile
that the Englishman is not such a fool as the American. At
the best, however, it is a little bit of ingenious self-deception.

What we British people have first to get rid of in con-
sidering industrial America is the Spanish attitude. We have
only to look round our own country to admit in our minds, if
we hesitate to express it with our lips, that the reason British
manufacturers do not commercially go the pace is not because
they do not want to, but because they cannot.

As the result of my investigation in the United States two
things came out most prominently: first, that the British
artisan is superior to the American workman; and, secondly,
that the American manufacturer, the employer, the director
of labor, is infinitely superior to his British prototype. The
chief reason America is bounding ahead as an industrial nation

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CAUSES OF MANUFACTURERS' SUCCESS 287

their whole life is absorbed in their business; their conversa-
tion hardly ever gets beyond the radius of how more dollars
can be made. You can never forget that here are men who
give every moment of their life to their work. I do not put it
forward as a noble life, but it is the life that makes successful
business men.

The American is a polyglot composition. We British
folk chaff him on his habit of "blowing/' of always making
out his firm as twice as successful as it really is, and of declar-
ing his machine will do three times as much as it can actually
do. Still, we have a fondness for the American. But the
fondness is not returned. Ambassadors, I know, say agree-
able things in after-dinner speeches at fourth of July cele-
brations. Go, however, among the common people and there
you will find a resentment toward the nations of Europe.
There is nothing of this to be seen in the pleasant social cir-
cles to which the average visiting Briton is introduced. It
exists strongly, undeniably, among the masses, and these
are the people, more than in any other country, who count
in America. The reason is not far to seek. The majority
of Americans are not more than a single generation removed
from being Europeans themselves. They left the old coun-
tries with no love in their hearts. For a long time they have
been the butt of ridicule to polite society in Europe. They
have felt as the new rich always feel— that in manners they
are not standing on safe ground ; they have resented the con-
temptuous smile of the other countries, and they have con-
vinced themselves that European countries "are back num-
bers anyhow, and don't cut no ice!"

It has not been the paupers of Europe who have gone to
make the American people, but rather men determined, and
maybe a little rancorous under a sense of curbed ambition,
who have thrown off old ties. The immigrant races are mixed
by marriage. So a new race — not a branch of the Anglo-
Saxon at all— has sprung into existence with that alertness of
brain you invariably find in the offspring of mixed peoples.
They start fresh, with no local customs, with no traditions,
with nothing but the feeling they are a new nation, somewhat
sneered at by the other nations of which they have to get

288 JOHN FOSTER FRASER

abreast. Not quite confident where they are exactly, the
Americans make a bold shot and declare they are first. This,
indeed, is the perpetual song of the newspapers. In England
we constantly tell one another Great Britain is going to the
devil. Americans always tell one another America is the
leading nation on the face of the earth. An English manu-
facturer receives a big order and is not at all desirious other
firms in the same line should know it. When an American
manufacturer receives an order it is blared to the world, and
he is interviewed. The English manufacturer has ideas about
" reserve" and " dignity." The American sticks all his goods
in his shop window for the world to gape at. He is cocksure;
he is buoyant ; he is absolutely certain of success. So, breezily,
with slapdash rush, "joshing" — not being accurate in Ins
facts — he pushes ahead in a way that startles the Englishman.

Therefore, in considering America at work there are these
important factors not to be lost sight of : that the American is
always enthusiastic ; that he is the son of a virile race, with a
quickness, an adroitness of intellect that is the result of mixed
breeding; and that the heads of firms are mostly men who
sprang from the people, are the makers of their own lives, and
know their business through and through.

It is within the reach of every American to be a landed
proprietor for himself; at least, to own sufficient ground to
provide for himself and his family. It is this bottom fact
which accounts for high wages in the United States. Where
every man can work for himself, extra pay, compared with
what he could get in other countries, must be offered to in-
duce him to work for another man. Therefore wages are
much higher than in Great Britain. Wages, however, are
only comparable when you take into account their purchasing
power. To the rude immigrant, the Irishman, the Swede,
the German, the Hungarian, the Italian, the French Canadian,
American wages are phenomenal. To the British working-
man, however, the wage is only large as a figure. Wages
both in England and America are on the upward trend. But
while wages in America have, within the last ten years, in-
creased two per cent, the cost of living in the Eastern states has
increased 10 per cent, and westward, in a place like Chicago,

CAUSES OF MANUFACTURERS' SUCCESS 289

it has gone up 40 per cent. So the real wages of the American
worker are considerably lower than they were ten years ago.
I know that in many industries the increase of wages has been
10 per cent; but in striking an average it has to be borne in
mind that in all work not actually physical — that is, in all
work that is clerical, administrative, supervisory — the wage
has decreased. And here we get just a glimpse of a state of
things coming about in America that we are very familiar
with in Britain — a fondness of the new generation for the
towns rather than for the country, a distaste for labor that
means grimy hands and mucky clothes, and a nocking to
work which gives a clean collar and passable cuffs, but a wage
inferior to that of a mechanic.

Wages vary in different parts of the continent, and the
extraordinary fact is that where the wages are largest in cash
they are the smallest in value, because the purchasing power
is less. For instance, wages are lower in Massachusetts than
in Illinois. But the working man, if he keeps a bank book,
would have a better balance to show at the end of a year were
he in Boston than if he lived exactly the same way in Chicago.
Speaking in the aggregate, however, I may say that whilst
the working man in America earns quite half as much again
as the Briton, he has to pay three times as much for rent,
twice as much for clothes, whilst the food, roughly speaking,
comes to about the same. Having gone carefully into this
question I find that the working man in the east is better off
than his British friend, whilst the working man in the west is
less well off, despite the fact that he receives excellent wages
in cash.

The great fact to be reckoned with is that the American
manufacturer has to pay big wages in producing an article
which is going to compete with a similar article produced in
countries where wages are comparatively low. In the home
market he has largely resisted foreign competition by means
of excessive tariffs. His woolen goods are rather beneath
contempt, not because he cannot produce a much better
article — he did that when the tariff was lower and English
cloth was a thing to be considered — but because he has no
competition from the outside. A curious point is that, in

Vol, 3-19

290 JOHN FOSTER FRASER

those industries which are most fully protected by tariff,
Americans do not at all show that adaptiveness remarkable
in all other industries where there is fierce competition — the
iron trade and shoe industry are random instances — chiefly
because there are no circumstances of competition to which
they are called upon to adapt themselves.

The line of progress in adaptability has been in those
trades that have had to grapple with European competition.
On one side of the Atlantic there have been low wages, on
the other side high wages. But manufacturers who have
paid and are paying high wages are frequently wresting trade
from those who pay low by producing a similar article at a
lesser price. Labor saving machinery has given them the
power.

Cause and effect are at work in all things, and labor
saving machinery has been brought into existence in America,
not because the American happens to have the inventive
faculty more largely developed than has the European — in-
deed, all who have considered this matter scientifically know
that the American mind is not creative; it is adaptive, appre-
ciative of the value of invention — but because that stumbling
block of high wages, which stood in the way of competition
with cheaply produced European goods met in the open
market, had to be overcome.

If you are in New York, take a walk along Broadway —
or, indeed, any of the main streets — and glance at the names
of the shopkeepers. It is rather the exception to see a name
with a British flavor. Go, however, to the patent office at
Washington, and run your eye along the lists of inventors,
and you are amazed at the vast majority of names being
British. Not by any means are they all of Americans who
come from a British stock; but a great many of them are of
men with a British domicile who have patented their inven-
tions in the United States because the American patent office
is infinitely superior to our own, and because the American
manufacturer is keen after anything and everything that is
novel and an improvement. In England, when a man thinks
he has invented something, and has patented it, and has
possibly leased it to a manufacturing firm, there is the likeli-

CAUSES OF MANUFACTURERS' SUCCESS 291

hood of an action at law for infringement put forward by-
some other inventor or firm. Having it decided in the law
courts, whether a thing is a patent or not, is expensive. I
can well understand British manufacturers hesitating to
make a mighty plunge with a new idea, because of the dread
of having to defend an action for infringement. There is,
however, no such trouble in America. The administration
of the law in the United States is almost as dilatory as in
Turkey — and there are other points of resemblance — but as
regards the law on patents it is effective and decisive. A
man sends his invention to the patent office at Washington.
It will take anything from six months to two years to get it
through. It is the staff of the patent office which finds out
whether there is an infringement or not. If it decides it is
a new idea — that, indeed, it is a patent — a document to that
effect is issued, and then no small firm which takes up the idea
need be in any dread of having to fight a big firm in the law
courts.

Neither the British employer nor the British workman
is so alive as the American to the practicability of an inven-
tion. The British manufacturer is sometimes suspicious of
a new invention brought to him. In considering it he focuses
his criticism on possible drawbacks; he says he will think
about it; that perhaps he will give it a trial; that he will see
how some other firm prospers before he spends any money on
it! When there is a mishap he rather prides himself on his
sapience, and reminds you of his original opinion with "I told
you so." The American manufacturer is hardly ever an ad-
verse critic to a new idea simply because it is a new idea.
He doesn't want to see how other firms get on with it before
he ventures; if there is anything in it, he wants to get right
away ahead before anybody else has a chance. He sees
quickly enough where faults are. He doesn't, however, throw
a thing on one side because of the faults. He sets about try-
ing to put them right. It is the idea he is after, and, as a
practical man, he will work out the ideas. Let me give a
remarkable instance. Nikola Tesla is regarded by many
electricians as a visionary, a flamboyant expounder of the
impracticable. They do not see beyond his theatrical posing.

292 JOHN FOSTER FRASER

But Mr. George Westinghouse, head of the Westinghouse
Electrical works at east Pittsburg, has seen beyond. Through
much vapor he has discerned germs of genius. As placed
before him by Nikola Tesla many ideas were unworkable.
But there were the ideas, the suggestion of possibilities, and
Mr. Westinghouse himself is a practical man and he has
practical engineers in his service. Much has been discarded;
yet some of the most valuable inventions belonging to the
Westinghouse company were, I am informed, the outcome
originally of Nikola Tesla's brain.

Many inventions in active use in America to-day are the
creations of Englishmen which no manufacturer in England
thought well to take up. In the first state they were prob-
ably not worth taking up. But it was the American who
grasped the thing, who altered, adapted, and improved the
invention, and made it valuable. It is to be noted how many
are the inventions respecting railway engineering, brought out
by Englishmen, not used in Great Britain, but in general
adoption in America.

The most striking recent instance of an English inven-
tion not being appreciated in England, but being adapted
in America, is the Northrop loom. Here is an ingenious loom
invented by a Yorkshireman, which automatically, when a
warp breaks, stops the machine instantly, and does not go
on weaving defective cloth. It requires an English girl of
experience to look after three or four ordinary looms, being
ready to run to a machine the moment her quick eye discerns
a break, to stop it and repair the warp ; and she is not always
successful in avoiding a stretch with a missing thread be-
cause, while she is repairing one machine, another may go
wrong. With the Northrop loom, however, a little girl, fresh
from school, with not more than a fortnight's experience, can
look after twenty looms.

When I went through the cotton mills at Fall River last
autumn I saw thousands of the Northrop looms at work.
Until quite recently there was not, I believe, a single Northrop
loom in all Lancashire — the center of the cotton industry of
the world — and even now, I understand, only one firm has
adopted them to any extent. The criticism of Lancashire

CAUSES OF MANUFACTURERS' SUCCESS 293

manufacturers against the loom was that the English warp
was so fine it would not bear the strain of the automatic
mechanism, and the reason its use has been possible in the
States is that the warp is rough and stronger. But it should
not be forgotten that when the loom was first taken to America
it was by no means perfect, even for rough and strong warp.
There was no doubt, however, about the invention being of
use the moment it was adapted. English manufacturers hung
back from any attempt at adaptation, and only now, when
improvements have been effected by the Americans, are our
own manufacturers waking to the possibility — probability,
maybe, very likely — that the Northrop loom can be made
serviceable in the Lancashire mills.

Now, whatever trade union leaders say to the contrary,
there is in the mind of the British workman an objection to
labor saving machinery. The motive of resistance, from his
limited point of view, is not altogether unworthy. He has
a wife and children to keep, and increased machinery may
throw him out of work. Certainly it will reduce the number
of workmen, and if he himself does not suffer, then his fellows
are likely to be dismissed. It is the same feeling which causes
him to uca' canny," to work much slower than he can work.
If he does twice as much work as he has been doing, that im-
plies, to his mind, he is keeping some other chap out of a job.
"Live and let live" is his easy philosophy. Trade unions
have laws which absolutely restrict the output, most perni-
cious in effect on trade and bad for the good worker, because
they make him set his pace to that of the slow man, and keep
his earnings down though they help up the wages of the
incompetent. Already in America there are signs of the trade
unions urging restriction of output. But there is no ani-
mosity to labor saving machinery.

The British workman is the most intelligent of his class
in the world. Give him time, and he will turn out a better
article than anybody else. Send him to America, and, when
he has got rid of his sluggishness, the American worker be-
comes but a boastful second rater alongside him. But the
American is alert, and does not feel that new machinery is
going to displace him. It is exceptional indeed for a British

294 J0HN FOSTER FRASER

employer to get an improvement on machinery suggested by
a workman. In the first place, the British workman has not
that zest for his work which the American has; in the second
place, it is none of his business to invent; in the third, even
if he thought of an improvement, he has a shyness about
approaching the employer; fourthly, the chances are he
might be snubbed for his trouble.

Nothing like this exists in America. There is a much
closer relationship between employer and workman. The
one calls the other "boss," but it is only a term, and is no
admission the employer is his master. He gives good work
for good dollars. On how a tiling should be done he will
"cheek" back his employer. There is no "Yes, sir," and do-
ing the thing the wrong way simply because the employer
proposed that way. The workman knows if he strikes an
improvement it is going to be a good thing for him personally.
If he thinks of some alteration whereby he can turn out twice
as much, he knows the employer won't expect him to turn
out twice as much for the same pay. They are partners,
and the workman will get at least half the advantage. So
there is an incentive to all the mechanics of America to adapt.
They make it their business to improve, and it is by this
wholesale adoption of labor saving machinery that the diffi-
culty of high wages has been largely overcome.

But there is another result. With almost everything
being done by machinery there is no need for skilled artisan-
ship. The brains are in the machine, and all the manufac-
turer requires is somebody to look after the machine. That
is often a simple matter. So what a British workman learns
to do after seven years' apprenticeship is, in America, done
by a machine looked after by a lad who has had only a fort-
night's tuition.

That is why as the Englishman walks through American
workshops he is startled to see so few middle aged men. What
is done by a man of forty in England is done by a lad of twenty
in America, and where we would employ lads the Americans
employ girls. Go into the Westinghouse works at east Pitts-
burg, and you will see a thousand girls engaged in making
delicate electrical appliances. Go into any of the big shoe

CAUSES OF MANUFACTURERS' SUCCESS 295

manufactories at Brockton or Lynn, near Boston, and again
you will see thousands of girls. The increase in the employ-
ment of women and children is altogether out of proportion
to the increase in the employment of men in the states.

Here, then, you have the American manufacturer equip-
ping himself for commercial competition by getting the brains
into the machines and getting cheap labor to work them —
cheap labor, that is, in comparison with what he would have
to pay were his workmen skilled artisans, as they are in a
British workshop. But he goes further. He specializes. He
does not try to make twenty things in engineering. He
makes one thing, be it bridges or locomotives, or reapers, or
machine tools. He focuses on one thing, makes his splash
in advertising that one thing, gets a reputation for that one
thing. But in it there may be a hundred parts. He special-
izes his work people in making those separate parts. They
have one little thing to do, and they do that, and nothing
else, year in and year out. It may be the punching of a hole.
I have seen an American workman do a monotonous thing
a thousand times a day — a thing which you cannot get out of
your mind as positively deadening to the intellect, and which
you would think would drive a man of intelligence to mad-
ness in a fortnight. It is all done with a speed that is amaz-
ing, and which I fancy no English workman would continue
for a week. But the American finds fascination in his adroit-
ness, in the very clatter of multitudinous repetition. He is un-
equalled as a worker; but put him alongside an English artisan
and you find that in excellence he is far surpassed. Yet over
all that specialization is the marvellous administration of the
employer, so that parts meet parts and, like the action of a
beautiful piece of clockwork, the article is brought to com-
pletion.

Here arises a very legitimate criticism, often heard in
Great Britain, that in wear and tear the American article
does not last as long as the British. That is correct. But
the American tells you, with a smile, that he doesn't make
things to last an eternity. He makes them to last only suffi-
ciently long. Take the manufacture of boots, about which
we have lately heard a great deal . The American manufac-

2g6 JOHN FOSTER FRASER

turer has invaded the British market, and while the sale of
British boots has decreased in our colonies, that of American
boots has increased. This is not because the American boot
wears better than the British. It does not. A finely made
British boot is the best in the world. But in the average
boot, the boot which the average person wears, which he buys
ready made in a shop at from 12s. 6d. to 25s. a pair, the
American article is more popular. It looks neater; there are
so many different widths and half sizes that it fits at the start;
you have not to be satisfied with it being "all right in a few
days, sir." The British boot manufacturers tried to laugh
American competition out of existence. Then they took to
American methods, and to-day all the largest British boot
manufactories are fitted with American machinery. Indeed,
all the most ingenious devices in the manufacture of a shoe
came from the other side of the Atlantic. It is not enough
to tell the public the British shoe wears longer than the Ameri-
can. We don't buy our boots and shoes to wear to the last
eighth of an inch. We buy them to fit us and serve us for
a time, wanting them to look neat and not be heavy and
clumsy. There the American showed the way.

Take railway locomotives. Several of our big lines have
tried American built engines. Generally speaking, they have
been pronounced a failure; they consume more coal than
English engines, and they spend too much of their time in
the repairing sheds. But there are several things to be borne
in mind. The American builds a locomotive to last ten years.
The British maker takes pride in pointing out engines in this
country that have run forty years. The American engine is
built to drag immense loads. It has an enormous haulage
power; it consequently consumes much coal. In England
or the States it uses the same amount of fuel. But whilst in
the States it has a giant's work to do in haulage, in England
it has only an infant's work by comparison. "Put the same
weight behind our engine in England," says the American
maker, "as we do in America, and then you will find while
it consumes more coal it earns more money by the increased
haulage capacity."

CAUSES OF MANUFACTURERS' SUCCESS 297

It is by the adoption of enormous cars and having loco-
motives of great haulage power that the cost of conveying
freight in America, which formerly was the same as in Eng-
land, is now less than one third per average ton. One sees
American locomotives all over the world. So one does British,
but not in the same proportion. British makers have recently
been getting big orders from abroad. This is not because the
American engine is being discarded. It is because America
is so prosperous — there is such a boom in the home trade that
American makers have no opening to fulfill new contracts for
two or three years yet. The point, however, is that the
American railroad companies have for a number of years been
solving the question of freight charges by the adoption of
engines of huge haulage power and cars of thirty ton capacity.
Only recently have the British railways made a move in the
same direction.

The American manufacturer has vim and something of
the gambler in him. He is thirsty for new ideas ; he is daring.
Where the Englishman would hesitate and think and calcu-
late, the American will plunge, neck or nothing, at a venture.
He can see ahead further than the Englishman. In British
works new machinery is fitted up when the old has begun to
wear out or when nearly everybody else has it and it is neces-
sary to have it also if trade is to be held. Those are not con-
siderations which weigh with the American manufacturer.
His constant criticism against his cousin on this side of the
Atlantic is that the Britisher doesn't know the value of a
scrap heap. An American will spend, say, $150,000 in putting
in the latest machinery. Six months later some fresh appli-
ance which will do more work and quicker is invented. He
does not wait till the machinery he has put in is worn out be-
fore adopting the new invention. The machinery fitted six
months back may hardly have got into proper working order.
But he rips the lot out, "scrapheaps" it, and has the very
latest machinery. He sees ahead. He sees how he has prac-
tically thrown away $150,000; but he also sees the gaining of
$500,000.

We, in this country, set much store by experience. The
American sets more store by youthful enterprise. We think

298 JOHN FOSTER FRASER

a man who has been in a business for thirty years is the one
who ought to know most about it. The American thinks that
a man who has been at it so long is certain to have fossilized
ideas, and therefore not likely to keep abreast of the needs of
the times. We think a youth thrown into responsibility will,
likely as not, make a mess of things. The American thinks
that responsibility brings ballast and with all the fire of his
young manhood a youth will strive night and day to prove
the confidence placed in him is well placed. And here the
American is right. Time and time again, as I have gone
through the workshops of the United States, I have almost
been staggered at the mere boys who are managers and heads
of departments; not the sons of proprietors, but young fellows
who have started at the bottom, proved their grit, shown their
energy, and been pushed on to high positions. It is not at all
unusual to find a man of twenty four years having the control
of several thousand men. And the fact that a man is young
and unmarried is no reason, in the employer's mind, why he
should receive comparatively small salary. The question of
how cheap you can get such men is not considered. No price
is too big to give a lad who has brains and adaptiveness. It is
recognized that by paying him well, appreciating him, you
fire his enthusiasm.

The tendency within the next decade will be to pay lower
wages in America for mere physical labor. The trend is to pay
more, never mind what, for brains. Every young American
knows this. That is why there is a positive rage for technical
instruction and why the technical schools are ever crowded.
We have nothing like the same eagerness in Great Britain.
After being in America, seeing young mechanics almost starve
themselves to pay for a university course — filling in their vaca-
tions by acting as waiters in hotels, or tram conductors or
bath chair men — it brings a chill to the heart of a Briton to
come home and see hardly any such desire among the British
youth, and to see our excellent technical schools appreciated
only in a lukewarm way.

I readily recognize there is a stress and a strain in Ameri-
can industrial life which suggest the inquiry, whether, after
all, the prize is worth the struggle? I have often shuddered

CAUSES OF MANUFACTURERS' SUCCESS 299

at the thought of what is likely to be the effect on the race
of making millions of workers little other than machines.
Now and then I have been unable to restrain an open smile at
the tremendous conceit of the American manufacturer and his
colossal ignorance about things European. But it is not by
pooh-poohing his braggadocio, nor by moralizing about the
grinding conditions of labor, nor by complacently saying
British ways are good enough for us, that British manufac-
turers will stem the tide of American industrial success, which
is already more than threatening fields of commerce we had
considered exclusively our own. It is not sufficient to point
to the fact that British trade is increasing, and so dismiss
foreign competition as the nightmare of pessimists. Increase
of trade can only be considered comparatively. And while
we crawl, America bounds.

THE RELATION OF EDUCATION TO INDUSTRIAL
AND COMMERCIAL DEVELOPMENT.

BY HOWARD J. ROGERS.

[Howard J. Rogers, educator; born in Stephentown, N. Y., Nov. 16, 1861; educated
in the public schools and at Williams college; superintendent of the New York
state educational exhibit at the World's Columbian exposition, 1892-4; director of
education and social economy for the United States commission at the Paris
exposition of 1900; chief of departments of education and social economy at the
St. Louis exposition, 1901-04; director of congresses at that exposition.]

The rivalry of nations has become so intense that the
preliminary training of their citizens is a matter of unusual
moment.

In older times this rivalry generally culminated in the
arbitrament of war, and as God was usually on the side of the
heavier battalions, and as the material of the battalions was
not of over vital import, provided it was good food for powder,
the necessity for the mental development of any class but the
ruling class was never keenly felt. But the rivalry of the
present day is not so much one of territorial aggrandizement
as of the development of trade and commerce, and war is con-
sequently a more remote resort. Were this spirit still one of
national aggression and territorial acquirement we should
now be turning out the common soldier and the officer; but
when the dominant activity of the world is turned to the
thousandfold phases of commerce and of industry, each re-
quiring special training, and each dependent on the flexibility
of mind and adaptability to conditions of its followers, the
drill and training of our rank and file becomes a vital propo-
sition.

Granting, then, the industrial predominance of the present
age, the timeliness of the subject of this paper becomes self-
evident. In discussing it we need to consider two main
propositions: (1) The tendency of our national development;
(2) the kind of education of value to it.

The initial years of the new century, are the annus mirabils
of material progress. They have broken the record of record

300

EDUCATION-COMMERCIAL DEVELOPMENT 301

breaking years and set the pace for the present century in a
manner to astound our calculations and confuse our stand-
ards. The units of value to which we have become accus-
tomed are inadequate, and it confuses our mental perspective
to see the billion-dollar combinations substituted for the
million, and continents take the place of countries as fields of
activity.

Just a brief resume of some of the most striking facts in the
record of the United States will indicate not only the ten-
dency of our development but fix more strongly in our minds
its propulsive power.

Bradstreet's, in the annual review given out in January,
states that the bank clearings for one year were 118 billion
dollars, a gain of 38 per cent over the year previous.

The gross railroad earnings for the year showed an in-
crease of 12 per cent, and the net returns 16 per cent over the
best preceding }Tear. Pig iron production was nearly one
seventh larger than the heaviest ever before recorded. Iron
ore shipments were never before equaled, and anthracite coal
production was 10 per cent larger than the year before, and 5
per cent greater than the record. The bituminous output
was equally heavy. Shoe and leather production and the
manufacture of woolen clothing show almost as large gains
and a steady advance. It is a matter of current information
that the freight transportation facilities of the country have
been utterly swamped by the demands upon them, and that
the capacity of our shipping interests has been strained to the
breaking point.

From other sources we learn that the mining industries
of the country contributed $1,650,000,000 to the wealth of the
country and of this amount 83 millions was of mined gold, —
an increase of 5 million dollars over any previous year. The
export movement in wheat during the first four months of the
crop year was unparalleled, and has reached the enormous rate
of 270 million bushels per year.

Not less wonderful have been the triumphs won in the
electrical field and the possibilities which they promise for the
development of industry. The storage battery perfected by
Edison, weighing but 46 pounds for each horsepower; the

302 HOWARD J. ROGERS

Delaney application of telegraphy, whereby a letter can be
transmitted from New York to Chicago with small expense
and with little loss of time, and the systems of wireless teleg-
raphy with all that they mean to ocean traffic, are the main
examples in point. Already the Marconi patents have passed
into the control of the Lloyds, the chief marine insurers, and
vitally interested in reducing the risks of maritime insurance,
as well as in developing the safety of ocean transit.

Such are some of the facts which indicate the tendency of
our national development, the nature of the great interests in-
volved, and the spirit and courage of our great republic. What
have been the underlying principles and agencies whose de-
velopment has caused this wonderful fruition, — for nations
do not develop in a day, — and to what must we look for
the preservation of this same spirit and intelligence in the
future?

Nothing has more tended to open our own eyes to our
strength and greatness than the concern and consternation of
foreign nations which have begun to realize it since the Span-
ish war. The " American peril" is a real one to them, since
successful competition with it means a readjustment of their
social and political as well as commercial relations. We can
well understand the cry of the European editor who, after a
resume of our power, growth, and energy, threw up his hands
in the admiration of despair and said : " A continent has come
of age." And I do not believe there is one of us, whether he is
expansionist or anti-expansionist, no matter where he comes
from or what he may be, that does not take pride in that forced
tribute, or look forward to the time when to say in any capital
of the world, "I am an American," will demand the same
respect as the shibboleth of ancient Rome — civis romanus sum.

The world is entering upon a new age. We can scarcely
call it a scientific age, as that name has been appropriated, and
justly, too, by the latter half of the nineteenth century, but it
will be an age in which the development of the sciences will
predominate. Hitherto we have restricted the word "age"
to a phase of development in a single country : The golden age
of Rome, the Elizabethan age of England, the Renaissance of
western Europe; but this is no longer possible. The world

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We may have, therefore, in a locality a fine series of
schools, well equipped, well manned, a matter of pride to the
people; we may multiply this community by as many towns
and cities as there are in the country, but this does not make
a national system ; nor will a study, on the part of a foreigner,
of this well regulated and well oiled machinery enable him to
obtain a comprehensive grasp of our educational life. Educa-
tion is a broad term, and means not only the mechanism of
instruction, but the national life outside the schools, that vital
intelligence of a people which maintains its institutions and
establishes its ideals.

To return to the main proposition: The story of free
public education in this country is founded on an altogether
different basis from that of continental Europe. We educate
all children alike, from their earliest years until the last year
or two of the high school course. No discrimination is made
or option given except those based upon the mental capacity
of the pupil. As some one has tersely put it, " every child in
the United States is educated in the possibility of one day
becoming president of the country."

In continental Europe, on the other hand, the average
child is destined from infancy to follow the occupation of his
father, and it is only accident that throws him from this rut.
His training is highly specialized from his earliest years with
this object in view, and while he becomes manually the most
expert workman in the world in his own particular craft, he
has lost sight of the relations of his trade to every other trade,
and has never gained that power of initiative essential to the
highest success of an individual or of a state.

We believe the superiority of American workmen and
American methods is due much more to the liberal training of
our public school children until they are fourteen or fifteen
years of age than to the extensive development of any form
of special training. First develop the mind on broad and
liberal lines so that, as a citizen, the pupil can grasp all sides of
a question, and then build on this solid substructure the trade,
profession, or specialty which he is to follow. He may not
become a wage earner so quickly as under the specialization

I

304

HOWARD J. ROGERS

the same grim courage and the same implicit obedience to
orders, the former has the initiative and the genius which act
where orders fail to reach, and where conditions unforeseen
arise. It makes no matter to what quarter of the globe he is
sent, or with what mission he is intrusted — he can adapt the
training which his country has given him to any variation of *
conditions, and make success where others fail.

The question then resolves itself into this: What is the
difference in the training given by the states that it would pro-
duce a different average of efficiency in the states? And here,
too, come in so many elements for consideration that we must
reach out a little and get a grip upon the subject.

We speak trippingly at times of comparing educational
systems. But do we always realize what we mean? The
comparison of educational methods of countries goes deeper
than curriculums, methods, or administrative machinery. It
comprises the history of a people, their temperament, their
traditions, and the spirit of their institutions. It is the out-
come of all these. Education is the embodiment of the genius,
the aspirations, and the compromises of a people. No ade-
quate idea of Greek art and Greek literature could be obtained
unless we knew the characteristics of the Greek nation, its
intense love of freedom, and its passion for physical beauty
and development. We must look to historical beginnings.
America has been particularly fortunate in this respect. We
had no legacy of ignorance and stolidity bequeathed to us
from the middle ages. There are some advantages in being a
young nation. You can cut your cloth regardless of the pat-
tern of your ancestors. We have never been burdened with
blind allegiance to precedent, or servility to a creed. What-
ever nation of Europe you may choose for an example ; whether
we take France or Prussia, which for nearly a century have
been engaged upon the problem of the education of the
masses; or England, which has been engaged upon it a lesser
time; or Russia, which is just beginning — they have had first
to penetrate down through the ignorance, superstition, and
even the antipathy to culture generated by centuries of mental
apathy. They have had first to awaken a responsive spirit —
a problem we have escaped

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EDUCATION-COMMERCIAL DEVELOPMENT 305

We may have, therefore, in a locality a fine series of
schools, well equipped, well manned, a matter of pride to the
people; we may multiply this community by as many towns
and cities as there are in the country, but this does not make
a national system; nor will a study, on the part of a foreigner,
of this well regulated and well oiled machinery enable him to
obtain a comprehensive grasp of our educational life. Educa-
tion is a broad term, and means not only the mechanism of
instruction, but the national life outside the schools, that vital
intelligence of a people which maintains its institutions and
establishes its ideals.

To return to the main proposition: The story of free
public education in this country is founded on an altogether
different basis from that of continental Europe. We educate
all children alike, from their earliest years until the last year
or two of the high school course. No discrimination is made
or option given except those based upon the mental capacity
of the pupil. As some one has tersely put it, " every child in
the United States is educated in the possibility of one day
becoming president of the country."

In continental Europe, on the other hand, the average
child is destined from infancy to follow the occupation of his
father, and it is only accident that throws him from this rut.
His training is highly specialized from his earliest years with
this object in view, and while he becomes manually the most
expert workman in the world in his own particular craft, he
has lost sight of the relations of his trade to every other trade,
and has never gained that power of initiative essential to the
highest success of an individual or of a state.

We believe the superiority of American workmen and
American methods is due much more to the liberal training of
our public school children until they are fourteen or fifteen
years of age than to the extensive development of any form
of special training. First develop the mind on broad and
liberal lines so that, as a citizen, the pupil can grasp all sides of
a question, and then build on this solid substructure the trade,
profession, or specialty which he is to follow. He may not
become a wage earner so quickly as under the specialization

Vol. 3—20

3o6 HOWARD J. ROGERS

process, but he will be a better and a safer one when he does
begin.

In the educational exhibits at the Paris exposition of 1900
the feature which overshadowed all others in prominence, and
which, by its dominance in every exhibit, characterized itself
as the foremost educational thought in every foreign country,
was industrial education. Whether it came from England,
where it appeared in tentative, individual, and irregular forms ;
or France, where it has reached, under government statutes
and municipal control, its highest development; or Hungary
and Belgium, where the French dictum is law and the French
influence paramount ; or Japan, where it is directed rigidly to-
ward those industries which make the wealth and trade of the
nation, the object is to train the children of the masses for the
trades and crafts which they will pursue through life, and to
minimize the time within which they can become wage
earners and producers of wealth.

Let us take the example of France, which with proverbial
keenness descried many years ago the necessity of improved
industrial methods to meet the demands of the times. In a
circular issued by the minister of commerce and industries in
1893 the situation was summed up as follows:

"The keenness of international competition has revolu-
tionized the conditions of trade. The wholesale use of ma-
chinery and minute subdivision of labor have practically ex-
tinguished apprenticeship in the workshops. Yet, in view
of the constant changes to which machinery is subject, it is
evident that there never was a time when it was so requisite
that workmen should possess scientific knowledge, and should
be thoroughly versed in all the requirements of the workshop.
It is the special aim of the ecole pratique to fill the void which
now exists both in commerce and industry."

It was at this time that the practice schools of commerce
and industries (ecoles pratiques de commerce et d'industrie)
were established throughout France in order to make " special
provision for the requirements of industry and commerce."
They aim to furnish clerks and workmen ready to take their
places in the counting room or workshops ; and much of the
work turned out by these pupils of fifteen to eighteen years

EDUCATION-COMMERCIAL DEVELOPMENT 307

of age compares favorably with the best product of skilled
labor. In addition to these schools there are also in France
the professional schools (ecoles primaries superieures pro-
fessionelles) under the department of primary instruction,
which aim to give a certain amount of technical instruction as
a preparation for apprenticeship.

If, then, our industrial and social development as a nation
demands highly specialized technical training, we have the ex-
perience of an alert and fearless nation as a guide. We have
for observation the manual training through all the grades of
the elementary school, and the technical training in the supe-
rior and practical schools. Their mistakes can be avoided,
their successes adopted. But do our needs demand it? That
is the question. The preliminary report of a committee of the
Society for the Promotion of Engineering Education, made in
New York in July, 1900, on " American industrial education:
what shall it be?" is presumably the strongest expression to be
found for the necessity of manual and technical training in our
schools, inasmuch as the sympathies and work of the society
are entirely in that direction. Yet nowhere do we find a state-
ment that it should displace any portion of the liberal and
cultural education which is offered to the pupils of our schools,
but, on the contrary, it is distinctly stated that it must be
entirely supplemental to the mind informing and mind de-
veloping education. Lest there should be any misunder-
standing, there is set forth in italics the sound doctrine that
"in America all schooling should lead primarily to the eleva-
tion and development of the individual, and only secondarily
to a greater material prosperity."

The committee further frankly states its inability, to agree
on the extent to which industrial training should be intro-
duced in the various grades of schools, but confines itself
rather to a discussion of the schools wherein all are agreed it
should find some place. If, then, a committee of specialists
cannot agree on this point, there is little likelihood that the
great body of schoolmen or the general public will do so.
There is probably little desirability that they should do so.
Such a consensus of opinion would argue an industrial condi-
tion in this country which we do not want to contemplate.

3io HOWARD J. ROGERS

development of our nation. They are seeking the cause of
our industrial prominence, and they will find it, not in superior
form of specialized training — they have a monopoly of that —
but rather in the liberal training pursued in accordance with
the theory and genius of our institutions.

One more argument should be touched in brief in dis-
cussing our educational system, viz., its influence in promoting
the stability of our institutions. The education of a democ-
racy determines its duration. We are engaged upon the
greatest experiment in popular government the world has
ever seen. Our remarkable progress should not blind us to
the inherent danger of a republic. We have enjoyed a national
existence for 125 years; Athens, when she fell before the
usurpation of the tyrants, had been a republic 150 years;
Rome, when she surrendered her liberties to the keeping of a
Caesar, had been a republic 450 years. I do not wish to pose
as a crier of calamities, but there is no use in shutting our
eyes to apparent conditions. Mankind is not yet very far
on the road to the millennium, nor is it likely to be so while
human nature is of such unregenerate material as at present.
The advancing tide of socialism, the destructive doctrines of
anarchy, the theories of Utopians, and false principles of gov-
ernment, can only be met by making our general public
familiar with true economic principles. To bring economic
science within the reach of the masses is the vital problem for
a democracy. There is only one machinery that can effec-
tually do this — continuous and extensive drill on the rational
principles of political and social economics, during the forma-
tive period of the minds of our future citizens, is the only
inoculant to protect our body politic. It is an old saying
that every artisan philosophizes in his own way; but it is a
responsibility that the state may well assume to teach him
the right way. The strength and promise of our great coun-
try lie in the fact that this may be insisted on without lese
majeste to a ruler, or enmity to a creed.

BUSINESS PRINCIPLES IN THE CONDUCT OF
INDUSTRIES.

BY ROBERT H. THURSTON

[Robert Henry Thurston, director Sibley college and Cornell university since 1885,
and university professor of mechanical engineering; born, Providence, R. I., October
25, 1839; graduated Brown university, 1859; worked in his father's shops until 1861 ;
assistant engineer and engineer in charge of vessels, United States navy, 1861-72;
acting assistant professor, natural philosophy, United States Naval academy, Anna-
polis, 1865-71 ; professor mechanical engineering Stevens Institute of Technology,
1871-85; president American Society Mechanical Engineers, 1880-3; inventor of
engine governors, testing machines, etc.; United States commissioner to Vienna
exposition, 1873; to Paris, 1889; Author: Friction and Lubrication, Materials of
Engineering, 3 volumes; Manual of the Steam Engine, 2 volumes; Materials of Con-
struction, Stationary Steam Engines, Friction and Lost Work in Machinery and Mill
Work, Manual of the Steam Boiler, Handbook of Engine and Boiler Trials. The last
thing from his pen before his death was this paper prepared for Cassier's Magazine.]

The business principles involved in the conduct of the
industries of a country include two distinct codes ; one of these
should control the whole system of the nation; the other
should guide the conduct of its details as affecting the in-
dividuals engaged in its various industries. These two codes
are not entirely independent, and are not at all conflicting in
their requirements. Both are simple and self evident in their
formulas, and both are founded upon obvious and unquestion-
able principles. Both have their economic, their moral and
their legal aspects, and, combined, they constitute the proper
and only proper system of principles which should control all
industrial operations. The national code should consist of
the following fundamental laws:

1. The nation should make itself industrially, as well as
politically, independent.

2. The national system of industries should be so ad-
justed and administered as to insure the production within
its own borders, just as completely as may be practicable, the
natural resources permitting, of all the essential industrial
products of a civilized community.

