Front Page Titles (by Subject) CHAPTER IX: Cartels and Trusts - Socialistic Fallacies
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CHAPTER IX: Cartels and Trusts - Yves Guyot, Socialistic Fallacies 
Socialistic Fallacies (London: Cope and Fenwick, 1910).
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Cartels and Trusts
The followers of Marx are full of admiration for cartels and trusts: they assert that they abolish competition and that they are thus instruments of socialistic politics; that, by concentrating industries within a few large organisations, they facilitate the absorption of private capital in collectivism; and that, finally, by their example, they teach the methods which collectivist society will have to follow in order to organise its methods of production.
Neither cartels nor trusts are applicable to every industry.1 On November 27th, 1907, M. Posadowski compiled a list of the industries in which their action was effective, viz., the mining, metallurgical and chemical industries, paper-making, sugar-refining and sale of alcohol, pottery, cement, glass works on the Rhine and in Westphalia and plate-glass manufactories.
Most of these industries only supply raw material or articles for consumption, one seldom finds cartels or trusts which sell finished products direct to the consumer.
Socialists have naturally claimed the American trusts as a justification of the “Communist Manifesto.” M. Paul Lafargue is full of enthusiasm for them, not on this account only, but principally “because they suppress competition and substitute a methodical organisation for the anarchy which prevails in capitalist production.”
Now the facts shew the exact opposite. The Anti-Trust Law of 1890 defines trusts as follows1 :
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations.
But the Anti-Trust Law is not easily applicable because the majority of trusts, far from restricting industry or commerce between different States, has developed them. As regards foreign nations, it is not the trusts that restrict commerce with them, but the protective tariff.
Mr. James Lee, President of the Pure Oil Co., defined a trust before the Industrial Commission in the following terms: “A trust is a corporation or combination of corporations intended to create and maintain a monopoly in any industry.”1 Mr. Archibald, Vice-President of the Standard Oil Co., replies that “under the definitions there are no trusts.”
The establishment of a trust is composed of two groups: (1) a promoting body, more or less nominated by some particular promoter, and (2) a financial body which supplies the purchase price of the properties which are to be included in exchange for preferred shares and common stock. The bonus is at least equal to the preferred shares. The holders of common stock have no privileges and only receive interest with the consent of the holders of preferred shares. The common stock represents the intangible assets, the goodwill, the power of the trust to make profits, and no one conceals the fact that this is watered capital. Although there was for several months a period of unprecedented prosperity in the United States, with prices greatly inflated, common stock has almost invariably produced more disappointments than dividends. Out of seven or eight combinations, only one from time to time makes an allotment to the holders of common stock in order to maintain or to raise its market price. Both the promoters and the administrators of trusts agree that the inflation of capital does not affect the shareholder; all that matters to him is the income. Now, such inflation denotes a decrease in the return upon capital or an increase in the outlet for it. Mr. Flint states that inflations have given experience to the public and have prevented the banks which have abused the practice from continuing their operations. The resultant economic intervention of competition is that the capitalist institutes a comparison between the different instruments which are open to him and decides upon that which appears to him the most advantageous. The whole of that portion of the capital of the trust which is based upon anticipations or hopes is unlimited except by the prudence of capitalists. Consequently it is an error to attempt to compare the capital of the trusts with the total wealth of the United States—an error into which M. Lafargue does not fail to lapse.
The census has estimated the value of the trusts, under the title of “combinations,” which are defined as follows: “An industrial combination consists of a number of formerly independent mills which have been brought together into one company under a charter obtained for that purpose.”1
On June 30th, 1900, there were 185 “combines” with a total authorised capital of $3,619,038,000 distributed as follows:—
In the following years down to 1903 there was a considerable development of trusts, such as the United States Steel Corporation, the International Mercantile Marine Company, and others.
