Contemporary American History, 1877-1913

by Charles A. Beard

CHAPTER IX

THE DEVELOPMENT OF CAPITALISM

The years immediately following the War with Spain were marked by extraordinary prosperity in business. The country recovered from the collapse of the nineties and entered with full swing into another era of inflation and promotion. The Dingley tariff law, enacted July 24, 1897, had incidentally aided in the process by raising the protection principle to its highest point since the Civil War, but the causes of the upward movement lay deeper. The Spanish War, of course, stimulated trade, for destruction on such a large scale always creates a heavy demand for commodities and capital—a demand which was partially met, as usual, by huge drafts on the future in the form of an increased national debt. But the real cause lay in the nature of the economic processes which had produced the periodical cycles of inflation and collapse during the nineteenth century. Having recovered from a collapse previous to the War, inflation and capitalization on a gigantic scale set in and did not run their course until a débâcle in 1907.

The formation of trusts and the consolidation of older combinations in this period were commensurate in scale with the gigantic financial power created by capitalist accumulations. The period of the later seventies and eighties, as has been shown, was a period of hot competition followed by pools, combinations, and trusts. The era which followed the Spanish War differed in degree rather than in kind, but it was marked by financial operations on a scale which would have staggered earlier promoters. Perhaps it would be best to say that the older school merely found its real strength at the close of the century, for the new financing was done by the Vanderbilt, Astor, Gould, Morgan, and Rockefeller interests, the basis of which had been laid earlier. There was, in fact, no break in the process, save that which was made by the contraction of the early nineties. But the operations of the new era were truly grand in their conception and execution.

A few examples will serve to illustrate the process. In 1900, the National Sugar Refining Company of New Jersey was formed with a capital of $90,000,000, and "from its inception it adopted the policy of issuing no public statements to its stockholders regarding earnings or financial conditions. The only statement ... is simply an annual balance sheet, showing the assets and liabilities of the corporation in a greatly condensed form." In 1904, the total capital of parent and affiliated concerns was approximately $145,000,000. The Copper Trust was incorporated under New Jersey laws in 1899, and in 1904 its par value capital was $175,000,000. In 1899, the Smelters' Trust with an authorized capital of about $65,000,000 was formed. In the same year the Standard Oil Company, as the successor to the Trust, was organized with $102,233,700 capital.

The process of consolidation may best be shown by turning from generalities to a brief study of the United States Steel Corporation, a great portion of whose business was laid bare in 1911-12 by a Federal investigation. It appears that until about 1898 there was a large number of steel concerns actively engaged in a competition which was modified at times by pools and price agreements; and that each of them was vigorously reaching out, not only for more trade, but for control over the chief source of strength—supply of ore. Finally, in the closing days of the nineties, this competition and stress for control became so great that the steel men and the associated financial interests began to fear that the increased facilities for production would result in flooding the market and in ruining a number of concerns. The rough steel manufacturers began to push into the field of finished products, and the wire, nail, plate, and tube concerns were crowding into the rough steel manufacturing. All were scrambling for ore beds. In this "struggle of the giants" the leading steel makers saw nothing but disaster, and they set to work to consolidate a dozen or more companies. Their labors were crowned with success on April 1, 1901, when the new corporation with a capital of a little more than $1,400,000,000 began business.

In the consolidation of the several concerns an increase of more than $400,000,000 was made in the total capital; and a stock commission of the cash value of $62,500,000 was given to the Morgan underwriting syndicate for financing the enterprise. It is, of course, impossible to discover now the physical value of the properties consolidated, many of which were already heavily "watered." Of the Carnegie concern, a Federal report says, "The evidence on the whole tends to show that bonds were issued substantially up to the full amount of the physical assets acquired and that the stock was issued merely against good will and other intangible considerations." How much of the total capital was "water" is impossible to determine, but the Bureau of Corporations estimates "that more than $150,000,000 of the stock of the Steel Corporation (this including more than $41,000,000 of preferred stock and $109,000,000 of common stock) was issued, either directly or indirectly (through exchange) for mere promotion or underwriting services. This total, moreover, as noted does not include anything for the American Sheet Steel Company ... nor is anything added in the case of the Shelby Steel Tube Company. It should be repeated that this enormous total of over $150,000,000 does not include common stock issued as bonus with preferred for property or for cash, but simply what may be termed the promotion and organization commissions in the strict sense. In other words, nearly one seventh of the total capital stock of the Steel Corporation appears to have been issued, either directly or indirectly, to promoters for their services." How much more of the $440,000,000 additional capital represented something other than physical values is partially a matter of guesswork. The Bureau of Corporations valued the tangible property of the corporation at $682,000,000 in 1901, as against $1,400,000,000 issued securities; and computed the rate of profit from 1901 to 1910 on the actual investment at 12 per cent. It should be noted, also, that shortly after the formation of the concern the common stock which had been issued fell with a crash, and the outsiders who risked their fortunes in the concern were ruined.[47]