3. Every natural resource should be developed as com-
pletely as possible and as efficiently as practicable.

311

312 ROBERT H. THURSTON

4. The system of national industries should be made capa-
ble of employing every citizen in the field of work in which
his talents make him most useful, and as continuously as is
possible at his best rate of economical production. The popu-
lation, as a whole, should be thus made in maximum degree
contributive to the welfare of the world. The industrial sys-
tem, considered as a machine, should be made thus in maxi-
mum degree economically efficient.

5. The political and the legal and the moral rights of
every citizen should be maintained, and the best interests of
the nation thus made to conspire with the highest interests
and the individual rights of its citizens.

6. The fundamental principle to be at all times recog-
nized and insured is that of maintenance of the law and pres-
ervation of the peace under the law, at all times and in all
places and at all costs, even of life, if need be, by the con-
stituted authorities.

The code for the citizen should include the following :

1. The right of every citizen to freedom, entire independ-
ence in right doing, and perfect liberty in the pursuit of
happiness, financial competence, and a higher knowledge; to
found a home and to educate children and to provide them
with opportunity for similar success in life, should not only
not be denied or infringed, but should be made a first consid-
eration and emphatically assured.

2. Every individual should be assured of entire liberty
to acquire education, property and the respect of his fellows,
and of safety and permanence of all that he may gain by his
own wisdom, experience, skill, industry, and frugality.

3. The individual, of whatever race, creed, or condition,
and of whichever sex, should be made absolutely free to take
up any vocation, to display his talents in any legitimate in-
dustry, and to work wherever, however, for whomsoever, and
on whatever terms he may find to his liking. His right to
make a bargain should be made absolutely safe and inviolate.

4. The right to individual freedom and independence
should be recognized as second only to that to life itself, and
the right to defend that right to the death should be a funda-
mental principle.

THE CONDUCT OF INDUSTRIES 313

The moral right of the citizen and his duty are comple-
mentary. He should be assured of the one absolutely, and
the other should be uncompromisingly exacted of him. ^ His
moral rights include perfect liberty of conscience and of judg-
ment and entire liberty of action within the law. He should
be guaranteed the right to form his own creed respecting social
matters, as in matters of theology and of scientific deduction.
He should be permitted to work by himself or with others of
like views; he should be given freedom to act for himself as
an individual or to join with others in co-operation in any
good works. He should be compelled to permit every other
citizen the enjoyment of the same rights.

He has the moral right to protection of life and liberty
and to achievement and possession of his own. He has the
right to train his children in what seem to him the wisest
courses, and to educate them as far and as well as his circum-
stances permit, to obtain for them opportunity to make them-
selves in maximum degree useful to themselves, the family,
and the world. He has a moral right to seek his own success
in any legitimate path and in any form which may seem to
him desirable — provided he does not infringe the individual
or the collective rights of his neighbors. In any case of
antagonizing interests he has a right, moral, and presumably
legal, to demand that the rights and wrongs of the case be
precisely defined, and that he be given his individual rights
irrespective of the character, the position, the social or finan-
cial standing of the other man. But these rights must be
defined by properly constituted authority and not by the
interested participant in any dispute.

The legal rights of the citizen are simply the formulated
expression of his moral rights and of his relations to the body
politic. The legal code is the summary of the conclusions
which a study of good morals and of industrial ethics in the
light of good sense and of good morals and good manners com-
pels. Laws contradictory to these principles are bad laws
and should be exorcised from the statute books. The primary
legal principle affecting the individual apart from the pro-
visions of the criminal law is that which gives every man the
right to make his own agreements and to conclude his own

3i4 ROBERT H. THURSTON

bargains without impediment or interference. A bargain is
an agreement entered into freely by two individuals, or two
parties, each finding it profitable and satisfactory to himself.
No man can be compelled to enter into an agreement in busi-
ness matters or to make a bargain the result of which is not,
in his view, the best that he can make and a profitable one to
himself. Compulsory bargaining, like compulsory arbitra-
tion, is a contradiction of terms.

While it is physically possible for the state to formulate
a code of law which may contain or involve a wrong principle
or a bad practice, it is always to be assumed that reference to
the constitution of the state or nation will lead the supreme
legal authority to restore the code to correct form. The funda-
mental principle on which must rest all others, legally as well
as socially and morally, is expressed in the maxim — "The
state must maintain the law and must preserve the peace."
When the law is maintained and the peace is preserved by
the authorities all disputes must settle themselves without
hostile meetings, and they always will be settled without
endangering the individual, the state or the nation. This one
maxim forces all ill disposed or unjust citizens to submit to
ultimate justice.

Strikes and boycotts are, usually, simply endeavors, by
forcible means, to compel another to make a bargain satis-
factory only to the attacking party. They involve the en-
deavor to secure a bargain by compulsion which could not
be secured with mutual advantage and by common agree-
ment as the best for both parties that could be arranged at
the time and under the circumstances. They preclude the
separation of the two parties to the negotiation and freedom
of both to open other negotiations where a proper and rightful
bargain may be made. In either case one party determines
that it should secure a better compensation for what it has
to offer and then seeks to compel the other side to its own
estimate of the value of its offering. When such efforts are
made to secure compulsory agreement with the claims of the
attacking party success can rarely be secured except by
forcibly destroying all competition, and strikes are almost
invariably accompanied by illegal violence and often by

THE CONDUCT OF INDUSTRIES 315

public disorder, not infrequently by destruction of life and
property. The whole tendency is toward the production of
lawlessness, lack of respect for legal authority, and general
demoralization. Where such violence and compulsory evasion
of competition and a fairly complete monopoly of power are
not observed the outcome is always simply that which natural
industrial laws would bring about. If labor be plentiful, and
its value, therefore, reduced, a strike will fail; when the class
of labor needed is scarce, and its value, therefore, is high, a
strike will generally succeed. But these results are simply
the ordinary and normal outcome of the ultimately controll-
ing principle in any case. Prices rise or fall as the supply is
less or greater than the momentary demand. Employment
being ample for all, prices of labor rise; the call for labor fall-
ing off, wages fall. If the wages are held constant by an
artificial system or by brute force, the numbers employed
will be less in hard times than the normal, and more people
will suffer. In good times no more than all can be employed.
The net result is probably a loss to the individual and to the
country.

The nature and method of compulsory interference with
the rights of any individual or body of men seeking a mu-
tually agreed-upon contract are thus antagonistic to the
principles of good business. They are usually resultant in
harm, and in many ways. The employees have a legal
and sometimes a moral right to retire from employment,
precisely as has the individual, — no more, no less. The
employer has the legal and sometimes the moral right to
close an establishment and go out of business either tem-
porarily or permanently; but when the legal right is exer-
cised by either for the purpose of exercising compulsion
in the making of a bargain, the moral right is exceeded.
Either party may exercise this right in self defence or in self
protection; but neither has the moral right to so act in com-
pulsion of the other. Either side has a right to place a
value on the article offered for sale, but neither has a right
to compel the other to accept that valuation. If an agree-
ment cannot be reached, the only proper course is for the
two parties to separate and seek better terms elsewhere.

3i6 ROBERT H. THURSTON

This often means a hardship, especially to the man without
reserves; but that fact does not change the principles or the
right of the question.

A peaceable strike is entirely legal, though often unwise;
a forceful strike is both illegal and impolitic, as a rule, if not
always. The nature and the method of the strike, as of the
boycott, are contrary to good morals and good manners, even
if not directly resultant in crime and infringement of the rights
of neutrals. It is sometimes claimed that a strike is war and
that, like war between nations, some methods and some acts
are proper and right which are not right in time of peace. A
strike is sometimes likened to justifiable rebellion, but it is
to be remembered that usually a large majority of the other
individuals composing the nation are directly or indirectly
wronged by strife, and that only the nation can declare war.
The courts uphold the right to strike and to combine to
strike; but no court upholds the boycott, the strike, or the
monopolizing of the right to labor, by the exertion of force
against neutral members of society. The economic results of
strikes, boycotts, and other irregular interference with the
course of trade are always more or less disastrous. It rarely
happens that even the side which gains the victory in such
strifes secures compensation in full for its losses in war. The
losing side invariably sacrifices largely by the strife. The
country loses enormously through the interruption of produc-
tion, and this is a loss which never can be repaired . Time and
work lost are never recoverable. Such economic wastes are
a tax on the whole community, and the acts which cause them
are in direct conflict with the primary principles of industrial
progress. The moral results of industrial strife are even more
deplorable than the purely economic consequences. The
loss of time, labor, and money is serious and far reaching,
and ultimately tells against the best interests of the people;
not unusually it leads to sacrifice of health and of life itself.
The moral results are demoralization of whole communities,
the loss of respect for law, and the promotion of disorder and
crime. The subordination of the good to the bad, of the lawful
and law abiding to the lawless and law breaking, means the
degeneration of the nation and the introduction of anarchy.

THE CONDUCT OF INDUSTRIES 317

It is the initiation of a retrograde movement of humanity
which has its limit only in barbarism.

The social effects of industrial war are simply the natural
outcome of economic inefficiency, of moral retrogression; the
inevitable and always to be expected outcome of the infraction
of those principles, practices, and methods which have been
the slow evolution of the later centuries. It is not that the
classes and the masses become sharply distinguished, but that
the masses submerge the best classes, and with no possible
chance, as now, of the advancement of the deserving to higher
positions in the community and of the skillful, wise, indus-
trious, and frugal to independence.

When a ship is wrecked on the rocks of a dangerous coast
and its crew is cast into a boisterous sea, the only safety for
the many is the prompt attainment by the few of a safe posi-
tion on the shore from which to reach out a helping hand
to the others. In any ship of state the best chances for the
people come from the exertions of the able and competent and
well disposed who have secured, by their skill, energy, ambi-
tion, and general efficiency, positions of security from which
they may, and must, inevitably, through the operation of
natural industrial laws, lend a helping hand to their fellows.
Precisely as only the existence of men of learning can promote
the education and the fitting of the teacher of the people, and,
through them, the intelligence and knowledge needed by the
people as a body, so it is only through the work of great men of
business and the operations of great capitalists that the suc-
cess of the people in gaining pecuniary independence can be
assured in maximum amount. The legal aspects of the case
are already well settled by the later decisions of the courts at
law. The right of every man to act, individually or in co-
operation with however many others, is assured by the laws
of the state and by the dictates of good sense and good feeling,
as well as by the law itself, up to that limit at which the indi-
vidual or the association of individuals begins to infringe upon
the rights of others. At that point limitation is necessary,
and the enforcement of that limitation is essential to the life
of the nation, as well as to the freedom and independence of
the citizen.

318 ROBERT H. THURSTON

The remedies for conditions producing economic ineffi-
ciency and industrial anarchy, for moral degeneration and
social disorder, are as simple as are the conditions themselves
and the causes from which they spring. These remedies may
be readily applied and made thoroughly successful provided
they are prescribed and enforced by wise, honest, determined,
and patriotic men. The primary necessity in their applica-
tion is an intelligent body politic; the next requirement is
representation of the people by their best element and the
construction of legislative bodies of wise, honest, determined,
and patriotic representatives of the people. The final neces-
sity is power to enforce the will of the well meaning and intelli-
gent majority by legal and peaceful ways, when practicable,
and by force if need be. The mob must be made powerless,
the people all powerful. Disorder and crime must be prompt-
ly and sternly repressed and the natural and legal rights of
every member of society, however humble or weak, assured
against the criminal, the selfish, and the ignorant and foolish
rebel against law and order. Educational remedies for the
industrial diseases are found in the extension of the public
school system throughout the whole nation and in the im-
provement of the system as a means of spreading throughout
the whole mass of the people an intelligent apprehension of the
principles bearing upon industrial questions and of the facts
which are revealed by experience and by the history of our
own and earlier times, illustrating the results, good and bad,
of correct and of incorrect industrial methods. It is the com-
mon school system upon which we have learned to mainly
rely to secure a general and liberal culture amongst the people,
sufficient at least to enable the responsible citizen to under-
stand and intelligently to vote upon the questions of the day
in politics and in economics. The improvement of this sys-
tem also insures a more efficient body of teachers for the next
generation of children, for the teachers are mainly supplied
by the common school system of education rather than by
the colleges and universities. If these teachers are earnest
and patriotic and intelligent and well informed, the next
generation is likely to be similarly earnest, patriotic, and in-
telligent and well informed. If the race of teachers is improv-

THE CONDUCT OF INDUSTRIES 319

ing, the race of citizens will improve. The improvement and
extension of higher education is an important element of this
progress. No stream can rise higher than its source. The
loftiest source of learning, culture, and intellectual, if not of
moral, progress is the university and its body of learned in-
vestigators, and the college with its great faculty of presum-
ably wise men. These institutions are the ultimate sources
of all contemporary learning and culture, wisdom, and real
knowledge. With their advancement and with their progress
in character, learning, and effectiveness in work goes the
progress of a nation.

Legal remedies for industrial disorders are to be found
in an intelligent and well digested system of legislation which
shall, first of all, insure the maintenance of the law by its offi-
cial representatives and their staffs and the preservation of
the peace by every needed power of the individual officer, his
staff, the municipality, the state, the nation if need be. The
code should, further, insure to every citizen, without regard
to age, sex, color, creed, or vocation, absolute freedom of
action within the range of the moral law. Freedom and in-
dependence are the rightful heritage of every individual citi-
zen, and freedom to engage in the pursuit of any innocent
form of life, liberty and happiness should be maintained by the
individual, at the risk of life, if need be, and guaranteed by the
state at all hazards.

Life is worthless and governments are failures if the citi-
zen is to be dominated by other powers than those of good
laws, established and faithfully administered by the freely
chosen representatives of the people. No individual and no
class can be safely permitted, for an instant, to assert its right
to rule over another, much less to attempt to establish that
rule. The bad legislator should be condemned as a traitor,
and, as such, punished in such manner that no one will be in-
clined to follow his dangerous example; the bad citizen,
whether acting as an individual or with a class or a club or
with a party, whether an executive of the law or a private
citizen, should be given the same judgment and the same
treatment. The individual seeking his own personal advan-
tage at the sacrifice of the interests of his fellows, of the city,

320 ROBERT H. THURSTON

or of the state or nation, should be legally placed in the same
category and subject to the same judgment.

Social remedies for the economic and social errors of the
time are to be found in the cultivation of a well defined and
well established private and public sentiment in favor of good
morals, good manners, and high culture, such that not only
the individual, but the body politic shall constantly gain in
these directions. When a nation, a state, a municipality,
as a whole as well as individually, becomes accustomed to sus-
tain good morals, to exhibit good manners and real courtesy,
and illustrates a steady advance in true culture, its future and
the safety, prosperity, and happiness of its people are assured
so long as its neighbors do not forcibly interfere. Its chances
of insuring its future despite the interference of others are also
improved; for patriotism, intelligence, wisdom and courage
are likely to be stimulated amongst such people as nowhere
else. These social remedies will be administered most suc-
cessfully through the educational system, which takes the
child at a tender age, and, when its mind is most impressible,
gives it a knowledge of the higher law and learning, and stimu-
lates its moral and its aesthetic senses. The foul seeds which
furnish the poisons of the body politic are cultivated by a few
within their own families and in the secret club rooms of
anarchist and of the Mafia. Their antidotes cannot be there
applied, as a rule ; they must be furnished to the whole nation
through the education of its children. These antidotes are
those which stimulate the growth and maintenance and re-
finement of those most beautiful products of civilization —
good manners, good morals, and high culture. Compulsory
application of remedies for social disorders is always a most
undesirable though sometimes a necessary course of action.
It should be applied, however, instantly and without hesita-
tion, by the constituted authorities when it becomes evident
that peaceable and kindly measures will not insure to indi-
vidual citizens, or groups of citizens, their legal and political
and moral rights. Every infraction of law and every breach
of the peace should bring its prompt and appropriate check
and punishment. Every forcible attempt to infringe upon
the rights of a single citizen or a class should be instantly met

THE CONDUCT OF INDUSTRIES 321

by the forces of the law and good government and crushed at
whatever cost, and should then be followed by prompt and
legal punishment of every lawless member of the treasonable
party. This is a first principle; for it is upon this principle
that the safety of the citizen, his life and property depends.

Industrial disputes should be settled, wherever possible,
by arbitrament; but there are many questions which cannot
be submitted to arbitration. No man could submit the ques-
tion of his right to his wife, his child, his house, his land
to arbitration. No man could allow any question to be
raised regarding the right to offer or to accept what he knows
to be for him a desirable exchange, in bargaining, whether in
business or for pleasure. No compulsion can properly be per-
mitted regarding any bargain. Arbitration is entirely right
and usually wise where the two parties to a bargain, disagree-
ing, are desirous, or at least willing, to submit the question to a
board of arbitration in the choice of which they have equal
power and in whose judgment they have mutual confidence.
But the law and constitution, if the latter were thus framed,
would have no moral, and should have no legal right to pre-
scribe compulsory bargaining. It is better for the nation
that an industry be disrupted temporarily than that the rights
of citizens should be denied.

The Pennsylvania anthracite strike during the year 1902
was one of the most famous of social disturbances ; it was the
first such great social disorder remedied by mutually agreed
upon forms of arbitrament. It was the most serious disorder
of that sort ever known to its date, and affected more seriously
a greater area and a larger number of people outside the ranks
of the disputants, and thus it became better known and under-
stood and awakened a larger public interest than any other
dispute in the industrial system of any country of this or of
any earlier time. The dispute was one arising between organ-
ized miners and other workers in the Pennsylvania anthracite
coal fields, under the official protection of the " United Mine
Workers of America," — a combination of practically all the
miners of the United States, both bituminous and anthracite
— on the one side, and, on the other, the proprietors and exec-
utive officers of the whole anthracite district. The points of

Vol. 3—21

322 ROBERT H. THURSTON

dispute were many and had long been taking form on both
sides. On the part of the miners, shorter working hours, bet-
ter pay, both for the day's work and for contract work, better
arrangement regarding the measurement of the product of
the day's labor, recognition of the union, and various priv-
ileges were demanded. On the part of the proprietors and
managements of the mines, it was asserted that it was, as a
matter of business, impracticable to award higher wages, to
establish a shorter working day, or to modify in any impor-
tant degree the methods or the details of working. It was
claimed that it was impossible to officially recognize the union,
composed, as it was, mainly of men whose work lay outside
the anthracite fields, and who, officers and men alike, were
entirely ignorant of the conditions prevailing in the anthra-
cite fields. It was stated that the influence of the union had
been wholly bad, and that it had become already impossible
to maintain essential discipline to carry on the business in a
satisfactory and profitable manner, and that conditions were
constantly growing worse through the malevolent influence
of the union. It was asserted that the union, instead of cul-
tivating a fair minded attitude amongst the miners, rather
sought to make the workmen assume an antagonistic and
even actively hostile position and thus stimulated a warfare
which was entirely wrong, as well as unfortunate from a
business point of view. The interests of the employer and
the employee were asserted to be identical, and it was urged
that no organization capable of converting the two once
friendly parties to the business into enemies, maintaining, at
best, an armed truce, could or should be recognized officially.
The outcome of this dispute between the representatives
of the two sides was the appeal of the miners to the national
organization, the consultation of its head with the heads of
the local unions, and, finally, when agreement was not
reached, a strike which called out about a hundred and forty
thousand men belonging to the national union and forced
out of employment practically all other miners and destroyed
the business of nearly all other industries in the anthracite
coal region. It loaded upon the other miners of the country,
in part, the support of the men on strike, and diverted large

THE CONDUCT OF INDUSTRIES 323

sums of money collected by the unions from their members
for the purpose, properly and impliedly, of caring for their
sick, aged, and impoverished, into the support of industrial
warfare. The result was the cessation for five months of all
coal mining in the anthracite districts and the embarrassment
of and often, toward the end, the infliction of suffering and
death upon innocent people throughout a large portion of the
United States and Canada. It was only when the approach
of cold weather threatened the parties to the dispute with
similar suffering and risk of life that the fight came to an end.
The results had been enormously injurious not only to both
parties to the controversy, but to the country at large. The
mine owners were estimated to have lost about $46,000,000
and the miners and other employees about $25,000,000; the
transportation companies also lost $28,000,000, while the
loss to the nation through disturbance of business, the com-
pulse^ closing down of mills and factories, the going out of
blast of furnaces, the check upon the coke and other more
or less closely related industries, and the loss of working and
earning power, through illness and death, directly and indi-
rectly caused by this tremendous disturbance of all industries,
has not been estimated, and can be stated only as beyond
computation.

The demoralization of industries was perhaps even far
exceeded in importance by the demoralization of the people,
not only in the coal regions where law and the principles of
good citizenship were most extensively and dangerously in-
fringed upon, but throughout the nation. In the case of the
anthracite strike universal uneasiness and distrust and a
spirit of antagonism between employer and employee were
awakened to an extent without parallel in the history of in-
dustry. Brother was set against brother, father against son.
The attempt to maintain order and to support the law by
use of the police powers of the state was often met with direct
resistance, and, throughout the country, by endeavors on the
part of the friends of organized labor to destroy the efficiency
of the militia by creating a sentiment against the entrance of
members of the unions into that essential instrument of pro-
tection of the law and of law abiding citizens. In some

324 ROBERT H. THURSTON

states it was found necessary to enact special laws forbidding
discrimination against union men for thus exhibiting their
patriotism. Patriotism was by large bodies of citizens made
a crime, and treason was encouraged and upheld.

The report of the commission appointed by the president
of the United States with the later endorsement of congress,
which body appropriated the needed funds for its compensa-
tion, was made only after a long, careful, and minute study of
the case, and after receiving the testimony of all available
witnesses and hearing the arguments of both parties to the
dispute, represented by the ablest counsel. It covered all
the specific questions raised, and a discussion of the details
of the testimony and of the principles involved from the point
of view of law and of equity, as well as of economic and
criminal law. It was decided that it would be right to raise
somewhat the wages paid in the anthracite coal fields, to
shorten, in some cases, the length of the working day, and to
adopt, in other cases, a sliding scale of payment of coal pro-
duced, basing the scale upon the prices obtained for the coal
at tide water in New York harbor. It was reported that the
pay previously given was not by any means as low compared
with that of other vocations as had been claimed, and that
the workers in the mines were able to adopt a scale of living
fairly comparable with that attained by labor of similar grade
in other occupations or in other coal fields. It provided for a
conciliation commission to settle disputes that might later
occur, and that the agreements made under the award should
hold until 1906, the advances dating from November, 1902.
This should be followed by other and new agreements made
by mutual understanding. The decision forbade discrimina-
tion between union and non-union men, abolished the "Coal
and Iron Police" employed and paid by the mine owners,
recommended new and better laws against the employment
of children, and advised state and national laws providing
for compulsory investigation, but not of arbitration, of future
contests of a similar sort.

The conclusions reached by the commission as just sum-
marized were given broadest statement in the final sections
of the report in which the general principles involved were

THE CONDUCT OF INDUSTRIES 325

discussed. Regarding lawlessness, such as so extensively
characterized this great contest, it asserted that no industry
is more dependent, for its success, its safety and its non inter-
ruption, upon discipline than is the vocation of coal mining
It is a dangerous and a troublesome work at best and in the
most skillful hands and directed by the best of supervision.
None other is more dependent upon mutual understanding
and mutual support in the maintenance of discipline. "Dis-
crimination and interference weaken all discipline." The
most rigid and efficient discipline should be established and
maintained by the co-operation of both employer and em-
ployed. The calling out of the militia was a justifiable, a
reasonable, an entirely proper, and, in fact, a necessary, act.
"No peaceable and law abiding citizen has reason to fear or
to resent the presence of either," — guards or militia. Ab-
sence of protest and of active resistance on the part of law
abiding citizens is an encouragement to disorder. The law
can make no exceptions, and it must use every available power
to maintain itself and to preserve the peace. Peaceable strik-
ing is not contrary to law or to reason ; but a strike set on foot
with the purpose of forcibly compelling all opposition to cease
until it gains its object "violates the law from the beginning."
A large strike always tends to encourage lawlessness and to
engender crime. The organization bringing about such
strikes voluntarily accepts these risks and this responsibility,
and is bound, in law and in justice, to provide against and to
prevent such results. "Only so can they deserve and attain
the respect of good citizenship. A labor or other organization
whose purpose can be accomplished only by the violation of
the law and order of society has no right to exist."

The right to work or to remain at work, to cease work
or to go to work under any conditions, themselves not in
conflict with law, cannot be rightfully or lawfully denied or
restricted, whatever the character or the opinions of the worker
or the would-be non-worker. In that matter every man is a
law unto himself, and has a right so to be, at all times and in
all places, in time of strikes or at any other time. Compul-
sions exerted to sustain or to destroy a strike are alike "im-
moral and anti-social." Concerted attempts to restrain the

326 ROBERT H. THURSTON

liberty of the citizen in these respects constitute "a conspiracy
at common law/' and should be punished as such. The " boy-
cott" is condemned as "tyranny, pure and simple, and, as
such, hateful/' The claim that the conditions affecting a
strike are those of "war" between the parties to the dispute
was made, but this is denied by the commission. "There is
only one war making power, and that is the government.
War between citizens is not to be tolerated, and cannot, in
the proper sense, exist ; it is unlawful, and it is to be put down
by the sovereign power of the state and the nation." The
"black-list" is condemned with the "boycott." Both are
cruel and cowardly. Finally, "it is adjudged and awarded
that no person shall be refused employment or in any way dis-
criminated against on account of membership or of non-mem-
bership in any labor organization."

The future of labor organizations, during the period of
strife and excitement of the Pennsylvania anthracite miners'
strike, seemed to many onlookers extremely uncertain. It
appeared as at least a possibility that but one of two develop-
ments could occur, — either the labor unions would succeed
in mastering the whole organization of the industries and
would bring about chaos by depriving it of its generalship by
talent evolved by experience and proved ability from the
midst of the whole body of citizens ; or a worse chaos, anarchy,
would be caused by the destruction of the body politic and
the provocation of strife without control of law, and with the
result of destroying law and order and all safety of property
for an indefinite period. On the other hand, should the
unions lose in the great contest, it was feared by many good
citizens that it would be impossible for the employees to secure
even a fair share of the product of their part of the wealth pro-
duced by "the triple partnership, labor, capital, and ability,"
and that, consequently, the country and the world would be
checked, if not turned back, in the path of progress. The out-
come of this particularly threatening and injurious contest,
however, while revealing the fact that such struggles are liable
sometimes to cover so large an extent of territory, to affect
so large a fraction of the industrial system, and to involve
such important industries as to produce most costly and dan-

THE CONDUCT OF INDUSTRIES 327

gerous effects, indicated that there, nevertheless, may be
found peaceful and righteous methods of settlement, so that
the outcome may, in the end, cause important and desirable
improvements in the methods of conduct of business, and
bring about better conditions of life and work for the pro-
testants against the older conditions.

The organization of the union has been already modified
by these events, and a revolt against lawless and unfair
methods of prosecution of the purposes of the organization
itself has been consequent upon these unhappy experiences.
Unions had been long in existence, both in the United States
and in Great Britain, which had recognized the inherent wrong
in strikes, lockouts, and especially the evasion or infraction of
the law and the provocation of disorder and attacks on the
rights of the citizen. Law and order above all had been the
motto of a considerable number of such unions, where the
most intelligent and patriotic and prudent of employees had
been banded together for the peaceful accomplishment of
rightful purposes. Their constitutions and by-laws had
sometimes explicitly declared for correct moral, legal, and
economic methods. All the older and most successful unions
had long exhibited a tendency in this direction, and the
greater their experience and the more intelligent and skillful
their administration, the less the frequency of resort to force
or to compulsory bargaining. In one case, that of a union
formed after the close of the struggle just described, the organi-
zation was incorporated, and its articles of incorporation in-
clude this declaration of principles :

"This association shall encourage industry, economy,
thrift, and honesty among its members; maintain amicable
relations between employees and employers of labor; assist
its members in obtaining the highest wages consistent with
the general good of all concerned; promote all forms of pro-
ductive industry and increase the employment of labor at
good wages; prevent unjust and unreasonable discrimination
against any of its members by any person, combination, or
conspiracy to prevent such members from securing employ-
ment in any branch of industry, and protect and defend its
members against any and all attempts by any person or com-

328 ROBERT H. THURSTON

bination of persons to abridge the inalienable right of all man-
kind to work for such wages as shall be mutually satisfactory
to the individual workman and his employer."

Legal incorporation is coming to be more generally recog-
nized as both fair and wise, and the deliberate assumption of
legal responsibility for the acts of the organization is becom-
ing more usual. The courts are also forcing this responsi-
bility upon all organizations. The administration of organi-
zations, both of employees and of employers, must be prob-
ably steadily improved by the recognition of the fundamental
principles of law, equity, and economics by their members.
Mutual agreement, after careful and fair minded deliberation
over the respective rights and needs of the parties to indus-
trial disputes, must probably supersede, ultimately, all at-
tempts at compulsory bargaining, and the absolute contra-
diction of these terms will be well understood as soon as both
sides begin to deliberate in a friendly spirit. The common
interests of both parties in maintaining, uninterruptedly and
efficiently, the steady operation of every industry under con-
ditions assuring the opportunity to every individual to con-
tribute in maximum degree through his individual ability
and talent, and giving him every opportunity to advance
to the position in which his talents and his character may
have full play in promotion of the good of all, is becoming
understood and admitted, and the administration of all
organizations of whatever kind or character on such princi-
ples may be hoped for in the early future.

The methods of operation must ultimately become those
of parliaments seeking the best and most correct, just and
efficient ways of promoting common interests and of recon-
ciling conflicting claims. The organization of industries and
the organizations of employers and of employees will be
found to have common and perfectly reconcilable purposes,
and the good of the people of all classes and vocations will be
found to be subserved by the adoption of legal and equitable
systems to procedure. The most intelligent, conservative,
wise, and prudent individuals will necessarily ultimately con-
trol and lead the organization, and the progress of the indus-
tries will be proportional to the spread of intelligence, pa-

THE CONDUCT OF INDUSTRIES 329

triotism, honesty, and fairness amongst the membership.
When the growth of this system of studying and of handling
industrial problems shall have brought about in maximum
degree steady industry for the masses, utilization of individual
capabilities and opportunity for gravitation of talent into
places of responsibility, the whole industrial system will
become, in the highest degree, efficient. Then, and only then,
can the nation attain its highest position on the scale of civili-
zation and its people become in the highest degree wealthy,
comfortable, contented, and happy.

The coming problems are thus those of promoting the
advance of the nation to the highest point of industrial effi-
ciency and the resultant assurance of greatest prosperity,
content, and intelligence. Only where a nation is in maxi-
mum degree wealthy, and its people, as a mass,, comfortable
and competent to think out the problems of its time, can
a real and a permanent higher life be assured. The whole
history of mankind is an illustration of the growth of these
principles and of the progress of the race in proportion as
they are more generally recognized and acted upon. Inven-
tion, progress in the arts and sciences, and growth of education,
of general intelligence, of wisdom and of culture conspire in
the promotion of the highest and best interests of all.

WHO OWNS THE RAILROADS?

BY SOLOMON HUEBNER.

[Solomon Huebner, economist; born Manitowoc, Wis., March 6, 1882; educated at
the Universities of Wisconsin and Pennsylvania; instructor in commerce and insur-
ance at the University of Pennsylvania; member of the editorial committee of the
American Academy of Political and Social Science; appointed a collaborator for
the Carnegie institution to prepare a history of America's foreign trade; author of
various monographs on economic topics.]

In a study of the distribution of stockholdings in Ameri-
can railways we touch upon a question which, as associated
with the fundamental institution of private property, has a
most important bearing upon our social, economic, and politi-
cal life. The ownership of property tends, above all, to create
a sentiment favoring conservatism. The greater the number
of individuals participating in the ownership of property,
the greater will be the number interested in promoting the
safety and conservatism of property, and the advancement
of industry. The effect of the diffused ownership of stock-
holdings, for example, upon our economic life may be readily
observed. Being owners in a great enterprise, the large num-
ber of smaller holders are thus prompted by self interest to
view economic questions from the standpoint of an employer.
In the industrial struggles between labor and capital, « widely
diffused ownership of stock may be of the greatest importance
in molding public sentiment with reference to the demands
of the contending parties. The holding of a single or a few
shares in a large corporation may not only cause the holder
to feel a greater interest in the welfare of his particular con-
cern, but may cause him, in a general way, to observe and feel
as a member of the employing class. Moreover, a large cor-
poration by widely distributing the ownership of its stocks and
bonds, especially if it be among an influential class, will thereby
safeguard its interests and privileges through an increased po-
litical constituency. Railways, for example, whose stocks and
bonds are held by thousands of holders may be expected to

330

WHO OWNS THE RAILROADS 33i

exert a powerful influence in the legislatures of their respec-
tive states.

These and other considerations point to the conclusion
that the economic and social effects, resulting either from a
wide diffusion or a high degree of concentration in the owner-
ship of stockholdings, are both numerous and important.
Yet, significant as a study of the distribution of stockholders
in American railways may be in this respect, we find ourselves
confronted with all the difficulties which beset the question
of the distribution of wealth in general. As Professor Mayo-
Smith has remarked: "Almost all statistical analyses of the
actual distribution of wealth break down on account of the
imperfections of the statistics." And it is especially in the
study of the distribution of railway stock, probably more so
than in the case of wealth in general, that we find the materials
at our disposal not only very incomplete, but also extremely
limited. In fact, reliance had to be placed almost wholly
upon individual statements concerning certain particular
roads, and upon the statements of the amount of capital
stock issued and outstanding, and the total number of stock-
holders for the various roads at the date of the last election
of the directors, as collected under the authority of the rail-
way commissioners of the various states. This latter source,
however, is by no means complete. In many states, espe-
cially the southern, with the exception of Alabama, Louisiana,
and Virginia, the railway commission reports furnish no infor-
mation whatever on the subject ; and in no case do the reports
give the exact distribution of the capital stock among the
holders. This absence of conclusive material determines
largely the mode of treatment to be followed, and fixes in a
general way the limits of the conclusions. The attempt is
made, therefore, to present, briefly, the distribution of stock-
holdings in those few railways where the evidence is direct
and conclusive; and to present tables showing respectively
tho««> important railways whose stock is owned by a com-
paratively large number of stockholders, those where con-
centration is apparent; and, lastly, those important railways
whose stock is concentrated in the hands of a few holders.
Despite the many defects in the materials, it is believed that

332 SOLOMON HUEBNER

a compilation of the data presented in the railway commission
reports, if supplemented by such considerations as are neces-
sarily involved in a statistical treatment of this kind, cannot
fail to add something to our knowledge of the subject under
discussion.

Passing now to an examination of specific railways, we
find that the Illinois Central stands out most prominently
in the effort to diffuse the ownership of its stock among small
holders, especially its employees. According to Mr. Cressey,
"No other railroad has adopted a plan to this purpose ap-
proaching in extent or liberality that devised by President
Stuyvesant Fish. Other roads, however, have made com-
mendable efforts in this direction, and among these may be
mentioned the Chicago Great Western system. Of the 6,526
stockholders of the Illinois Central in 1900, 705 were officers
and employees of the company, other than directors, and held
stock to the amount of 2,554 shares. Three thousand eight
hundred and sixty eight of these stockholders, owning 346,-
207 shares, were residents of the United States; 2,543, owning
198,616 shares, were residents of Great Britain; 115, owning
55,125 shares, were residents elsewhere. Excluding one large
block of 40,000 shares held by a Dutch syndicate for thirty
years, and itself divided among hundreds of holders, the aver-
age number of shares per holder is eighty five and one half.
According to the books of the company there are "5 holdings
of 5,000 shares or over; 85 of 1,000 shares or over; 93 of 500
shares or over; 694 of less than 500, but more than 100; 455
of exactly 100 shares each, and 5,194 of less than 100 shares."
Approximately thus 80 per cent of the stockholders own less
than one hundred shares each, and the fact is emphasized that
it is the 5,194 small stockholders who own by far the majority
of the stock.

Equally favorable appears to be the distribution of stock
in the Boston and Albany and the Boston and Maine railways.
The capital stock of the Boston and Albany, aggregating $25,-
000,000, is distributed among 8,434 stockholders. The largest
of these stockholders owns but 3,000 shares, while at least
4,645 holders, or 54 per cent of the total number, hold less
than ten shares each. As regards the Boston and Maine rail-

WHO OWNS THE RAILROADS 333

road, the annual report for 1899-1900 places the number of
shares of that company at 250,345, and the number of stock-
holders at 7,148. Of this number of stockholders 4,575, resid-
ing in Massachusetts, owned 124,030 shares; 1,515, residing
in New Hampshire, owned 29,212 shares; 599, residing in
Maine, owned 18,349 shares; 459, residing elsewhere, owned
60,678 shares, while 18,076 shares of common stock were owned
by the company itself. From this report it also appears that
approximately 7 per cent of the largest stockholders of the
company owned 26 per cent of the stock.

Another illustration of the wide diffusion of stock owner-
ship in some of our great railways is afforded in the Atchison,
Topeka and Santa Fe railway. This road, the most important
of the southwestern roads, and the greatest of the " independ-
ent systems," has its capital stock of $233,468,000 distributed
among 13,147 stockholders. The two facts according to Mr.
Thomas F. Woodlock that distinguish this road from other
large western roads are: (1) "That alone of all transcontinental
lines it extends from Chicago to San Francisco," and (2)
"That there is no dominant stockholding interest or combi-
nation of interests in control of the property. . . . And it is
the only large system in the west that nobody in particular
owns or specially controls." According to Mr. Woodlock,
"the ownership of the Atchison road became thoroughly scat-
tered in the reorganization and afterwards." "I am credibly
informed," he writes, "that Messrs. Baring and the interest
known as the 'Berwind Pool' are at present the only examples
of concentrated ownership in the company, and that all three
combined are a relatively small percentage of the whole."

Directing our attention next to an examination of the
distribution of the capital stock of railways other than those
just considered, reliance had to be placed upon the data fur-
nished by the latest available state railroad commission re-
ports, namely those of 1900 and 1901. In the following four
tables an attempt has been made to group this data. Table I.
includes those important railways whose stock is owned by a
large number of stockholders. Table II. presents those im-
portant railways whose number of stockholders is not un-
usually small, but where concentration in stockholding is ap-

334

SOLOMON HUEBNER

parent. Table III. comprises those important railways whose
capital stock is owned by a comparatively small number of
stockholders, while Table IV. shows the distribution of stock
in New England railways with a capital stock of $1,000,000
or over.

Table I.

Amount Total number

Name of Railway Company. of of

Capital Stock. Shareholders.