M. Paul Lafargue has obtained the figures for his pamphlet from a small work published by Mr. Moody in 1903. I take mine from a work published subsequently to Mr. Moody's, entitled “The Truth about the Trusts,” of which the author is an ardent admirer. The figures are:—
The industrial trusts formed prior to January, 1898, represented a capital of $1,196,000,000; those which were formed subsequently to that date, a capital of $6,049,000,000. Ten trusts have each a capital of $100,000,000 or more. The seven largest have a total capital of $2,662,000,000, of which the United States Steel Corporation has $1,370,000,000 or about one half. Thirty trusts have a total capital of 50 million dollars, and 129 trusts a capital of ten million. But according to the census of 1900, common stock represented 65 per cent., and the proportion has certainly not diminished, so that $4,700,000,000 must be deducted from the total of $7,245,000,000. Mr. Moody adds the following figures:—
The conclusion he arrives at is that the whole of the “combines” represent 8,604 original companies, and a capital of $20,379,000,000. He adds, with regard to the capital of the seven largest trusts, that their capital is $2,662,000,000, while their market value (in 1904) is $2,278,000,000, a decline of 384 million dollars.
Mr. Pierpont Morgan's “combines” represent $1,540,000,000 or 60 per cent. of the total capital of the seven largest trusts. At the market price (in 1904) they were only worth $820,000,000, or less than 37 per cent. of the total market price of $2,278,000,000.
The Shipbuilding Trust began with a capital of $3,278,000; when it was reconstructed, it was reduced to $1,450,000, i.e., a reduction of 55 per cent.
The “Wall Street Journal,” on October 23rd, 1903, published a list of a hundred trusts, with a total capital of $3,693,000,000, which would have obtained a price of $490,000,000 on the market, and recovered sufficiently to be valued at $2,336,000,000, a decline of $1,357,000,000 or 43.4 per cent from the price at the time of the boom.
The capital of the United States Steel Corporation was $1,370,000,000. Mr. Carnegie was paid $447,416,000 in shares for his concerns, which had brought in six million dollars in 1896, seven million in 1897, eleven and a half million in 1899, and twenty-one million in 1899, which was an exceptional year. The Steel Corporation issued shares and bonds to the amount of $1,297,000,000, in exchange for shares and bonds bought for $894,988,000, an inflation of 45 per cent. The apparent values represented 25 per cent., the mysterious values 75 per cent. According to the census of 1890, $414,000,000 were invested in the metallurgical industry. The capital has increased regularly by 46 per cent., and should have been 600 million dollars in 1900. The trust which only represents 40 per cent. of the total capital was formed with a capital of more than 100 per cent. in excess of the total capital nominally required by the industry.
People form wild illusions as to the wealth of the trusts. A great part of their capital is based upon the hope of goodwill, its only merit being in the foresight or the expectations of capitalists. It is therefore a mistake to make a comparison between the capital of the trusts and the total wealth of the United States.
In an affidavit made in the summer of 1902, Mr. Schwab estimated at 11,000 million dollars the value of the ores, coal, natural gas and limestone belonging to the Corporation. What is the value of the ore. If it represents the whole of the ore of the United States, it is enormous; if it represents 65 per cent., as is suggested, it is not so large; and if only 30 per cent., it is still less.
In spite of its unprecedented industrial activity, the capital value of the Steel Corporation of 1,370 million dollars had fallen in 1904 to 760 million.
The year 1906 was an exceptional year every where. The preferred shares issued in March 1902 at $92¾, fluctuated between 102 and 117; common stock issued at $42/3 fell as low as 33⅜ and rose as high as 52⅛. In August, 1907, there was a heavy decrease in orders. The railways always need rails, but have not always the funds to pay for them. The corporation's enterprise has, therefore, passed through various vicissitudes and is likely to encounter others. On September 30th, 1907, the preferred shares stood at 90⅞ and the common stock at 27½.
