The great increase in the size of the manufacturing establishment and of the capital invested in the manufacturing industry which necessarily followed the adoption of expensive machinery for manufacturing purposes was followed by a tendency toward co-operation and mutual agreements among the great organizations engaged in similar lines of work, the purpose being to reduce expenses, increase profits and control prices. Originally the persons, firms or companies engaged in manufacturing disposed of their products as best they could and in direct competition with others in their own line of manufacture. If the market for their product was good they demanded higher prices. If there was an oversupply they sold for whatever profit they could get, or if necessary at cost or even lower than cost, in order to prevent accumulations of stocks or the closing of their factories. The competition thus grew intense. In order to dispose of their goods they must put
many salesmen into the field, they must advertise freely, and often their orders came from such distances that the cost of delivery formed a large percentage of the cost of the goods by the time they reached the purchaser.
This competition of one manufacturer with another making the same line of goods was not only expensive but resulted in working at cross purposes in many ways, and in loss of energy and money. So certain of the companies or corporations engaged in like industries began to make agreements among themselves by which they could co-operate in distributing their supplies to a given field and reduce the expenses of supplying that field. It was argued that the people of any section would only use a given amount of any standard product, and that the expense which the various manufacturers were incurring in competing among themselves for their respective shares in that trade might be materially reduced by an agreement through which the extraordinary efforts to sell in competition with each other should be abandoned and each manufacturer receive the share of the sales to which his proportion of production would entitle him. Not only would this reduce unnecessary expenses but it would in some degree render possible the maintenance of prices as they might be mutually agreed upon.
The first steps in combinations or agreements of this sort are known as “pools.” “This form of agreement,” says J. Russell Smith, “provides that each of the makers of a certain material for a certain territory should make a stipulated proportion of the product to be sold at an agreed price. If a factory made more than its share the owner made a cash payment to the pool and the money went to some manufacturer who had made less than his share. The weak spot of these pools was their absolute lack of power of coercion and that no member had faith in the others.” Often members took advantage of technicalities to violate the spirit of the agreement, and the agreements were short-lived.
The system, while it is still working satisfactorily in Germany under the name of the “cartel,” failed to give satisfactory results in the United States, and also met with disaster in the fact that the courts held it to be a combination in restraint of trade and therefore unlawful.
To overcome these defects and create a system of division of production, control of prices and distribution of profits in proportion to the value of the plants co-operating, a new form of agreement was devised. It provided that the companies or corporations entering the agreement for mutual operation and proportionate distribution of profits should transfer the shares of their respective properties to a new corporation with full powers to manage the same, receiving in lieu thereof certificates which should entitle the holder to his proportionate share of the net earnings of the new corporation. “Under this form of organization,” says the Universal Encyclopedia, “the stockholders of each of the separate companies assigned their stock to a few trustees, giving thus an irrevocable power of attorney. In lieu of the stock assigned the trustees issued stock certificates to the stockholders of the separate companies and upon these trust certificates profits were divided. All of the earnings of the different members of the company were pooled and each manufacturer received his proportionate share as evidenced by the certificates, regardless of the question whether his establishment was running or closed. The trustees, having in their hands the voting power of all the stockholders, elected whatever persons seemed to them best as officers of the separate companies. In this way the management was absolutely unified and the interests of all parties concerned became as one. The courts finally holding that this trust agreement was illegal, the plan was later adopted of organizing a new company which should buy up all of the separate plants of the different companies entering the combination, so that in this way a unified management was secured within the law. In order
that a more convenient form of handling the properties of the different companies might be secured, a third form of organization was later adopted in which a new company is organized as a stockholding company. This company then buys up all, or a large proportion of, the stock of each of the companies coming into the organization and controls these stocks. The officers of the central organization are thus in a position, by voting the stocks of different companies, to elect the directors and officers of those companies and thus control their policy.”
The advantages of this combination over competition are summed up by the Encyclopedia Britannica, in its 1902 edition, as follows: (1) The cost of selling may be greatly lessened; (2) the salaries of commercial travelers and their traveling expenses can be largely reduced; (3) if different manufacturing establishments, scattered throughout the country, are brought under one management it will be possible for orders for goods to be distributed so that goods can be dispatched to customers in each case from the nearest establishment and freight expenses reduced; (4) when several establishments are combined the most skillful of the managers can be selected for the general manager; (5) each business manager is likely to have some special excellence in his methods of management, and by combining the establishments it is possible to so distribute this managerial skill as to give to each branch of the work the man best suited to its conduct; (6) it is also possible to distribute the various branches of the manufacturing to the various mills or factories of the combination best suited for that particular branch of the work; (7) the advantages of unifying in one establishment the machinery of selling the product of all; (8) the ability of an establishment to fill large orders on short notice gains and retains business; (9) the great financial and business strength and skill of the combined organization gives it special facilities for pushing its goods into foreign markets, as is shown by the success
abroad of the Standard Oil Company, and the American Tobacco Company; (10) better facilities for dealing with credits and thus aiding the business community.
Whether trusts, through their control of prices of the particular commodities which they manufacture, have actually advanced the selling price to the consumer, has been and is still the subject of much discussion. It has been urged that the mere reduction of the cost of production and distribution which results from the combinations would enable them to realize larger profits than formerly, even if the manufactures are sold at former prices, and that although their profits have doubtless been large it has not been accomplished through an actual advance in prices to the public, but rather through economies of production and sale. Nelson’s Encyclopedia, issued in 1908, discussing this subject, says, “The weight of evidence indicates that, judged from the margin between price and finished product and cost of raw materials, prices are increased somewhat by the existence of trusts. It is a fair conclusion that the actual prices of goods have as a rule been somewhat increased by trusts, although not in the measure that was anticipated at the inception of the trust movement.” The Encyclopedia Britannica of 1902 in discussing this subject says, “Experience seems to show beyond question that whenever the combinations are powerful enough to secure a monopolistic control it has usually been the policy to increase the prices above those obtained during the period of competition which preceded the formation of the combination.”