Atchison, Topeka & Santa Fe $233,486,000 13,147

Boston & Albany 25,000,000 8,434

Boston & Maine 26,516,970 7,229

Chicago Great Western 68,572,074 3,627

Chicago, Milwaukee & St. Paul 100,480,200 5,786

Chicago & Northwestern. 66,227,320 4,260

Chicago, Rock Island & Pacific 59,988,260 2,934

Cleveland, Cincinnati, Chicago & St. Louis 38,418,307 2,197

Delaware & Hudson 35,000,000 3,958

Fitchburg 24,360,000 5,935

Illinois Central 66,000,000 6,526

Lehigh Valley 40,441,100 6,916

Long Island 12,000,000 646

Louisville & Nashville 55,000,000 1,982

Minneapolis & St. Louis 10,000,000 448

New York Central & Hudson River 115,000,000 10,320

New York, New Haven & Hartford 54,685,400 9,560

New York, Ontario & Western 58,118,982 2,056

Old Colony 16,617,625 5,331

Pennsylvania Railroad company 204,374,850 29,000

Pere Marquette 28,000,000 2,098

Union Pacific 203,600,000 12,450

Table II.

Amount Total number

Name of Railway Company. of of

Capital Stock. Shareholders.

Atlantic Coast line $ 34,280,500 874

Buffalo, Rochester & Pittsburg 12,000,000 224

Burlington, Cedar Rapids & Northern 8,887,380 325

Chesapeake & Ohio 86,000,000 1,145

Chicago, Burlington & Quincy 110,800,000 616

Chicago, St. Paul, Minneapolis & Omaha 34,050,126 1,019

Duluth, South Shore & Atlantic 22,000,000 350

Great Northern 123,853,300 1,835

Kansas & Colorado Pacific 25,498,100 156

Kansas City, Pittsburg & Gulf. 23,000,000 325

Lake Shore & Michigan Southern 50,000,000 708

Minneapolis, St. Paul & Sault Ste. Marie 21,000,000 148

Michigan Central 18,738,000 563

Missouri, Kansas & Texas 72,569,200 1,080

The Missouri Pacific 76,402,875 8S9

New York, Chicago & St. Louis 30,000,000 677

Norfolk & Western 89,000,000 1,876

Southern Pacific 197,832,148 968

St. Louis & San Francisco 50,000,000 1,416

St. Louis Southwestern 36,000,000 778

Texas & Pacific 38,760,110 916

Western New York & Pennsylvania 20,000,000 176

WHO OWNS THE RAILROADS

335

Table III.

Amount Total number

Name of Railway Company. of of

Capital Stock. Shareholders.

Arkansas & Choctaw railway $ 15,230,000 6

Chicago, St. Louis & New Orleans 10,000,000 22

Cincinnati & Northern 6,800,000 6

Dubuque & Sioux City 10,999,600 31

Eastern Railway company of Minnesota 16,000,000 6

Erie Railroad company 176,000,000 17

Fremont, Elkhorn & Missouri Valley 36,940,000 8

Kansas City, Fort Scott & Memphis 28,510,000 17

Kansas City Southern 51,000,000 15

Northern Pacific 155,000,000 17

Morgan's Louisiana & Texas Railroad and Steamship

company 15,000,000 6

Southern Railway company 180,000,000 13

St. Joseph & Grand Island 13,598,500 9

St. Louis, Iron Mountain & Southern 25,795,055 32

St. Paul, Minneapolis & Manitoba 20,000,000 69

The New England Railroad company 25,000,000 51

Wilmar & Sioux Falls 7,000,000 6

Wisconsin Central 30,000,000 12

Yazoo & Mississippi Valley 6,168,400 14

NEW ENGLAND RAILROADS.
Table IV.

Amount Total number

Name of Railway Company. of of

Capital Stock. Shareholders

Boston & Lowell $6,529,400 2,142

Boston & Providence 4,000,000 1,668

Connecticut River railroad 2,630,000 952

New Haven & Northampton 2,460,000 7

New London Northern 1,500,000 379

Providence & Worcester 3,500,000 902

Vermont & Massachusetts 3,193,000 1,312

Worcester, Nashua & Rochester 3,099,800 805

Boston & New York Air line 3,907,968 610

Central New England 6,600,000 277

Hartford & Connecticut Western 2,712,800 641

Naugatuck Railway company 2,000,000 463

Norwich & Worcester 3,006,600 941

Atlantic & St. Lawrence 5,484,000 1,647

Concord & Montreal 7,197,600 2,214

Maine Central 4,975,300 824

Manchester & Lawrence 1,000,000 545

Northern Railroad company 3,068,400 1,179

Bennington & Rutland 1,000,000 8

Newport & Richford 3,200,000 9

Rutland railroad 6,719,700 about 600

St. Johnsbury & Lake Champlain 3,848,500 432

Vermont Valley 1,000.000 59

Bangor & Aroostook 2,178,307 24

Grand Trunk railway 5,484,000 1,630

Portland & Rumford Falls 1,000,000 50

Washington County Railroad company 1,999,000 27

A glance at the foregoing tables reveals a striking contrast
between different railways as to the proportion between the

336 SOLOMON HUEBNER

amount of their stock and the number of their stockholders.
From the evidence submitted for the twenty two railways in-
cluded in Table I., aggregating $1,541,887,088 of capital stock,
it appears that railway stock is to a large extent distributed
among a great number of holders. Thus the number of
stockholders for these twenty two roads is 144,840, and for
the New England railways with a capitalization of $1,000,-
000 or over is in excess of 20,000. Upon glancing at Table
II., however, we find the number of stockholders compara-
tively small, and in Table III. exceedingly small considering
the large capitalization of the roads.

Proceeding to a closer analysis of these tables, we find
that the average stockholding for all the roads of Table I.
amounts to $10,646 per stockholder. This comparatively
low average, however, loses some of its significance when we
remember that seven roads — the Atchison, Topeka and Santa
Fe; the Union Pacific; Chicago, Milwaukee and St. Paul;
Louisville and Nashville; New York, Ontario and Western;
Chicago, Rock Island and Pacific, and the Chicago Great
Western — aggregating $779,245,516 of capital stock, or over
one half of the total stock of these twenty two roads, have an
average stockholding of $18,561 per holder.

In Table II. the concentration becomes much more
marked. Having a capital stock of $1,180,871,739, the
twenty two railroads of this table have a total of but 17,064
stockholders, and an average stockholding of $69,463 per
holder. As in Table L, however, this average partially loses
its significance, since eight roads — the Chicago, Burlington
and Quincy; the Chesapeake and Ohio; the Great Northern;
Kansas and Colorado Pacific; Minneapolis, St. Paul and Sault
Ste. Marie; Missouri Pacific; Southern Pacific, and Western
New York and Pennsylvania — with a total capital stock of
$643,387,023 or over one half of the total capital stock of
these twenty two roads, have an average stockholding of
$108,442. Moreover, three roads — the Southern Pacific;
Chicago, Burlington and Quincy, and Kansas and Colorado
Pacific — with capital stock aggregating nearly 30 per cent of
the total stock represented in this table, have average stock-
holdings of $187,777, $179,871, and $163,577 respectively.

WHO OWNS THE RAILROADS 337

If, for the purpose of comparison, we look now at Table
III., we note a still greater contrast than exists between the
railways of Tables I. and II. The nineteen important roads
represented here have their aggregate stock of $829,041,555
distributed among but 357 stockholders, having thus an aver-
age holding of $2,322,245 per holder. Three of the roads,
however — the Erie railway, the Northern Pacific, and the
Southern railway — with an aggregate capital stock of $511,-
000,000, or five eighths of the total capital stock represented
by this table, have an average stockholding of $10,872,340
per holder.

It will doubtless be urged with reference to these averages
that, owing to the rapid changes in stock ownership, they
have value only for the particular year for which they are
compiled. In fact there is scarcely any ownership of prop-
erty more transitory than the ownership of railway stock.
In this connection the statistics of the New York stock ex-
change for 1901 may be studied to advantage. In that year
the total number of shares sold at the exchange numbered
249,193,674, representing a par value of $24,254,887,825;
and by far the great majority of these stocks constituted
railway stocks. Indeed, within the year 1901 the total num-
ber of listed shares for some of the leading railways was sold
from ten to twenty times over. Thus the Milwaukee-St.
Paul stock was sold twenty times over; the Union Pacific
stock twenty one and one quarter times; Rock Island stock
thirteen and one half times; Wabash preferred stock twelve
and one half times; Atchison stock eleven and seven eighths
times, and Erie stock ten times.

Such a volume of stock transactions would seem to in-
dicate that the above statistics can have but a temporary
value. As a matter of fact, however, when we compile
statistics for a considerable number of railways for different
periods, we find that the proportion between the amount of
stock and the number of holders shows an increase in the
average stockholding sufficiently large to indicate that the
above tables rather underrate than overestimate the average
stockholding in railways at the present time. A few statistics
will corroborate this statement. Thus as regards eleven rail-

Vol. 3-22

338 SOLOMON HUEBNER

ways of Table I., for which information could be found, the
capital stock increased from approximately $650,834,038 in
1890 to $942,946,162 in 1900 or 45 per cent; while during the
same period the number of stockholders increased from 54,-
928 to 75,528 or 37 per cent. In other words, the average
stockholding for these eleven roads increased from $11,848 to
$12,486, or over 8 per cent. Again, in seventeen of the
twenty two railways of Table I., for which information was
available, the capital stock increased since 1895 from approxi-
mately $875,296,724 to $1,143,512,238 or over 32 per cent;
the number of stockholders increased from 92,029 to 100,532
or over 9 per cent, and the average stockholding increased
from $9,318 to $11,435 or over 22 per cent. Similarly in Table
II., we find that eleven railways have increased their capital
stock since 1890 from $350,106,859 to $564,251,559 or over
61 per cent. During the same period the number of stock-
holders decreased from 20,109 to 7,980 or over two and a half
times, thus increasing the average stockholding from $17,410
to $70,708 or over four times. More significant by far has
been the increase of the average stockholding of the railways
of Table III. Since 1890 eleven of these roads have increased
their capital stock from approximately $387,419,427 to $523,-
048,100 or nearly 35 per cent. Within the same period the
number of stockholders has decreased from 6,215 to 239,
while the average stockholding has increased over thirty five
times. Despite, therefore, the rapid changes in stock owner-
ship, the railways of the foregoing three tables show, on the
whole, a marked tendency towards an increased average
stockholding. The above tables, if they err in any direction,
may be regarded as underrating rather than overstating the
average stockholding at the present time.

Thus far, then, we have taken into account the average
stockholding of leading railways whose capital stock aggre-
gates $3,551,800,382 or about 60 per cent of the total railway
stock of the country. Directing our attention to the distri-
bution of stock of the smaller roads, our only guide, again,
consists in the state railroad commission reports. An exami-
nation of the latest of these reports indicates that the stock
of the smaller roads in the west is held by comparatively few

WHO OWNS THE RAILROADS 339

investors and that the stock, on the whole, becomes more
and more widely diffused as we go eastward, especially
towards the New England states. Thus from the preceding
tables it appears that the six principal New England railways,
with stock aggregating $172,000,000, show the exceedingly
large number of 36,540 stockholders. Likewise Table IV.,
including those New England railways with stock of $1,000,000
or over, shows an exceedingly large number of stockholders
in view of the small capitalization of the roads. In short, the
twenty seven railways included in this table have their aggre-
gate stock of $93,294,375 distributed among 20,347 stock-
holders. When to the railways of Table IV. are added the
roads with stock of less than $1,000,000, the railway com-
mission reports of Connecticut, Massachusetts, Maine, and
New Hampshire show the total number of stockholders for
the roads represented in these states, and for which calcu-
lation can be made, to be 28,923. The average stockholding
in these roads for Connecticut is placed by the reports at
approximately $7,041. Maine follows next with an average
holding of $5,486, while Massachusetts and New Hampshire
have the extremely low averages of $3,146 and $3,451 re-
spectively. If we could carry our inquiry to all the rail-
ways represented in all the New England states, it is safe to
assume from the above calculations that the total number of
stockholders of New England railways would be considerably
in excess of 70,000. If, however, we extend our inquiry to
the smaller roads outside of New England the average seems
considerably larger. Thus the average amount of stock per
holder in all the railways considered by the reports, and for
which calculation could be made, is, approximately, $156,638
in Minnesota, $110,600 in Louisiana, and $72,320 in Kansas.
Of the remaining states for which calculations were possible,
the greatest average stockholding ($49,484) is shown in
Arkansas, Alabama follows next with an average of ap-
proximately $43,239, and then Michigan with an average of
$33,859. In New York the average stockholding for such
roads, other than proprietary and lesser surface steam rail-
way companies, is approximately $18,582, and in Virginia
$15,849.

340 SOLOMON HUEBNER

If the averages presented in the preceding paragraph are
correct, the conclusion suggested is that, excluding the New
England railways and the roads represented in Table I., the
stock owned by the average holder is comparatively large.
A closer investigation will reveal the fact, however, that the
question is not fully determined by merely presenting the
average stockholding for the roads of each of the four groups.
It is manifest that while the above averages present the mini-
mum concentration of stock among the so-called " stock-
holders," they do not take account of the fact that these
stockholders do not in all cases necessarily represent individual
holders, but may in some cases represent corporations. In
the first place, one railway corporation, itself representing
many stockholders, may be the holder of a portion of the stock
of another railway company. Or considerable blocks of such
securities may be held by trust companies, life insurance com-
panies, investment companies, etc., which in turn represent
the investments of a large number of persons, many of whom
belong to the middle and poorer classes. How far this proc-
ess of subdivision must be carried in order to fairly determine
the extent to which the population of the country is now
involved in railway ownership, it is difficult to judge. Suffice
it to say, that large blocks of railway securities are held in
this way, and that this indirect form of investment is rapidly
increasing. Thus on July 1, 1901, the general stock invest-
ments of the trust companies of New York city alone aggre-
gated over $209,000,000. Even in the case of savings banks,
whose investment powers have been very carefully safe-
guarded, a change of policy is manifesting itself. Since 1899,
for example, the three states of New York, Massachusetts,
and Connecticut were obliged, owing to the rapid increase
of the deposits, to extend the power of these institutions to
invest to a limited degree in railway securities. While no
available statistics exist on this phase of our subject, we may
nevertheless conclude that this subdivision of the stockhold-
ings in railway securities, especially when we remember that
trust companies, investment companies, and the like, repre-
senting the merging together of a large number of small and
separately owned capitals, do actually hold large blocks of rail-

WHO OWNS THE RAILROADS 341

way shares, points unmistakably to a very widely diffused
ownership. Nothing more strikingly illustrates the extent
to which this diffused ownership may exist in some of our
leading railways, than the statement of Mr. J. J. Hill to the
effect that "when the Chicago, Burlington and Quincy railroad
was taken into the Northern Securities company some 2,000
of its 18,000 stockholders owned five shares each and 300
owned one share each." The eastern trunk lines were re-
ported to have had their stock distributed among 99,829
shareholders in the year 1896, and the Pennsylvania railroad
company reported that 40 per cent of its shareholders were
women.

One other exception to the above averages is pertinent
to our discussion. This exception, while it does not in the
least disprove the wide diffusion of stock ownership indicated
by the foregoing process of subdivision, does tend to show, on
the contrary, a large degree of concentration of stock in indi-
vidual hands. To rely merely upon the preceding averages,
it is clear, would prove inadequate for our purpose, since they
do not afford an exact criterion of the actual proportion of
stock held by the different shareholders. The concentration
of stock ownership in individual hands, as indicated by these
averages, becomes all the greater when we remember, first,
that the above tables fail to show the unequal distribution of
the stock among the shareholders of any given road, which
as a practical matter of fact we know exists; and, secondly,
that they do not take cognizance of the very common fact
that the well-to-do stockholders of one railway, though own-
ing far more than their proportionate share, also own stock
in a large number of other roads.

How unequal the stock of a particular railway may be
distributed among its holders is well illustrated in the case of
the Fitchburg and New England railways. With the excep-
tion of the Boston and Albany, the Boston and Maine, and
the Old Colony railways, the Fitchburg Railroad company
represents the lowest average stockholding of the roads of
Table I. Yet 624 of its stockholders, or those residing in
New Hampshire, own but $871,300 of its $24,360,000 of capi-
tal stock; while 1,119 of its 5,935 stockholders own but

342 SOLOMON HUEBNER

$1,440,000. More significant, still, is the instance of the
inequality of ownership afforded in the case of the New Eng-
land Railroad company. This company has its capital stock
of $25,000,000 distributed among fifty one stockholders, and
with but three exceptions shows the largest average stock-
holding of the nineteen roads included in Table III. Yet
twenty six, or one half of these fifty one stockholders, accord-
ing to the Massachusetts Railway commission report, owned
but $55,000 of the capital stock, or slightly more than one five
hundredth part of the total.

Having thus illustrated the unequal distribution of stock
among the owners of a given road, which illustrations may be
almost indefinitely multiplied, we may now inquire briefly
into the second point, the ownership of stock by one individual
in several or many roads. To what extent this multiple
ownership exists is partly indicated by a comparison of the
directorates of a number of the leading railways with a view
of noticing to what degree the names of the directors of
various railways duplicate one another. For the purpose of
this comparison, the names of the directors of the ninety
principal railways, as published in the state railroad com-
mission reports, and including the directors of all the roads
of Tables I., II., and III., were examined. After a tabular
analysis had been made, and all duplications had been elimi-
nated, it was found that the total number of positions in the
directorates of these ninety roads was 819 and the total num-
ber of individual directors 393. Of this number of individual
directors one was the director of fifteen roads, aggregating
over $929,000,000 of capital stock, and one the director of
fourteen roads aggregating over $565,000,000 of capital stock.
Three were the directors of twelve roads each; one of these
directors representing capital stock to the extent of $765,000,-
000, and the remaining two over $367,000,000 each. One
was the director of eleven roads with a total capital stock of
$572,000,000; one the director of ten roads whose total stock
exceeded $656,000,000, and two the directors of eight roads
whose stock reached $541,000,000 in the one case, and $565,-
000,000 in the other. Of the remaining directors, two
were the directors of seven roads; eight the directors of six

WHO OWNS THE RAILROADS 343

roads; fourteen the directors of five roads; thirteen the direct-
ors of four roads, and forty the directors of three roads. In
brief, eighty six of these 393 directors represented at least
three of these important roads, and 192, or nearly one half
of the total number, were found to be directors of two of these
roads or more.

In the foregoing paragraphs we have reviewed, as briefly
as the subject permits, some of the considerations which assist
us in arriving at some conclusion with reference to our subject.

In the first place, from the evidence submitted it appears
that railway stock is to a large extent owned by a great num-
ber of holders scattered throughout the country, and repre-
senting every stratum of society. The Illinois Central, we
saw, stood out conspicuously in its attempt to extend the
ownership of stock to its employees. The Boston & Albany
and the Boston & Maine railroads likewise had their stock
distributed almost entirely among small holders. The Penn-
sylvania railroad has its capital stock of $204,000,000 distrib-
uted among 29,000 individual stockholders. With reference to
the New England railways, we noted that the stock was distrib-
uted among at least 70,000 stockholder while the total num-
ber of shareholders for the roads of Table I exceeded 144,000.
Recognizing that some of these stockholders may in turn
represent corporations, it becomes apparent that in our great
railways the number of small individual owners is exceedingly
large. Indeed, it has been estimated by Mr. George B. Blanch-
ard that the total number of holders of railway stock reaches
950,000, and that the total number of stockholders and bond-
holders combined approximates 1,250,000.

Secondly, in accordance with the statistics presented, we
have determined the average stockholding per holder of rail-
ways aggregating approximately $3,822,214,000, or nearly
65 per cent of the total railway stock of the country. A sur-
vey of the smaller roads showed that outside of the New
England states, the average stockholding was comparatively
large, ranging from a maximum of $156,638 in Minnesota to a
minimum of $15,849 in Virginia. With reference to the more
important railways, we noted that the average stockholding

344 SOLOMON HUEBNER

for twenty two of these roads, representing $1,541,887, 088,
was $10,646. In twenty two of these roads, aggregating
$1,180,871,739 of stock, the average stockholding was $69,463;
while in nineteen roads, representing a capital stock of $829,-
041,555, the average stockholding reached $2,322,245. By
regrouping these railways, however, it was found that over
one half of the total capital stock of the first group is held in
average holdings of $18,561 ; that over 55 per cent of the total
capital stock of the second group is held in average holdings
of $108,000, and that five eighths of the total capital stock of
the third group is held in average holdings of $10,872,340.

These averages, it is true, are modified by the fact that
as several small corporations become financially interested in,
or are merged into, a larger railway corporation, the number
of small stockholders may thereby be increased many times.
But the effect of this increase upon a wider diffusion of railway
stock, it is believed, is more than neutralized by the counter-
tendency of well-to-do individual stockholders to acquire
stock in a large number of such undertakings. Indeed, we
have seen that this multiple ownership on the part of individ-
ual stockholders exists to an exceedingly large extent. If
we recall, furthermore, that the average stockholding for the
roads of the first three tables has shown a decided tendency
to increase, and that great extremes of stock ownership exist
even in most of the roads of Table I, we may conclude with a
rough degree of accuracy that the above tables present, on the
whole, a far too conservative view of the actual concentration
of railway stock in individual hands at the present time.
Concentration certainly does manifest itself strongly in the
roads included in Tables II and III. And, if the composition
of the comparatively low averages of the railways of Table I
could be ascertained, to see whether they are made up of great
extremes or not, it seems probable, from the above considera-
tions, that by far the majority of the large number of stock-
holders cited for these roads represent small investors, and
that the majority of the stock, in many, if not in a majority
of these roads, is held by a comparatively few large holders.

SOME ECONOMIC ASPECTS OF ELECTRIC
POWER DISTRIBUTION.

BY LOUIS BELL.

[Louis Bell, consulting electric engineer; born Chester, N. H., Dec. 5, 1864; resides
in Boston, where, besides his active life in his profession, he has found time to write
many scientific and technical essays chiefly for the Engineering Magazine, in which
the article here published first appeared ; also author of the following books among
others: The Electric Railway, Electrical Power Distribution, Power Distribution
for Electrical Railways, The Art of Illumination.]

Much of the complicated mechanism which we are pleased
to call modern civilization has for its purpose the survival
of the unfittest and the subversion of natural laws. Instead
of punishing criminals, we spin fine drawn theories about
them and turn them loose to be a drag upon the progress of
decent society. Instead of segregating degenerates in suita-
ble asylums, we form societies for the study of their literary
and artistic works and pay two dollars per seat to hear their
mephitic plays. We treat economic laws with even more
contempt than civil and criminal laws. Professors of the
dismal science sometimes speak of the law of supply and
demand as bearing at least some remote relation to actual
human needs, while in reality the basis of many movements
in modern industry is the substitution of an artificial law
for the natural one. If vested interests have acquired an
unprofitable railroad, which upon a sound commercial basis
should not have been built prior to 1950, there is at once a
cry for such a "readjustment" of rates as shall charge up the
loss to communities along lines which were more wisely
planned. Fortunately, civilization brings good along with
evil; and while there is terrible loss of energy in the artificial
methods employed, there is still progress, not so much per-
haps as the world flatters itself in thinking, but progress
nevertheless.

In the last resort, the substance of civilization is human
development — all the rest is accident. The Greeks had no
knowledge of steamships railroads, electric lights, telegraphs,

345

346 LOUIS BELL

or automobiles — they would have offered hemlock to the
man who tried to start a telephone exchange; and yet no
people ever reached a higher plane of thought or action.
Likewise our little Japanese friends, cheerfully hailed as bar-
barians fifty years ago, had in reality risen to a mental and
spiritual height that enabled them in thirty years to grasp the
material advances of well nigh thirty centuries.

The lesson to be learned, then, is to value the achieve-
ments of modern science and industry not upon their proceeds
in dollars and cents next week or next year, but by their effect
upon the growth of human kind and the evolution of society.
In discussing, then, the effects of a particular branch of tech-
nical progress, it should be considered in this broader aspect,
not merely from the so-called " economic" standpoint, which
is concerned exclusively with the balance sheet. To come
down to the concrete, in the larger view of things it is of
little consequence that John Doe should contract for electric
power at an annual saving of $10,000, as in nine cases out of
ten he will merely put the money in his pocket; the real im-
portance of the gain is measured by the number of people
benefited by it. If, on the other hand, the contract enables
John Doe to put out his goods at a lower price, or to reduce
the hours of labor, or to do anything else to the advantage
of his fellowman as well as himself, that contract is of direct
value to the community. On the contrar}", if a similar con-
tract enables Richard Roe to start an industry where none
was before, to open a new bit of territory to human activity,
the community is at once directly the gainer and electric power
is no longer an instrument of private gain, but of general
welfare.

Of course, one may say that all private gain goes ultimate-
ly to the increase of industry; but unhappily the self consti-
tuted redistributor of wealth is not always a philanthropist in
the proper sense of the term, and vague and indirect methods
are usually inefficient ones. The special topic of interest
here is the direct usefulness of electric power in the generaliza-
tion of human activity, rather than its impossible indirect
value in enabling John Doe's heirs to assist in developing
the French automobile industry.

ELECTRIC POWER DISTRIBUTION 347

The distribution of manufactures in our own or any other
country would be a most curious and interesting subject
of study. The first thing to stand out conspicuously in the
investigation would be the gradual tendency toward concen-
tration in the larger cities, and the gradual recession of manu-
factures outside them. Certain sections of the country are
full of decaying communities, once active, but from which
the chief industries have been withdrawn. If investigation
disclosed the fact that certain centers of manufactures had
become such through the pre-eminent natural advantages,
such a condition would be easily explained; but in fact,
natural advantages have comparatively little to do with the
matter. It is common enough to find large manufacturing
plants of a particular kind concentrated in a place that is
only moderately good as a working point. Some one shrewdly
managed factory has made a success there, and has gathered
others about it till by sheer force of output and combination
of interests they have frozen out the scattered factories with
small capital. Taking into account the steady tendency of
population to move toward the cities for various causes, the
outlook for local enterprises seems far from good. In fact,
the situation is fraught with the gravest dangers to the com-
munity at large. A country consisting mainly of large cities
with merely incidental rural population has taken a long
step toward final disintegration. Moreover, even if actual
disintegration is not eminent, there exists the curious and
anomalous condition of a community in which the transpor-
tation and distribution of commodities is the predominant
element — in which producer and consumer stand at the ends
of a long chain of intermediaries. It is bad enough in this
respect, even at present, but every step toward further con-
centration of industry and population makes it worse. No
country in which the productive forces are steadily being
subordinated to an intricate (and, upon the whole, wasteful)
mechanism of distribution can long remain prosperous.

It is the recognition of this general principle that is the
basis of the present agitation for regulation of railway rates
and of similar movements.

348 LOUIS BELL

Starting with the condition that wide distribution of
industries is desirable in order to render more simple and
efficient the mechanism of commerce, there are two promi-
nent factors in the problem at hand. The first is improve-
ment in the organization of transportation so that needless
work can be in part eliminated. The second is such an
equalization of the industrial conditions that bear upon
manufacture as shall minimize the legitimate need for trans-
portation. For economical manufacturing, one must have
moderate costs of raw material, labor, and power. The two
former are strongly affected by transportation conditions,
as is also the last named when its source is fuel.

The importance of electric power distribution from this
standpoint is already great and will become greater. If one
takes a map showing the distribution of the coal in the United
States, it is at once apparent that by far the greater part of
the territory either has no fuel at all, or little, and that of
poor quality. Wood has been practically eliminated from
the question by the rapacious wastefulness of the last quarter
of a century. Hence as regards the country at large there is a
heavy transportation charge on power. Within the past ten
years we have learned to utilize the water powers of the
country (which, by the way, are as a whole in regions having
least fuel) and cheap electric power has already done much
to open new fields to manufacture, especially in the south,
which is the natural field for cotton manufacture. In one
particular the present working of hydraulic power is very
faulty, and to this defect I wish to direct especial attention.
In spite of the great growth of electric power transmission,
its effect on the consumption of fuel has thus far been very
small, owing to the fact that the great mass of hydraulic
power, which is in small units, has practically not been
touched at all.

Of our total water power, probably four fifths is in falls
below 1,000 horsepower in capacity, and at the present time
money can rarely be found for the development of small
enterprises of this kind. Bankers as a rule have not the
slightest interest in these small permanent investments.
They will lend moderate amounts upon quick assets, but

ELECTRIC POWER DISTRIBUTION 349

frankly say — and with a showing of truth — that they handle
a bond issue of millions with no more labor than one of a
hundred thousand, and with ten times the profit.

To my personal knowledge, there are scores of water
powers in New England able to furnish preposterously cheap
power for small investment by transmission of trivial length,
but they are cases for private investment and not for " finan-
cing." By utilizing such privileges it will often be possible
for small industries to obtain power at less than half the cost
paid by their larger competitors. The present adverse fac-
tors are mainly due to transportation. Putting aside the in-
stances of deliberate discrimination in rates — which are alto-
gether too common — there is a strong general tendency toward
punishing the industries in small places situated on non-com-
petitive lines. At this point the electric railway is beginning
to come in as an ameliorating influence, and if its develop-
ment is allowed to go on unimpeded, much good will be done.
Every electric railway network means a readier market for
every point touched, and when light freight haulage becomes
more general the influence will be strongly felt, unless the non-
urban communities are foolish enough to allow electric systems
to be captured by the steam roads which now hold the field.
The small hydraulic powers already referred to are well able to
furnish cheap motive power for transportation, if given the
chance, and thus to make the regions served more self support-
ing and self reliant.

The effect of cheap electric power in encouraging and con-
serving small industries has already been well demonstrated,
particularly abroad. In several regions on the continent its
introduction has preserved the industrial automony of large
groups of villages threatened with extinction by the very
forces more conspiciously active in the United States. Since
the existence of a small industrial center means increased
prosperity in all the region about it, the value of such a policy
to the country is all the more evident.

Bearing in mind the cost of transportation, the manu-
factures which can profitably be carried on in small places
having cheap power available are especially those in which
the value of the finished product is due mainly to the expendi-

350 LOUIS BELL

ture of power and labor, in particular, highly skilled labor.
Besides these, there are also some industries in which the raw
material can be obtained locally. It is sometimes popularly
supposed that skilled labor is not easily obtained outside
of considerable cities. It is perfectly true that in certain
lines skillful workmen are now mostly to be found in large
industrial centers, but on the other hand, they are the easiest
class to get away from these centers when good employment
offers. It is the ordinary "lumper" who is most gregarious
and who is most unhappy when withdrawn from the asso-
ciations of the city. And in fact, in small places where the
workmen are stable and responsive members of the com-
munity the difficulties of the labor situation are at a minimum.

To come to concrete figures, there are to-day many un-
utilized powers ranging from 200 to 500 horsepower that can
be acquired and developed, including electric transmission of
moderate length, for about $100 per horsepower delivered.
The}^ are cheap simply because they are on rather small
streams easily controlled in places where at present there is
a small demand for power. A factory wishing power can
thus obtain it, as the investment cost shows at a very moderate
rate, and in the majority of instances can get the few hours
of hydraulic storage necessary for utilizing enough of the
energy for lighting to offset no inconsiderable part of the ex-
penses. There are now not a few small industries clustered
about little water powers, but electric transmission has yet
to play its part in bringing isolated waterfalls into use where
there are existing facilities for transportation. It is almost
an untouched field, and one of great promise.

As an extension of the same idea one should consider the
new phase of power transmission which unites into networks
the available powers of a considerable region. This is the
basic principle of some very considerable systems and applies
with equal force to smaller ones. Given three or four small
powers within a few miles of one another, and when united
they can not only furnish their aggregate power at one or
several points but are generally available for an amount con-
siderably greater than the sum of their nominal powers. It
often happens that one of the lot has available storage greater

ELECTRIC POWER DISTRIBUTION 35i

than would be advisable to utilize independently, but which
can be used very economically to help out the entire group.
I call to mind one case with several plants on the same stream
where the storage of the upper one can be conveniently used by
all those below, the time of flow between consecutive stations
being sufficient to equalize the output very neatly. More-
over, when several plants are united in a network, the need
for duplicate lines is diminished, since most points of the
network are fed from at least two directions.

Carrying out this principle it is quite feasible to group
and utilize several powers, individually of modest size, so as
to put electrical power into many places where it would be
profitable to use it; into every conveniently situated village
in a county for the upbuilding of local industries. That
which is already done profitably over an area of many thou-
sand square miles can certainly be made highly successful over
a few hundred square miles. This work with small powers
is relatively very easy, for the distance of transmission are
generally very moderate, so that no problem of extreme high
voltage is involved; the developments of the hydraulic side
are usualfy easy, since the volume of water to be controlled is
small, and simple methods can be used throughout. It is
now common practice to run several transmission plants in
multiple, so that nothing is to be feared on the operative side
of the work. The sole difficulty is the financial one, rising
from the small amount of securities involved and a certain
disinclination to consider country affairs seriously. The
work is emphatically one most profitably to be undertaken by
local interests, interested directly in earning power rather
than promotion.

As power propositions are generally financed, the funded
debt is expected to cover the whole expenditure, including
profits to those who handle the bonds, the entire stock issued
being aqua pura. Under these conditions the absence of large
stock dividends is not evidence of poor business. On the cash
actually put in, a well planned power plant, even on a small
scale, will generally pay a handsome rate of interest after
setting aside a liberal reserve for maintaining the value of the
property.

352 LOUIS BELL

In caring for small industries and developing local re-
sources, continental Europe is far ahead of the United States.
In France, Germany, and Switzerland, there has been a keen
interest in preserving manufactures against the inroads of
centralization, and a good many electrical plants, both large
and small, have had this aim in view. The task is rendered
easier by close governmental control of transportation. In
America, on the contrary, the tendency toward industrial
centralization is at present very strong, and almost wholly
uncontrolled. Each census shows worse conditions in this
respect, without compensating advantages. It is small glory
to have rapidly growing cities fed by depletion of the rest of
the country, when at the same time economic waste is in-
creased.

The practical problem to be solved is to make the non-
urban regions industrially more useful ; and as already pointed
out, electric power distribution and communication gives at
least one efficient decentralizing agency. In a concrete case
things would work out somewhat as follows:

A factory starts up in a small town with transportation
facilities now reasonably good. With some aid from local
interests, it takes up and improves a neglected water power
a few miles away; and, not needing the whole output, sells
what it can for power and light, thus obtaining its own power
at a very low figure. It brings in workmen, not as waifs, but
as permanent residents, casting their lot definitely with the
community. Presently, ability to get cheap motive power
starts some one else at working a small shop ; a few more work-
men come, business in general begins to feel the effects of the
movement, and before long another water power is pressed
into service and tied in with the first, picking up another
village on the way with a casual shop and a little lighting.

By this time the influx of workmen encourages the
starting of an extra store or two; then another factory,
scenting cheap power, comes along and settles down to busi-
ness. The united water powers are pretty well loaded, but
then the community is now thoroughly interested; some
enterprising individuals pick up a third power ten or a dozen
miles off, develop it, and add it to the others, catching an

ELECTRIC POWER DISTRIBUTION 353

incidental village or two on the way. Each added com-
munity adds a few shops, and before long it is time for a little
electric road connecting all with the railway. A little tele-
phone exchange starts up and gets connected with the long
distance lines, and within a few years the whole region, cov-
ered by the electric network, takes on an air of new pros-
perity; population increases, the farmers find a home mar-
ket, and instead of a decaying backwoods community with
one lonely general store, a tumble down church, and a cider
mill, we have a lively little group of towns, each hustling to
get ahead of the others, in close touch with the nearer cities,
and a part of the industrial world. There are to-day little
manufacturing specialties that are known everywhere, and
with decent utilization of natural resources to give cheap
power, their number might be increased tenfold. And the
modest prosperity thus acquired is stable to a far greater
degree than that which depends upon huge urban aggregations
of manufacture. A little factory does not shut down because
a prominent broker has been speculating too freely, or be-
cause a foreman has employed a nonunion scrub woman.

Technically, the task of organizing a power network for
such uses is very straightforward indeed. It simply means
following out intelligently principles already familiar. The
transmission and distribution of the power is done generally
by ordinary polyphase methods, which may perhaps be sup-
plemented more or less by single phase circuits for small
powers. Abroad, some few plants have tried continuous
current distribution with series motors, but the high motor
voltages are objectionable on the score of safety. The most
interesting feature of engineering small plants lies in the
tactful use of water storage. For example, take a power giving
300 horsepower off the shaft of the wheel. The normal generator
in such a case would be of about 200 kilowatts capacity.
This could easily be used up in power and could be put to
use in lighting only after the period when lap load occurs.
But flash boards and two or three acres of storage at a working
head of, say, twenty five feet, would put another hundred
kilowatts into service for the couple of hours necessary to
carry the load over the peak, so that the plant could earn

Vol 3-23.

354 LOUIS BELL

moderately at least, for twenty four hours per day, at no
great added expense. A few additional acres will sometimes
work wonders. I call to mind, right in New England, several
instances in which, at a low figure, enough storage is attainable
to carry a plant over the entire dry summer season. The
trouble heretofore in the electrical power business has been
that men were hunting for big streams with several thousand
horsepower available for long transmissions to the larger
cities, and altogether overlooked scores of available small
powers, relatively much cheaper to develop and with far
nearer markets.

The number of big transmissions is necessarily limited —
there is but one Niagara, but one great cataract in Zambesi.
Though the former may be loaded to its utmost, and the
latter may turn every wheel from the equator to the cape,
the bulk of the world's power will still remain in small units.
The world's coal supply, while in the aggregate probably
much larger than is generally supposed, is being drawn upon
at a rate that implies, merely from increased difficulties of
mining and lengthened transportation, a steady increase in
price ; but the rains will still fall and the rivers flow when our
coal has to come from Thibet or Matabeleland.

Long before that time, the industrial salvation of a coun-
try will be the utilization of its smaller powers. And every
beginning made now will help to put off the day when the
earth will have to call on the skies for heat as well as motive
power, or shift its activities nearer the tropics. Meanwhile
the prosperity of our own and other countries depends upon
opening wider areas to human activity, instead of still further
confining it to great centers of population.

AMERICAN LUMBER.

BY B. E. FERNOW.

[Bernhard Eduard Fernow, director and dean, New York State college of forestry-;
Cornell university since 1898; born Inowraclaw, Posen, Prussia, January 7, 1851;
educated at gymnasium, Bromberg forest academy, Muenden, and university of
Konigsberg; came to United States in 1876 and engaged in metallurgical business;
chief division of forestry, United States department of agriculture, 1886-98; chair-
man executive committee and first vice-president American Forestry Association;
was for some time editor of The Forester; Author: The White Pine, Economics of
Forestry.]

