Slipshod thinkers speak of the desire for gain as something evil, or at least unpraiseworthy. Intemperately indulged in the individual it becomes so. But as to business, gain is a necessary law of being, and the industry that ceases to make profits ceases to exist, as many

have.

Two forms of good to the race result from sequence combinationsthe temporary and the permanent.

The temporary, the "commodities," men buy; the permanent, the improvement in products and processes, accrues, or should accrue, to the people, a free gift, by natural law.

A corporation organizes one sequence combination for gain and reduces costs; but does not correspondingly.reduce selling prices. It keeps for itself, for a period, great part of the permanent good, in larger profits; and properly. Now its capital is far more powerful than formerly and to use it profitably the volume of trade must be enlarged by taking that of its competitors.

Competitors are forced into similar organizations.

Numbers of such organizations compete and the selling price and profit rate are forced down until the capital earns only market interest rates.

Thus the permanent good accrues to the people at large.

The tables prove conclusively that sequence combination vastly multiplies the power of the people's savings, generally called capital; but the interest and profit rates are not raised-they are reduced. Sequence combination vastly multiplies the gross product, the wage fund, the number of employed, and the comfort and well-being of everybody.

The people's direct gain by reason of it is many times greater than the gain of capital, which, after all, is the people's indirect gain. Sequence combination is an unmixed good to all the people and should be fostered and encouraged-not penalized.

"Parallel combination" can show no such, and I doubt if any true mathematical proof of its desirability or beneficence to the people at large. It may divide a reduced overhead charge over a larger product and reduce this part of cost a few cents-rarely 5 per cent— shut up inferiorly equipped and located plants and specialize; that is to say, run particular plants on one kind of work, instead of a variety, and buy cheaper; but these economies are likely to be more than offset by decreased efficiency of overworked officers and by blunders of mere accountants and clerks, inexperienced and representing inexperienced owners, given undue power in management relatively to the practical men of affairs, trained in the business.

Parallel corporations are pools or price-raising agreements made permanent by incorporation and by actual ownership of stock and property of the subsidiary corporations and having their powers and functions extended thereby to include control of the officers and general direction of the affairs, and even the entire management of the subsidiaries which are made mere departments or sections.

A few examples of each kind may aid understanding.

The United States Steel Corporation is a parallel corporation, so is its subsidiary, the American Bridge Co., which consolidated 24 out of 27 existing bridge works.

The Carnegie Steel Co., at the time it was sold, was a very effective sequence, almost complete as to physical acts. It owned metallic ore mines of divers kinds (iron, manganese, etc.) in the United States

and elsewhere; mines or quarries of flux; coal mines and cokeovens and gas wells; assembling transport in the forms of ships, harbors, terminals, and handling machinery; blast furnaces; puddling furnaces; steel works, both Bessemer and open hearth; mills for rolling almost every used form of wrought iron and steel; steel foundries and bridge works, and I do not know what other finishing works. Its physical organization was elicient and economical; it owned its own fixed and fluid capital, and its management was scientific, progressive, and aggressive and efficient.

Few corporations, if any, in any line of business were its equals in these respects.

But the Carnegie Steel Co., incomparably powerful as it was, could not and did not raise or maintain prices, acting of and by itself.

To raise prices, parallel combinations were necessary, including numbers of its competitors.

1

Such a combination or pool to control prices of shapes (beams, channels, angles, tees, etc.) was formed about 1890,' which fixed the price for such material at 3.68 cents per pound. This price shut European shapes out of all ports between and including New York and Texas, but abandoned the New England States and Pacific coast ports and their tributary trade territory to European shapes. The pool abandoned the outlying parts of the country in order to wring

the last cent out of its heart and center.

The Carnegie works made all the shapes sold and used in the selected territory and every month mailed their prorata checks to the other works in the pool, which stood idle.

After a time the Carnegie management saw a greater gross profit in lower prices, and thereupon further improved their sequence organization, processes, and machinery. When these improvements were complete the Carnegie Co. withdrew from the pool and cut the price to 1.851 per pound. It was generally told at the time that no other works in the country could make shapes in competition with the Carnegie Co., and there was a wild scramble among the other steel works owners to bring their plants and product up to the new standard. The panic of 1893 caught the trade and the price dropped to "buyer's price."

