CHAPTER II

NATURE OF COMBINATIONS IN THE UNITED STATES AND ABROAD

THE tendency toward combination in the industrial world is everywhere manifest. It is not confined to any one country or to any one industry, although the particular form that it takes, the extent to which it is carried, and the policies adopted by different countries show considerable variation. In popular language the word "combination" is generally understood to mean operations on a large scale, but the two are not necessarily synonymous. A great organization may be formed directly instead of by the consolidation of smaller concerns. Still that is not the most frequent origin of large scale operations of the present day, especially in the United States. The Steel Corporation is a good example of the usual method pursued. This gigantic combination embraces a considerable number of large single corporations, such as the Carnegie Steel Company, and derives benefit from the experience and patronage of its constituent members.

There are two distinct sets of causes underlying the movement toward combination:

1. Those which are normal and responsive to those economic laws which make for cheapness or efficiency.

2. Those operating under conditions which are not normal, in which cheapness and efficiency are entirely subordinate to private gain and efforts to secure monopoly.

Among the first class are the diminished cost per unit of production, better utilization of capital, advantages in purchasing raw material and in obtaining improved mechanism. Substantial advantage can also be secured from the more perfect organization made possible in large establishments by the division of labor and the manufacture of distinct articles in separate shops. Large concerns also obtain increased profits from the manufacture of by-products, thus utilizing material which would otherwise be wasted. Smaller establishments with limited capital could not utilize this material because of an insufficient supply. Some time ago, the manager of a company proposing to construct coke ovens, gave figures showing that for $400,000 ovens could be built for producing a certain quantity of coke, while for $1,600,000 a plant could be constructed from which there would be by-products in the form of gas and sulphate of ammonia, which would much more than pay an income on the increased cost; indeed would make it possible to furnish the coke for a very small sum. The report made on the Beef Industry some years ago by the

Bureau of Corporations, even went so far as to say that without the utilization of the by-products the business would be unprofitable at the prices charged.

consumer.

The economies in distribution are even greater than those possible in production. The larger the product and the greater the variety, the less the expense in delivering it to the middleman or to the Substantial economies can be secured in the cost of distribution by division of territory, thereby avoiding what are called cross-freights. For instance, under a régime of competition, a manufacturer in Chicago might ship to Philadelphia, while a rival factory in Philadelphia would be shipping to Chicago. When acting in unison this waste is done away with and orders are filled from the nearest factory. Diminished cost in freight charges is often secured by shipping considerable quantities. A large combination saves, to a great extent, the cost of advertising and the wages of salesmen. Further, it increases efficiency by abandoning inferior plants and discarding obsolete machinery. Another important advantage results from the better understanding of the market which can be gained. When there is a multitude of small establishments, the probability of overproduction is very much increased. The managers of a large concern are located, as it were, on a commanding eminence. They can more readily detect signs of slackening demand and thus adjust

the volume of the product to changing conditions.

These same factors are plainly visible in the second class of causes, but they are eclipsed by motives less beneficial to the public, for in actual experience the attainment of economy and efficiency is not the cause which has contributed most potently to the formation of combinations. The prevailing

reason has been the desire to eliminate competition, to fix prices by controlling output and thereby to secure a monopoly. In the "Preliminary Report on Trusts' made by the Industrial Commission some ten years ago, it was stated that "Among the causes which led to the formation of industrial combinations, most of the witnesses were of the opinion that competition so vigorous that the profits of nearly all competing establishments were destroyed, is to be given first place."

In this desire for the elimination of competition we may detect the partiality for monopoly which has always been prominent in industry and trade. One reason for the monopolies of the Middle Ages was that those undertaking great enterprises could not otherwise make them profitable. The modern captain of industry seeks the sole occupancy of the field in the same manner as the English Trading Companies, but he must secure it by combination instead of by obtaining a grant of exclusive privilege from some sovereign.

The worst evil of existing combinations is over

capitalization. Whenever a combination is formed, it is generally necessary to take in a considerable number of plants-good, bad, and indifferent-and allow for the value of each in the capitalization of the new concern. But that is not all. The promoter must receive very generous compensation, and it is well known that some of the largest legal fees ever received have been paid to lawyers engaged to do the legal work connected with the incorporation of new companies. As a result, combinations so organized must begin business with an inflated capital.

Furthermore the formation of a combination often partakes of the nature of a stock-jobbing operation, the aim being not to facilitate production or to diminish cost, but to afford profits to promoters and underwriters. Fraudulent promotion and stock watering were especially prominent during what is sometimes called the promoters' period, from 1899 to 1904. During these five years, combinations with an aggregate capitalization of several billions were launched. The principal motive for their formation in numerous instances was to unload upon the credulous public large quantities of worthless securities. The sudden collapse of some of these concerns, such as the Ship Building Trust and the reorganization of others, is sufficient proof that they were not formed in response to any legitimate business demand.

The tendency toward combination is not without