One thousand million dollars a year is the wood bill of
the people of the United States for materials which they
derive from the virgin forest without any expenditure except
for harvesting and shaping the treasures, stored for centuries
for their use. About one half of this value represents the
cost of firewood, fencing, and other smaller materials, as
hoop poles for coopers' use, hop poles, bean poles, and the
like, while the other half is for lumber and other material
that requires bolt or log size and forms the basis of our enor-
mous wood consuming industries, which double the value of
the raw product by turning it into houses and barns, cradles
and coffins, tools and toys, and the ten thousand uses to
which it is adapted and upon which our modern civilization
depends. We hear much about the mining industry, the
coal fields, the importance of the iron and steel industry,
and about gold or silver we nearly came to civic war. And
yet the value of these last two products is not one tenth in
their annual output of what the forest furnishes ; the iron and
steel industry furnishes hardly one half the values of the
forest, and if we put all the mineral products, coal, metal,
petroleum, and every earthy material together, they fall forty
per cent below the value of the forest products, excelling the
most valuable portion of these, the sawmill product, only by
about fifty per cent. With such a showing we are justified
in placing our forest resources as second only in importance
to agriculture; wood crops next to food crops, both equally
indispensable.

355

356 B. E. FERNOW

No other country in the world has been so blessed with
useful tree species as the United States. While some of the
tropic countries excel not only in the extent of their forest
areas, but also in the total number of the arborescent forms,
they fail to produce the variety of qualities which we find in
our forest wealth, and especially are these countries deficient
in that class of timber which is most needful for a rapid de-
velopment of civilization, namely, construction materials. So
it happens that Brazil, in spite of its endless forests, imports
its building timber and lumber from us, and the distance to
Australia is not large enough to prevent us from supplying
those English colonies with lumber from the Pacific coast, in
spite of the magnificent forests of eucalyptus and other species,
which, good enough for some purposes, are not as serviceable
as our conifers.

A combination of qualities, which offers lightest weight
compatible with greatest strength and stiffness, ease of work-
ing and the possibility of securing large quantities of long and
clear material, is what we look for in building timber, and this
combination is found in the coniferous woods, the pines,
spruces, firs, cedars, redwoods, hemlocks, cypress, which are
called "soft woods" by the lumberman, although some of
them are rather harder than some of those called "hard
woods," among which are classed all the broad leafed trees,
no matter whether they are soft or hard, when worked with
cutting instruments. In addition to their qualities, the fact
that these coniferous species occur gregariously makes their
cheap exploitation possible and adds to their value. The
northern temperate zones abound in this class of woods and
one may not improperly ascribe to this fact, in part at least,
the rapid progress of civilization in these regions. Without
such cheaply and easily transported material the develop-
ment of the vast prairies would have been at least much
slower and more difficult, if not impossible. Few of the set-
tlers in those forestless regions realize the debt of gratitude
they owe to the forest.

Again, no other country in the temperate zone can boast
of such a variety, enormous development in size, and large
quantities of these most useful species as we command in

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LUMBER INDUSTRY AND ITS PRODUCTS

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AMERICAN LUMBER 359

streams of later years were hardly yet mentioned. It was
after the war, when the development of the railroad system
opened up virgin forest areas of vast extent and wealth, that
the enormous expansion of the lumber trade with its modern
machinery and modern methods began. Railroads have not
only brought distant lumber centers within easy reach of
markets but they have even penetrated the woods them-
selves, connecting the mill directly with the sources of supply,
reducing although not superseding the river drive. Under
the enormous competition thus stimulated and with ever new
virgin woods coming to development, most wasteful treat-
ment of the seemingly boundless and inexhaustible forest
wealth was the consequence, and now we are only just learn-
ing that there is no such thing as inexhaustible supplies. We
are not only becoming aware of the fact that our forest area
is comparatively small, considering the vast extent of our
country and our rapidly growing population, but the really
good timber in it is not so plentiful as the acreage might lead
one to think, and it is confined to certain localities.

There are large areas of woodlands encumbering the soil,
but economically speaking they are not of any value, being
covered with scrubby growth of tree weeds which prevent
the recuperation of the valuable kinds that have been culled
out by the lumbermen, and thus the ground is left to their
undesirable competitors. Hence, while there are about 500,-
000,000 acres of land covered with some kind of forest
growth, thousands, nay millions of these acres do not contain
any merchantable material or even promising young growth.

Our annual cut has reached such dimensions that if we
had our forest area in as good condition and as well managed
as the German state forests are, we would have to have 600,-
000,000 acres in first-class order to furnish annually our re-
quirements. We would then cut every year say six million
acres, allowing 100 years in the average for the trees to grow
that are to be cut — at present most of the trees from which
we derive our lumber are over 150 or 200 years, and the giants
on the Pacific coast have taken 500 to 1,000 years and more to
reach their dimensions. Under present conditions, when we
only exploit our virgin forests to secure the five and one half

360 B. E. FERNOW

billion cubic feet of log timber which are to furnish our forty
billion feet of lumber, timber, and bolts, we cull over probably
not less than ten to twelve million acres, taking out the best
kinds and best trees and leaving the ground to the undesirable
kinds and trees, preventing a satisfactory young growth to
take the place of what we have removed. And if perchance
a young growth starts, a natural phenomenon — natural only,
or mainly, to the United States — the ever recurring forest
fires, will sweep it off. It is now even admitted by lumber-
men, those who have a fuller acquaintance with the country,
that our " inexhaustible " forest wealth is sufficiently reduced
to call for restorative measures, such as the art of forestry
teaches. The state of New York has perhaps taken the most
advanced step in that direction by not only buying up the
culled forest lands in the Adirondack mountains but by estab-
lishing a state college of forestry in connection with Cornell
university, where the art of forestry is to be taught as a pro-
fession and the foresters to handle and recuperate the state
property are to be educated.

The geography of our lumber supplies is such that we
can recognize lumbering regions, each of which furnishes the
bulk of one or more staples to the lumber market. Thus
Michigan, Wisconsin, and Minnesota monopolize the white
pine market; the Southern Atlantic and Gulf states contain
the bulk of our hard pines, while the hard woods are mainly
furnished by the central states, with Tennessee the greatest
producer. The state of Maine, the Pine tree state, has long
ceased to supply much of the white pine, from which it derived
its name. Spruce for pulp is now its principal lumber product,
although the birch and maple in which it abounds but which
are hardly yet cut to any large extent will some day become
more valuable. Spruce also is the main lumber tree of New
Hampshire, while the rest of the New England states are cut
out of all valuable coniferous material and also largely of
their hardwoods, the majority of the woodlands being coppice
growth, fit for firewood and small dimension material only.
The state of New York, which of all the states in 1850 fur-
nished still the largest amount of lumber, especially white
pine, now only has spruce and hemlock left to furnish staple

AMERICAN LUMBER 361

goods for the market and hardly counts among the lumbering
states. Pennsylvania is in the same condition, hemlock being
its main staple, although some white pine and hard woods
still furnish the basis for its large sawmill capacity. Williams-
port once was the great lumber market of the United States,
but by the beginning of the seventies this prestige had been
transferred to Chicago, which drew its supplies of white pine,
the greatest staple of the American market, from Michigan,
Wisconsin, and Minnesota. The great lumber industries
which made Saginaw, Mich., famous all over the world reached
their climax of production in 1882. Now the cut in Michigan
has sunk from two and one half billion feet board measure in
1882 to less than one billion. Wisconsin reached its max-
imum cut in 1892 with over four billion feet, which has now
come down to less than two and one half; while Minnesota's
cut is still on the increase. These figures refer to white pine
and show plainly that this our greatest staple is rapidly near-
ing the end of supplies. Then when this great source of
wealth has ceased to flow, what remains of hard woods in these
great lumbering states will perhaps be more carefully handled.

The great hardwood market to-day is, however, at St.
Louis, to which are tributary the magnificent hardwood for-
ests of the Mississippi bottom and its affluents. Here the
white and red oaks are kings of the market, as the white pine
in Chicago, ash and hickory, sycamore and cottonwood — for
this last species too has become an important material for
boxes, etc. — and the long despised, but lately highly appre-
ciated red gum, or liquidambar, are supplying the furniture,
carriage, cooperage, and other woodworking trades.

The southern pineries have not developed any one great
center of distribution for their matchless ware of hard yellow
pines, longleaf and Cuban, which both go under the name of
Georgia pine, although they are found from North Carolina to
Texas; shortleaf pine, which goes in the trade as North Caro-
lina pine although it is as well developed in Missouri and
Arkansas, and loblolly or Virginia pine, which accompanies
the other two to Arkansas and Texas. Here, too, the bald
cypress, most fine grained and durable of conifers, grows in
the swamps, having its greatest development around New

362 B. E. FERNOW

Orleans, where the cypress association controls the market.
In the south we must seek the supplies of building material
for the next century, at least the first half, for even here sup-
plies are not inexhaustible and the naval store industry, fol-
lowed usually by forest fires, assists in decimating them. From
the west we have so far not drawn much. The distance for-
bids shipment by rail of the bulky material except for special
purposes. But when the Panama canal shall have estab-
lished a short water connection the magnificent giants of red-
wood— if any shall be left by that time — of the soft sugar pine
and the hard yellow pine, and, best of all construction timbers,
the Douglas spruce, in the trade called yellow or red fir, will
be welcome substitutes for the kinds which we shall then find
becoming scarce on the eastern side of the continent. We
shall then also appreciate some kinds which now we despise,
the magnificent hemlock of the Pacific coast and the giant
larch of the interior basin, which now are mostly only de-
stroyed by forest fires. Before another generation shall have
passed, however, we shall have learned that we can and must
get along with less lumber, build of iron and stone those
structures which are better built of those materials, and re-
serve wood for those uses for which it is indispensable, namely,
where non conductivity of heat and electricity are essential.

THE COMMERCE AND INDUSTRIES OF THE

WEST.

BY LESLIE M. SHAW.

[Leslie M. Shaw, secretary of the treasury, United States; born, Morristown, Vt.,
November 2, 1848; graduate Cornell college, Mt. Vernon, Iowa, 1874; Iowa college
of law, 187G; practiced law at Denison, Iowa, since 1876; president, Bank of Denison;
also Bank of Manila, la.; gained prominence as a McKinley advocate, 1896; elected
governor of Iowa for two terms, 1898-1902; appointed secretary of the treasury,
United States, February 1, 1902.]

Where shall the line be stretched separating the east
from the west? Mason and Dixon's line, at one time sup-
posed to mark the boundary of a section of our country, has
been so far obliterated, that to be mentioned except to re-
joice at its disappearance is an offense to modern politics
and alike to modern commerce.

Where shall the freight borne by the Mississippi river
and the Illinois Central double tracked railway paralleling
this great waterway on its eastern bank, be classed? The
Southern Pacific conveys more than seven hundred cars per
day, a quarter of a million per annum, of transcontinental
freight. Is this eastern, western, or southern commerce?
Because traffic originates on the Atlantic coast and is sent
westward via the Golden Gate and the Pacific to the far
east, is it therefore eastern commerce? Is not at least that
portion which touches the gulf southern commerce? It all
crosses the Rocky mountains, and hence, I make mention of
it as western commerce.

Chicago sends eastward over trunk lines of railroad
one hundred and fifty tons of provisions each hour of the
calendar year; Minneapolis exports four million barrels of
flour per annum; Duluth and Superior forward by way of the
lakes, sixty five million bushels of grain; Duluth, West Supe-
rior, and Milwaukee receive from the east cargoes of coal aggre-
gating three million tons per annum; Buffalo receives from
the west, and by the same great waterway, one hundred and

363

364 LESLIE M. SHAW

fifty million bushels of grain; Escanaba, Duluth, and Two
Harbors ship twelve million tons of iron ore; while Ashta-
bula, Cleveland, Conneaut, and Chicago unload an equal
amount from more than seven thousand vessels that an-
nually enter their harbors. The Detroit river floats four
times as much tonnage as passes through the Suez canal, and
one and a half times the aggregate of all vessels engaged in
foreign trade that enter our ports on the Atlantic, the gulf,
and the Pacific seaboard, an amount about equal to that of
London, Liverpool, and New York combined.

We will classify all this western commerce. It will be
observed, however, that for no other purpose may we wisely
make class distinctions among our people, or sectional divi-
sions of our country. Arbitrary though it be, I assume for
the convenience of the hour, and for the hour only, that "the
west" includes Michigan, Indiana, Missouri, Oklahoma,
Indian territory, and all west of these and all north and west
of Texas. Probably a majority of the people of the United
States speak of Ohio as a western commonwealth, while those
who live in states washed by the Mississippi river realize
they must travel some miles toward the setting sun to reach
the line that would bisect the great republic. The eleventh
census credited these states with forty five per cent of the
farm area, but gave them over seventy per cent of the culti-
vated land. The twelfth census shows a much larger propor-
tion of tilled lands. These states produce more than two and
one half billion bushels, more than seventy per cent of the
nation's cereals, and seventy per cent of the nation's hay.
They contain fifty per cent of the milch cows and sixty per
cent of all other cattle, sixty five per cent of the swine, seventy
five per cent of the sheep, and where, except in the west
would you look for eighty per cent of the wool?

Permit a few observations, tending to show that an
ever increasing proportion of the people within the territory I
have described are giving well deserved attention to indus-
tries other than agriculture. Illinois, Wisconsin, and Iowa
have increased their average annual cereal products less than
nine per cent since 1890. During the preceding decade these
same states made a fourfold larger increase, indicating very

INDUSTRIES OF THE WEST 3^5

clearly, I think, that the maximum capacity, under present
methods of agriculture, has been nearly attained.

In 1889, forty per cent of the arable land of Iowa (the
proportion actually cropped) produced one pound of cereals
per day for every man, woman, and child in the United States
— in round numbers eleven million tons. This would be quite
enough to sustain life, and more than the average ration en-
joyed by the people of the world. If all the arable land of
Iowa were put in crop, and that portion not needed to sup-
port the teams necessary for its cultivation placed on the
market, the people of the United States could not consume it
though restricted to a cereal diet. The only way the yield
of this unequaled fifty six thousand square miles of land can
be consumed by eighty million people is to have large quanti-
ties of it first manufactured into beef and pork and dairy
butter. Our increasing population renders it improbable,
however, that this remarkable showing can be long continued,
even by Iowa, though she may increase to some extent her
cereal production.

The west not only grows food products, but her people
have become no mean competitors in their preparation.
Minneapolis alone manufactures 16,000,000 barrels of flour
per annum, a carload (60,000 pounds) every ten minutes,
day and night, 365 days in the year. A branch factory in a
prairie town of Iowa of less than 4,000 population produces
6,000,000 cans of condensed milk per annum, while the parent
plant in Wisconsin makes more than double this amount, a
portion of which helps to feed the standing armies of Europe.
The Elgin Butter company consumes the cream from 70,000,-
000 pounds of milk, manufactures 3,000,000 pounds of butter
(1,500 tons), and exports its products to China, Japan, Cuba,
Mexico, South American countries, and to Alaska. A single
unincorporated firm in southwest Iowa handles in a year a
quarter million pounds (125 tons) of butter, and 3,000,000
pounds (more than 100 carloads) of poultry. Another firm
in the same state marketed, in a single year, 1,500,000 dozen
eggs, sending them to the Atlantic, the gulf, and the Pacific
coasts, while a third firm ships dressed poultry, not by car-
load only, but by trainload.

366 LESLIE M. SHAW

The product of packing houses west of the Missouri
river sells on the market for an amount in excess of the postal
receipts of the United States, while a single institution, en-
gaged in the preparation of animal products, whose parent
plant is in Chicago, produced in one year more than 10,000 car-
loads, 900 tons per day, of manufactured products, in addi-
tion to its meats. The packing houses represented in Chicago
yield a larger gross income than all the customs houses and
internal revenue collectors of the United States, while the
live animals sold on a square mile of ground within the limits
of that city is only 15 per cent less than the gross earnings of
all the railroads that enter it. Either of two packers
within this territory pays more for live animals to the enrich-
ment of the ranchman and the farmer than is paid in divi-
dends and officers' salaries by all the railroads in the United
States, operating more than 200,000 miles, transporting more
than 500 million passengers, and moving a half billion tons
of freight, and capitalized at five and a half billions.

California is known as a gold producing state, and she
well deserves her most enviable reputation, for her mines have
yielded in excess of $1,250,000,000, but her orchards and
vineyards are now a close second. California produces an-
nually 250 million pounds of cured fruits, and 7,000,000 cases
of lemons and oranges. Her farms responded with 32,000,000
bushels of wheat, 25,000,000 pounds of butter, 5,000,000
pounds of cheese, and 11,000,000 pounds of hops. She manu-
factured 65,000,000 pounds of sugar, and sent through the
Golden Gate more than 1,000,000 barrels of flour, and ex-
ported 15,000,000 dollars worth of other agricultural prod-
ucts, while her forests yielded 500,000,000 feet of lumber.

Washington has a fame world wide for her fisheries; and
her forests cut 1,000,000,000 feet of lumber, and 3,000,000,000
shingles. The fisheries of Oregon yield $3,000,000, her mines
$4,000,000, and her farms and orchards $50,000,000. Her
manufactures, including lumber, are worth $60,000,000. Cali-
fornia, Oregon, and Washington estimate more than 400,000,-
000,000 feet of lumber yet standing in their forests, 100,000,-
000,000 more than government experts estimate in all the

INDUSTRIES OF THE WEST 367

territory of the United States outside that portion which I
here represent.

Michigan, Wisconsin, and Minnesota have more than a
national reputation for their lumber interests, and this is well
deserved, yet the mines of these three western states produce
seventy five per cent of the nation's output of iron ore, more
than all the German empire and about the same as Great
Britain and France combined.

Colorado produces nearly forty per cent of our gold,
and more than forty per cent of our silver. Not one per
cent of the precious metal is found outside the limits of the
territory west of the Missouri river. Montana has produced,
during the last five years, more than forty per cent of our
annual product of copper. The west, therefore, produces
ninety nine per cent of the gold and the silver, and the copper;
ninety per cent of the zinc, seventy five per cent of the iron,
all the lead, all the nickel, and all the quicksilver, an aggregate
of more than $250,000,000 worth of metallic minerals per
annum, nearly eighty per cent of the nation's output.

While it is true that the production of grain in the states
named has not increased as rapidly as their population, it is an
encouraging fact that their manufactures, their commerce, and
their banking facilities have increased more rapidly than in the
nation at large. The United States increased her manu-
factured products seventy per cent between 1880 and 1890,
but the states for which I speak increased theirs 112 per cent
during the same period. This country now manufactures
$13,000,000,000, an amount in excess of the output from all
the factories and all the shops of Great Britain and Germany
combined by more than 3,000 millions. This enormous show-
ing records an increase of 40 per cent in the last decade, but
the territory I have defined made an increase in the same
period of 45 per cent.

A few illustrations of what has been done must suffice
to show what can be done, and hence what will be done, even
in the smaller cities and towns, in this yet undeveloped
though wonderfully progressive west.

A prairie town in Illinois, with no coal, no iron, no water
power, and with no means of communication save one rail-

368 LESLIE M. SHAW

road, in fact with no advantages save the business grasp and
enterprise of a few and the skill and industry of many, pro-
duces boilers, iron and steel pipe, brass and plated fittings,
which find a market in nearly every state in the Union, and
are exported to all countries and to the islands of the sea.
One firm with headquarters in Missouri, ships six thousand
carloads of clay products per annum into more than fifteen
states and territories and exports in large quantities to the
republic of Mexico. A single factory in Iowa, in a city of
less than 25,000, no coal, no iron, no water, but with much
skill and more energy, ships its products to England, to Ger-
many, to France, Russia, Austria, Africa, Canada, Mexico,
South American countries, Cuba, Australia, and New Zealand.
Its boilers are now running cotton mills in the Carolinas,
cutting lumber in Tennessee, Alabama, and Mississippi, irri-
gating plantations in Louisiana and Texas, making flour in
Minnesota, Kansas, Oklahoma, and the Dakotas, manufactur-
ing furniture in Michigan, and crushing ore in the valleys of
the mountains. A few miles away stands another factory
whose output of shoes finds a market in more than a dozen
states and territories, and sells for more than a million and a
half. Unincorporated mills in the same state, under a single
management, annually consume half a million pounds of
wool, the product of which, in finest flannels and ladies'
dress goods, is shipped in carload lots to the commercial cen-
ters on both oceans.

A single unincorporated mercantile establishment in Chi-
cago, whose founder is still active in its management, does
an annual business equaling the gross earnings of the New
York Central railroad, with its more than 3,000 miles, with
a train movement of 35,000,000 miles, carrying 30,000,000
passengers, and moving 35,000,000 tons of freight. Do you
wonder that I claim Chicago as a western city, when such
gigantic things can be done within its limits in the business
lifetime of a single man?

The territory I represent imports, through customs dis-
tricts located within its limits, merchandise valued at $85,000,-
000 and exports $120,000,000 worth. But who shall say how
much is consumed within these limits, or what is received at

INDUSTRIES OF THE WEST 369

other ports, or how much it contributes to swell the enormous
aggregate that goes hence from the Atlantic seaboard. The
banks within the same territory hold a billion and a half
deposits, and their clearings exceed $15,000,000,000. In 1892,
for the first time in our history, individual deposits in national
banks within the grain growing states exceeded the value of
wheat and corn sold from the farm. Now, individual deposits
in the same class of banks exceed by one hundred per cent the
value of these cereals disposed of by the producers thereof.
Manifestly the banks of the eastern metropolis hold more
western money than they have on deposit in western banks,
but it is equally true that the east has contributed generously
to western industries and enterprises; another evidence
that our country is too small, or people too few, and have too
much in common to permit even imaginary lines to divide our
commercial and industrial interests.

It is easy to predict great things. It would be, indeed,
pleasant pastime to picture the states that now produce the
iron, manufacturing the same ; the states that cut the lumber,
consuming it; and the states that grow the wool, having as
they do the purest water for its cleaning, coal in abundance,
and power in literal torrents, weaving the finest cloths, as well
as flannels, for the clothing of a hundred million of our own
people and for the comfort of many nations beyond. But I
am not so much interested in the particular location where
this work shall be done, as I am in the inauguration of such
means and policies as shall open the way for yet increased
American activities. The Pacific ocean is ours, and the gulf
is ours. Let those join hands, not across, nor over, but
through the isthmus, and the Atlantic shall be ours.^ Dis-
cover means for informing our people what distant portions of
the world require, and it will be produced. With the same
fostering that other nations afford, American ships will carry
the product of our mines, and of our farms, our fields, our
folds, and our factories, beneath all skies and into all ports,
and America will become the workshop of the world, where he
who seeks to sell his labor shall find abundant employment,
and he who employs labor shall find abundant market, thereby
contributing to the comfort and contentment of all.

Vol. 3-24.

COMMERCIAL DEVELOPMENT OF THE SOUTH.

BY CHARLES M. HARVEY.

[Charles M. Harvey, editor; born Boston, Mass., 1848; has done editorial work for
New York, Chicago and St. Louis papers and since 1886 has been associate editor
and chief political writer for the St. Louis Globe-Democrat. He is a frequent con-
tributor to magazines and reviews, writing chiefly on political and sociological topics;
author of History of the Republican Party, Handbook of American Politics, etc.]

When, on April 9, 1865, Lee's army surrendered and the
confederacy collapsed, there were 33,000,000 people in the
United States, as compared with 83,000,000 in 1905; there
were thirty six states, counting the eleven in the confederacy,
as against forty five now; and $20,000,000,000 of wealth, as
compared with $110,000,000,000 to-day. Immigration fell
off sharply in the first half of the war, and then began slowly
to increase, and expand markedly after the war ended. Hun-
dreds of thousands of lives were lost and billions of dollars of
property was destroyed during the four years ending with
Appomattox, including the $1,500,000,000 which represented
the slaves of the United States, which were counted in the ag-
gregate of the country's wealth in 1860 and previously. In
every slave state, except Delaware, Maryland, and Missouri,
none of which seceded, the value of property decreased in the
decade ending with 1870. In all those states, and in many
of the free states, the value of the property shrunk between
1860 and 1865. In the north and west expansion came quick-
ly after war closed. Thus Appomattox becomes an important
starting point in American progress.

It was in 1865 that the first real work of construction of
the Union and Central Pacific railways began, which brought
rail connection between the Atlantic and Pacific in 1869.
Those roads were a direct result of the war. During the latter
part of Polk's days, in 1848, a bill was first introduced in con-
gress looking to the construction of a transcontinental railway.
At that time there were only eight thousand miles of railroad
track, counting main lines, in the United States, Prac-

370

DEVELOPMENT OF THE SOUTH 37i

tically there was not a mile of road west of the Mississippi.
The transcontinental railway project was talked of much in
Taylor's, Fillmore's, Pierce's, and Buchanan's days, but with-
out tangible result. It was the war which brought the Union
and Central Pacific railways, the former being the eastern and
the latter the western link between the Missouri river and the
Pacific. Military necessity — the fear that if direct and quick
communication between the rest of the country and the
Pacific slope were not soon obtained the latter region would
be in danger of separation — was the impulse which secured
legislation for the building of the road. Secession sentiment
was strong on the Pacific coast in 1861. Breckinridge, the
southern candidate, got 34,000 votes in California in 1860, as
compared with 38,000 for Douglas, the nominee of the democ-
racy's northern wing, and 39,000 for Lincoln. The strength
of the Breckinridge vote in the golden state was a surprise
to the north. In Oregon Breckinridge had 5,000 votes, as
compared with 4,000 for Douglas, and 5,270 for Lincoln. It
was only through a split in the democratic party that the
republicans carried the two Pacific coast states in that criti-
cal canvass of 1860, and even then the republican margin was
perilously narrow. The activity of the secession agents in
California in 1861, and the fear that they might gain control
of that region, put a bill for the construction of a transcon-
tinental railway through congress in 1862, but the work of
laying the rails did not actually begin until 1865.

The railroads built the west, which has grown up since
Appomattox, and the Union and Central Pacific roads were
hardly completed when the second of the transcontinental
fines, the Northern Pacific, was started. That, too, was a
product of the civil war. A charter for it was granted in 1864,
but construction work did not fairly begin until 1870, a year
after the meeting of the rails at Promontory Point, in Utah,
on Oakes Ames' and Huntington's roads. Jay Cooke, the man
who floated the bonds for the government during the rebellion,
was at the head of the project, but he went down in the panic
of 1873, and work on the road, suspended then for a few years,
was taken up by Henry Villard, and pushed to completion in
1883. Those two lines, and the Southern Pacific, the Great

372 CHARLES M. HARVEY

Northern and the other transcontinental roads, threw open
the trans-Mississippi west to settlement, and incited a popula-
tion expansion without parallel in the previous history of the
country, or in the history of any other part of the world.
During the civil war, for the first time since 1848, the railway
construction in the country at large dropped below 1,000 miles
a year. In the south railway construction practically ceased.
The 35,000 miles of railway in the United States in 1865 ex-
panded to 52,000 in 1870, virtually all the gain being in the
north and west. The south' s industrial expansion was to
begin a little later. The 52,000 miles of 1870 increased to the
93,000 of 1880, to the 166,000 in 1890, 194,000 in 1900, and
to 212,000 at the beginning of 1905. This increase in railway
mileage is a fair index of the industrial and financial growth
of the country in the forty years since Lee and Johnston sur-
rendered.

The world quickly grasped the vast opportunities which
the overthrow of the confederacy and the removal of the last
cause for internal trouble would bring to the United States.
More capital for industrial investment was sent to this coun-
try in the five years immediately after Appomattox than in
any fifteen years before that time. The immigration, which
had dropped to 89,000 in each of the two years of 1861 and
1862, went up to 247,000 in 1865, after the close of the war,
and was 387,000 in 1870. It crossed the 400,000 mark for
the first time in 1872, it went above the 600,000 line in 1881
and the 700,000 mark was left behind a year later. That
represented the maximum annual inflow until it went up to
857,000 in 1903, dropping to 812,000 in 1904. The immigra-
tion tide, however, is subject to ebbs and flows, dependent on
the industrial conditions in the United States and on the
political and industrial conditions at home. The prosperity
here and the depression abroad, coupled with the domestic
troubles in Russia and Austria and the crushing burden of
taxation in Italy, is sending the immigration now up to unprec-
edented figures. Very nearly three times as many immi-
grants have landed in the United States in the years since
Appomattox as came here in the previous seventy six years,
since the first inauguration of Washington as president.

DEVELOPMENT OF THE SOUTH 373

At the end of the war there were thirty six states, three
of which had been created since Lincoln's first election. These
were Kansas, admitted in January, 1861, a few weeks before
Buchanan stepped out of office; West Virginia, admitted about
the middle of the war; and Nevada, created just in time to
take part in the presidential canvass of 1864. The first state
created after Appomattox was Nebraska, which was let in in
1867. Nebraska was the original name of the whole territory
comprising the Kansas, Nebraska and other states of to-day.
It was organized as a territory at the same time as Kansas, in
1854. The more southerly territory, however, increased
faster in population, and was admitted just after the southern
members of the senate had left congress to follow their states
in secession. While Kansas had 106,000 population in 1860,
the year of Lincoln's election, Nebraska had only 28,000.
By 1870, however, Nebraska's inhabitants had increased to
122,000. The growth in the railway mileage of the north
and west accounted for most of this expansion. Colorado,
which had been trying to get in ever since 1861, when its popu-
lation was only about 35,000, succeeded in 1876, and became
the centennial state. Then thirteen years elapsed before any
more additions were made to the number of stars on the flag,
the longest time which had passed between successive state
creations except when Missouri, let in in Monroe's time, left
a gap of fifteen years before her nearest successor, Arkansas,
came in in the latter part of Jackson's second term. But a
large bunch of states came in together this time. The rail-
ways had been building up the country west of the Missouri.
Villard's and other roads had been carrying people over into
the shadow of the Rockies and beyond them quicker and
cheaper than they had gone from the western border of Penn-
sylvania over into Ohio two thirds of a century earlier. The
consequence was seen in 1889, when North Dakota, South
Dakota, Montana, and Washington came in nearly together,
and when Idaho and Wyoming were admitted a few months
later. This completed the roll as it is to-day, except that
Utah did not get in until 1896.

But in some respects the south was by far the largest
gainer of all the sections through the collapse of the confed-

374 CHARLES M. HARVEY

eracy. Population and wealth in the south had fallen off dur-
ing the four years of war. Had a census been taken in 1865,
it would probably have shown that in the eleven ex-confeder-
ate states there were fewer people than there had been in 1860.
In the half a dozen years of reconstruction there was no
chance for the south to make much real progress. The carpet-
baggers piled up immense debts in most of the states of the
confederacy. In nearly all of them, through the enfranchise-
ment of the blacks and the disfranchisement of the confeder-
ates, the bottom stratum of society was put on top. When
President Hayes' withdrawal of the troops from South Caro-
lina and Louisiana in 1877 led to the overthrow of the last of
the carpetbag state governments, reconstruction was com-
pleted and the work of undoing it began.

But while the south's political troubles were at their
highest, the south's natural resources were beginning to at-
tract the country's attention. West Virginia, Tennessee,
Alabama and other states had coal and iron deposits which
were unthought of before the war, and these have been util-
ized in an increasing degree in the past quarter of a century.
The United States was far down on the list of coal producing
countries twenty* five years ago. It passed England in 1900,
which nation led the world until that time, and it now pro-
duces 37 per cent of all the world's coal. The south has made
a large contribution to this gain. In 1880 the United States'
pig iron product was 3,800,000 tons. It was 18,000,000 in
1903, and will be 21,000,000 in 1905. Here, too, the south
has made an important contribution to the sum total of the
country's expansion. The Birmingham (Ala.) district is a
rival of the Pittsburg region, and has advantages over the
latter in having the coal, iron ore and limestone nearer than
in the Pittsburg field.

There have been complaints from the south recently
about the low prices for cotton. These come from the im-
mense crop of that staple which was produced in 1904. That
year's yield was over 13,500,000 bales, which was 2,000,000 in
excess of the largest crop ever raised previously. The cotton
crop of 1860 was 4,800,000 bales, that of 1904 being almost
three times as great. The cotton crop has much more than

DEVELOPMENT OF THE SOUTH 375

doubled in size, measured by the 1904 figure, since 1880,
when the south's real progress since the war began to be made.
The United States produces three fourths of the world's cot-
ton, all of the American crop being raised in the south. In
that staple the south has something like a monopoly of one
of the most useful and profitable commodities in commerce.
Nor is the south's connection with cotton restricted to raising
the raw material. The old slaves states have now caught
up with the region about the Potomac and the Ohio in cotton
manufacture. Of the average of 4,000,000 bales retained
for home consumption now about 2,000,000 are manufactured
in the southern mills. In 1880 the south manufactured only
221 bales of cotton. In this branch of industry, owing to the
nearness of the raw material, to the low price of labor and to
the low rents, the south is bound to far exceed the north. Its
facilities for the production of the raw material, too, are
practically exhaustless. The 13,500,000 bales of cotton in
1905 could be more than doubled if all the south's waste
lands capable of cotton production were to be reclaimed and
utilized.

The south has not yet regained its political prestige of
the antebellum era. It furnishes no candidates for either
end of national tickets. In no convention is its advice sought
with the eagerness of the old days. The south furnished all
the country's presidents along to 1861 except the two Adamses,
Van Buren, Harrison, Fillmore, Pierce, Buchanan and Lin-
coln, and Harrison and Lincoln were born in the south. For
fifty one of the seventy two years of the nation's fife preced-
ing the civil war a man of southern birth and residence was
at the head of the government. Many of the country's vice
presidents in those days were also southern men. No south-
ern man has filled either the first or the second office since the
war, except Johnson, who, however, was chosen before the
war ended. In two elections immediately after the war the
south was not fully represented in the electoral college. Since
that time, until recent days, the south has been giving the
electoral vote to one party, and thus depriving it of a very
powerful means for exacting favors from each of the parties
in national conventions.

376 CHARLES M. HARVEY

In this respect the south has not progressed far since
Appomattox, but even here there are evidences that an ad-
vance is in sight. With its farms and plantations far more
productive than in the past, its mines and factories busy,
and its ports getting a larger and larger share of the country's
commerce, the south can reasonably consider itself a favorite
of fortune. Its wealth growing at a rate never before equaled,
it is in a position to stand philosophically the ostracism which
has barred it from the larger prizes of politics.

CORPORATE FACTORS IN AMERICAN PROGRESS
—WALL STREET AND THE GRAIN PIT.

BY W. R. LAWSON.

[W. R. Lawson, a London journalist, came to the United States several years ago and
in behalf of the London Daily News made an investigation of the industrial situation
in this country ; he had previously made similar investigations of Spain and Germany ;
Mr. Lawson's shrewd observations were quoted so widely that a demand arose for
their publication in book form and the resulting volume "American Industrial Prob-
lems" is regarded in England as a standard book on its subject.]

If an English reader were asked what influence the stock
exchange and the Baltic have on the general business of the
country he might be hard put to it for an answer. If an
American reader were asked a similar question as to the in-
fluence of Wall street and the produce exchange he would
have no corresponding difficulty. Both these institutions
stand in very close relationship to the staple markets of the
United States. They are among the recognized price makers,
and sometimes they are more effective than all the other price
makers together. They furnish the speculative element which
sometimes intensifies, sometimes neutralizes the natural tend-
ency of a market. When, for instance, a short crop is antici-
pated, speculation discounts it beforehand. By buying in
advance it puts up the price sooner than it might have risen if
left to its own course. When there is promise of a heavy
crop speculation discounts that by selling in advance. Both
operations may be quite legitimate and have a beneficial
effect. The rise and the fall may be equally moderated by
the action of the speculator. They may be spread over
longer periods, and in that way their ultimate danger may
be lessened.

The trader generally does not recognize the speculator
as a friend and ally. He more frequently treats him as a
mischievous interloper. He regards the speculator as a
creator of fresh risks rather than as a reinsurer of risks already

377

378 W. R. LAWSON

existing. But eliminate the speculator, and the grower of
produce, the dealer, and the transporter will find that they
have lost their means of reinsurance. They must now bear
all their risks themselves. If a country like the United
States, raising enormous quantities of agricultural, mining,
and other produce which have far to travel to a market and
many accidents to encounter by way, were to restrict itself
severely to the ordinary course of trade, it would often be
caught in disastrous fluctuations. In such circumstances
the farmer would have to choose between selling his crop
early — perhaps at the lowest price of the season — and holding
it for a better price, which he perhaps might not get after all.
No trader would buy it from him except at a price which
would leave ample margin for future contingencies.

Thus the farmer, in deciding whether he shall hold or
sell early, incurs the risk of a wrong decision; in other words,
he speculates. The trader who takes part of the risk off the
shoulders of the farmer also speculates. Between them and
the professional speculator there is no essential difference.
Is is only a question of degree in any case. If a distinction
had to be drawn, it might be said that the farmer and the
grain merchant only undertake risks incidental to their busi-
ness while the professional speculator goes out of his way for
them and undertakes them voluntarily. That may be, but
the vital point is, that there must be a large amount of risk
in the marketing of such produce, and that some one must
bear it. The professional speculator may argue that better
many should share it than that one should bear it alone.

Under the present commercial regime, wherever there
are business risks to face there will be speculation as well as
so-called legitimate trade. Moreover, the dividing line be-
tween the two will never be easy to draw anywhere, and most
difficult of all in the United States, where risks are great in
proportion to the enormous amounts that have to be handled.
Speculation that simply spreads these heavy risks over a
larger area requires little if any apology. On the contrary,
it may be claimed that the better it is organized and con-
trolled the more justifiable it will be. The Americans have,
after long and thorough discussion, concluded that a certain

CORPORATE FACTORS IN PROGRESS 379

amount of speculation is inseparable from business of any
kind in stocks or staple produce. Instead, therefore, of mak-
ing a futile attempt as the German government did to sup-
press it, they allowed it to organize itself on the safest attain-
able lines. The Americans have consequently the greatest
freedom of speculation and more abundant facilities for it
than any other people. They have created the largest num-
ber of speculative methods and devices . ' ' Futures, " " options, ' '
"straddles," and every known kind of contingent dealing are
familiar to them.

These facts are worth mentioning, not for their own
sakes but in order to show that in the case of the Americans
we are not dealing with a people who are squeamish or fastid-
ious in speculative matters. An American speculator will
be allowed both by law and public opinion to go farther —
considerably farther— than would be tolerated anywhere else.
Therefore whatever oversteps the American code of specula-
tive ethics is likely to be rather rank. Here we shall judge
the Americans by their own code, and not by that of any
European community. Transactions that would be penal
in Berlin form a large part of the day's work in New York or
Chicago; and things that would scandalize London are mere
passing sensations in Wall street.

These rather elastic principles of Wall street and the
produce exchange have another noteworthy peculiarity —
they are steadily growing more elastic. The question before
us now is, what effect this laxity may be expected to have on
the industrial future of the United States. It may be best
answered, not by elaborate descriptions of Wall street and
other centers of speculation, but by a few examples of the
length to which speculative plunging is now carried. It
would seem as if all the most dangerous precedents of the
past were being revived for the purpose of out-Heroding
them. In the phenomenal outburst of American prosperity
there is much that foreigners can cordially admire. Threaten-
ing as it may be to their own interests, they can respect the
splendid business abilities associated with it. But there are
some phases of the boom which cannot be regarded either
by Americans or foreigners without grave alarm.