Is such a concentration necessarily deducible from economic evolution? Has it not been provoked and hastened by the intervention of the State? Mr. Hamevayer, President of the Sugar Trust, says frankly, “I doubt whether we could venture to form the trust if it were not for the tariff. The tariff is the father of all the trusts.” And Mr. Carnegie exclaimed in an enthusiastic moment of sincerity, “Protection is the American revenge for the high-handed acts of the Alabama. We have had thirty years of protection at 30 per cent. Without protection we could do nothing.” Mr. Schwab, at that time a director of the Steel Corporation, said before the Industrial Commission: “If you take the case of rails or tinplate and the highly finished articles in which labour forms a very important element of cost, and remove the tariff, you lose the trade or you reduce your labour.”1
According to Mr. David Wells in 1880, the capital employed in the iron and steel industry amounted to 341 million dollars. From 1878 to 1887 the consumers of the United States have paid 560 million dollars more for iron and steel than they would have paid if there had been no protective tariff, so that they have paid 60 per cent. more to the iron and steel owners than the amount of capital employed by them. Mr. Byron W. Holt, of Boston, in 1902, attributed 76 millions out of the 111 millions of profits1 of the United States Steel Corporation to the tariff. Otherwise they would not have exceeded 35 millions, of which the requirement of bond holders, after the conversion of 200 millions of preferred shares into bonds, would have absorbed 25 millions. There would thus have remained only 10 millions to pay interest upon 600 millions of share capital.
Can the trusts be said to have destroyed competition? Not a single one absorbs the whole of production. According to Mr. J. Moody, of the 92 large trusts, 78 absorb 50 per cent. and more of production, 50 absorb 60 per cent. and more, and 26 absorb 80 per cent. and more. The Standard Oil Company itself only controls 84 per cent. of the home and 90 per cent. of the foreign consumption. The United States Steel Corporation has not destroyed the metallurgical enterprises of the United States, far from it; they have always been on the increase. Enterprises which are not burdened with the financial dead weight which the trusts have to drag, are able to compete with them. At the beginning of 1892 the lead trust owned all the concerns in the United States, except two. In 1894 the independent concerns produced as much lead as the trust, and their capital was two million dollars as compared with the thirty millions of the trust.
Competition is the check upon the trusts. Mr. Chapman, a banker, states the principle of their policy as being that “he is going to get all he can, but he must be careful, because if he raises the price too high, in comes competition. To keep out competition, he must reduce his price, and keep the margin between cost and selling price just as low as he can.”1
It is freely stated that a trust can sell at a loss in order to ruin a competitor. But if its operations are extended, can it sell at a loss in every market in order to annihilate a competitor everywhere? Its losses would be in proportion to the amount of its business. Not only do the trusts fail to suppress competition on the market, they make it the motive force of their internal economy. When Mr. Hadley says that there is very little difference between the administration of trusts and of public affairs, he makes a mistake of fact. In the first place, there is only one policy in the trust, to increase business in order to increase profits. Now a government or a municipality are occupied with other aims. There are the political interests of influential supporters to satisfy, as well as party rivalries, which have to be taken into account, and which frequently force an administration, however intelligent it may be or however good its intentions, to take precisely the opposite course to that which would be necessary in order to attain its object. This is a fundamental distinction. And no State has yet succeeded in establishing a method of promotion in its services which entirely ensures the predominance of the most capable and excites the emulation of all. Trusts, on the other hand, are organised on a competitive basis. In the United States Steel Corporation, each of the concerns is autonomous, and the directors are frequently animated by a spirit of particularism, each striving to do better business than the others. If they have to hand over particular products of their manufacture to a concern belonging to the same trust, so far from making a present of it, they insist on selling it at the best possible price. The trust is in fact a federation of companies, its committee of management constituting a clearing house for the mutual exchange of information.
There is thus no comparison with the compressed and centralised administration existing in a government monopoly. The following points should be noted:—
I have only examined trusts from the point of view of Marx' theory of the concentration of capital. They do not confirm it.
We may admit the existence of preferential rates, such as those obtained by the Standard Oil Company from the railway companies, but this only proves that the company has committed acts which can be successfully attacked by a legislation of an individualistic and not a communistic type.
THE DISTRIBUTION OF INDUSTRIES
Arthur Raffalovitch, “Trusts and Cartels.” See also Lacollection du Marché financier.
For the law on the subject, see “Trusts, Pools, and Corporations,” edited by William Ripley, 1906.
United States Industrial Commission, vol. xiii., p. 668.
Census 1900. Census Reports. vol. vii (manufactures, part i.), p. lxxv.
United States Industrial Commission, vol. xiii., p. 456. See also “The Tariff and the Trusts,” by Franklin Pierre (1907).
For the details, see Yves Guyot, “I'United States Steel Corporation,” Journal des Economistes, November, 1902.
United States Industrial Commission, vol. xiii., p. 107.