Another pool raised the price to 1.65 about 1895, and when it fell to pieces the price dropped to the lowest on record. About 1897–98 the writer obtained a price of eighty-eight one hundredths of a cent a pound for a miscellaneous estimate, including almost all weights of shapes and ship and sketch plates.

In 1899 the business revival caused a steel famine and prices advanced almost incredibly; a new pool was formed to last until 1900, when prices tumbled again.

Last came the incorporated pool, the parallel corporation, the United States Steel Corporation, which advanced the price to 1.65 cents per pound base price, which remained unchanged until 1909.

But this fixed base price did not mean the current price of steel for market necessities. Whenever business was active and the market would warrant an increased price it was got by making a higher price (generally 2 cents) for prompt deliveries-say within a practical

1 These figures are from memory. I have not had time to look them up. But the facts are the main thing.

period. One could get steel for 1.65, time of delivery uncertain and at the pleasure of the maker.

Sequence combination is not a new discovery.

Before corporations became the vogue, copartnerships practiced sequential consolidation of stages of production, in some cases carrying it to perfection; for example, in the old days of wrought iron and local ores, a Pittsburgh ironmaster built his works on the river bank and chuted ores, fuel, and flux into it from the bluff above.

Circumstances compelled the modern steel industry to be initiated by single stage corporations. It was natural and proper that they should coalesce into sequence combinations, which made great headway before parallel combinations became common.

Sequence combinations were made in all industries to reduce costs. Selling prices were being reduced competitively as more and more sequences were perfected. Natural law was transferring the permanent good-the improvement in products and processes-to the people at large, by lower prices and higher wages.

Unincorporated parallel combinations were not powerful enough to override natural law for long periods.

Then came years of financial panics-1890, 1893 to 1897-with complete dislocation of business. The old owners emerged from this period of stress worn out by superhuman exertions and profoundly discouraged and were, many of them, glad to give, free of cost, options on their works, to sanguine trust promoters; and the people were ready for a bull market; whence the crop of trusts.

The period of physical birth and trying-out was succeeded by that of improvement of organization-sequence combination, and that, by the period of financial panic and dislocation.

Then came the period of trusts, which can not be believed to have proved either their ability to exist, or their desirability, in normal periods, for it can not be believed that general laws suitable to and true in normal times can be deduced from the events of such abnormal and formative periods as we have lived through since, say, 1860, except where mathematical analysis applies.

Moreover, parallel combination has been mixed up with sequence combination; the people have been and are lied to and falsely told that the good results of sequence combination are due to "Trusts," or parallel combinations, and that if the "Trusts" or parallel combinations be smashed, the advantages of combination (really of sequence combination only) will be lost.

The chance for great profits to the trust promoters lay in the facts that sequence combinations were not yet general and complete and that their benefits were not yet all passed along to the people, and that said promoters could make extensive sequence combinations and thereby greatly reduce the general level of costs, and by at the same time making parallel corporations of great size they could delay or prevent corresponding reductions of prices, and thus keep for themselves, at least for a time, the permanent good of sequence combinations, which should inure, in large degree, to the people at large, in higher wages, more employment, and lower prices.

In so far as trusts have done this they have been evil (but were not supposed to be criminal) and have prevented or hindered the orderly and normal progress of the human race.

But things that work evil will be made criminal sooner or later. Such things must stop. Deceit must stop.

If parallel combinations are to be permitted to exist (obnoxious ones can not, unless the Sherman law be amended), they must be made to tell the truth and keep accurate books. Fictitious bookkeeping must be made criminal.

By keeping accounts in forms as though the original, separate, single-stage corporations in an operative sequence combination were still independent entities, by numerous fictitious "sales" between such fictitious corporations, trusts, or parallel combinations can and do make the "capital" charged in their books many many times the capital actually used, the parallel or book cost many times the actual cost and the apparent profit rates-that is to say, the interstage compounding rate a very small fraction of the real profit rate.

If a trust keeps such fictitious accounts it does so for nefarious purposes.

If trusts or obnoxious parallel combinations are to be permitted to exist, it will be by grace of the people, who permit amendment of the Sherman law.