380 W. R. LAWSON

The colossal gambles which follow each other so rapidly in
Wall street and in the "grain pit" must shake confidence in
the whole commercial system which permits them. Whether
they be inseparable from it or not, they threaten serious dis-
aster to it sooner or later. They are even more ominous than
the trusts, for the latter may plead that union is strength,
but colossal gambles can end only in panics. The gamblers
themselves are perfectly aware of that, and it is amusing
to see how jealously they watch each other when any
alarm of a perilous "deal" is afloat. Formerly the greatest
exploit that a Wall street filibuster could achieve was
a "corner" of some kind. It was the crown of his ambition,
like the role of Hamlet to a budding tragedian. But now the
bare mention of a corner sends a cold shiver through Wall
street. It begets terrible visions of a house of cards tumbling
about one's ears. So terrifying is the prospect it conjures
up that the banks, as soon as they hear of one being attempted,
launch a vigorous remonstrance at the cornerers. This ac-
tually occurred not long ago — in fact, about the beginning
of 1902. The episode was afterwards described by the actor
in chief, John W. Gates. To an interviewer he made the
following ingenuous confession:

"On the Louisville we had the opinions of the best ex-
perts and auditors in the country that it was worth more per
share than the Illinois Central. Before we started we knew
there were $25,000,000 quick cash assets in the treasury; but
the public did not know that. We started knowing the actual
intrinsic value of the company and its exact physical condi-
tion, and we had the reports of the auditors on its financial
condition.

"When we obtained 306,000 shares — the amount we
started out to get — there was a short interest of 150,000
shares, of which 100,000 shares were the foreign short inter-
est and 50,000 were stock that August Belmont had sold
under a resolution of the board authorizing its sale. These
50,000 shares were not good delivery for thirty days, and if
we had called the stock and insisted upon the specific per-
formance of the contracts, as we had every right to do, we
could have caused a panic greater than the May panic.

CORPORATE FACTORS IN PROGRESS 381

"The proposition was made to me, by a thoroughly
responsible man financially, that if I would call the stock and
insist upon delivery he would sell 500,000 shares of the stock
and give me half the profits for doing it. Morgan's people
sent to my hotel and awakened me at 1 :30 in the morning,
and stated that at a meeting of bankers it had been deter-
mined that we were the owners of the Louisville, and wanted
to know what we proposed to do, stating that it meant a
panic probably greater than the May panic. I told them the
proposition that had been made to me; but said that under
no circumstances would we insist upon specific performance
of the deliveries of Louisville."

In any other country than the United States Mr. Gates
and his confederates would very probably have had to answer
a charge of criminal conspiracy. But never a suspicion or a
fear of that kind seems to have entered their minds. They
laid their plans most deliberately and carried them out step
by step — an expert examination of the Louisville company's
books; cautious buying of over 300,000 shares, which must
have taken some weeks; an arrangement to "call" the shares
suddenly — in other words, to insist on immediate delivery
at a critical moment; and, by way of grand finale, an agree-
ment with another confederate to supply the frightened bears
with as many shares as could be worked off on them during
the bear panic. Apparently it was intended to sell half a
million shares against the three hundred thousand held, so
that the corner would have ended in the cornerers being
themselves short of two hundred thousand shares.

Wall street would probably say that it was a Napoleonic
scheme, and if it had succeeded the consequent panic would
have been almost forgiven for the sake of the skill and daring
of its authors. But the New York banks were not in a posi-
tion to let Mr. Gates and his fireworks have their own way.
They were thoroughly alarmed, and to add to their terror
Mr. Pierpont Morgan, the deus ex machina of Wall street,
was away in Europe. In great haste the Atlantic cables were
set to work, and a message came back for Mr. Gates which he
dare not defy. Without Mr. Pierpont Morgan and the Mor-
gan banks Mr. John Gates would be a very small Napoleon

382 W. R. LAWSON

of finance. He read aright the Olympian message and climbed
down, but not unconditionally. Mr. Morgan and the banks
had to pledge themselves to protect the three hundred thou-
sand shares which Mr. Gates would be left with if the bear
squeeze did not come off.

The Gates-Louisville episode of 1902 is so far the high-
water mark of Napoleonic stock gambling. We have pre-
sented it thus early in our sketch of Wall street for that
reason. It represents in a striking and graphic way how far
the stock gamblers of the period are prepared to go in the
manipulation of markets — not stock markets alone, but grain,
cotton, tobacco, iron, steel, coal, or any other staple with a
"pull" in it, according to Wall street slang. Conversely it
shows how much these markets have all the time to fear from
the most daring and reckless manipulators. We may be asked
how such things can be done in New York and not elsewhere.
That is a question on which a great deal hangs. The possi-
bility of such things being done in New York, not once or
now and then, but almost any day in the week, seriously
compromises the whole industrial system of the United States.
Unfortunately the champion stock gamblers are also the in-
dustrial kings. This same Mr. Gates was a leading promoter
of the United States Steel corporation. He has been an
active lieutenant of Mr. Morgan in other big deals. He is
understood to control quite a number of railroads. And his
exploit in cornering July corn proved him to be also a man
of some importance in the grain market.

The big deals which are now almost daily events in Wall
street are not merely alarming in themselves — they are much
more so for the character of the men engaged in them. These
men are, sad to say, not ordinary gamblers. They are also
financiers of genius and commanding ability. As financiers
they are at the head of their profession, not in New York only
but in the world. A group of them, not exceeding a score
perhaps, hold all the principal banks in New York and Chicago
in the hollow of their hands; they control all the chief railroad
systems; they are nearly if not quite as omnipotent in politics
as in finance. Only two checks on them can be said to exist.
One is President Roosevelt and the other is the great labor

CORPORATE FACTORS IN PROGRESS 383

unions. Morganeers — trade unionists — and single handed
president; that is how the triangular duel stands. It is a far
more portentous struggle than that of McKinleyism and
Bryanism, which shook the country to its center. It will be
a more critical one for the millionaires. In the McKinley
campaign they had the workingmen to a large extent on their
side, but in the next struggle every trades union will be arrayed
against them. Every labor war, great or small, now going
on will leave its mark on the succeeding elections.

But what can be wrong with Wall street when a score of
men, self made all of them, can in a few years raise them-
selves to such a pinnacle of wealth and power as to be able
to do not only anything they please, but when and how they
please? All ordinary laws and principles of finance have
been swept away before them. They claim the right to con-
vert stock into bonds and bonds into stock at their own con-
venience. They capitalize and recapitalize the creatures of
their own creation as the whim seizes them. They split or
splice securities, organize or disorganize them, bull or bear
them, talk them up or talk them down "to suit their books,"
as the saying is. And these things they do not by hundreds
or thousands but by millions.

In any case Wall street transactions would be large com-
pared with those of any European stock market because it
has so much more to deal in. But that only renders it the
more surprising that a small group of men should have got
control of markets so extensive that the very idea of manipu-
lating them should seem prima facie absurd. The stock
market, which from its huge size and the great variety of
securities it deals in might have been thought safest from
faking, has been captured hand and foot by a band of finan-
cial fakers. There must be something in Wall street itself
or in the financial system it represents to have made such a
paradox possible. This is the problem which of all others
in the economic life of the United States most urgently de-
mands solution. It cannot be pretended that such a state of
affairs is safe or healthy for the commonwealth. It cannot
be expected to continue long without provoking resistance
and possible violence. Hence the duty that is laid on serious

384 W. R. LAWSON

minded Americans to find out how this gambling oligarchy
has arisen, and how in the public interest it is to be checked.

The Wall street oligarchy has no counterpart in Europe.
Stock dealing is active enough in all conscience in every
European capital, but there is nothing Brobdingnagian about
it. There may be firms which turn over a few thousand
shares per day more than their neighbors, but the very largest
turnover in London, Paris, or Berlin would look small in New
York. European dealings are further distinguished by being
mainly personal. There may be some large operators who
work together or on the same speculative tack; there are
foreign banks who act for large clienteles; and there may be
casual combinations within the stock markets themselves.
These exceptions do not, however, materially affect the rule
that speculation in Europe is mainly personal. Another of
its peculiarities is that it is greatly subdivided among different
markets. In the London Stock exchange, for example, pro-
fessional dealers are supposed to restrict themselves to one
group of securities, be it consols, home railways, Americans,
or Kafirs. The area of individual speculation is consequently
limited. A man with $500,000 of stock open is a somebody,
whereas in Wall street he would be nobody.

The great distinction between the old and the new worlds
from a speculative point of view is that European stock
markets have so-called " leaders." With them the crowd is
everything, and it sways hither and thither under a multi-
tude of ever changing impulses. There is no Keene or Harri-
man to take it in hand and work it up to reckless enthusiasm
in favor of a particular stock. Neither is there a Mr. Gates
lying low and buying hard till he gets unsuspecting sellers
into a trap and shuts it down on them. It is very doubtful
if either the Morgan or the Gates role could be played with
any success in Europe. Past experience has made the British
investor too skeptical about American booms suddenly sprung
on him. Even if he were easier caught the machinery to
catch him does not exist here to a twentieth part of the ex-
tent that it does in the United States. Neither is it worked
with a twentieth part of the energy that American stock-
brokers throw into it.

CORPORATE FACTORS IN PROGRESS 385

Not so many years ago speculation in stocks was con-
fined to New York and two or three of the principal cities in
the interior. Chicago was of course the headquarters of
speculation in grain, but its stock exchange was of very little
account. In the same way there was very little betting on
races. The average American had enough to do attending
to his own business, and he seldom went farther afield. But
an enormous expansion of all kinds of gambling is now visible.
The Western Union Telegraph company supplies stock quota-
tions and racing news at a fixed rate per annum to all and
sundry. Every hotel and beer saloon has its ticker. Every
town of fifteen or twenty thousand inhabitants has a stock
exchange or a board of trade. Every provincial broker who
would be thought anything of has his special wires from Wall
street and issues his daily bulletin to clients. From Boston
to San Francisco nearly everybody talks more or less of
stocks, options, bulges, and corners. The huge advances
which all leading stocks have made since the reorganizations
of 1895-96 have thrown a glamour over the whole country.
People who never touched stocks before now regard them as
a lottery in which big prizes are to be drawn. Again and
again they try their luck, and they have just enough success
to keep up their interest in the game.

There is thus a plentiful supply of inflammable material
for the Wall street leaders to operate on. A hint has only
to be dropped that the Morgan brokers have been large buyers
of southerns, or that Mr. Keene speaks well of Union Pacific
prospects, or that Mr. Gates has formed a bull pool in Atchi-
son, and it will be flashed across the continent over every
tape machine and into the columns of every newspaper.
Then the bull fever breaks out again, and orders to buy are
flashed back to Wall street from all over the country. From
Montreal to El Paso, and from Philadelphia to Seattle, the
grand army of punters answer to the signal. A leader can
do almost anything with such a following. He can run up
prices till he gets tired of raking in profits. He can unload
shares by tens of thousands in sure and perfect hope that he
will be able to get them back again when he wants them, and
at his own price. He can lure them on with " privileges,"

Vol. 3-25.

386 W. R. LAWSON

new issues, combinations, rumors of increased dividends,
and all the rainbow visions that fascinate the gambler. If
now and then he takes out the peg which holds up their fool's
paradise and lets them drop into the cellar, the worst he has
to fear is that they may storm and swear a bit. But he knows
they are very forgiving, and at the first offer of a new plum
they will all swarm round him again.

The only British parallel to a Wall street leader is a
popular company promoter. But he is a mere rocket in com-
parison. No sooner is he up skyhigh than down he comes
like a stick with a crowd of furious dupes on top of him. The
same rocket seldom goes up a second time, but a Wall street
juggler can play the game over and over again ad libitum.
Mr. Gates himself has been at it for at least ten years. Our
company promoting rockets have other limitations which do
not trouble their American prototypes. They have to be
content with what they can work off on the public. Our
banks and finance houses are, as a rule, closed to them or
opened only sparingly. But the Wall street juggler has banks
and trust companies galore at his service as well as the public
pocket.

Herein is the greatest peril of the American situation.
A private speculator may lose his money and be done with it,
but when a bank or a trust company loses money it may be
the beginning of far reaching trouble. After what has been
said in defense of intelligent speculation within safe and
moderate bounds, it will not be supposed that we are purists
in this matter. But in the name of sound honest finance a
protest has to be raised against financial institutions which
have the interests of seventy eight millions of people to protect,
mixing themselves up, however slightly, with Wall street
plungers of the Gates type. The Gates corner in Louisville
& Nashville stock could never have been thought of if two
or three considerable banks had not undertaken to back it.
Without them nothing Mr. Gates or his confederates could
have done would have mattered much to any one but them-
selves. But when important banks will stoop to such opera-
tions it is impossible to say what they may not do. They forget
entirely their proper duties and responsibilities when they

CORPORATE FACTORS IN PROGRESS 387

thus lend themselves to gigantic schemes of stock jobbing,
which, if carried out as planned, might have wrecked Wall
street and half of the New York banks at the same time.

American produce exchanges are more speculative than
even Wall street, and they are no less necessary to the business
of the country. It would be easy to mention a number of
very important functions they have to perform, and on the
other hand equally easy to draw up a long catalogue of abuses
which may be charged against them. Briefly put, their raison
d'etre, like that of the stock market, is to distribute the risks
inseparable from modern industry and commerce. For ex-
ample, when pioneer settlers are pushing into a new country
they have to contend with many special difficulties and stand
in need of special facilities from banks, railroads, and other
local institutions. Few of them will have barns to store their
crops in. As a rule they have to take them immediately they
are harvested to the nearest railroad station. Here there is
probably an elevator belonging to the railroad company and
run on its behalf. The company, through its local grain
agent, buys the wheat or corn and pays for it. Possibly it
cannot be sent east at once, and in order to minimize the risk
of holding it for weeks or months it is sold for future delivery.
Formerly that was a very usual practice in the northwest, but
it is no longer indispensable.

As a second example, there is the owner of a huge flour
mill turning out several thousand barrels a day. In order
to ensure a constant supply of wheat for his mill he must make
heavy purchases in advance. If he were to enter at the open-
ing of the season into unprotected contracts for all the wheat
he expected to need, the risk would be tremendous for both
buyer and seller. They have to face the danger of market
movements so violent as to be ruinous. Both, therefore,
welcome a means of hedging. The miller can at any board of
trade or produce exchange in his neighborhood sell " futures."
He can protect himself against a violent slump in wheat or
corn by a prospective sale for September, October, Decem-
ber, January, or February delivery— any month in the grain
year, in fact. The seller on his side can protect himself against

388 W. R. LAWSON

a hitch in the fulfillment of his contract by buying for October,
December, January, or any other month.

A third example of the bona fide usefulness of " futures"
is to be seen in dealing for foreign markets. The dealer may
in course of his regular business have to enter into contracts
for millions of bushels. To carry such a risk unprotected
would be madness, especially when it can be insured, as it
were, by post-dated sales or purchases. In short, the scope
for legitimate dealing in future wheat or corn is unlimited.
At the same time it opens up still wider scope for speculation.
A large portion of the grain trading in Chicago and New York
is speculative. Three fourths speculative to one fourth regu-
lar business might be about the proportion of the two. Again
the speculative section of the market has many degrees. It
may extend from punting for a few dollars up to a corner en-
gineered by millionaires. But, large or small, all have this
feature in common — they are little else than betting on the
weather, with the help of a state aided weather bureau. Even
the department of agriculture has to become an indirect ac-
complice of the grain speculators.

Both the department of agriculture and the weather
bureau conduct for the public benefit a highly organized
statistical service which, without their intending it or being
able to prevent it, tends to foster this kind of gambling. It is
not their fault that the gambler can make as good or even
better vise of their information than the legitimate trader.
Anyhow, the result is that an immense volume of business,
speculative and otherwise, is based on the weather and crop
reports issued periodically by the government. The influ-
ence of these reports extends even beyond the grain trade,
and has at times a powerful effect on the stock markets.
From the moment that the seed goes into the ground the grow-
ing crops become a subject of lively interest on every stock
and produce exchange in the United States. Day by day
their prospects are discounted as an item in the current year's
business, the traffics of the railroads, and the general eco-
nomic situation. As they approach the critical stage the prob-
able yield of the various crops is appraised by a host of expert
statisticians, and every slight fluctuation in their condition

CORPORATE FACTORS IN PROGRESS 389

begets a sympathetic movement in grain and stocks. In effect
they are revalued day by day, and grain and stock operators
readjust their calculations to every change.

To the British phlegm that may seem a very gratuitous
and unprofitable kind of worry, but the Americans love it.
Discounting the harvest several months in advance is one of
their most favorite methods of quick money making. Between
them the government statisticians and the "grain pit" have
reduced it to a science. The crops are valued on a system
of percentages which looks very exact, but is capable of great
discrepancies. On the wheat crop of 1901 the department
of agriculture and the census department differed about a
hundred million bushels on wheat alone. The standard
represented in the official tables by 100 is obtained by averag-
ing the actual harvests of the previous five years. In 1902
100 meant 16.9 bushels per acre of winter wheat, 17.7 bushels
of spring wheat, 34.7 bushels of oats, 15.7 bushels of rye, and
31 bushels of corn. If on a given date " condition" was re-
ported at 90, that implied a probable crop one tenth smaller
than the average of the preceding five years. If " condition"
were 80, that would be one fifth smaller than the average of
the preceding five years, and so on.

The department of agriculture very prudently does not
go beyond percentages, but these, as soon as published, are
laid hold of by another set of statisticans who work out from
them the estimated yields. Taking the average of each crop,
they multiply it by the number of bushels per acre which the
percentage of "condition" indicates. On this branch of the
crop estimates the chief authority is Mr. J. C. Brown, the
statistician of the New York produce exchange. He gives the
finishing touch to them, and the "grain pit" has so much
faith in him that immediately his figures appear operators pro-
ceed to trade on them. If they foreshadow a light crop —
that is, in the slang of Wall street, a "bull point"— the bulls
redouble their buying. If the forecast be for a heavy crop,
the opposite effect happens, and the bears take their turn.
Technically speaking, they "sell the market down." Thus
the "grain pit" ebbs and flows until the last grain report of
the season has appeared.

390 W. R. LAWSON

There are, of course, a good many other influences com-
ing into play. Manipulation is in season all the year round.
It is generally spasmodic and short lived, but seldom a year
passes without an attempt at a grand corner. It almost in-
variably comes to grief, but next year is sure to produce
a new candidate for the questionable distinction. The latest
was Mr. John W. Gates of steel trust fame. During the sum-
mer of 1902 he had several big railroad deals pending, and,
apparently to amuse himself while they were maturing, he
tried a " squeeze" in corn. It may be worth describing, not
merely as the latest novelty of its kind, but for various pecul-
iar features it presented. Mr. Gates is an all-round plunger
to whom nothing comes amiss, from poker to a corner in pork
or corn. On this occasion he selected "July" corn as the
subject of his experiment.

When he began buying is unknown, but it may have been
early in the year, very probably soon after he unloaded his
Louisville & Nashville stock on Mr. Pierpont Morgan. How
much he bought is also a secret, but the general estimate in
the "grain pit" was twenty million bushels. Mr. Gates and
his associates could not possibly have taken up and paid for
twenty million bushels of corn or anything like it. They cal-
culated on the sellers not being able to deliver. But, like the
youthful plunger Mr. Leiter, they had made one or two errors
in their calculations. No doubt they were all right as to the
1901 crop having been five hundred million bushels short, and
as to the consumption being much in excess of the current
supply. They may have been right, too, in their belief that
the visible stocks in Chicago and at other reporting points
were unusually small. But the invisible stocks — namely,
corn in the hands of farmers and elsewhere outside of reporting
centers — seem to have proved too much for them.

It was a race against time to get the invisible stocks for-
ward during July, and if the duel had been fought out to the
bitter end the whole twenty million bushels could hardly have
been forthcoming. Still the "shorts" did wonderfully well,
considering. Early in the month they were bringing into
Chicago 500 carloads a day, and by the middle of the month
they had increased the number to a thousand a day. Very

CORPORATE FACTORS IN PROGRESS 391

soon Mr. Gates and his friends had had to pay for three million
bushels of corn. But all the time they were putting on a bold
front in the "grain pit" and successfully bluffing the bears.
The price of the corn ran up from 60 to 90 cents per bushel,
and predictions of dollar corn were being joyfully made in
the pit. But farmers and other holders did not wait for the
dollar. From 70 cents upwards they sent in every bushel
they could muster, and Mr. Gates saw that if he was not to
get his full twenty million bushels he would get an inconven-
iently large portion of it. So he called a halt and came to
terms with the shorts.

How the two sets of plungers arranged their "draw" is
of no public interest, still less which of them had the best of it.
But it is of public importance that immediately the end of
the corner was announced corn dropped back from 80 cents
to about 65 cents a bushel. A rise of 25 cents per bushel, en-
gineered in a few weeks, ended appropriately in a fall of 15
cents in as many hours. For the farmers who were sharp
enough to sell on the rise the corner was a stroke of luck, but
for traders who were frightened into buying on the rise by
the alarm of an impending corner it was the reverse. To
the legitimate grain market it was a demoralizing evil, and
for American finance it is an obvious misfortune that men like
Mr. Gates, capable of imperilling a whole community for the
sake of a few million dollars profit, should be recognized
financial leaders. Twice within a year he brought the coun-
try to the brink of a panic — first by his Louisville rig and next
by his corn corner. On both occasions he had to be called off
at the last moment in order to avert a catastrophe, but he will
often be heard of again at the same game.

The more respect one feels for institutions like the stock
and produce exchanges of the United States in their legiti-
mate sphere, the more he will regret the flagrant abuse that
is frequently made of the facilities they offer for useful and
even indispensable classes of business. The more liberal
his views as to American methods of speculation in grain and
stocks, the stronger will be his criticism of operations which
go far beyond the widest limit of financial ethics. Markets lia-
ble to be upset by "squeezes" and corners of the Gates type
are not in a fair way to be accepted as international models.

STRENGTH AND WEAKNESS OF AMERICAN

FINANCE.

BY ELLIS H. ROBERTS.

[Ellis H. Roberts, treasurer of United States; born, Utica, N. Y., September 30, 1827;
graduated from Yale, 1850; principal, Utica free academy, 1851-59; editor of the Utica
Herald, 1851-80; member of New York legislature, 1866; member of congress, 1871-5;
assistant treasurer of the United States, 1889-93; president, Franklin National bank.
New York, 1893-7; treasurer of United States since 1897.]

The United States is not asking for new loans. The
government is not increasing its debt by long bonds or by
exchequer bills for temporary needs. If in any month outlay
exceeds income, the deficit is covered by previous surplus laid
away. Individuals and corporations reach out for vast sums
in loans, but the nation is not a borrower in any market. Its
interest bearing debt at the beginning of the fiscal year 1898
was $847,365,130, and the annual interest was $34,387,315.
A loan of $200,000,000 was made by popular subscription for
war purposes. Yet at the start of the fiscal year of 1904 that
debt was only $895,157,440 and the annual interest $24,176,-
745. In the interval the government has paid the cost of the
Spanish war, $20,000,000 under the treaty of Paris, and $50,-
000,000 on account of the Panama canal. Now the nation
stands on a granite basis of credit, and over the door of the
treasury may be inscribed: "We are not borrowing here."

This fact reduces the financial problem to simple terms.
The government leaves the loan market alone. Enough
factors remain, however, to make it worth while to study the
strength and the weakness of American finance. For a full
discussion of our theme, we might perhaps be required to treat
of the receipts and disbursements of the government. We
may, however, in these partisan days leave this branch to the
orators and the press of the political parties, who will be quite
ready to thresh out the straw to the uttermost. In an ideal
currency system, one would not expect to find besides sub-
sidiary and minor coin, and the disappearing treasury notes,

392

AMERICAN FINANCE 393

six classes of money — gold coin, uncovered notes, certificates
issued for gold, certificates issued for silver, bank notes and
legal tender silver dollars. Or only four classes might be
named, to wit: gold and its certificates, constituting 44.1
per cent; silver and its certificates, 21.2 per cent; uncovered
notes 13.2 per cent; and bank notes, 17.2 per cent. The
financial architect would seek to be rid of uncovered notes
and legal tender dollars, and might look askance at the large
bank circulation.

The United States notes, at first and still in theory a
forced loan, began without reserve behind them. The re-
sumption act which aimed to redeem them in gold, gave them
a power for mischief as weapons for assault on the official
treasure. Danger arose when the revenue was inadequate,
and the treasury became impoverished. Peril ceased when
a surplus was created, and the yellow metal flowed into the
national coffers. In itself the United States note is weak;
it gains strength as gold is put behind it. The practical
banker may join with the theorist in the wish that it may
pass gradually into the gold certificate. That change is going
on without jar or friction on two paths; first, by the increase
in the gold in the treasury, and second, by the use of notes of
$10 instead of those of larger denomination. In five years
the $10 notes have run up from just less than $100,000,000 on
July 1, 1900, to $193,459,321 in 1902, to $245,440,011 on
the same date in 1904. The treasury gross gold in the
same period from $423,577,971 rose to $681,838,821, and
is now over $700,000,000. Thus these greenbacks have
turned from large notes in chief part to be 70.7 per cent in
$10 bills, for which the demand always, with rare excep-
tions, exceeds the supply. In the same five years additions
of 60.9 per cent to the gross gold in the official vaults have
been made. The share of the uncovered notes to the total
currency is steadily growing less. From 33.6 per cent in
1880, and 23.4 per cent in 1900, it has fallen to 13 per cent.
The danger from them has diminished in certainly as marked
a ratio. They are to decrease, while the general volume is
to increase. Congress could without friction use at once
$50,000,000 of the gold reserve for certificates of $10

394 ELLIS H. ROBERTS

and $5, as a substitute for United States notes for redemp-
tion, and in each succeeding year apply a like sum for
the inflow to continue such change. The redemptions of
United States notes last year were $122,680,000 and the
average for five years $101,231,200. It would be easy to
transform half of this sum into gold certificates. By this
process the United States notes would grow less weak, and
before very long become in fact gold certificates, as they are
now in essence, in the ratio which the reserve holds to them,
or 43.2 per cent.

The silver dollars have of late been severely assailed in
and out of congress. They are denounced as excessive in
volume and as a menace to the integrity of the currency.
Demand has been loud for their redemption in gold, and for
the reduction of their number by coinage into fractions.
Predictions have been put forth that some official may, at
his option, pay them for interest or some other high obliga-
tions. Assault on a fortress does not prove that it is vulnera-
ble, but it does challenge vigilance and defence. While
additions to the silver dollars were constant, their force for
evil or for good grows apace. The repeal of the act for the
purchase of silver set a barrier to the current and checked it.
The recent stoppage of the coinage of dollars fixes a limit to
their volume, and permits a calm survey of their use and their
abuse. Silver dollars in circulation and not covered by certifi-
cates on July 1, 1900, were $65,889,346, and 3.2 per cent of
the total currency. The volume increased for three years,
but the ratio fell to 3 per cent of the total circulation. In
the fiscal year 1904, including the coinage for treasury notes,
the volume became $71,561,684, or 2.8 per cent of the total
circulation. The silver dollars in the treasury reach the
maximum from October to December annually, and the
minimum in July or June. In 1900 the difference between
summer and early winter was $8,203,467; in 1901 it was
$10,422,985; in 1902 it was $6,651,358; in 1903 it was $9,794,-
447; and in 1904 it was $10,011,539. This is a margin of
practical elasticity in these metallic dollars, and marks the
currents of their use in the varying seasons. This elasticity
is in so far an offset to the weakness of such coinage.

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MONEY STOCK OF THE NATIONS
IN MILLIONS OF DOLLARS

2400

2200

2000

1800

1600

1400

1200

1000

800

600

200

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AMERICAN FINANCE 397

introduced. If not one was passed, every project sought to
unsettle in some way existing conditions. This threat of
instability is one of the penalties of the great blessing of
free speech and unstinted right of petition. The day must
have its shadows a well as its sunshine. The confession that
weak links can be found in our financial chain shall not drive
us into pessimism. We know the growth and the reserve of
strength. Under the act of March 14, 1900, every dollar is
equal to every other dollar, and all are interchangeable. Be-
cause they are most in use among all the people everywhere,
the small notes are in greatest demand. If conditions point
at all to a premium, the ones, twos and fives will command it
first. But the level is well maintained. Whatever winds
blow or storms beat, our currency has a surface as clear and
even as a mirror. That surface is not of mercury, shifting
and undulating; it is formed of the minted gold.

The stronghold of our financial system is its actual gold,
as well as our statutes. The world has about $5,500,000,000
of this metal, of which the United States has in its stock
$1,342,422,740. In the last reported year, the world pro-
duced less than $300,000,000, of which our mines gave $80,-
000,000. Our treasury holds $700,000,000 in gross, and our
banks, national and other, have $300,000,000, approximately.
So over one fifth of all the world's gold is in the United States,
and the bulk of it is in the banks and the treasury. The in-
crease in gold in both forms in our currency in five years has
been just less than $300,000,000 ($299,853,457), and in the
past year from August 1st to August 1st, $137,727,920. The
charge is put forth often in spirit, and sometimes in words,
that we are extravagant and wasteful in the possession of so
much of the precious metal. Are we? A leading financial
journal of New York quotes the president of one of the largest
banks in San Francisco as alleging that it costs $20 to get a
dollar of gold out of the ground. Was the metal all that the
picks of the miners and their self sacrifice took out of the
earth? Did not the argonauts of 1849 and their successors
create the California of to-day? The ranches, the orchards,
the wheat and the fruit, the factories and shipyards, the
cities, the churches, the universities, the civilization of that

3q8 ELLIS H. ROBERTS

prosperous commonwealth, are a part of the harvest planted
by that $20 of the miners.

A writer in the Nineteenth Century alleges that in
Australia the balance in gold mining has been adverse, and
in the same review we read that on the whole gold discoveries
have not been of use. For all fields response may be given
on the same lines as for California. Is not California now, is
not Australia, worth all they cost? But we are not studying
whether gold prospecting or gold mining as an industry is
profitable or the reverse. Loss may befall the miners in
direct results, and yet by extending population, opening up
new districts, creating new centers of production, they may
add largely to the welfare of mankind.

Quite another question is whether the supply of yellow
metal in this country and in the world is in excess. That
problem is important and far reaching. We are to note that
gold here is in the ratio of 44.9 to the total currency, while in
Great Britain it is 70; in France, 62.12; in Germany, 66.10;
in Russia, 87.71, and in Austria-Hungary, 68.90. In all these
countries combined, gold is 69.6 to the total circulation. If
the world's experience is to be accepted our gold is not in
excess, although our whole volume of money may be too
great. Gold, whether in coin or certificates, becomes elastic
as currency just to the extent that it comes to the treasury
and goes out from the vaults. This counterflow has no limit
save the operations of trade. No payments or deposits in
this form will be rejected, and the treasure will be held intact
until the public use draws it out. Coin and certificates are
interchangeable, and elasticity may assert itself to any de-
gree. Our total circulation per capita at $31.06, exceeds
that of every other nation save France, where it is $39.22.
But our industry and enterprise and local traffic also lead in
the comparison. The question is grave whether our cur-
rency is not in excess of our needs.

American finance connects itself with world movements.
While we cannot follow the debate relative to the profit of
gold mining, we must recognize the fact that among the great
commercial nations the yellow metal is the only instrument
for the final adjustment of trade differences. The experience

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MONEY IN THE UNITED STATES BY DECADES
FROM 1800=1904

MILLIONS

2550

2450

2350

2250

2150

2050

1950

f
f

1850

f

1750

■

1650

1550

1450

1350

1250

1150

1050

950

i

850

750

650

m

550

/

450

350

250

150

50

1800

1810

1820

1830

1
1840 1850

I860

!870

1880

1890

1900

1904

EARLY AHERICAN FINANCIERS.

BY GEORGE ALFRED TOWNSEND.

[George Alfred Townsend ("Gath"), journalist and author; born Georgetown, Del.,
January 30, 1841; graduated from Philadelphia High School, 1860; became a jour-
nalist in 1860 with the Philadelphia Inquirer, and later with the Philadelphia Press
and New York Herald; war correspondent New York World, 1864-5, where he made
a reputation as a descriptive writer; described Austro-Prussian war for the World,
1868. Author, Life of Garibaldi, Real Life of Abraham Lincoln, The New World
Compared with the Old, etc.]

Poets are not of much interest in our day because pov-
erty, tranquillity, dignity, humility, the cardinal virtues of
many centuries, have lost their charm. To do anything pur-
poseful now one must collect wealth first.

In doing so, the purpose generally loses its soulfulness.
The wife of our bosom says : " O, don't be notional ! You can't
make the age." We harden by our material fiction. As Bill
Travers said, when trying to light his gas with his wife's comb,
which he thought was matches: " Tooth is stronger than fric-
tion."

Some men, like Dr. Schliemann, succeed at money, and
go and dig Agamemnon up. Others, like the sturdy president
of the Chicago university, make letters a character by saying
to their rich patrons, "Give me $2,000,000 to start with, or
I'll stay a poor tutor."

Indeed, wealth exercised to great ends is poetry. The
transmuting power to give Cinderella a glass slipper, Aladdin
a magic lamp or the Christian his heaven, are imagination
with a financial requital.

Science has changed the theme of poetry from barbaric,
causeless riches and display to enlightened power and sys-
tematic utility.

Hence the bank is the muse, the banker is the good fairy,
the God of the living world is the financial essence and trinity
which hears the popular prayers and answers them in showers
of treasure.

We pray for a railroad, not to the same old moral over-
looker. We pray for waterworks to the banker god. We ask

401

402 GEORGE ALFRED TOWNSEND

not upon our knees, but with our most wistful and worshiping
intelligence that the concrete wisdom of the lords of exchequers
will rescue us from panic, and our words are still the same:
"Lord, help thou mine unbelief."

It was this feeling of pious homage Daniel Webster paid
to Alexander Hamilton in the metaphor of God appearing to
Moses, of Jesus raising Lazarus.

"He smote the rock of the national resources and abun-
dant streams of revenue gushed forth. He touched the dead
corpse of the public credit and it sprang upon its feet. The
fabled birth of Minerva from the brain of Jove was hardly
more sudden or more perfect than the financial system of the
United States as it burst forth from the conceptions of Alex-
ander Hamilton."

Having applied the religious figures of both the Jewish
and Christian scriptures to his hero, Webster added from the
mythology of the ancients another religious tribute. The
country heart of Webster, his luxurious blood, his waste of
revenue, his literary incapacity to do more than earn fees
and salaries, had yet the justice and discernment to see that
the founder of the American treasury was a universal provi-
dence.

So all those who continue Hamilton's task, the wise mer-
chants who were Hamilton's consulters and their continuers
to the present day, the savers of money and the utilizers of
savings, the upright and public hearted bankers, the youth
who join their seniors in holding up the hands of men of fiscal
supervision, are of the new elect and patriotism of the saints.

Before Hamilton existed business had its public opinion
and general convictions. But the exact mathematics, the
precise and long projections, the Scotch and the French com-
bination in Hamilton, enabled him to do the work of John
Law, his Franco-Scotch predecessor, upon the more certain
resources of the United States.

Law, the founder of the bank of France, died about
thirty years before Hamilton was born; he was of the gambling
class of Cammack, Villard and Woerishoffer, but he had studied
the bank of Amsterdam on the spot, while a very young man,
and it was as old as Jamestown and Captain John Smith, and

EARLY AMERICAN FINANCIERS 403

nearly a hundred years older than the bank of England,
which Law saw appear.

Bills of exchange dated from a previous bank of Barce-
lona, when the Jews were in disfavor and required to have
their money in some liquid state. The Dutch gave the penin-
sular Jews an asylum, and hence fiscal science paused long
at Amsterdam.

The Jewish race proved an exception to all the other
migrations of Germans, Tartars, Phoenicians, etc., in that
they carried financiers in their camp. The golden calf is
still their passover mark. Their survival is not a miracle,
but a scientific, a constitutional method, an insurance and
commissariat. "Render unto Caesar the things which are
Caesar's, " was also spoken by a Jew.

At this day, when Rothschild and Belmont extend to us
the certitude of our money and enable the times to revive,
the traditions of some old transactions about Jerusalem are
commonplace. From the Arab and Semitic sentimentality
we get a foolish hostility to riches, and the church had to take
among its saints the rich man who, by not giving his all to
the poor, preserved the moralist a tomb.

A Dutchman, King William, reared among the semi-
Jewish bankers of Holland, planted the bank of England at
the suggestion of a merchant who offered through it to raise
the king's war loans. The politicians in parliament attacked
it. It charged the government 8 per cent, and £4,000 besides
annually, but the people took the stock ten years after Penn
founded Philadelphia.

The bank set Europe free from the French king and his
persecutions and gave English liberty its career, of which we
are a part, and the public debt of England is the private
affair of the bank, not the business of impecunious political
demagogues.

Why did America, with such a capable financier as Hamil-
ton, grow up to dislike banks and bankers? The constant
indebtedness of slaveholders and the debts of the free settlers
to establish themselves on new land caused the two classes
to unite against paying debts and taxes. The four presidents
elected after Hamilton's retirement and death traduced his

404 GEORGE ALFRED TOWNSEND

merits and copied without understanding his finance. The
fifth president, Jackson, attacked the bank of Biddle as a part
of the spoils programme and in behalf of the right of politics
to issue money. The states, according to the genius of their
people, disciplined their several banking systems, some, like
Mississippi, repudiating, others, like New York, setting the
national government its banking example.

The populace was always behind the men of finance. The
southern or slave states had often capable financiers like
Langdon Chenes, William H. Crawford, James Guthrie and
Hugh McCulloch. Here and there a banker of special apti-
tude like Alexander Mitchell issued the currency for an im-
mense section, yet was called a sound democrat.

Salmon P. Chase lived under the shadow of the failure of
the Ohio Life Insurance and Trust company, which went
down in 1857, and brought on that general panic of which
the civil war was the relief. A cause of it was excessive rail-
road building and the contraction of loans, the latter having
reached in New York the figure of $122,000,000. The Ohio
failure was for only $2,000,000, but it was a sign of the times.
The whole capital had been embezzled. It was also plain
that the bank presidents were incompetent even in New York
City. Extravagant living, fraud in corporations, overbond-
ing, a corrupt press, state legislatures bribed by railroads, and
state wildcat banks, aided the eventuation. Chase was gov-
ernor of Ohio at the panic and his state treasurer, Gibson,
had been caught robbing the state of half a million dollars.
Chase's majority ran down from 15,000 to 1,500 voters. Yet
he stepped from this embarrassment to the head of our ruined
finances and his chief monuments were the national banks.

A year after the legal tender or arbitrary treasury note
bill passed the national bank act was passed, Feb. 25, in each
case, 1862 and 1863. Chase as chief justice attempted to
return to the democratic party and declared the legal tender
act illegal, December, 1869. Field was one of the four other
justices with him. Both were presidential candidates. Mil-
ler, Swayne and Davis, all or nearly all ditto.

The public paid no more attention to the decision than
to the first abortive decision of the income tax case of 1895,

EARLY AMERICAN FINANCIERS 405

knowing that it would be set aside by a reconstituted court, as
was done.

A biographer of Mr. Chase pretends that he was originally
against the legal tender act, but Senator Morrill told me that
Chase intimated that he would resign from the cabinet unless
Morrill, Morton and others in congress ceased their opposition
to the greenback measure.