All of the leading trusts and railways were, even at their inception, intimately connected through cross investments and interlocking directorates. Writing in 1904, Mr. Moody, an eminent financial authority, said: "Around these two groups [the Morgan-Rockefeller interests], or what must ultimately become one greater group, all other smaller groups of capitalists congregate. They are all allied and intertwined by their various mutual interests. For instance, the Pennsylvania Railroad interests are on the one hand allied with the Vanderbilts and on the other with the Rockefellers. The Vanderbilts are closely allied with the Morgan group, and both the Pennsylvania and Vanderbilt interests have recently become the dominating factors in the Reading system, a former Morgan road and the most important part of the anthracite coal combine which has always been dominated by the Morgan people.... Viewed as a whole, we find the dominating influences in the trusts to be made up of an intricate network of large and small capitalists, many allied to another by ties of more or less importance, but all being appendages to or parts of the greater groups which are themselves dependent on and allied with the two mammoth, or Rockefeller and Morgan, groups. These two mammoth groups jointly ... constitute the heart of the business and commercial life of the nation."[48]

How tremendous is this corporate control over business, output, and wage earners is indicated by the census of 1909. Of the total number of establishments reported as engaged in manufacturing in 1904, 23.6 per cent were under corporate ownership, while in 1909 the percentage had increased to 25.9. Although they controlled only about one fourth of the total number of establishments, corporations employed 70.6 per cent of all the wage earners reported in 1904 and 75.6 per cent in 1909. Still more significant are the figures relative to the output of corporations. Of the total value of the product of all establishments, 73.7 per cent was turned out by corporations in 1904 and 79 per cent in 1909. "In most of the states," runs the Census Report, "between three fifths and nine tenths of the total value of manufactured products in 1909 was reported by establishments under corporate ownership." Of the 268,491 establishments reported in 1909, there were 3061 which produced 43.8 per cent of the total value of all products and employed 30.5 per cent of the wage earners. It is, in fact, this absorption of business by a small number of concerns which marks the great concentration of modern industry. The mere number of corporations is not of much significance, for most of them are petty.

In addition to gaining control of the leading manufacturing concerns and the chief natural resources of the country, the great capitalist interests seized upon social values to the amount of billions of dollars through stock watering and manipulations of one kind or another. "Between 1868 and 1872, for example, the share capital of the Erie was increased from $17,000,000 to $78,000,000, largely for the purpose of stock-market manipulation.... The original Central Pacific Railroad, for instance, actually cost only $58,000,000; it is a matter of record that $120,000,000 was paid a construction company for the work. The syndicate which financed the road received $62,500,000 par value in securities as profits, a sum greater than it actually cost to build the property. The 80 per cent stock dividend of the New York Central in 1868; scrip dividends on the Reading in the seventies; the 50 per cent dividend of the Atchison in 1881; the 100 per cent stock dividends of the Louisville and Nashville in 1880, by a pen stroke adding $20,000,000 to 'cost of road' upon the balance sheet; the notorious 100 per cent dividend of the Boston and Albany in 1882 [are further examples].... Recent inflations of capitalization in connection with railroad consolidation are headed by the case of the Rock Island Company. In 1902 this purely financial corporation bought up the old Chicago, Rock Island, and Pacific Railway, capitalized at $75,000,000 and substituted therefor its own stock to the amount of $117,000,000, together with $75,000,000 of collateral trust bonds, secured by the stock of the property acquired. The entire history of the New York traction companies is studded with similar occurrences. One instance may suffice. In 1906 the Interborough-Metropolitan Company purchased $105,540,000 in securities of the merged lines, and issued in place thereof $138,309,000 of its own stock and $70,000,000 in bonds.... E. H. Harriman and three associates ... expanded the total capitalization of the [Alton] road from $33,950,000 to $114,600,000, an increase of over $80,000,000. In improvements and additions to the property out of this augmented capitalization, their own accounts showed only about $18,000,000 expended. It thus appears that securities aggregating $62,600,000 were put forth during this time [seven years, beginning in 1898], without one dollar of consideration. This sum is equal to about $66,000 per mile of line owned—a figure considerably in excess of the average net capitalization of the railroads of the country."[49]