This grace must go hand in hand with regulation. Regulation must be based on knowledge.

Therefore one of the first duties of Congress is to prescribe standard systems of truthful accounts for all corporations subject to Federal law and supervision-that is to say, for parallel corporations for all others are or ought to be exempt.

I am now at the disposal of the committee for any questions they desire to ask.

Senator CUMMINS. I understand your general division of industry to be unorganized and organized industry and that you illustrate in these charts unorganized industry as compared with sequenced industries or sequence corporations?

Mr. DUTTON. Yes, sir.

Senator CUMMINS. I will put a very simple case, and I am asking you this rather to make it clear to my mind, because I want to understand your view. You mentioned the manufacture of steel rails. Let us suppose that that is, or ought to be, divided into four stages. First, the mine owner engaged in the production of the ore; second, the ore merchant and transportation of the ore to the blast furnace; third, the blast furnace which manufactures the iron ore into pig iron; fourth, Bessemer or open-hearth furnace and rolling mill. Now, I have got there four distinct independent stages or steps in the production of steel rails. According to the charts that you have presented, if $28 a ton were a fair price for steel rails, if the work in those different stages were performed by independent corporations, what would be a reasonable price if performed by a sequence corporation? I mean, now, taking the same basis of profits.

Mr. DUTTON. I will have to figure that. I will have to proportion it. I will not give it to you with absolute accuracy, but will give you a quick calculation-an approximation. The prices are, approximately, $24.22 with no profit, $18.68 with 10 per cent profit, and $13.05 with a 25 per cent profit. That is not accurate, but is an approximation.

Senator CUMMINS. I do not gather that. If the unorganized four distinct establishments could do business so that each earned 10 per

cent profit, and the last one would finally sell to the consumer at $28, under similar conditions, with 10 per cent profit, what could the sequence sell for?

Mr. DUTTON. $18.68.

Senator CUMMINS. At $18.68?.

Mr. DUTTON. Yes; approximately.

Senator CUMMINS. That means that it would cost the organized industry more than $10 a ton less than it would cost the combined or the aggregate unorganized industry?

Mr. DUTTON. I want to put on record one principle here. These are of course supposititious calculations which it is not likely will ever exactly fit any real business, because I have taken there the supposition that each successive unit added is of equal intrinsic value. That probably would not be exactly true, and therefore these are only rude approximations to the truth, but they show the tendency.

Senator CUMMINS. Precisely. Let us go a little further with that. We will suppose these four independent establishments are running, and they are turning out the products finally. Now, suppose that without changing the amount of capital, either adding to it or diminishing it, they are combined in a single sequence corporation. Would that make any difference in your calculation?

Mr. DUTTON. There would be a very large amount of idle capital unless the volume of trade were increased.

Senator CUMMINS. Then of course your calculation depends initially and fundamentally on the saving in the amount of capital required to carry on business if they are combined in sequence? Mr. DUTTON. Very largely.

Senator CUMMINS. You do not know what that saving would be in any particular case, do you?

Mr. DUTTON. To apply the principle to any particular case you would have to have the facts of that particular case. Then it becomes a simple actuarial or compound-interest calculation, like the calculation of the amortization of obsolescence.

Senator CUMMINS. But if the amount of capital required to carry it on in a combined way, under one management, was substantially the same that would be required to carry it on in the unorganized way, then these results that you have pointed out here would not ensue?

Mr. DUTTON. Oh, no, sir; they would not ensue in their entirety. Senator CUMMINS. That is, for instance, take the mines. Now, if it would require just as much capital to maintain those mines and produce the ore if in the hands of a combination that it would require in the hands of a single industry, then you would save nothing at all? Mr. DUTTON. No, sir; not in this, the first stage.

Senator CUMMINS. Your overhead charges would be the same?
Mr. DUTTON. That is, for the first unit; yes, sir.

Senator CUMMINS. Then, if your transportation between the mines and the blast furnace requires just as much capital in the hands of the sequence corporation as it would require in the hands of an independent railroad company, you would save nothing there, would you? Mr. DUTTON. Yes, we would.

Senator CUMMINS. What would you save?