Mr. Chase's merit as a financier was reviving a national
currency.

The assaults previously efficacious against the one United
States bank and its branches now fell upon a cordon of banks,
each intrenched in its own locality.

These banks and bankers generally regarded Chase as
having tried to chisel his name out of its only durable monu-
ment.

McCulloch, of Maine, an Indiana practical banker, for
years at the head of the successive state bank systems there,
was required by Chase for his currency details and not im-
probably for future political assistance. He obtained Chase's
place in Johnson's cabinet, was resuscitated by President
Arthur, and he set on foot the acts which John Sherman con-
summated to restore specie payments, or the equality of all
our money, in 1879.

Boutwell and Windom were payers of the public debt
and refunders; Manning and Fairchild grown-up clerks of the
national bank system ; Carlisle was a Saul of Tarsus suddenly
become a financial Paul.

The financiers have been long lived.

McCulloch died at 87, the widow of Alexander Hamilton
at 97, his survivor fifty years; Albert Gallatin died at 88;
Alexander Dallas, who restored the United States bank, died
earlier of the gout. Adam Smith lived to be 67, a sickly child
and old bachelor. Richard Rush, promulgator of the great
tariff as secretary of the treasury under President J. Q.
Adams, lived to be 79. Finance, relieved from the personal
pursuit of wealth, is a seasoning, wholesome profession. And
even avarice requires virtues which pleasure throws away.

The Astors, the first Vanderbilt, Peabody, Girard, lived
full lives. Men of providence for themselves get longevity,

406 GEORGE ALFRED TOWNSEND

and benevolence or providence for the many cannot but be
blessed. The secretary of the confederate treasury, Mem-
minger, was far above the men in Davis' cabinet in correct
understanding, and that edifice, discarding the sound experi-
ence of nations, exhausted itself before it ceased to fight. The
military ardor which made him the chief victim of the bank-
rupt Burr's gamester shot probably took from Hamilton the
fifty years his wife survived him. Presidential ambition is
equally incompatible with steady financial statesmanship.
The art of evading responsibility is the financier's stultification.
Gallatin, Crawford, R. J. Walker, Howell Cobb, Chase, John
Sherman, are instances of men who weight themselves with
treasure to win a jockey race.

The severest comment upon Aaron Burr's reputed talents
is that he who would be president and an emperor could
not make a living either by his talents or his probity. His
second wife, a former mistress, turned him out of the house
for appropriating her rents. He was the natural founder of
Tammany hall. Alexander Hamilton, according to the diary
of Gouverneur Morris, who wrote it there the day he eulo-
gized Hamilton's ashes, was an illegitimate son, but his
financial genius remade him family ties.

It is not necessary to remind you that the Rothschilds,
who are now taking care of our currency, established their
fortune upon the loan of the British subsidy for Hessian troops
to subdue America; nor that half the foundation of the Bar-
ings, whose failure made our misery, was the fortune of Senator
William Bingham, of Philadelphia, whose daughter married
Baring. Her sister, who had been seduced by Count Tilly,
a roue noble in Philadelphia, was lifted out of her humility by
another Baring marrying her. European travel, foreign
society, profusion and fast life extinguished this family here,
and in the abbey church at Bath, England, I read the tablet
over William Bingham, Robert Morris' successor, and the
descendant of one of Paris' Quaker blacksmiths.

The life of Jacob Ridgway's heiress, Mme. Rush, of Phila-
delphia, was equally foreign and fast. Ridgway was the
banker rival of Stephen Girard, and, like Bingham, used our
consular service to increase his wealth. His daughter had

EARLY AMERICAN FINANCIERS 407

the flavor of Antwerp and Rubens, where her father was
consul. She died in a Saratoga hotel in 1857. Her effects
are to be seen in the library called for her and left by her
bookworm husband, James Rush. They apparently burned
out the fires of congeniality in foreign travel, and resolved
to respect each other as a Quaker solemnity.

Stephen Girard removed from New York to Philadelphia
the year before he married, in 1770, a servant girl. He di-
vorced her, it is said, for infidelity, and it is also said that for
a like cause James Lick ran away from Philadelphia and made
a stake in Chile.

The female sex often points the moral of "Lucky in love,
unlucky at cards."

Girard kept a cider grocery and sold claret to soldiers in
the revolution, and after it was over went into the San
Domingo trade. His wife went to the lunatic aslyum in 1790
for twenty five years. He was a one eyed man. His wife
had a child seven months after she went to the asylum.
Girard possibly reaped treasure in the San Domingo massa-
cres. He named his ships after the French philosophers
Voltaire, Rousseau, Helvetius, and Montesquieu, to whom
the orphans probably owe Girard college. The unbeliever
astonished Philadelphia in the yellow fever by taking personal
custody of the chief hospital, but he may have been familiar
with the fever in the West Indies. He equally contemned
doctors and clergy, respected the cents and let the dollars
respect themselves, wore out his old clothes but fed well, and
like Hopkins, Peabody and other philanthropists, made
transient love no expensive thing. He swore like a jack
pirate. When he frequently gave to churches it was only to
improve the city. To young Baring, the London banker, who
rode five miles to cry: "Mr. Girard, the Voltaire has arrived
safe," he cried, "my ships always come safe; I am busy with
my hay." Girard's bank, established when he was 62, was
the result of the scoundrelism of the politicians in congress,
led by the vice-president, George Clinton, in wiping out the
first United States bank. The politicians of our time would
do well to go to the library of congress and get the little vol-
ume of Stephen Simpson. I am now consulting in my library

4o8 GEORGE ALFRED TOWNSEND

the biography of Girard published in 1832, near the time of
his death. Believing, as a Jeffersonian democrat, that the
United States bank charter would be renewed, he bought
through the Barings, of the English selling stockholders,
$500,000 of the stock.

Barings were then about to fail through their American
investments, as they did almost fail through Argentine invest-
ments eighty years later. The Barings, already embarrassed,
owed Girard $1,000,000 which they could not pay. He took
this falling stock for the debt. The honest bank settled at an
advance of 8J per cent, making Girard's stock 3| per cent
premium. The charter being beaten by George Clinton's
casting vote, Girard resolved to trust congresses no more, but
established a private bank with his money. He originated
that now common character, the private banker, in this
country. He also pressed Alexander Dallas to have the
United States bank renewed. He bought the old United
States bank building in Third street, with the cashier's house,
for $120,000, one third their cost. Girard was the real founder
of the second bank of the United States, which built the mar-
ble temple now the custom house in Chestnut street. With
the first bank, he received deposits of $5,000,000 specie from
the expired bank, and his own $1,300,000. He founded civil
service reform by keeping all the United States bank officers.
He adopted for his shield and bank note vignette, the American
eagle and a ship under full sail. A fair running account was
considered entitled to accommodation; small notes were
discounted the first; the chief losses were from preferring to
lend to big depositors.

He took large subscriptions to the war loans of 1812-14.
He was the Pierpont Morgan and August Belmont of the
treasury in that crisis. He called in his own currency at the
suspension of specie payment and paid out state bank notes
not his own issue, bought for cash. So, by 1817, he stepped
forward with his own resources to restore government specie
payments. With this specie reserve he ransomed his ship,
the Montesquieu, for $93,000 from the British captor, and
she had $200,000 cargo. He sold it for $500,000— silks,
nankeens, etc., now made in this country.

EARLY AMERICAN FINANCIERS 4<>9

In 1814, the treasury was bankrupt and government
offered 7 per cent and a large bonus for $5,000,000. Only
$20,000 was proffered till Girard stepped forward and took
the whole amount. The effect was electrical and cowards
were clamorous to be let in on the ground floor. Girard let
many of them in on his best terms. Bill Jones, acting secre-
tary of the treasury, a rival sea captain, refused to let Girard's
cashier have one eighth of 1 per cent for getting this loan.
Girard never would lend money to a demagogue politi-
cian.

This humble but meteor man took the loans for the second
United States bank at his counter, and waited till the last day
before he took the remaining $3,100,000. Indeed, he brought
the original bank of Hamilton to uphold the public finances
till party folly would recharter another national bank. Bill
Jones, aforesaid, and Sam Smith, of Baltimore, expected to
govern the second bank. They rejected Girard's offer of a
million of specie and the dissolution of his bank into that of
the government if he could name the cashier. The bank
would have burst long before Nicholas Biddle's time had not
Girard had it investigated by congress. The cashier was
then made John Kean, father-in-law of the late governor,
Hamilton Fish, of Grant's cabinet. Specie payments resulted
from the bank importing $7,000,000 of specie from Europe,
precisely as we are doing now.

Girard was an antitype of Commodore Vanderbilt, both
sailors. Girard was blind of one eye and partially deaf. The
legislature of Pennsylvania pronounced private banks like
his unlawful. Girard said that "the art of finance was as
necessary to those who governed as industry was to those
who produced the wealth of a country; soldiers and generals
were of secondary importance, and could be created by
money." The politicians in 1829 bankrupted Pennsylvania,
and Girard advanced the naked treasury its clothing.

Two years later Girard checked the outflow of specie
by knocking down exchange. He lived to subscribe to the
earliest railroads, and died at 82 from being upset by a wagon
and from erysipelas. Hardly had he died, the most complete
individual Pennsylvania ever had, when his magnificent will

4io GEORGE ALFRED TOWNSEND

made the whole city his orphan. He died in the presence of
the busts of Voltaire and Rousseau, was buried like a Quaker
in a Catholic yard, without ritual, and the freemasons marched
for him, their grand treasurer. No clergyman attended his
funeral, but the wealth he accumulated was the national
religion, and he remains our greatest financier.

THE CONCENTRATION OF BANKING INTERESTS
IN THE UNITED STATES.

BY CHARLES J. BULLOCK.

[Charles Jesse Bullock, professor of economics, Williams college; author; born Boston,
May 21, 1869; graduated Boston university 1889 Author, The Finances of the
United States, Essays on the Monetary History of the United States, Introduction
to the Study of Economics. Editor : A Discourse Concerning the Currencies of the
British Plantations in North America, by William Douglass.]

Ever since Andrew Jackson overthrew the Second Bank
of the United States, the American banking system has con-
sisted of a large number of small institutions possessing little
desire or power of helpful cooperation. Large banks with nu-
merous branches, such as exist in Canada and Scotland, have
been unknown in the United States, save for a few transient
enterprises of ante bellum days. A central institution, enjoy-
ing federal patronage and serving to unify banking interests,
has been a political impossibility since Nicholas Biddle rashly
ventured upon a trial of strength with the masterful statesman
from Tennessee. National banks, state banks, private banks,
trust companies, competing vigorously for public favor, have
met tolerably well the needs of the country in fair weather;
but in times of stress and storm these separate institutions
have been unable to oppose a united front to the forces of finan-
cial disorder. Yet, upon the whole, this decentralization of
banking interests has been generally approved as democratic
in its tendencies and well adapted to the diverse needs of our
vast territory.

At the head of the system stand the national banks,
which possess the exclusive power to issue circulating notes.
For twenty years following the Civil war this privilege remained
sufficiently remunerative to gain for these institutions a de-
cided predominance over the banks of deposit and discount
incorporated by the several states ; but since the early eighties
causes which are well understood have reduced the profit de-
rived from the issue of notes, and have decreased the attract-
iveness of a federal charter. In 1884 there were 2,550 nation-
al

4I2 CHARLES J. BULLOCK

al banks and but 1,022 state associations, while in 1902 there
existed 5,397 state banks, and 4,601 national. In point of re-
source and banking power the national associations still retain
their preeminence, having nearly three times the capital and
over twice the deposits shown by the state institutions; yet
banks of the latter class are increasing more rapidly than those
of the former, despite the temporary influence of recent
changes in the national banking laws.

The state banks of deposit and discount have multiplied
rapidly in the Mississippi valley, and especially in the south
and west. In general, the laws under which they are formed
are more liberal in their provisions concerning loans upon real
estate, and permit the establishment of banks with smaller
capitals than are required under the federal statutes. The
last circumstance accounts for the rapid growth of state asso-
ciations in communities where a capital of $25,000, the mini-
mum fixed for national banks, is too large to be employed with
the greatest profit. In some cases the state laws may verge
perilously toward the point of laxity, but in general these
banks are safely conducted and enjoy excellent credit in their
own communities. In New England and the middle Atlantic
states a decided preference is shown for national banks; but
New York has nearly two hundred state associations, some of
which, in New York city, make large advances to operators on
the exchange.

Private bankers are very numerous in most parts of the
United States, and are usually allowed to conduct their busi-
ness without public supervision. In 1902 no less than 4,188
such individuals or firms paid the internal revenue tax then
levied upon their capital and surplus. In most sections their
resources are small, and their average capital in many states
does not exceed ten or fifteen thousand dollars. In agricul-
tural districts such agencies are useful in supplying credit fa-
cilities, but in recent years the state bank with small capital
has secured an increasing share of such business. Our large
cities, however, have many private bankers who are conduct-
ing enterprises of the largest size. Besides receiving deposits
and making discounts, these firms frequently do a brokerage
business or deal in foreign exchange. Many of them have

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CONCENTRATION OF BANKING INTERESTS 415

tions hold no less than $160,000,000 of funds deposited by
other national banks. The reserves of state banks and trust
companies are handled in the same manner; and on Septem-
ber 15, 1902, the national banks of New York city had
$414,000,000 of deposits that belonged to other institutions.
This means, of course, that the bank reserves of the United
States are concentrated more and more in a single city, just
as, in France or England, the reserves are stored in a great cen-
tral bank.

The marvelous development of American industry in
recent years has increased very decidedly the demands made
upon our banking system at the very time when such business
has been drifting toward the city of New York. Between
1897 and 1902 the total bank clearings of the country in-
creased from fifty four to one hundred and sixteen billions of
dollars, while the proportion falling to the New York clear-
ing house rose from fifty seven to sixty four per cent of the
entire volume of these transactions. This has caused an un-
precedented increase of the capital employed; so that within
five years the banking institutions of New York have enlarged
their capital, surplus, and undivided profits from $232,000,000
to $451,000,000. And if, to these figures, we add the increased
deposits secured from outside banks, we can form some ade-
quate estimate of the strength of the forces that have been
concentrating our banking interests in a single city.

To no small extent this demand for additional capital has
been met by the establishment of new institutions, particular-
ly by the formation of trust companies ; but in a much larger
measure it has occasioned an increase of the resources of exist-
ing banks. Prior to 1898 the banks of New York had been of
very moderate size. Only two had a capital of $5,000,000,
and the average for the clearing house institutions was less
than $1,000,000; to-day the average capital is nearly twice as
great, while three banks have as much as $10,000,000 and one
has $25,000,000. In 1895 the capital, surplus, and undivided
profits of the fifty national banks amounted to $110,000,000,
and their deposits stood at $507,000,000; in 1902 the number
of these institutions had fallen to forty five, while their capi-
tal, surplus, and profits had risen to $191,000,000, and their

416 CHARLES J. BULLOCK

deposits to $1,057,000,000. It is evident, therefore, that the
rapid expansion of the business conducted in New York city
has stimulated the growth of larger institutions than the coun-
try has known since the days of the Second Bank of the United
States which, it will be remembered, employed a capital of
$35,000,000. It should be observed that our largest bank,
the National City, with its capital of $25,000,000, is smaller
than the great banks of other countries. The capital of the
bank of England is $72,000,000; that of the bank of France
amounts to $36,000,000 ; while the bank of the empire of Ger-
many has a capital of $30,000,000.

The increased capital of the larger banks has been se-
cured in many instances by subscriptions from the existing
stockholders, but in other cases it has come from the consol-
idation of two or more institutions. The national banking
laws do not authorize explicitly the combination of banking
associations, yet one section relating to voluntary liquidation
seems to contemplate such an occurrence. Mergers are some
times effected through the purchase of the assets and the as-
sumption of the liabilities of the institution that is to be ab-
sorbed. In other cases one bank increases its capital and sells
the new shares to the stockholders of the liquidated associa-
tion for the cash that they receive in payment for their original
holdings. Occasionally both banks are placed in liquidation,
and their assets are bought by a new institution which also
assumes their liabilities. The comptroller of the currency
recommends that the law should be amended in such a man-
ner as to simplify the process of consolidation.

In New York city these bank mergers have attracted
great attention, and the First National bank, the National
City, the Bank of Commerce, the Hanover National, and many
others have figured in such transactions. But in Boston,
Philadelphia, Pittsburg, Baltimore, Cincinnati, Cleveland, De-
troit, Chicago, St. Louis, and Omaha, the process has been re-
peated; so that reports of bank consolidations have become
quite the order of the day. In 1901 twenty one national banks
were absorbed by other national associations, while six were
merged with state banks or trust companies; in 1902 there
were forty six consolidations of the former class, and eleven

CONCENTRATION OF BANKING INTERESTS 417

of the latter. Apparently we are now witnessing a movement
which resembles, at least superficially, that which has proceed-
ed so rapidly in the field of transportation and manufactures.

But actual consolidation is not the only method by which
our banking capital is being aggregated in larger masses; for
in many cases a common ownership has been established in in-
stitutions which retain a formal independence. The national
banking laws prohibit one association from holding stock in
another, but there is nothing to prevent a group of men from
buying a controlling interest in an}^ number of banks. This
method is exemplified by the groups of institutions which
Mr. Charles W. Morse has brought together in several cities.
It has been followed also, by the capitalists who control the
great National City bank, and by others. Sometimes a great
deal of diplomacy is required to effect such an arrangement,
since prosperous banks of long standing are jealous of their
independence and their stock is held at very high prices. An
illustration of this is seen in the relations of the First National
bank of New York with the Chase National. In this case
some degree of union was secured through an exchange of
holdings and directors, so that the resources of the two banks
are now under a joint control. In many cases it is supposed
that the stockholders of one bank have purchased an interest
in other institutions with money that has been borrowed by
pledging as collateral security the shares thus acquired. Such
a practice makes it possible to secure an extensive control with
a small amount of capital, and may yet prove to be a source
of danger. Obviously, if a number of banks that are involved
in the same set of enterprises make numerous loans upon each
other's shares, an impairment of capital might result from
the failure of the undertakings in which such loans were used.

Finally, in addition to all the centralizing tendencies which
have been described, every effort has been made to secure co-
operation on the widest possible scale, through arrangements
designed to unify the world of finance. The larger life insur-
ance companies have become interested in various banks or
trust companies ; and their officers in a purely private capaci-
ty, are influential in many other institutions. Private bank-
ing houses are represented among the owners and managers

Vol. 3-27

4i8 CHARLES J. BULLOCK

of national and state associations, while the good offices of
influential capitalists have been enlisted as far as practicable.
As a prominent banker has stated: "We now have skill and
resources combined, with a strength never before seen in the
United States and perhaps never in the markets of Europe."
In the present day of unbounded prosperity, the structure
erected upon the principle of community of interest presents
an imposing, even awe inspiring, appearance ; its solidity, how-
ever, will not be subjected to the decisive test until we reach
a season of adversity.

It is difficult to trace with entire accuracy the complex
relationships which now unite so many of the financial insti-
tutions of the city of New York. In broadest outlines, how-
ever, the situation can be described by saying that two major
and two minor spheres of influence can be clearly recognized.
A brief description of these will serve to give greater definite-
ness to our statement of existing conditions and tendencies.

Of the major spheres of influence the first is dominated,
although not absolutely controlled at all points, by what are
known as the Standard Oil interests. Ten or twelve years ago
the magnates of the oil combination secured control of the Na-
tional City bank which, within a decade, has increased its cap-
ital, surplus, and undivided profits from three to forty one
millions; and its deposits, from twelve to one hundred and
thirty millions. This corporation is believed to be connected
more or less closely with some fifty other institutions located
in various parts of the country. In New York it stands at the
head of a chain of eleven or twelve banks and trust companies.
Some of these, as the Second National bank, are wholly con-
trolled by the interests which the City bank represents, and
are operated virtually as branches of the larger institution;
others, as the United States Trust company, possess greater
independence, but work in harmony with the general policy of
the group. The entire chain of institutions employs a capi-
tal and surplus of $92,000,000, holds deposits amounting to
$377,000,000 and carries loans that aggregate $266,000,000.
With the National City interests, also, there are identified
some of the leading officials of the New York Life Insurance
company and the banking house of Kuhn, Loeb & Company.

CONCENTRATION OF BANKING INTERESTS 419

The same interests control, also, a second chain of insti-
tutions. This is headed by the Hanover National bank, and
includes two smaller banks and the Trust company of America.
The total capital of the four institutions is $16,000,000; their
deposits amount to $97,000,000; and their loans stand at
$57,000,000. With the Hanover bank, moreover, the Union
Trust company, controlling $52,000,000 of deposits and
$44,000,000 of loans, is known to have intimate relations.
If now we combine the figures of the two chains of institutions
associated with the City and the Hanover banks, it appears
that within our first sphere of influence there have been aggr-
egated $108,000,000 of banking capital, $474,000,000 of depos-
its, and $323,000,000 of loans. And these data, it should
be remembered, take no account of the control exercised over
banks located outside of New York.

The other major sphere of influence is controlled from the
banking house of J. P. Morgan & Company and from the offices
of the two large insurance companies. Perhaps little violence
will be done to the facts if, henceforth, we call this the Morgan
sphere ; for it seems certain that the dominating influence ema-
nates from 23 Wall Street. Three chains of banking institu-
tions are the repositories of the power here represented. One
of them is headed by the First National bank, which, within
ten years has increased its total resources from thirty one to
one hundred and ten millions, and now has a capital, surplus,
and undivided profits amounting to over twenty three millions.
In this institution Mr. Morgan's control is almost undisputed;
and with it are associated the powerful Chase National bank,
the Liberty and Astor banks, and the Manhattan Trust com-
pany. This group of institutions possesses an aggregate bank-
ing capital of $33,000,000 while its deposits and loans stand
respectively at $149,000,000 and $72,000,000.

A second chain of banks is led by the National Bank of
Commerce in which the Mutual Life Insurance company is one
of the principal stockholders. With it are grouped four other
institutions, of which the largest is the Morton Trust com-
pany. At the head of a third chain stands the Western Na-
tional bank, which is associated with the Mercantile and the
Equitable Trust companies. The Equitable Life Assurance

420 CHARLES J. BULLOCK

society holds large blocks of stock of the first two of these in-
stitutions, and the Gould interests are represented in the own-
ership and management of the Mercantile Trust company.
If both of these chains are combined with the one controlled
through the First National bank, we find in the Morgan sphere
of influence a banking capital of $97,000,000, deposits amount-
ing to $472,000,000, and loans which aggregate $299,000,000.
In addition to this the two life insurance companies just men-
tioned have outstanding loans of $28,000,000 upon collateral
security.

Compared with the Standard Oil and Morgan interests,
the chain of institutions known as the Morse group is of
decidedly minor importance. But this includes twelve banks
and two trust companies, with an aggregate capital of $23,000,-
000 and loans amounting to over $100,000,000. Mr. Morse
and his associates have purchased the control of these insti-
tutions, perhaps with the aid of loans secured in the manner
described in an earlier paragraph. At present the group is
supposed to be operated upon an independent basis, but there
is no speculation concerning the possibility of its being merged
with one of the larger banking combinations.

And, finally, we have come to the National Park bank,
with its group of affiliated institutions. Four of these are
small state banks in different parts of New York, which are
operated virtually as branches of the larger corporation; the
fifth is the Colonial Trust company. The banking capital
of the six associations is $13,000,000 and their loans do not
exceed $76,000,000; ownership and management rest with the
Astor, Vanderbilt, and Belmont interests.

Outside of these various spheres are independent banks,
some of which a decade ago occupied the leading positions.
Then, too, many new institutions, generally employing a small
capital, have been established during the recent period of busi-
ness expansion. Yet the Morgan and the Standard Oil alli-
ances control not less than $205,000,000 of the $451,000,000
of banking capital invested in the city of New York; and, in
all probability, secure a similar proportion of the business
transacted. Time alone can tell whether these mighty aggre-

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HARLES J. BULLOCK

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CONCENTRATION OF BANKING INTERESTS 423

illustrates the conditions under which the operations of such
institutions must be conducted. The same tendencies exist
also in the case of the deposits by country banks. At the ap-
proach of anything resembling a panic these are withdrawn
with great rapidity; so that they have been justly called the
explosive element of our banking system. It is evident, there-
fore, that more than ordinary conservatism will be required
if the largest banks are to exercise a steadying influence in
times of actual or impending danger.

This point can be made somewhat clearer by a brief refer-
ence to the conditions that prevail in other lands. In France
or in England for example, the specie reserves of the whole
country are concentrated very largely in the vaults of a central
bank. The Bank of France and the^Bank of England occupy
an independent position, and are dominated by no outside in-
terests that can involve them in the fortunes of special enter-
prises. Sobered and steadied at all times by an appreciation
of the enormous moral responsibility that rests upon them,
the managers of these institutions adhere to their ultra conserv-
ative policy even when the spirit of speculation is rampant
in other financial circles. Against its enormous deposits the
Bank of England maintains a cash reserve of over fifty per
cent, while the position of the Bank of France is even stronger;
when, therefore, other banks experience a demand for ready
money, relief can be quickly afforded by these central institu-
tions. And it is only through such conservatism as these
banks display in periods of prosperity that they can contribute
to stability in times of stress and storm. When it is remem-
bered that the reserves of the New York banks seldom exceed
very greatly the twenty five per cent limit which has been
established by law and by custom, the contrast between Amer-
ican and French or English conditions becomes at once appar-
ent. For an independent bank, which is free to seek its own
safety at the approach of danger, a reserve of twenty five per
cent should ordinarily prove to be ample; but for institutions
that aspire to the rank of central banks such a safeguard must
be wholly inadequate.

This leads us to another weighty consideration. Unlike
the central banks of other countries, our largest institutions

424 CHARLES J. BULLOCK

are closely connected with various industrial interests, so that
they do not occupy an independent position. Their policy is
not controlled with sole regard for the general welfare of our
banking system; but they have been drawn into vast enter-
prises, into promotions, or reorganizations, often of a specula-
tive character, and have displayed less, not more, than ordi-
nary conservatism. The National City bank stood sponsor
for the Amalgamated Copper company, and the First National
has lent its aid to the various undertakings with which Mr.
Morgan has been identified. This is not to say, even by re-
motest implication, that the safety of the banks have been en-
dangered by such transactions; but it is mentioned in order
to illustrate the fact that these institutions are not free to
husband their resources in order to insure the stability of the
money market, and are not, at present, qualified to assume
the roles of the Bank of England and the Bank of France. It
is to be feared that our financiers have not yet learned the dif-
ference between banking and the promotion of companies ; but
until this distinction is better understood, New York city will
not rival London as an international financial center.

One thing, however, may be conceded to the claim that
the union of banking interests already effected may do some-
thing to mitigate the severity of future panics. A mere increase
of capital will accomplish nothing in this direction, if banks in
the day of prosperity, use their credit up to the hilt in their or-
dinary enterprises. But the common control of large groups
of institutions may develop the habit and power of more effect-
ive cooperation. This will not, it is true, avert the inevitable
consequences of over speculation; it will not prevent a certain
depletion of bank reserves under the demands made by depos-
itors whose affairs have become involved; but it may allay that
senseless feeling of panic which is always responsible for some
of the worst features of a crisis. In a situation where purely
psychological forces play so large a part, even the expedients
of the faith curist are not to be despised.

The concentration of banking power has now proceeded so
far that discussion has inevitably arisen concerning the length
to which it will be carried and the possible dangers of the
movement. In the counting room and upon the street New

CONCENTRATION OF BANKING INTERESTS 425

Yorkers are pondering upon these questions, and not infre-
quently printed remarks are made about the "money Trust."
If this expression were heard only in the region of the hun-
dredth meridian its interpretation would be obvious; but with-
in the sacred precincts of Wall Street, such words cannot fail
to produce a certain impression. At least they serve to sug-
gest some concluding remarks.

It is sometimes said that the weekly statement of the con-
dition of the New York banks is being manipulated for specu-
lative purposes, and that it can be made favorable or unfavor-
able, according to the market position of the larger interests
in finance. If, for example, it is desired to depress the prices
of stocks, it is thought that large sums are withdrawn from
the Clearing House banks, in order to reduce the surplus re-
serves which are commonly accepted as the index of the con-
dition of the money market. This charge is, from the very
nature of the case, extremely difficult to prove or disprove.
Such transfers of money might certainly be made; but in the
absence of positive proof, one cannot assert that they are of
frequent occurrence.

Other disagreeable rumors concern discrimination in ex-
tending or withdrawing loans by which, it is said, certain con-
cerns that have attempted to compete with some of the trusts
have been forced to inevitable ruin. Here, again, decisive
proofs are hard to obtain. The withdrawal of bank accom-
modations has always been a possible means of commercial
reprisal, but it is usually conceivable that some other reason
exists for the action of the banker. Doubtless the concen-
tration of great power in few hands increases the dangers that
may be apprehended from this practice; but up to the present
time the evil is probably more potential than the actual.

The question of greatest interest, however, is: How far
is the process of concentration to go? If two groups of mag-
nates control to-day nearly one half of the banking capital of
New York, what is to prevent them from establishing a practi-
cal monopoly of the business? There can be no doubt that
money is now held much more tightly than formerly, and it is
not strange that the situation has caused some apprehension.

In considering the matter it is possible to stay one's judg-

426 CHARLES J. BULLOCK

ment by recalling the fact that, of all forms of capital, banking
capital is absolutely the freest. It is unnecessary for the bank-
er to erect an expensive plant which will be rendered worthless
if his competitors are able to drive him out of the business.
Provided that care is excercised in making loans, it is possible
for any concern to enter or to retire from the field without los-
ing any appreciable portion of its investment. The trouble
and expense of incorporating a banking association need not
be incurred by any individual or firm that may desire to lend
money upon personal or collateral security. No crude ma-
terials have to be transported through pipe lines or upon rail-
roads that refuse equal opportunities to all shippers. The post
office does not attempt to discriminate between its patrons,
and express companies would hardly be so foolish as to hasten
the establishment of a parcels post by adopting such a short
sighted policy. Moreover, the average small customer, like
the average large depositor or borrower, prefers to have per-
sonal relations with the banker; and this becomes increasingly
difficult as the size of an institution increases. Under such
circumstances, the establishment of anything resembling a
complete monopoly is quite inconceivable. Even when a gov-
ernment grants special privileges to a central bank, as has
been the case in Europe, a vigorous competition still persists.
By the side of the Bank of England there has grown up a vast
system of private and incorporated banks, and the Bank of
France is confronted by such rivals as the Credit Lyonnaise.
But even if complete monopoly is impossible, it does not
follow that the prospect is free from all unpleasant features.
So large a part of the resources of the New York banks is now
controlled by the great alliances that it would be difficult to
finance a corporate enterprise of the largest size without the
consent of the Morgan or Rockefeller interests. For such a
purpose outside capital might possibly be enlisted, but this
would probably entail considerable risk and effort; so that,
for the present, a few magnates have the situation pretty well
in hand. Then, again, it is unfortimate to have the largest
banks and their affiliated institutions so closely identified with
particular corporate interests. This gives to the great captains
of industry almost unlimited control over other people's capi-

CONCENTRATION OF BANKING INTERESTS 427

tal, and enables them to tie up in their own enterprises banking
resources that should be available for the use of the community
at large. Especially undesirable is it to have life insurance
and trust companies drawn so largely into the domain of spec-
ulative finance. The general tendency of the times seems to
be to confuse the distinction between enterprises that are safe
and investments for funds in a fiduciary capacity and ven-
tures that should be undertaken only with capital that is
otherwise provided. Underwriting projects in which a profit
of two hundred per cent is considered none too large a compen-
sation for the risks assumed, do not furnish a good field for the
conservative employment of trust funds. It is in these direc-
tions rather than in the menace of a monopoly that the present
dangers of the concentration movement are to be found.

The systemization and, within conservative limits, the uni-
fication of our banking system offer large opportunities for le-
gitimate enterprise, and contain the possibility of great advan-
tages for the entire country. The analogies furnished by ex-
perience of other nations suggest, at any rate, that such devel-
opments are likely to occur during the next decade. The joint
control of numerous banks will probably lead to what will
amount virtually to the growth of branch banking, which has
proved so successful wherever it has been tried. Monopoly
will not be the result of such a process, if the example of other
lands may serve as a guide for our conclusions ; rather will it in-
crease the effectiveness with which capital competes with capi-
tal in all parts of the United States. But the movement must
be guided with great circumspection if political antagonism of
the most violent character is not to be aroused ; and it must not
be directed with a view to the advantage of ulterior industrial
interests. At the center of any stable system there must
stand large banks of which the independence and the conserva-
tism must be as unquestioned as the power. Without these
qualities, mere bigness will be of no avail; and this is the fact
that must receive chief emphasis in the consideration of present
conditions and tendencies.

THE RISE AND BUSINESS OF THE MODERN
TRUST COMPANY.

BY WILLIAM P. QEST.

[William P. Gest, vice president of the Fidelity Trust company of Philadelphia, is one
of the best known trust officials in the country. He has not only a reputation as a
practical financier, but he has made a thorough study of the theory of his branch of
finance, and has written a number of articles on the theory and operation of trust com-
panies, and also has delivered addresses on these subjects.]

The economic conditions under which we live must be
of interest to all : and particularly when the United States is
confronted with a problem unsurpassed for magnitude and in-
terest and for which history affords no precedent — it is the rec-
onciliation of democracy with the modern industrial move-
ment. This problem is year by year moving into a more acute
stage, while, on account of the perplexity of its factors and the
newness of their character, we search the past in vain for any
method of solution. It is no wonder, therefore, that some of
our wisest see no solution except retrogression, while many to
whom retrogression seems impossible stand aghast to await
time's own solution.

Now, our whole economic system in its present develop-
ment depends on the free employment of individual capital,
and of this system the trust company is the newest and most
elaborate instrument. It is quite necessary, therefore, for one
who wishes to understand the times in which we live to know
something of these new and powerful agencies.

Those who decry present conditions under the name of
capitalism, as well as those who endeavor to alleviate them,
must remember that the development of our industrial system
started and is built upon the free movement of capital, and in
order to have a convincing knowledge of this it will be of ad-
vantage to revert for a moment to the origin of the industrial
movement.

What it was that caused the sudden acceleration of indus-
try in England in the last half of the eighteenth century is a
question which has not, so far as I know, been analyzed in suf-
ficient detail. That was one of the most singular and portent-

428

THE MODERN TRUST COMPANY 429

ous events in all history. Most of the important arts had al-
ready been discovered. Iron, steel and textile fabrics could
be made; the possibilities of steam had been foreseen, but all
these tremendous powers lay dormant only to dream in Uto-
pian visions of the future. Suddenly all of these power sprang
into action. Huxley states this problem in his customary
clear and accurate style :

"The middle of the eighteenth century is illustrated by a
host of great names in science — English, French, German and
Italian — especially in the fields of chemistry, geology and bi-
ology ; but this deepening and broadening of natural knowledge
produced next to no immediate practical benefits. Even if,
at this time, Francis Bacon could have returned to the scene
of his greatness and of his littleness, he must have regarded the
philosophic world which praised and disregarded his precepts
with great disfavor. If ghosts are consistent, he would have
said, 'These people are all wasting their time, just as Gilbert
and Kepler and Galileo and my worthy physician Harvey did
in my day. Where are the fruits of the restoration of science
which I promised? This accumulation of bare knowledge is
all very well, but cui bono? Not one of these people is doing
what I told him specially to do, and seeking that secret of the
cause of forms which will enable men to deal, at will, with mat-
ter, and superinduce new natures upon the old foundations'."

Huxley's explanation is that a little later the growth of
knowledge beyond imaginable utilitarian ends began to pro-
duce some effect upon practical life. This explanation, how-
ever, fails to satisfy the economist. He looks for a positive
cause, not merely a condition in which the cause may act. Hux-
ley, indeed, has no positive message for the world in econom-
ics; his political doctrine being (consistently with his position
as a naturalist) an indeterminate expediency. The historian
and not the physiologist must discover the cause, and there
must evidently be some positive cause. Knowledge is power,
but power does not execute itself. Even after an invention is
realized in a machine, it remains an experiment until economi-
cally excited.

No doubt the full answer to the problem is complicated.
There might be found remotely a geographical cause in the

430 WILLIAM P. GEST

insularity of England; a political source in the freedom and
moderation of her institutions; a moral source in the social
virtues inculcated by the Methodist revival which preceded
the industrial. But, however unsafe it may be to dogmatize
on the subject, it is evident that a most direct economic reason
was that then and not till then was there sufficient free capital
distributed in private hands to make it practicable to bring
the scattered forces of nature into contact. The period im-
mediately preceding the industrial revolution was preparatory
to it; and the first half of the eighteenth century is marked by
the ascendancy of Whig principles, a vast increase of trade, a
wide extension of banking and the growth of the monied
class.

Iron can be made in a forge with charcoal at a trifling and
ruinous rate, but it cannot be made in quantities without the
cheap transportation of coal. It will be remembered that in
England the making of iron with charcoal at one time threat-
ened the existence of the forests, and various acts were passed
in the sixteenth century to restrict it. It is evident that the
improvement of the manufacture of iron was not dependent
on the advance of knowledge, because the smelting of iron ore
by mineral coal was invented as far back as the reign of James
I, but various causes conspired to retard it until the art was
buried in the oblivion of the civil wars. The industrial revival
depended most directly upon the introduction of transporta-
tion systems. The first was the Duke of Bridgewater's canal,
to which he devoted his private fortune, and which first brought
coal to Manchester in 1760. This is the year from which we
may date the modern movement. From this time it has swept
on with increasing power and an ever accelerating rapidity,
bearing the world on its crest we know not whither.

On the other hand, it is evident from the example of
France that means of transportation will not alone explain the
phenomenon, for the early canals of France preceded those of
England by a century, and far surpassed them in magnitude;
while her industrial development long waited for the lead of
England.

It was not, therefore, any lack of technical knowledge
which delayed the canal system of England. The marks of

THE MODERN TRUST COMPANY 431

Roman canals lay across her land, and France displayed to her
a working proof of what skill could do. But the lack of capital
only time could supply. So, in Scotland, a canal joining the
Forth to the Clyde was proposed after the union, but was aban-
doned as chimerical until 1768.

In his Law of Civilization and Decay, Brooks Adams,
indeed, finds the principal cause of the industrial revival in
the importation of the treasure stolen from India; and while
I think his disposition is to overemphasize the material side
of history, yet it may be asserted with sufficient confidence
that modern industry has been built up and still rests upon
that free employment of large masses of capital which then
for the first time began.

The early industrial development of America was similar,
but was delayed for more than half a century longer, for want
of capital. This difference between the two countries is, of
itself, sufficient to show the true origin of the development.
Every reader of American history will remember the scarcity
of currency and coin which led even to the making of foreign
coins legal tender, by an act which was not repealed until 1857.
The old forges, for instance, of America, now blown out, have
only the same sort of historic interest as those of Surrey,
though they were operated to a later period. The development
of Pennsylvania, the great iron field of the world, dates from
the state systems of transportation inaugurated in the '30's,
aud that the great state of Pennsylvania went bankrupt in
1842, under a debt of only thirty millions, largely incurred for
public works. This was not a permanent default. Sidney
Smith sold his bonds too soon; Pennsylvania finally paid every
dollar, with interest on interest. If the ecclesiastical humor-
ist had possessed his bonds in the patience of hope, a classical
piece of literature would have lost forty per cent of its humor,
but its author would not have lost sixty per cent of his stock.
These prefatory words are truly germane to the subject,
because it explains the origin and condition of the movement
of which the trust company is the newest exponent; for the
functions of a trust company are, in general terms, the conser-
vation and employment of capital.

Lest this statement of the object of trust companies should

432 WILLIAM P. GEST

seem to be too general, I will pause for a moment to show that
all of its operations come within these terms.

Money deposits; These are for the conservation of capi-
tal.

Loans are for the employment of capital.

Safe deposits are for the conservation of capital, such as
gold, jewelry, bullion, or its evidences, such as stocks, bonds,
etc.

Trusts: These are for the conservation of capital under
certain special conditions. Trusts also involve investment,
resolving themselves thus into a means for the employment of
capital, because it is the duty of a trustee, like the holder of the
talents, to lend out the funds and make them productive by
investment. This may be either in certain restrictive forms
of loan or in various kinds of securities. A trust fund is, there-
fore, free capital, though less free than bankers' funds. The
other functions of a trust company, such as the registration of
stocks, the transfer of stocks and loans, corporate trusteeships
(as of mortgages, car trusts, etc.), the insurance of titles, the
insurance of fidelity, and various other forms of activity, may
all be classed as methods of insuring the conservation or regu-
lating the transfer of capital.

It may be well here to distinguish between a trust com-
pany and a bank. These words cannot be defined exclusively
of each other; they can only be distinguished by description.
For some of their functions are alike, and trust companies differ
among themselves in the class of business which they execute.
In general, there are three kinds of banks — banks of deposit,
banks of issue and banks of discount. National banks, at
present, fulfill all of these functions. Now, receiving deposits
of cash is common both to banks and trust companies, but the
issue of notes and the discount of bills are distinct features of
banking. They do not pertain to the preservation of capital,
but to the creation of credit. They are entirely different func-
tions and are not normally a part of a trust company's
business. We may distinguish, therefore, banking from a trust
company business by saying that while the trust companies
deal in capital, banks create and deal in credits. Both the issue
of notes and the discounting of bills belong to the credit busi-

THE MODERN TRUST COMPANY 433

ness, because they deal with promises to pay. If a bank dis-
counts a note, it creates no capital; the transaction is represent-
ed by crediting the borrower in his account with the bank, but
no money passes. The net result of the transaction is an in-
crease of deposits and an increase of loans, without any increase
of capital. These distinctions, however, are in part unreal and
in part accidental. There are trust companies — at least, I
know of one— which do not receive deposits, and some trust
companies discount paper; but in general, trust companies
are restricted from a general discount business and the national
banking act (apart from particular restrictions in special
charters and other state laws) effectually prevents the issue
of notes by state institutions. Nevertheless, there is a certain
similarity between both branches of business; as all these
functions, whether of banks or trust companies, result either
in lending or borrowing, so that both sorts of companies bring
together the two classes of men into which all the world has
been divided, namely, the men who borrow and the men who
lend.

As generally happens, therefore, when definitions fail us,
it becomes necessary to describe. A trust company is a
corporation under state law with authority to transact business
relating to deposits, loans or trusts, and such other business
as its charter or general laws may allow. There being no
general word to cover these various departments, the term
trust company has been seized upon to cover a multitude of
functions. Hence, it very often happens that the execution
of trusts (properly so called) becomes a small part of the
actual business of a trust company, and, indeed, may not be
carried on at all.

This is the case with many of the trust companies in some
states, some of which would more properly be called invest-
ment companies than trust companies. In most states many
so called trust companies are simply large moneyed institutions
whose principal business is receiving deposits and investing
in large financial operations, such as underwriting or placing
issues of securities.

When trust companies were first incorporated, there
was an attempt to indicate by name the kind of business to be

Vol. 3—28

434 WILLIAM P. GEST

transacted. Such were the names of the earlier companies in
Pennsylvania — the Pennsylvania Company for Insurances on
Lives and Granting Annuities; the Girard Life Insurance,
Annuity and Trust company; the Provident Life and Trust
company; the Fidelity Insurance, Trust and Safe Deposit
company; the Philadelphia Trust, Safe Deposit and Insurance
company — but that was in the days when men had more time,
and the shortened form has now become more popular. This
is partly because in a number of the titles mentioned the
business described is just the kind of business the companies
no longer do.

Compared with banks, trust companies are recent.
There were, of course, always bankers, but banks, properly
speaking, date in England from the seventeenth century.
There were no banks in America in colonial times except those
known as land banks. The first incorporated bank in the
United States is generally stated to have been the Bank of
North America, which was chartered by congress in 1781, and
still continues to transact business in Philadelphia. Trust
companies had no existence until the beginning of the nine-
teenth century. The oldest one in America is the Pennsyl-
vania Company for Insurances on Lives and Granting Annui-
ties, which was organized in 1809 and chartered in 1812. Other
companies were chartered from time to time, until I believe
there were in all, prior to 1860, some eight companies in the
United States. These early companies were, however, gener-
ally chartered for the purpose of doing a life insurance and
annuity business. Power to execute trusts was conferred
afterwards from time to time by special charter or amendment.

The active growth of trust companies really dates from
the Civil war, and is closely connected with the establishment
of the safe deposit business. The war caused an unprece-
dented increase in government securities, which were held by
vast numbers of investors. Just before the Civil war the debt
of the United States was about $72,000,000. Immediately
after the Civil war it was $2,757,689,571, and there were issued
on account of the Civil war, from time to time, notes, certifi-
cates, and bonds aggregating over seven thousand millions.

Formerly, individuals kept their securities either them-

THE MODERN TRUST COMPANY 435

selves or left them free of cost in care of a bank. There were
more than one objection to this — first, the right of a national
bank to take such a deposit was considered doubtful, as
appears from a notice issued by the comptroller of the curren-
cy; and secondly, the liability of a bailee without compensation
is not the same as that of an insurer, and one or two cases arose
where such depositors brought suits against national banks, the
outcome of which was very unsatisfactory.

It so happened, also, that after the war there were a great
many burglaries and bank robberies. It was, indeed, much
more frequent then than now to read in the papers of banks be-
ing entered. I am disposed to attribute this, at least in part,
to the wave of disorder which always tends to follow the dis-
persal of a great army, when many men, grown accustomed
to the law of force, are scattered without resources through the
community. Any reader of the papers of that time will find
many advertisements for stolen and lost United States bonds.
It is true, also, that banks were then not so well protected
against burglaries as they are at present, at least in the east.

The charters of the new companies which were started at
that time joined with the right of receiving such deposits the
right to receive on deposit property of every kind, as well as
to execute trusts, frequently following in this respect the
rights which had been specially conferred on the earlier com-
panies. The mo^ey deposit department of trust companies,
which is usually the most profitable, was fostered by the allow-
ance of interest, generally at two per cent, upon funds subject
to check. This was a new departure. In the older days none
of the banks allowed interest on money payable at sight, and
therefore the money deposits of the trust companies quickly
increased. This has been somewhat changed now, owing to
the fact that many national banks allow interest (generally on
large accounts), and the competition between banks for de-
posits has become extremely keen.

The next step in the enlargement of trust companies was
the introduction of the real estate title insurance business.
Prior to the introduction of this branch real estate titles had
been passed by counsel upon the production by a conveyancer

436 WILLIAM P. GEST

of a brief of title, and all careful persons taking a conveyance
or mortgage submitted the papers to counsel before settlement
was made. The increase in the number of real estate trans-
actions and the amount involved led to the formation of com-
panies which undertook to insure the purchaser or mortgagee
against all loss from defective titles. These were first allowed
in Pennsylvania by the corporation act of April 29, 1874.
These companies joined with this power to transact the differ-
ent kinds of business theretofore conducted by the trust com-
panies.

The history of trust companies in Philadelphia, which is
typical, may be roughly divided into five periods.

First. — The early period of life insurance, which was grad-
ually given up by the older companies when the newer style of
business involving the payment to agents of large commissions
was introduced.

Second.— The inception of the trust business, which may
be dated from the amendment to the charter of the Pennsyl-
vania Company for Insurances on Lives and Granting Annui-
ties, in 1836, and the incorporation of the Girard Life Insur-
ance, Annuity and Trust company, in the same year.

Third.— The introduction of the safe deposit business, in
1866, largely by the incorporation of the Fidelity Insurance,
Trust and Safe Deposit company.

Fourth.— The introduction of the title business, which
may be marked by the incorporation of the Real Estate Title
Insurance company of Philadelphia (afterwards changed to
the Real Estate Title Insurance and Trust company), in 1876.

Fifth.— The present period of increased activity in the fi-
nancial branches of the trust companies. This period has been
marked by the rapid increase in their number and resources,
and may be connected with the large increase of gold and cir-
culation since 1896.

It is interesting to observe how the more important steps
have been taken at intervals of about thirty years— equivalent
to a generation— the first bank, 1781: the first annuity com-
pany, 1809, 28 years; the first trust company properly so called,
1836,' 27 years; the first deposit company, 1866, 30 years; the
vast expansion of the trust company business, 1896, 30 years.

THE MODERN TRUST COMPANY 437

Since 1873 the growth of the trust companies has been
very rapid. It is not possible to show this throughout the
United States by authentic figures, because no official statistics
are available except in the scattered reports of state officials,
and many of those run back only for a comparatively short
time. The United States census makes no enumeration of
financial institutions, and the comptroller of the currency has
no authority to compel statements from state corporations.
No attempt, indeed, has been made to analyze the statements
of all of the companies in the United States except by Mr. Ed-
ward T. Perrine, formerly treasurer of the United States
Mortgage and Trust company of New York. Mr. Perrine found
that in June, 1903, there were about 1, 100 trust companies in the
United States. The statements of 912 of these he analyzed and
tabulated. Mr. Perrine has been good enough to lend me the
results of his work on the subject, and to it I am indebted for
some of my facts and figures.

At that date, June, 1903, trust companies amounted, ap-
proximately, to one fifth of the number of national banks,
but ranked nearly one half in point of resources. That is,
the aggregate resources of 912 trust companies were $2,910,-
063,340.11: aggregate resources of 4939 national banks were
$6,286,935,106.16.

It agrees with what I have said about the business of trust
companies to find that, on an analysis of these figures, the trust
companies, in proportion to their assets, hold more securities
than the banks, about equal loans, less cash, more real estate,
more surplus, and larger individual deposits.

In view of trust companies having grown up under various
state laws and different conditions, we may expect to find a
great variation in their distribution:

New YorkCity has 48

Philadelphia " 42

Pittsburg. " 31

Boston " 17

Chicago " 14

Cleveland " 12

Baltimore " 11

St. Louis " 10

You will observe that Pittsburg and Philadelphia have
together some 73 companies, which leads one to suspect — what

438 WILLIAM P. GEST

is the case — that Pennsylvania is far ahead of the other states
in the number of incorporations.

New York state has 78 j Pennsylvania has 210. From
Mr. Perrine's figures I have made up the following table of
states :

Pennsylvania 210 Washington (State) 9

New York 78 Rhode Island 9

New Jersey 56 Louisiana 6

Indiana 47 Minnesota 6

Illinois 37 New Hampshire 6

Ohio 36 Mississippi 6

Massachusetts 35 Nebraska 6

Tennessee 30 Kansas 5

Missouri 23 Michigan 5

Iowa 22 Washington, D. C 4

Maine 20 Wisconsin 4

West Virginia 19 Arizona 4

Vermont 19 Delaware 3

Texas 19 Montana 3

Virginia 18 Oregon 3

Kentucky 18 Florida 3

Georgia 16 South Dakota 3

California 16 Oklahoma 3

Maryland 16 Utah 2

Connecticut 15 Idaho 2

North Carolina 13 New Mexico 2

Arkansas 12 North Dakota 2

Indian Territory 10 Nevada 1

South Carolina 10

Alabama 10 Total 912

Colorado 10

The causes which have fostered the growth of these com-
panies in Pennsylvania are unquestionably their early origin
and the favorable statutes conferring so many different powers.

The figures bear no sort of proportion to the banking
capital of the cities mentioned. New York, Philadelphia, Chi-
cago, St. Louis and Jersey City all have more trust companies
than national banks, and in Brooklyn, Cleveland, Newark,
Jersey City and Providence trust companies' resources exceed
those of the national banks.

The largest trust company in the United States is, I be-
lieve, the Illinois Trust and Savings bank, whose aggregate re-
sources were, in June, 1904, $90,913,567.44. The largest in
New York and I believe the next largest in the United States
is the United States Trust company, whose aggregate resourc-
es on the same date were $73,036,781.57. It will help us to
appreciate the tremendous growth shown by these figures
to recall that the national debt after the Revolution was about

THE MODERN TRUST COMPANY 439

$72,000,000, which may be said to represent the money cost
of independence.

The figures increase with great rapidity. In June, 1903,
the aggregate resources of the trust companies of Philadelphia
were $237,000,000, and on December 31, 1904, they were
$283,000,000, being an increase of $46,000,000 in eighteen
months in Philadelphia alone.

In such reports as I have alluded to, the corporate assets
alone are included, and none of the figures given above cover
amounts held in trust, as these do not enter, ordinarily, into
the balance sheet. Indeed, no data on this point are at all
accessible to me outside of Pennsylvania. The statements
compiled by Mr. Perrine and published by the United States
Trust company make no allusion to trust funds.

But since the establishment in Pennsylvania of the office
of the commissioner of banking, in 1891, the reports of com-
panies in this state include statements of trust funds. This,
however, is not the case for the first few years, in which his re-
ports have only incomplete data of trust funds. We are, how-
ever, able to make a fairly complete comparison in Pennsyl-
vania between national banks and trust companies since 1892,
and I have accordingly had tables prepared from the report of
the banking commissioner and of the comptroller of the cur-
rency, which compare the growth of the trust companies and
the national banks in Pennsylvania for the last twelve years.

From these tables it appears that in the twelve years end-
ing November, 1903, the number of national banks in Penn-
sylvania has almost doubled, and that of the trust companies
has quadrupled; the agrgregate resources of these banks has
more than doubled, and the aggregate resources of the trust
companies more than tripled. The deposits of the banks are
two and one half times as great; those of the trust companies
more than three times as great. The increase of trust funds
cannot be accurately told for the same vears, the reports
thereof for 1892, 1893, 1894 being incomplete.

The flow of capital into trust companies is better shown
by the increase of the aggregate capital, surplus and undivid-
ed profits, which have much more than tripled.

440 WILLIAM P. GEST

The large amount of trust funds held by the trust com-
panies in Philadelphia is a unique feature of its business,
and by far the greater part of such funds are held by some half
dozen companies, as follows :

Pennsylvania Company for Insurances on Lives and Grant-
ing Annuities 1120,467,880 24

Fidelity Trust Company , . . 87,257,645 18

Girard Trust Company 63,936,750 50

Provident Life and Trust Company 59,573,161 28

Philadelphia Trust and Safe Deposit Company 45,820,454 00

Real Estate Trust Company 25,688,328 16

or over four hundred millions in six companies.

The magnitude of the amounts held in trust by companies
in Philadelphia may be illustrated by a comparison with those
of the trust companies of the entire state of New York, which
are reported as of January 1, 1905, at $275,665,112.

I believe, however, that all of the reports of trust funds
are not made upon the same basis, some of the companies
including securities pledged as collateral for corporate trusts —
such as collateral trust bonds, etc. Most of the companies,
however, I believe, including the six mentioned, now report
only such funds as are held on active trusts. If all of the de-
posited collateral in corporate trusts was included, the amount
would certainly be increased by much more than one hundred
millions.

It is to be remembered, also, that a large amount of real
estate is held by these companies which does not appear in the
above figures. I think it would be a moderate estimate to
allow real estate in addition, at, say, 15 per cent of the personal
estate. It would be necessary to add, therefore, for all the trust
companies in Pennsylvania, say, seventy five millions.

Some persons do not consider such statistics as I have en-
deavored to present as being of much practical importance,
but I believe them not to be without their use if by them we
can be led to a better understanding of the great current of
business of which we all form a part.

GOVERNMENT CONTROL OF BANKS AND
TRUST COMPANIES.

BY WILLIAM BARRET RIDGELY.

[William Barret Ridgely, comptroller of the currency, born in Springfield, 111., July 19,
1858; graduate of Rennsalaer Polytechnic institute, 1879; engaged in mining, manu-
facturing and banking in Springfield until 1899, when he became secretary and vice
president of the Republic Iron and Steel company; appointed comptroller of the
currency of the United States Oct. 1, 1901 ; has written many articles on banking
problems.]

The passage of the National Bank Act, or National Cur-
rency Act as it was called, may be considered the beginning of
the federal control of banks. This has now been exercised for
more than forty years with most satisfactory results, both to
the government, the banks and the people who have done bus-
iness with them. It has resulted in an excellent system of
banks, honestly, ably and well managed. The figures in regard
to the number of failures and loss to depositors show an un-
equalled record of soundness and safety, and, contrasted with
the previous records of state banks and even with the better
and stronger state banks and trust companies which have ex-
isted alongside of the national banks, make a strong argument
in favor of national control of institutions of this character.
The total loss in over forty years is less than eight one hun-
dredths of one per cent of the average amount on deposit.
The volume of experience gained during the forty years' con-
trol of the national banks is probably the greatest accumula-
tion of such experience which has ever been made, based, as it
is, upon the control of a greater number of banks, more wide-
ly distributed, doing a larger volume and variety of business
and covering a longer period than has ever been exercised in
any other country. As a matter of fact, other countries do not
attempt such a complete control or examination of banks as
we do in the United States. The nearest approach to our na-
tional system is in some of our state bank departments.
State banks, and especially the mutual savings banks in sever-
al states, are quite closely controlled in their management
by specific statutes and are frequently and thoroughly exam-
ined. But there is no other system of banks over which there

441

442 WILLIAM BARRET RIDGELY

has been for any such period such a thorough control through
restrictive statutes, frequent examinations and report, as
has been exerted over the national banks of the United States.

Probably the main consideration in the passage of the cur-
rency act establishing the system of national banks was to pro-
vide a market for the national loans made necessary by the
war. The country, however, was glad of a chance to exchange
the system of state banks under different laws in each com-
monwealth for a national system, which would at least be uni-
form, and which, above all, would substitute a system of na-
tional bank note currency for the many issues of state bank
notes. As is well known, it was then expected that this bank
note currency would replace all other forms of paper currency
in circulation. It was probably on this account that the official
who was to have charge of the relations of the federal govern-
ment and the banks, was called comptroller of the currency, in-
stead of comptroller or superintendent of national banks,
which, as events have shown, would be a more distinctive title.
The issue of legal tender, United States notes and other forms
in circulation, and later the addition of a large volume of silver
certificates to our paper circulation, have made such a change
in the situation that, instead of furnishing all the paper cur-
rency, the national bank notes have formed but a compar-
atively small part of it.

It was mainly the granting of the privilege of note circu-
lation which first attracted banks to the national system and
made any national control of banks possible. The national
banks were intended and expected to be primarily banks of
issue, and were indirectly given a monopoly of this privilege by
a prohibitive tax levied on the issues of all other banks. Out-
side of their note issues, the powers of the national banks were
quite severely restricted. They were expected to be banks of
deposit and discount and to transact, as far as possible, the
local commercial business of their community. They were
denied the power to have branches, to make loans on real
estate or to own real estate other than their necessary bank-
ing houses, to loan more than ten per cent of their capital to
any one person, firm or corporation, to own or deal in shares
of stock, to own or make loans on their own shares of stock

GOVERNMENT CONTROL OF BANKS 443

as security. Each bank was originally required to keep a min-
imum reserve against deposits and notes issued, but this was
later amended to require a reserve on deposits only.

When the act was first passed, there was much question
whether the inducements offered the banks were sufficient to
induce them to submit to examination, restriction and control
by the United States. Many of the early banks were organ-
ized or converted from state to national as much or more from
patriotic motives as from hopes of increased profits. The
fact is, the circulation has never been very profitable; never
sufficiently so to induce the banks to approach the maximum
amount permissible. The highest percentage of possible cir-
culation was issued in 1882 and was 81.6 per cent. This grad-
ually declined to 27.54 per cent in 1892 and has since then
steadily increased to 54.75 per cent in 1903. A strong induce-
ment to the banks in the larger cities to secure national charters
is the system of reserve and central reserve banks, which per-
mits a national bank in other cities to keep two thirds of its
cash reserve on deposit with an approved reserve agent na-
tional bank in a reserve or central reserve city ; and a bank in
a reserve city to keep one half its reserve in the central reserve
cities, St. Louis, Chicago and New York. This gives national
banks in reserve cities an opportunity to secure large deposits
from country banks which the state banks cannot secure, be-
cause deposits with state banks are not counted as reserve,
and are also subject to the ten per cent limit on indebtedness
by any one firm or corporation. An additional inducement
for banks to submit to federal control is the greater confidence
in which the banks under national supervision and control
are held by the people. This has steadily increased since
the creation of the system as the result of the examinations
and published reports, and that this is justified is shown by the
comparative statement of the failures of national and state
banks. From the date of the organization of the national
system to January 22, 1904, there were organized 7,083 nation-
al banks. Of this number 404 became insolvent and 1,499 have
gone into voluntary liquidation, leaving 5,180 in operation.
The percentage of failed banks to the total organizations is 5.7

444 WILLIAM BARRET RIDGELY

per cent; the percentage of liquidating banks is 21.2; the per-
centage of active banks is 73.1.

From an estimate based on 330 insolvent national banks
whose affairs have been finally closed, dividends amounting to
71.31 per cent have been paid on claims proved, amounting to
$101,724,840. Including in this estimate, however, offsets al-
lowed, loans paid, etc., the creditors received on an average
78.55 per cent on their claims. This would make a loss of 21 .45
per cent to the creditors. The total loss to depositors in forty
one years on deposits, now amounting to almost three and one
half billion dollars, has been less than thirty million dollars.
The cost of liquidation, based on the total amount collected
from assets and from assessment on shareholders was $8,579,-
822, or 8.3 per cent. The causes of failure have been classified
as follows :

Excessive loans 22.81%

Fraudulent management and defalcation 36.34%

Injudicious banking 25.06%

General stringency and panic 15.79%

Comparing the result of failures and liquidations among
the national banks with the figures in regard to the failures of
state banks from 1863 to 1896, as given in the report of the
comptroller of the currency for 1896, the last date to which
complete figures are available, it will be seen that while only 6.5
per cent of the number of national banks in existence failed
during this time, 17.6 per cent of the other banks in existence
failed. And while the national banks which had failed up to
1896 paid to their creditors 75 per cent in dividends, the state
and other banks paid only about 45 per cent. The cost of liq-
uidation of state and other banks which failed is also very
much higher than the cost of liquidation of national banks.

The present law authorizes the comptroller to order an
examination of a bank at any time he may see fit. For sever-
al years after the establishment of the system but one exam-
ination was made each year. After a short time the banks
in the reserve cities were examined twice in each year. During
the administration of Mr. Eckels after the panic of 1893, this
system was extended until each bank is now examined regu-

GOVERNMENT CONTROL OF BANKS 445

larly twice each year. The reports made by the examiners
have grown from a short statement of liabilities and resources
until they now cover all vital points of interest in regard to
the condition and solvency of the bank examined. These
reports when received from Washington, are gone over very
carefully by a corps of trained men, and letters are written to
the banks, calling attention to and criticising the various items
in the reports and asking for an explanation or additional
information in regard to them. This is probably the most
important work of the bureau, especially in cases where a
bank is in a critical condition. Probably the greatest utility
which is done by the currency bureau is to be seen in those
cases where it is discovered through the reports, that a bank
has made such losses as to involve an impairment of cap-
ital or possible insolvency. In more cases than are generally
known the comptroller of the currency, with the aid of the
bank examiner, is able to save a bank which, without interven-
tion and assistance, would have failed. Of course it is essen-
tial to success in this matter that secrecy be observed, and it
rarely becomes known to any one outside of the bank and the
comptroller's office what has been the condition of a bank or
what steps are necessary to save it. It is the experience of
the office that, where the officers of the bank are honest, truth-
ful and make complete statements of their difficulties, in most
cases additional security can be obtained for doubtful paper,
or such a contribution made by the directors or other stock-
holders that the impairment of capital or insolvency can be en-
tirely removed, and there are many banks in the United States
to-day which have been saved in this way and are now not
only thoroughly solvent, but highly prosperous institutions.
This system of examinations, of course, is far from perfect.
The examiner cannot, in the time at his disposal, make such
an inspection as will always result in the detection of fraud and
violations of law. If the officers of a bank, or any of them, are
dishonest, being in the bank every day, they have every advan-
tage over an examiner, and are very frequently able to deceive
him. No system of examination can supply ability or insure
honesty in bank management. This must be supplied by the
officers and directors, and upon them the responsibility must

446

WILLIAM BARRET RIDGELY

rest. In any well managed bank the work of the examiner
ought to be supplemented and aided by continued and thor-
ough examinations by the directors themselves, or some one
appointed by them independently of the men who regularly
have charge of the funds and accounts. In addition to the two
examinations in each year, each national bank is compelled by
law to make to the comptroller at least five sworn reports of
its condition. These were first made on fixed dates, but it was
found that as these dates were known the banks would always
prepare to make their statement; and the present method is
for the comptroller to call for a statement of condition as of
some previous date, and these are always made without any
notice to the bank on dates which are not fixed by the comp-
troller until the moment the call is made. A summary of the
statement of condition of all banks of the country, divided by
states, which is published within two or three weeks after the
issuance of a call, gives very prompt and valuable information
as to the condition of the banks in all parts of the United
States.

BANKS.

Number

CAPITAL.

DEPOSITS.

Amount.

Per cent.

Amount.

Per cent.

1882.

2,239
5,063

$477,200,000
234,900,000

67.01
32.99

$1,131,700,000
1,718,700,000

39.7

60.3

Total

7,302

712,100,000

100.00

2,850,400,000

100.00

1892.
National

3,759
5,579

684,678,203
386,394,845

63.9
36.1

1,767,519,745
2,911,594,571

37.8

62.2

Total

9,338

1,071,073,048

100.00

4,679,114,316

100.00

1902.

4,535
7,889
3,732

701,990,554
499,621,208
138,548,654

52.4
} 47.6

3,222,841,898
f 6,005,847,214
t 478,592,792

33.2

Reporting for tax only. . .

I 66.8

Total

16,156

1,340,160,416

100.00

9,707,281,904

100.00

1903.

4,939
8,745
4,546

743,506,048
578,418,944
152,403,520

50.43
| 49.57

3,348,095,992
( 6,352,700,055
] 502,522,431

32.81

j. 67.19

Nonreporting

Total

18,230

1,474,328,512

100.00

10,203,318,478

100.00

It is worthy of notice that, while the national banking sys-

GOVERNMENT CONTROL OF BANKS 447

tern has been steadily growing until there are now about 5/200
banks, with the great resources already referred to, the tenden-
cy to increase, both in number of banks, capital and deposits,
is greater among the banks other than national than among
the national banks. The foregoing is a table from the report
of the comptroller of the currency for the year 1903.

The national banks, which had 67 per cent of the capital
in 1882, had 63.9 per cent in 1892, 52.4 per cent in 1902,
and 50.43 in 1903. The national bank deposits, which were
39.7 per cent of the whole in 1882, were 37.8 per cent in 1892,
32.2 per cent in 1902 and 32.8 in 1903. Some of this apparent
decrease may be possibly due to more complete returns from
the banks other than national which are now obtained, but
there is no doubt of the fact that the tendency is for the banks
other than national to increase more rapidly. This is true in
spite of the fact that the law of March 14, 1900, authorizing the
organization of national banks with a capital as low as $25,000,
has resulted in the conversion of a large number of state banks
in the country towns into national banks, and the organization
of a great many national banks to succeed private ones. Prob-
ably the principal reason for this tendency is the great in-
crease in the number of trust companies which have been or-
ganized during the last ten years. These companies, organized
under state laws originally designed to provide for companies
doing a strictly trust business, are taking advantage of the lib-
eral character of those laws, and a very large portion of the new
organizations are merely commercial banks, having trust com-
pany privileges perhaps, but in reality doing comparatively
little strictly trust company business. The laws of the differ-
ent states, particularly in regard to the cash reserves to be held,
and loaning money on real estate security, are so liberal that
organizations of this character have a great advantage over
the national banks in the inducements which they can offer
their customers. It is naturally to be supposed that any one
contemplating the organization of a new bank, other things be-
ing equal, will be inclined to do so under the laws which allow
the greatest freedom from governmental interference, restric-
tion and control. The question as to what shall be done in the
way of control of these new trust companies is very important.

448 WILLIAM BARRET RIDGELY

It would be a great mistake for the different states to allow the
national banking system to be broken down or seriously weak-
ened by new organizations which are able to do so because
they are less carefully examined and controlled than the na-
tional banks. The national system has furnished most ex-
cellent banks for the regular commercial banking business. It
is not likely to be an improvement to have this replaced by any
system of state banks. Much less is this likely to be the case
if the inducement to go into the state systems is greater free-
dom from control, weaker reserves, and less careful manage-
ment. The modern trust company has been called the highest
example of modern commercial organization, and of many of
the largest and best companies this is doubtless true. The reg-
ular trust company business is a very important part of any
financial system, and calls for the highest degree of character,
honor and ability. »

I quote from a recent writer on this subject, and agree
with all that he has said in regard to the trust companies:

"Trust companies are formed for the execution of the
most sacred duties that can be imposed by man. The care of
the property and welfare of the helpless and the dependent,
the widow and the orphan, the feeble and ignorant ones, who
are such an easy prey for the unscrupulous, is part of their
mission ; to carry out the wishes of the dead, who put faith in
the company and entrusted their dearest interests to it for
years, in the belief that it always would be true and honest; to
meet the expectations of the living, who entrust their property
to it in full confidence that it always will be faithful and capa-
ble ; this demands a conscientiousness and thoroughness, which
must always serve as a high ideal and inspiring stimulus to
right minded men."

When, however, the trust companies cease to do this char-
acter of business or attempt to add to it not only commercial
banking, but in many cases underwriting and promotion of all
sorts of new enterprises, the case becomes entirely different.
It can hardly be said to be a reasonable or proper regulation
of the banking and trust company business to allow the organ-
ization, under the same law, of concerns which not only have
the power to act as trustees in all of the important capacities

GOVERNMENT CONTROL OF BANKS 449

which the writer has enumerated, but which also have the pow-
er, if the management is so inclined, to do a general com-
mercial banking business with little or no cash reserve, and
even to underwrite an issue of bonds and securities several
times in value the combined capital, surplus and deposits of the
so called trust company, as happened in a recent notable case.
In another instance trust companies organized under the laws
of certain eastern states engaged in the organization of nation-
al and other banks in the western states and attempted to pay
up the capital with certificates of deposit in the so called trust
company. It is true most of the older trust companies have
been splendidly managed in every respect, their officers and
directors are men of the highest character who can safely be
trusted with any business, whether it is in the nature of a trust,
commercial banking, promotion, or underwriting. It is not
such concerns as this which need control and regulation.
Their business will be well and properly done in any event, and
probably will come well within the terms of any law intended
to control this class of business. Such concerns as this have
nothing to fear from regulation, nor should they oppose the
attempts to place reasonable safeguards upon the business for
the protection, not only of their depositors and creditors, but
of the entire country. If there is any reason why a national
bank should maintain reserves against commercial deposits,
the same reason will apply to commercial accounts in any other
bank, whether called a trust company or not. A trust com-
pany with a large business in its trust department, if it also has
a banking or savings department, owes it to its customers and
to the public to see that the banking department is not so con-
ducted as to endanger its trusts in the slightest degree. The
very existence of those trust obligations should make its bank-
ing department ultraconservative and careful, as so many of
them are. The trust company whose chief business is in its
banking and savings department and is carefully and con-
servatively managed, is more interested than anyone else
to prevent reckless and incompetent, or dishonest, men from
securing similar charters which will permit them to run com-
peting banks, without proper reserves or other safeguards pre-
scribed by experience. Frederick D. Kilburn, superintendent

Vol. 8-29

450 WILLIAM BARRET RIDGELY

of the New York state banking department, says in regard to
reserves in trust companies for March, 1904:

" After mature consideration of the subject and a study
of the existing conditions, I am of the opinion that the whole
matter should be regulated by statute. Before this is attempt-
ed, however, the banks and the trust companies should agree
upon the provisions of any proposed legislation in this di-
rection. All feelings of spite and selfishness, if any exist,
should be forgotten. The interests of any particular institu-
tion, except as it may be in harmony with the interests of all,
should not be considered. The law should be general in terms,
and, if any class of deposits are exempted from its operation,
sound reasons should be given for the exemption.

"I am well aware that many trust company officials, and
some bank officials, will not agree with my view. Some think,
and perhaps not without reason, that they are able safely and
conservatively to conduct the affairs of their institutions with-
out interference of this or any other kind ; but others will some-
time take their places, and then perhaps a less experienced and
less conservative management will be in control. The whole
matter should be adjusted with exclusive regard for the needs
of the situation, and with the sole purpose of conserving the
interests of all concerned. In the meantime, it should be re-
membered that trust companies and banks alike are in the
main founded upon the same general principles and are
dependent to the same degree upon public confidence for suc-
cess."

In his annual report for 1904, Mr. Kilburn also says:

" The right of domestic trust companies to hold stocks in
private corporations might wisely be definitely defined, their
right to engage in underwriting schemes unqualifiedly denied,
and the obligation imposed upon them to carry a legal reserve.
As a part of this latter proposition, I am confident that it would
be advisable to require also that these institutions and the
state banks in New York make weekly reports similar in scope
to those submitted by the clearing house banks and the non-
member banks to the clearing house association."

Whatever regulation or control there is to be of the trust
companies must come, for the present at least, from the state

GOVERNMENT CONTROL OF BANKS 451

governments. Federal control of the national banks has been
so satisfactory and successful that there is some desire ex-
pressed for federal control of other banks and trust companies.
There has not been, however, so far as I know, any practical
suggestion made by which these institutions can be forced or
persuaded to submit to federal control, especially if it is to be
more severe than that now exercised by the states. Federal
control, therefore, does not seem to me to be a present practi-
cal question.

INSURANCE IN PRACTICE.

BY OSWALD J. ARNOLD.

[Oswald James Arnold, secretary of Illinois Life Insurance company; born Rochester
N. Y., Oct. 2, 1872; graduated from the University of Chicago, 1897; on leaving college
entered the service of the Illinois Life Insurance company as private secretary to the
president; appointed agents and solicited life insurance, and later became assistant
secretary, and then secretary of the company; he is also director of two Chicago
banks.]

It is a novel statement for the average investor in a life
insurance policy to be told that on the issuance of that policy
to him, the insuring company would be quite satisfied to take
his premium payments in a lump sum, with proper discounts
for cash, as to receive it without discount in twenty payments.

Life insurance perhaps appeals strongest to the man who
is married, and who all at once is presented with the question
of what will happen to his family in case of his sudden death.
Perhaps at 35 years old this question assails him, and he an-
swers it by taking out a policy. At the time he may have
$1,000 in cash in a savings bank at 3 per cent interest. From
this $1,000 he takes just enough to pay the premium for one
year on a twenty year endowment policy, leaving the balance
at simple 3 per cent in the savings bank. Here, then, is his
position between the savings bank and the life insurance com-
pany: -

To have left the $1,000 in bank at 3 per cent interest,
wholly undisturbed for twenty years, the compounded interest
at the end of the period would approximate another $800, mak-
ing a total of $1,800.

But in taking $43.32 from the $1,000 in the savings bank
and applying it as a first annual payment of the twenty pay-
ments to be made in the next twenty years, the 3 per cent in-
terest on the remaining $956.68 almost will cover the fixed pre-
miums on the policy for the nineteen years. At the end of the
twenty year period of the endowment policy the holder of it,
having paid out only $866.40 in that period, will receive his
guaranteed $1,000, having been insured in all those years
against death in any form. Or should fate have interposed in

452

INSURANCE IN PRACTICE 453

that first year of the policy's issue and the holder of it died, his
family would have received the $1,000 insurance and have had
in bank the $956.68 remaining after the payment of the first
year's premium — more than the savings bank alone would have
had for the heirs at the end of twenty years.

And in the meantime, under honest administration of the
affairs of either concern, the bank and the insurance company
have only the same common field of investment for the funds
of their patrons held in trust. A savings bank ordinarily can
claim no security for its investments over the investments of
the life insurance company. Indeed, savings banks, as a rule,
are given greater latitude by legal enactment in the matter of
investments than are the fife insurance companies.

How does the insurance company find it possible to offer
this seemingly extraordinary inducement above the savings
bank?

For several reasons, chief of which is that the bank pays
a fixed rate of interest on its deposits of 3 per cent or 3^ per
cent. The insurance company, on the other hand — whether
on the stock or mutual plan — credits each policy holder with
the entire interest earnings on the funds behind his policy.
Then again the insurance company is able to earn a higher rate
of interest on its funds than is the bank. The bank must hold
itself in readiness at all times to convert its funds into cash
quickly to repay its depositors on demand, for it cannot fore-
tell what its withdrawals will be. The insurance company can
foretell with a marked degree of certainty what its withdrawals
will be, and is in consequence enabled to invest its funds in
what are known as long time securities, such as mortgages run-
ning for a period of years. These pay the company a much
higher rate of interest than the bank gets on its short time and
demand loans. Then again by a careful selection of applicants
for insurance, accepting those only whose family history, phy-
sique, and environment are such as to indicate ability to with-
stand disease, the insurance company is enabled to profit by
experiencing a lower death rate than that shown by the table
on which its rates are based.

Strange as it may seem, the payment of a death claim by
an insurance company does not mean a loss to the insurance

454

OSWALD J. ARNOLD

company. By means of mortality tables, the company, know-
ing the total number of policy holders insured, can foretell to
a nicety the amount it will be called upon during any given
period to pay out in death claims. Statistics show that, while
the duration of any single life is most uncertain, the number
that will die from year to year of a thousand or more lives can
be foretold with marked precision. Adequate provision is,
therefore, made in the premiums collected to cover each policy
holder's share of the death claims resulting under policies
matured by death.

Your chance of death with 100 others of your own age.

Age.

18...

19...

20...

21...

22...

23...

24...

25.. .

26...

27...

28...

29...

30...

31...

32...

33...

34...

35...

36...

37...

38...

39...

40...

41...

42...

43...

44...

45...

46...

47...

48...

49...

50...

51...

52...

53...

54...

55...

56...

57...

58. . .

59...

60. . .

1
Yr.

10
Yrs.

9
9
10
10
10
11
11
11
11
12
13
13
14
15
16
17
18
19
21
22
23
25
27
29
31
33

15

Yrs.
11
11

12
12
12
12
12
12
12
13
13
13
13
13
13
13
14
14
15
15
16
16
17
18
18
19
21
22
23
24
26
27
29
31
33
35
38
40
43
46
49
51
55

20

Yrs.
15
15
15
16
16
16
16
17
17
17
17
18
19
19
19
19
20
21
22
22
23
25
26
27
28
30
32
33
35
38
40
42
45
47
50
53
56
59
62
66
69
72
75

25

Yrs.
19
19
20
20
20
20
21
21
22
22
23
24
25
25
26
27
28
29
30
32
33
35
37
39
41
43
45
48
51
53
56
59
62
65
68
72
75
77

30
Yrs.
24
24
24
25
25
26
27
27
28
29
30
31
33
33
36
36
38
40
41
44
46
48
51
53
56
56
62
65
68
70
73
76
79

35
Yrs.
29
29
30
31
32
33
34
35
36
37
39
40
44
44
46
48
50
53
55
58
61
64
66
69
72
75
77
80

40
Yrs.

35
36
37
38
40
41
43
44
46
48
50
52
57
57
60
62
66
68
71
73
76
79
81

40

Yn

US

90

;

38

40

41

43

(4

18

•a

R

5!

«

90

82

66

68

n

18

18

81

454

OSWALD J. ARNOLD

By means of mortality
il number of policy hoi
e amount i

period to pay o

the duratii

that will

be for<

there

holder

ma;
Yoi

51..

rmpany, know-
can foretell to
ing any given
bow that, while
in, the number
more lives can
b provision is,
ver each policy
under policies

our

own age.

40

31

44

37

40

44

67

44

46

71

LIFE INSURANCE

INCOME AND PAYMENTS TO POLICY HOLDERS

1904

1900

1890

I860

PAYMENTS

IINCOME

INSURANCE IN PRACTICE 457

mium paying to the end of the term, the question may be
asked, Where does the company's money come from ?

The primary source of income is, of course, the premium
receipts from the policy holders. If the experience of a life
insurance company showed that its expenses each year were
exactly equal to the total of the items for expenses, and that
its death claims were equal to the total of the contributions
for death claims of all its outstanding policies, and that it
earned interest on its reserve funds at the exact rate at which
it is assumed it would earn interest in constructing its premium
rates, the result would be shown in the illustration on the en-
dowment policy above ; the company would just be able to ful-
fill its contracts — pay death losses as they occurred and pay to
the endowment policy holder the face amount of his policy,
$1,000 at the end of the twenty year endowment period.

The experience of all legal reserve companies, however,
shows that in practice the death losses are less than indicated
by the mortality tables upon which the premium rates are
established, and that interest earnings are in excess of the
assumed rate of earnings. This salvage from the mortuary
element of the premium and the excess interest earnings,
together with any portion of the expense element of premiums
not used for expenses, constitutes the principal secondary
source of accretion to the companies' funds.

The experience of American companies shows that each
policy's share of actual death claims incurred ranges from 85
per cent to 90 per cent of the item "For death claims" included
in the premium. The savings out of the expense apportion-
ment is practically nothing. The majority of the companies
operating in America in determining their premium rates
assume that their future interest earnings will be at the rate
of 3 or 3^ per cent; no companies assume a rate higher than
4 per cent. During 1904 the average rate of interest realized
by the seventy leading American legal reserve companies was
4.33 per cent. On the average, therefore, the rate of interest
earnings was something more than 1 per cent higher than the
rate assumed in constructing premium rates now in use.

The salvages on mortality and expense, together with the
excess interest earnings, constitute the surplus funds of life

458 OSWALD J. ARNOLD

insurance companies; it is from this fund that dividends are
paid.

During 1904 the American legal reserve companies in-
creased their reserve funds from $1,978,166,083 to $2,168,-
468,541, being an increase of $190,302,458. In the same time
they increased their surplus funds from $268,621,596 to $330,-
492,427, being an increase in surplus of $43,870,931. The
assets — reserve and surplus — of all the legal reserve or "old
line" life insurance companies on Dec. 31 , last, amounted to
$2,498,960,968.

The last few months have made the question as to where
this enormous reserve and surplus fund of insurance com-
panies is invested a pertinent one. A careful compilation of
the investments of the ninety three regular and industrial old
line companies of the United States shows that on Dec. 31,
1904, the investments were distributed as follows:

Real estate, $180,875,035; bonds and mortgages, $671,-
577,813; bonds owned, $1,067,027,851; stocks owned, $172,-
582,075; collateral loans, $42,715,261; premium notes, $19,-
300,755; loans on policies, $170,438,024; cash in office and
bank, $104,027,124; net deferred and unpaid premiums, $45,-
879,455; all other assets, $24,636,705. Total, $2,408,960,968.

THE INSURANCE INVESTIGATION.

BY GILBERT E. ROE.

[Gilbert E. Roe, attorney, was formerly the law partner of Senator La Follette in
Madison, but when the firm was dissolved upon Mr. La Follette's entrance into active
public life, he removed to New York where he is at present practicing law. Mr. Roe
has taken an active interest in public questions, especially in the insurance situation
which he has investigated from the point of view of the insured.]

Life insurance, as generally conducted, and its evils and
abuses are tremendous facts in our social and commercial and
even political life with which we must deal now. With these
facts, and not with theories, I purpose to deal in this discussion.
I venture also to hope that I may show that the evils of life
insurance now being revealed to the world are merely grafted
upon it and not inherent in it: and that those evils may be
easily, quickly and completely eradicated.

The first thing to do in entering upon any discussion of
life insurance, is to free our minds from the idea that the busi-
ness is mysterious or deeply complex. However much those
interested in confusing the public regarding it may seek to give
it that character, the principles of the business are simple and
easily understood.

Life insurance is merely a method or plan by which the
many help bear the burden of financial loss incident to the
death of one. Life insurance conducted upon the mutual
plan, merely means that a large number of persons combine
and agree that upon the death of one of their number the sur-
vivors will pay to the beneficiary, designated by the deceased,
a certain sum of money. As some one must collect and dis-
burse the money, agents are appointed by the members or
persons insured, who are charged with that duty, and these
agents are called officers. The aggregation of persons so com-
bined and agreeing is called a life insurance company or asso-
ciation. Surely there is nothing mysterious or beyond the
ability of the average person to understand in this. Thus
viewed, every person who takes life insurance insures not only
his own life, but helps to insure the lives of all his associates.

459

460 GILBERT E. ROE

As he knows that some of his associates are certain to die and
receive the agreed amount of insurance before they have con-
tributed a like amount to the common fund, he becomes a
voluntary contributor to the benefits received by others, and
to that extent he sows that others may reap. In another
view, life insurance is no less beneficent, though in a sense self-
ish. It enables the head of the family to provide even after
death for those dependent upon him during life. It enables
all of us to furnish financial help to those who are the objects of
our care, our bounty or our love, when death has deprived
them of our service. The average life insurance policy is less
than twenty- three hundred dollars in amount. The large
majority of all premiums paid represent stern self denial on
the part of those paying them. It is a story of comforts
omitted and often necessities denied that the fife insurance
premium tells to the officers receiving it. Under these circum-
stances it surely is not too much to expect rigid economy and
strict fidelity on the part of those whose duty it is to collect
and disburse this money.

If I were to attempt to be strictly logical in the treatment
of my theme, I should probably begin with a discussion of the
excellent work done by the state legislative committee con-
ducting the insurance investigation, and follow that with an
analysis and condemnation of the evils which that investiga-
tion has shown to exist, and then propose a remedy for the evil
conditions disclosed. A little reflection convinced me, how-
ever, that by this method I could only cover a small part of the
field in the limits of the present article, and that I would be
obliged to leave unsaid, for lack of time, the most important
things to be said, on the subject; moreover, this method of
treatment, which is the only one thus far accorded the subject
that I have observed, has resulted only in confusing the public
mind and rendering it less capable than before to deal intelli-
gently with the momentous question presented.

Neither is it any part of my plan to indulge the very
natural feeling of resentment against unfaithful insurance
officials by calling them names. We can truthfully say of each
leading life insurance official thus far investigated, as Anthony
said of Caesar: "But yesterday" his word "might have stood

460

GILBERT E. ROE

vain to die and
3 the agreed hey have con-

tributed a like amou he become

voluntary contribul
to that extenl
view, life in
ish. It ena
death fo
all oi
our car
them of

by others, and
p. In another
1 in a sense self-
vide even after
life. It enables
he obje<

leprived

is less

t. The large

ms paid rep If denial on

iiem. of comforts

e life insur

um-
too 1 and

ad of t!

or o
The

. thi

it tr.

things to b

mind <xi

tient
►f the

ailing them

ae, how-

I would be
t impor
(his method of

ublic

.1 intelli-

indulge the very
ance
Lthfully say of each
as Anth

__

FIRE INSURANCE

1890=1904

70

■30

40

I I TOTAL INCOME

50

PAYMENTS TO POLICY HOLDERS

THE INSURANCE INVESTIGATION 463

premiums." The Mutual Life Insurance company answered:
" Dividends are declared annually." The New York Life In-
surance company answered: "Dividends are declared annu-
ally." Such in substance were the answers also of all the
companies reporting to the New York department.

What do the words surplus and dividend mean, in the
fundamental law of these companies, referred to above, and in
the reports made to the insurance commissioners? Whatever
the words mean and from whatever source surplus is derived,
I have now conclusively shown that up to the year 1868, at
least, the surplus was always returned to the policy holder at
short periods varying from one to five years. The answer to
this question requires a somewhat further explanation of the
principles upon which life insurance is conducted. There are
two fundamental facts which all rational life insurance recog-
nizes. The first is, that all men must die, and the second is,
that the probability of dying, disregarding the years of infancy,
increases with increasing age. So certain is this latter fact
that, starting with a large number of fives, say one hundred
thousand at age ten, it may be prophesied with approximate
certainty how many will die in each succeeding year. The
experience of one American life insurance company combined
with that of seventeen English life insurance companies in this
matter, was gathered, and about forty five years ago formu-
lated and set forth in a table which is called the American
Experience Table of Mortality. There are also other mor-
tality tables, but this is the one most commonly used in the
United States. Starting with one hundred thousand lives at
age ten, this table shows how many are expected to die each
succeeding year, the death rate increasing with increasing age,
until age ninety five is reached, when, according to this table,
three persons are alive, and these are expected to die during
that year. It becomes, therefore, a comparatively easy matter
for a life insurance company by the use of the mortality tables
to approximate the loss by death which its membership must
suffer from year to year and the amount of insurance which in
consequence must be paid.

Now it is perfectly obvious that there are two purposes
for which the funds of an insurance company may be properly

464 GILBERT E. ROE

expended. One is to meet the legitimate expenses of conduct-
ing the business, the other is to meet death losses as they occur.
Every premium, therefore, contains these two elements, or at
least it may properly be applied to these two objects. As,
however, the death rate increases rapidly with increasing age,
the premium rate to meet death losses among the very old
would necessarily be practically prohibitive. To avoid this
and in order that the premium may be kept level, or at the
same sum throughout the life of the policy, what is called a
reserve is accumulated. With the reserve we have little to do
in the present discussion. It may roughly be described by
saying that the company, by means of the mortality tables,
can compute approximately the number and amount of its
policies, among the large number outstanding, which will
probably mature by death in each succeeding year, and a sum
is held or reserved which, compounded at the rate of interest
required by law, will enable the company to pay all its policies
as they mature. Generally speaking, it may be said that the
reserve is a sum laid aside out of the premiums paid which,
compounded at the rate of interest which the law requires,
will, when the last person dies during his ninety fifth year,
according to the mortality table, be just sufficient to pay the
final death claim. The law of every state fixes some low rate
of interest which the reserve fund must earn, ranging usually
from three to four per cent. It is the reserve, with future
premium payments, that keeps the company solvent and makes
it certain that its death claims will be paid as they mature.
With the reserve we have nothing further to do in this discus-
sion, and my only purpose in mentioning it was to distinguish
between it and another accumulated fund of the company
which is called the surplus.

Surplus is just what its name indicates. That which
remains above what is used or needed ; excess beyond what is
prescribed or wanted; more than enough. If it were possible
for those conducting the business of a life insurance company
to know the future, to know in advance each year how many
members would die, and the claims which would mature and
the interest which the money of the company would earn and
the expenses which it would need to incur, there would be no

THE INSURANCE INVESTIGATION 4^5

such thing as surplus. The premium which is paid in advance
would be made just sufficient to meet the requirements of the
company during the period covered by the premium. But
because these matters can not be known in advance with
absolute certainty, they must be estimated; and because all
estimates are, and very properly should be, made on the side
of safety, it comes about necessarily that more money is col-
lected according to the estimate than is properly and necessa-
rily used in meeting the actual expenses and paying death
losses that actually occur; and this excess is called the surplus.

The amount of this surplus which is from time to time re-
turned to the policy holder, is called, though improperly, a
dividend. It is not properly a dividend at all; it is merely the
repayment to the policy holder of the money collected in ex-
cess of what has subsequently been found necessary to meet
the needs of the company. That is why it is returned to the
policy holder. The surplus is derived practically from three
sources : First, gains made from investments in excess of the
interest rate which the company assumed its funds would earn;
second, lower mortality than estimated according to the mor-
tality table employed; third, less expenses than estimated and
provided for in the loading of the premiums, as it is called. A
possible fourth source of surplus, though not strictly so, may
be said to be the accretions from forfeitures and surrender
charges.

The accumulations from these sources are necessarily very
large. The mortality tables by which the number of deaths
to be anticipated are calculated were compiled many years
ago, since which time medical science and improved methods
of living have greatly lessened the death rate. So also the
excess of the interest earnings over the estimate is very great.
The aggregate surplus according to the reports of the three
companies which we are using as illustrations, in 1894 amounted
to seventy seven million twenty one thousand four hundred
and eighty five dollars. In 1904, according to their reports, it
amounted to two hundred and two million two hundred and
eighty thousand eight hundred and nineteen dollars, an in-
crease of substantially a hundred and twenty five million dol-
lars in ten years. Or, to put it in another way, the aggre-

Vol. 3—30

466 GILBERT E. ROE

gate surplus of these companies was approximately two and
one half times greater in 1904 than it was ten years previously.
If this proportion of increase is continued within the life of the
present generation, the surplus of these three companies alone
will amount to more than the present interest bearing national
debt. During the ten years from 1893 to 1903, the national
banks of this country showed a combined surplus increase of a
little more than thirty four per cent, while the forty one life
insurance companies reporting to the New York department
during the same time showed a surplus increase of one hundred
and ninety five per cent. Under the system of surplus accu-
mulation now practiced, every hamlet and almost every home
of this country pays tribute to this fund.

There seems to be a popular idea that in some way the
surplus adds to the security of insurance. The opposite is
true. As we have seen, the surplus is wholly unnecessary for
the payment of death losses or legitimate expenses. That is
why it is surplus. It is the fund that is left after the death
losses and legitimate expenses of the business are met, and
should be returned to the policy holder from year to year, or
time to time, as the amount of this over payment is deter-
mined. Because it was never contemplated that such a fund
would be accumulated, the law makes no provision for its
earning anything, as it does in the case of the reserve. With
no surplus the reserve must be carefully invested and com-
pounded in order to earn the amount which the law requires.
With the surplus on hand, the life insurance officials may spec-
ulate even with the reserve, instead of investing it in the se-
curities required by law, and if any portion of the reserve is
lost, make it good out of the surplus.

It is the surplus that is being used to-day to pay fabulous
salaries to incompetent life insurance officials, who, according
to their testimony, know less about the business of their com-
panies than the average policy holder knows. It is the surplus
that is being used for speculation for the personal gain of the
officers of the companies. It is the surplus that the officers
are loaning to their friends and themselves at one to two per
cent interest. It is the surplus that is being used to control
the legislation of the state and nation, not only where life

THE INSURANCE INVESTIGATION 467

insurance is involved, but upon other subjects as well. It is
surplus that is being used to make and unmake political parties
and public men. More menacing than all else, perhaps, it is
the surplus which is being used as a compact money power in
the hands of five or six men to control the industries of the
country.

Why did Mr. Ryan pay to James H.Hyde millions of dollars
for five hundred and two (502) shares of stock in the Equitable,
which under the charter can never pay in dividends to exceed
three thousand six hundred and forty ($3,640) dollars a year?
Why did Mr. George Gould and others offer fabulous prices for
this insignificant amount of stock? Simply because it would
give them control of the surplus. They did not expect to be
officers of the company. They expected, however, to elect
the officers of the company. Once elected, the officers would
have precisely the same power, and no more, that officers of
the purely mutual companies have. What matters it, then,
if the Equitable should be, as it is called, mutualized? The
policy holder would be in precisely the same position that he
now is in the Mutual, the New York Life and other purely mu-
tual companies.

You may very properly ask at this point two pertinent
questions: First, how is it that insurance companies whose
charters require them to distribute the surplus annually or at
short periods among their policy holders, are able to accumu-
late and hold it indefinitely for the profit of their officers?
Second, how is it that in purely mutual companies where the
policy holders elect the officers each year, that the persons
who wrongfully withhold hundreds of millions of dollars from
the policy holders are continued in office?

These two questions I purpose to answer in their order,
and the answers to these questions will, I am confident, suggest
the solution of this entire question.

In the year 1877, a legislative investigation of insurance
companies took place in this city. The report of these pro-
ceedings has been printed, and to the facts contained in that
report, I shall have occasion to refer from time to time. I
think that it has been generally assumed that the scheme by
which policy holders have been defrauded out of their surplus

468 GILBERT E. ROE

had, at least, the merit of great cleverness. From the exam-
ination I have made of the origin of this scheme, I am con-
vinced that it does not possess even that poor merit. At the
time of the legislative investigation of 1877, Henry B. Hyde,
the father of James Hazen Hyde, was president of the Equi-
table Life Assurance society. At page 35, volume I, report
of that investigation, I find an affidavit from Mr. Henry B.
Hyde in which he sets forth the extra compensation that he
received from the company in addition to his salary. That
extra compensation took the form of a certain percentage paid
him upon the surplus of the company. According to that af-
fidavit, this extra compensation for the years 1864 and previous
amounted to $16,199.

In 1874, it amounted to $50,000. By the testimony of
William H. Beers, then vice president of the New York Life,
and afterwards its president, found in volume II, page 35, it
appears that substantially the same arrangement was made
effecting the compensation of the officers of the New York
Life. By the testimony of Mr. Richard A. McCurdy, then vice
president of the Mutual Life, afterwards its president, it seems
that the officers of the Mutual had the same habit of voting
bonuses to themselves based upon the surplus (see volume II,
pages 98-99). And that these bonuses or percentages of the
surplus which the officers of the company voted to themselves
were falsely stated in the reports of the company to the insur-
ance department to be dividends paid to policy holders. At
page 152, volume II, Mr. McCurdy testifies:

Q. Where in the report is the payment of the bonuses
charged?

A. At that time? (Referring to the year 1870.)

Q. Yes.

A. Well, the theory of the actuary we had at that time
was, that that was a proper charge to the dividends to the
policy holder because it was part of the earnings of the com-
pany, and should be participated in by them.

Q. In what part of your account does it appear, then?

A. It appeared at that time as dividends paid, I think;
I have such an understanding in my mind; at this date I have
an impression it should not be charged so, but the amount was

THE INSURANCE INVESTIGATION 469

charged to the dividend and passed to the dividend account.

Q. It was not dividend as such, was it?

A. Well, it was part of the dividends earned by the com-
pany.

Q. But not what the officers were entitled to as policy

holders?

A. I am not defending it and it stopped right there; it was
a theory that prevailed then, but we have learned better since.

Think of not only taking the policy holders' money in this
way, but actually crediting it as having been paid to the policy
holders !

The time referred to by this witness is shown, on [the
same page of the testimony, to be the year 1870. The time
that the witness was testifying was March 28, 1877. This
crude method of looting the treasury was, as this witness says,
abandoned in the early seventies because they had learned
better. It was never very clever, but it was this idea of voting
themselves bonuses upon the surplus that no doubt suggested
the desirability of making the surplus as large as possible so as
to increase the amount of the bonus. The ease with which
these bonuses could be voted to the officers and then covered
up by charging them to the dividends paid to policy holders,
suggested also the great possibility of concealment contained
in a large surplus. Since a large surplus was not contemplated
by the law, it was required to earn nothing, and it was easy to
account for any money which might disappear from a company
by calling it surplus and charging it as paid out in dividends.
m Of course, this was all very petty and crude, as compared with
5 what the officers of the insurance companies are doing at the
present time. As Mr. McCurdy says, they have learned better
now. They have improved upon these early, primitive
methods; but the idea that found lodgment in the brains of the
insurance officers at this time was the desirability of increasing
the surplus.

Straight across the pathway of each company, forbidding
large surplus accumulation, was the provision in its charter
requiring distribution of the surplus to be made at short peri-
ods. The first thing to do, therefore, was to get rid of those

470 GILBERT E. ROE

charter provisions, and the best, quickest and easiest way to
do this was by means of a general law. To have amended all
the charters would have attracted too much attention, and
also probably would have been very expensive . Some attempt
was made in 1868 to get a law that would accomplish the
desired result, but it was not until 1872 that the law was ob-
tained which struck down the provision in every charter re-
quiring short period distribution of the surplus, Chapter 100
of the laws of 1872, section 83 of the present insurance laws
provides :

"Distribution of Surplus to Policy Holders.— Any domes-
tic life insurance corporation may ascertain at any given time,
and from time to time, the proportion of surplus accruing to
each policy from the date of the last to the date of the next
succeeding premium payment, and may distribute the propor-
tion found to be equitable either in cash, in reduction of premi-
um or in reversionary insurance, payable with the policy, and
upon the same conditions as therein expressed at the next
succeeding date of such payment, notwithstanding any thing
in the charter of such corporation."

This law, while drawn so as to be obscure, permits the sur-
plus to be ascertained not at short periods, but at any time.
It permits it to be distributed not at short periods, but upon
such conditions as may be provided in the policy, any thing in
the charter to the contrary notwithstanding. Such is its
interpretation by the courts (Greeff vs. Equitable Life, 160
N. Y., 19). Strangely enough, a law effecting this same pur-
pose was passed at about the same time by the legislatures of
nearly all the states in which leading life insurance companies
were incorporated. The proposition was now easy. Insert
in the policy form, in fine print, among one of its innumerable
conditions, a proviso, that distribution of the surplus shall be
postponed for twenty years, or any other period, and for-
feited in case any premium is not paid, and the scheme of
building up a surplus is complete. Give to the agents more
commission for writing this kind of policy, as all the companies
admit they do, and the accumulation of surplus becomes a cer-
tainty.

The history of the Equitable is the history of the others

THE INSURANCE INVESTIGATION 471

in this matter. In 1870 the surplus of the Equitable amounted
to only $408,434. This is the sum which would naturally be
accumulated under the plan of short period distribution then
in operation.

In 1880, only eight years after the passage of this law, the
surplus had been multiplied to $6,555,654.

In 1890 it had become $21,510,671.

In 1900 it had become $65,923,573, while the divisible
surplus of the company, December 31, 1904, is reported by it as
being $78,944,061.31.

I have now answered the first question and shown you
the origin of surplus accumulation and how it has been success-
fully carried forward to the present time. Large surplus accu-
mulations, as we have now seen, originated in no requirement
of the business, but in the selfish greed for personal gain of life
insurance officers. The fundamental law of the insurance
companies themselves had forbidden this accumulation. To
change the law, therefore, became the work of the unfaithful
officers.

Here also is another milestone in the history of life insur-
ance. The ease with which these men were able to break down
the law protecting the surplus of the policy holder suggested to
them the possibilities in controlling legislation in other direc-
tions. We have heard in this insurance investigation that it
was necessary to maintain an insurance lobby because strike
legislators would blackmail the insurance companies otherwise.
Were the companies being blackmailed when they obtained
this first piece of legislation which has permitted the policy
holders to be robbed of more millions than can ever be known?
Were the companies being blackmailed when later, little by
little, they broke down the laws prescribing the securities in
which the policy holders' funds could be invested? Were the
insurance companies being blackmailed when, in 1890, section
56 of the present insurance law in this state was passed, for-
bidding the commencement of proceedings by injunction, or
for an accounting or for the appointment of a receiver against
an insurance company to be instituted by policy holders with-
out the consent of the attorney general? Is it because they
have been blackmailed that certain gentlemen find it convent

472 GILBERT E. ROE

ent to sojourn beyond the seas while the present investigation
is in progress? If any insurance companies are being black-
mailed, it is because they have invited it. Lincoln Steffen
says, "You can't blackmail a man who won't pay a bribe."
As applied to our present discussion, I fear his statement might
be paraphrased by saying that you can't blackmail an insur-
ance company that has not paid a bribe. This evil, however,
like all the others, has its origin in the one thing, an unneces-
sary surplus.

Why don't the policy holders who must elect their officers
annually elect men who will return these surplus accumulations
as rapidly as possible and cease accumulating them in the
future? Let our old friend Mr. McCurdy, from whom I have
previously quoted, tell us. I quote from his testimony, vol-
ume II, page 115, legislative report of 1877:

Q. Let me ask you if you have any proxies from any one?

A. Yes, sir.

Q. To what extent?

A. I don't know, sir.

Q. Have you no idea?

A. No, sir.

Q. You don't know whether you have one or a hundred
thousand?

A. Well, if you won't accuse me of being facetious again,
permit me to say that we give them the name of the children
of Israel; because the children of Israel were never supposed
to be numbered, and we never counted them, and don't mean
to.

That is all there is of it.

By getting proxies from policy holders these insurance
officials merely meet annually in their board room and go
through the form of re-electing themselves. By letting no one
know the number of proxies held, it is rendered almost certain
that no one will attempt to wrest control from the present offi-
cers, for no one can tell what number of votes it will be neces-
sary to have in order to do it. Even if the outraged policy
holders should combine, as a result of the disclosures of the
present investigation, and elect new officers, it would do no
good. So long as the policy holder's money in the form of

THE INSURANCE INVESTIGATION 473

surplus is withheld from him, it does not make any difference
whether it is withheld by Mr. Hyde or Mr. Alexander or Mr.
Paul Morton, or for that matter by ex-President Cleveland.
It is the unnecessary withholding and accumulation of the
surplus by any one that at once robs the policy holder and de-
bauches the officials.

If I have stated clearly the facts that I have tried to state,
I need spend no time in pointing out the remedy. The remedy
suggests itself. Repeal the laws permitting the surplus accu-
mulation and pass a law compelling, as rapidly as consistent
with safety, surplus distribution. Put the business back on the
foundation upon which it rested in the beginning. Restore
to it the principle of protection to the policy holder by short
periods of surplus distribution, without which the business
would never have had a beginning, much less its marvelous
growth. In doing this you are doing no more than a few insur-
ance companies have voluntarily done for over fifty years, at
all times with great profit to the policy holder and credit to the
managers of the companies. In doing this you are doing no
more than the laws of Germany, at least, now require; and
with which laws the New York Life Insurance company com-
plies in that country, in order that it may continue to do busi-
ness there.

Already the signs are many that ingenious efforts are to be
made to pacify the policy holders with something less than
their rights and the public with something other than justice.
The present New York legislative investigation is replete with
startling information as to how the policy holders' money rep-
resented by the surplus, in the hands of insurance officers, has
been misapplied; but the question is, Why is the policyholders'
money there at all? The present insurance officials are being-
execrated from the pulpit and through the press; some have
been deposed and others will be deposed. But what profits
it if the surplus remains for a new set of officials to convert to
their own use either by the methods with which we are familiar
or by new ones to be easily invented? Salaries are being re-
duced, and will be further reduced. We may almost hope to
see the day when a president of a life insurance company will
not receive much more in salary than the president of the

474 GILBERT E. ROE

United States receives. But why reduce salaries and other
expenses merely to increase the surplus accumulation? Fed-
eral supervision of life insurance is proposed, and the humor
of this proposition is that it is proposed by the insurance offi-
cials themselves, who have been the greatest offenders. Every
insurance department of every state and territory in this
country could have investigated in the most complete manner
the affairs of these companies, and most of them in recent
years have done so ; yet it remained for a personal quarrel be-
tween Mr. Hyde and Mr. Alexander to reveal the true condi-
tion of the Equitable society, which revelation in turn set in
motion the present investigation. There is no doubt that the
insurance departments in many of the states are honestly and
ably conducted, and that they have done all that any depart-
ment could do to investigate and supervise these companies.
Federal supervision could do no more than state supervision
has done, and the right of federal supervision is, to say the
least, doubtful in point of law. It would seem much easier
also for the companies to deceive one department than many,
and [that seems to be the idea of the companies, since they
favor federal supervision.

So long as human nature remains as it is, and the surplus
accumulation is continued, the conditions which our present
investigation has shown to exist will continue. Restore to
the policy holder the money of the policy holder now withheld
from him, without justification or excuse, and the life insurance
problem is solved. In no other way can it be solved.

THE INDUSTRIAL AND FINANCIAL FUTURE OF
THE UNITED STATES.

BY FRANK A. VANDERLIP.

[Frank A. Vanderlip, banker; born Aurora, 111., Nov. 17, 1864; educated in
public schools, University of Illinois and Chicago; began his business career as
a reporter on the Chicago Tribune, of which he later became financial editor;
associate editor of the Economist, 1894-7; became private secretary to Secretary
of the Treasury Gage, 1897, and later in the same year, assistant secretary of the
treasury; became vice-president of the National City bank, 1901. Author of
many articles on economic topics.]

It has seemed to me fitting to attempt to review, in the
briefest manner, a few of the figures illustrative of our material
progress and to try to draw some deductions from them. In
order to get a setting for our comparisons, let us for a moment
glance back at conditions during the years when we were just
emerging from the depression of the panic year of 1893, and
when we were facing a great political and economic conflict
over the silver issues. The whole world was filled with dis-
trust in regard to the future of our standard of value and the
chilling shadow of that distrust was falling heavily on our com-
merce and finances.

Then came the definite verdict of the people, declaring for
a sound currency, and following that began an unexampled era
of prosperity such as no other country, in any age, has ever
known. The expansion went beyond all the experiences of
men of affairs. We had learned lessons of economy, of careful
management and of cheap production in the depression whch
followed the panic of 1893, and now we suddenly waked to the
fact that we had obtained a grasp on the markets of the world.
Our exports of manufactures ran up from $183,000,000 to
$433,000,000 in half a dozen years, and this increase of
$250,000,000 in the annual average of our exports of manu-
factured products made Europe stand aghast at what was
denominated the American commercial invasion. Our gen-
eral foreign trade balance assumed such totals as to cause
economists seriously to consider what was to happen to the
rest of the industrial world if this march of progress went on.

475

476 FRANK A. VANDERLIP

In half a dozen years we piled up against other countries a
trade balance in our favor of more than $2,600,000,000, a
trade balance far larger than the net trade balance had been
from the beginning of our government down to the time when
this remarkable expansion started.

And then we made mistakes. We were in the midst of a
prosperity so great that it went beyond the experience of the
most experienced. With the flood tide of this prosperity cov-
ering all of the old landmarks, it was small wonder that there
were blunders made in steering the craft of business. We ran
into excesses, extravagances and miscalculations. Capital
made mistakes of over-capitalization; labor made mistakes of
arbitrary and unwise demands ; every body made mistakes of
extravagance. Producers made errors in estimating the de-
mand and made miscalculations in the multiplication of their
productive capacity. Those errors of estimate were almost
unavoidable. There was a surplus demand above our produc-
tive capacity, and that demand went knocking at the door of
first one factory, then another and another, producing the
impression on the mind of each individual manufacturer that
the demand legitimately pressing upon him warranted him in
doubling his plant; and when every one started to double his
productive capacity, capacity soon ran ahead of demand.

The railroads were caught in much the same situation.
They made huge engagements for expenditures which they
felt were necessary in order to handle the traffic that was press-
ing on them. For the time being, far too great a portion of
liquid capital was absorbed into fixed forms of investment.
Directly and indirectly, bank credits which were payable on
demand were, in a dangerous proportion, converted into new
manufacturing plants and into new railroad tracks, equipment
and terminals. Bank reserves fell until they were a danger
signal pointing with certainty to the need for more conserva-
tive administration. Banks applied the financial brakes of
higher interest rates. Stock market values, unduly inflated
by the spirit of optimism which was all pervading, began to
melt.

In 1902 this turn came. The decline which followed cut
a billion dollars off the value of securities in a few months.

OUR INDUSTRIAL AND FINANCIAL FUTURE 477

The vast readjustment which such a change in values made
necessary was accomplished, however, without panic, without
great failures, and with few of these disasters which usually
are the features of such a period. The way the country met
the situation stands to-day as the most striking monument we
have yet reared to our increasing wealth and financial strength.

Ten years ago we had a population of sixty eight millions ;
to-day it is eighty two millions, and ten years hence, with this
ratio of increase, the population of the United States will be
ninety eight millions. We will in the next ten years add to
our number a population equal to one half of France. Such
growth in numbers matched to our wealth of resources makes
the sort of material out of which to shape an entirely new level
of statistics marking the country's material progress.

The total wealth of the United States, according to the
best estimates which we have, has risen in ten years from
$75,000,000,000 to $106,000,000,000. Ten years more of in-
crease will make the wealth of this country $140,000,000,000.
When we remember that such a total will compare with the
total of $42,000,000,000 in 1880, the accumulation is seen to be
at a rate almost incredible.

Our money stock has increased in ten years from $1,600,-
000,000 to more than $2,500,000,000, and every dollar of it is
sound and every dollar of it is on a parity with gold. The
actual gold stock itself increased in that period $250,000,000.
If the money stock increases in the next ten years in the same
amounts, we will have $3,400,000,000 of circulation at the end
of that period. Incidentally, it is interesting to note that
national bank note circulation in the last ten years has risen
from $172,000,000 to $411,000,000; and one might stop to won-
der, if this rate of increase is to go on, where the government
bonds are to come from in the next ten years to provide for a
further increase of national bank circulation of $250,000,000 or
$300,000,000. Such inquiry points inevitably to the necessity
of some change in our national banking laws in the due course
of time.

National bank deposits in ten years have doubled, going
up from $1,600,000,000 to $3,300,000,000. State bank de-

478 FRANK A. VANDERLIP

posits in that time have trebled, marking an increase of from
about $660,000,000 to $1,900,000,000.

A careful estimate of the total bank deposits in the United
States to-day — national, state, savings banks and trust compa-
nies—brings them up to a grand total of $10,000,000,000, and
that compares with a total ten years ago of $4,600,000,000.
The increase has been well over double. Will it double again,
and will we have $20,000,000,000 deposits in 1914? If we only
make the same actual gain, we will have over $15,000,000,000;
and barring any unexpected interference with our expansion,
I believe that that is a conservative figure and inside the
probabilities.

In ten years we have seen railroad gross earnings increase
from $1,200,000,000 to $1,900,000,000. With only an equal
actual increase, we will have railroad earnings of $2,600,000,-
000 ten years from now; while, if the percentage of increase of
the last decade were to be maintained, the figures would reach
$3,000,000,000. The lower total is the fairer presumption.
With gross earnings reaching such a figure, with constantly
improving methods of administration, and with more perfect
roadbeds and equipment, we may expect to see steadily in-
creasing economy of operation. Is it not fair to presume,
then, that these vast gross earnings, coupled with a decreasing
ratio of expenses, will most certainly provide for an increasing-
ly satisfactory return upon railroad investments?

I will not weary you with too many statistics. If you are
interested in pursuing such a line of inquiry, get the monthly
summary of the bureau of statistics from Washington. You
will see from the figures which you will find there, for instance,
that our foreign trade, which ten years ago footed $1,500-
000,000, was this year $2,450,000,000. Our exports of agri-
cultural products may not increase much from present figures,
but it is safe to say that our increasing command of foreign
markets for our manufactures will perhaps bring the total
of our foreign trade to $3,000,000,000 in the next decade. You
will see that national bank loans and discounts, which were
under $2,000,000,000 ten years ago, are now $3,725,000,000.
A similar increase would carry us above $4,500,000,000 in
national bank loans ten years hence. Let us hope those loans

OUR INDUSTRIAL AND FINANCIAL FUTURE 479

will not increase with un conservative rapidity. Bank clear-
ings of the country have increased two and a half times in ten
years. If progress were to continue at this rate, we would
show bank clearings of more than $200,000,000,000 at the end
of the next ten years. You will find that the total mineral
production of the United States has increased in value from
$650,000,000 to double that figure. If there is reason to sup-
pose that this increase will continue, we will yet make a record
of $2,000,000,000 as the annual product of our mines. Our
production of steel has doubled in ten years. The value of the
product of our cotton mills has increased fifty per cent. The
volume of business, as measured by the receipts of the post
office department, show almost a hundred per cent increase,
those receipts coming up from $75,000,000 in 1894 to $144,-
000,000.

If we look abroad, we see England struggling under most
adverse conditions, a great portion of her industrial population
actually underfed, and a million people receiving aid under her
poor laws. We see in France a nation grown rich by thrift, a
nation where economy has become a disease, and in the growth
of it, all initiative for new accomplishment has been lost. In
Italy we see a great industrial awakening, but conditions still
so hard that a large percentage of our 800,000 immigrants
annually come from that country. In Germany we find a
barren land yielding from the fields most meagerly and from
the mines hardly at all, but with a population whose energy,
intelligence and education has built, out of most discouraging
conditions, a vast industrial organization which is our one real
competitor in the markets of the world. If we will accept
from the Germans something of their scientific methods, their
carefulness, their thoroughness and their willingness for hard
work, and bring such qualities to bear upon our own resources,
the figures which I have been quoting as possibilities of the
future will yet look small.

These statements are generalities intended to apply only
over considerable periods. We are always in danger of
overdoing, and we may for the moment, perhaps, have al-
ready made that error, for prices have shown most sub-
stantial recovery — a recovery certainly in advance of what

48o FRANK A. VANDERLIP

would be warranted by the present actual conditions. It is
safe to say, however, that we are to-day in a sound financial
position. Bank reserves are ample — at least national bank
reserves are. Bank loans and discounts are not of a character
to offer grounds for any general criticism. We have probably
fully paid off the foreign indebtedness in the shape of finance
bills which two or three years ago had reached large totals.
We are in a position to command international credits and to
bring gold to strengthen our reserves, if we should need it. We
have every year a corn crop that is worth a billion dollars, a
cotton crop worth $600,000,000, and a wheat crop worth
$412,000,000. The value of these three crops alone every
year is fully $2,012,000,000, which compares with the value of
these same crops ten years ago of $1,067,000,000.

We have learned some valuable lessons in finance, and the
memory of recent years reminding us of the results of the mis-
takes made at the height of the boom period is still keenly
enough in our minds to warrant the belief that we will admin-
ister our financial affairs with a fair degree of common sense
for some time to come. We have learned that there is not a
new political economy, but that, in spite of our vast resources,
our growing wealth and our recuperative power, we must obey
the same old sound laws of finance and commerce that have
long ruled.

APR 1 5 1953

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