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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XXXII

Commerce and Finance - Chapter XXXII

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII



The word trust has been perverted during recent years from
its proper signification. Properly speaking, trusts are of many
kinds, but they all imply the placing of property or power, or
both, in the hands of agents who are called trustees, and whose
functions in relation thereto may be so broad as
" Trust " f to P errmt tne widest possible scope in the manage-
ment of a business or the exercise of authority, or
they may be limited to the merely nominal holding of title
without any discretion or authority whatever, as in the case of
real estate held for the benefit of another. Trusts of this char-
acter are as old as human law and as varied as human experience.
An example of a pure trust may be found in what is known in
modern financiering as the "voting trust."

A voting trust is an arrangement whereby the stockholders
of a corporation part with their voting power for a specified
time or term, and thus for such time give up their control over
the affairs of the company. The object is to prevent changes of
management which might arise in case a majority
Voting Trusts of the stock should change hands, thereby per-
haps greatly diminishing its value by radical
changes of policy. If all or a majority of the stock is placed
in the hands of trustees, who give in return trust certificates
entitling the holders to their dividends the investment becomes
separated from the management. Holders of trust certificates
may transfer their holdings, but the management continues
unchanged. The Reading Railroad is an example of a corpora-
tion controlled and managed by a voting trust. This form of



trust is chiefly for the protection of bondholders, who are thus
assured of a uniform management of the corporation by com-
petent and experienced men, who will see that the interest upon
the bonds is promptly paid, and the sinking fund provided for.

The rapid growth and development of the manufacturing
interests of the United States during the last twenty years of the
nineteenth century put into vigorous operation the laws of trade,
one of which is that as industries grow in volume they tend to
centralize. The large establishments can make and sell cheaper
than the small ones. They can buy the raw material cheaper,
avail themselves of the most approved machinery and employ
the best skill and business ability. Fierce competition is con-
stantly hammering down prices and the effect is to drive con-
cerns into combinations whereby they may increase their capital
and secure the benefits of a large volume of business. This
tendency was manifest some years ago in the formation of cor-
porations and changing of partnerships to corporations. The
same causes continued to operate and produce the combination
of corporations into trusts.

A trust may be defined as a combination of the capital of
several corporations under one management whereby the cost of
production is reduced, the amount of production limited and
regulated, and the cost of the article to the consumer is con-
trolled. Attempts were first made some years ago to secure the
benefits of co-operation between manufacturers by
Trusts agreements to sell through a common agent, and

at agreed prices, but the courts held such agree-
ments to be not binding, and members often secretly violated
them, so that it became necessary to make an absolute transfer
of the property of each member to the trust. A trust takes the
management and ownership of the property out of the hands
of the various corporations composing it, and deprives them of
the power to withdraw their assent.

The method of procedure in the formation of a trust is for


each of the parties to incorporate his establishment, if it is not
already incorporated. The stock of these various corporations
is then turned over to the managers of the trust, called trustees,

and in return for it the trustees issue trust cer-
HOW Formed tificates similar in some respects to shares in a

corporation. These certificates recite that the
holder is a beneficiary of the trust to the extent of so many
shares; and the certificates are assignable and transferable in the
same manner as certificates of stock, though their legal status is
in many respects dissimilar. It will be perceived that under this
exchange the trustees hold a majority of the stock in each of
the corporations and are able to elect the directors and officers
of each concern and thus control the management to the smallest
detail. They can close one factory, enlarge another, consolidate

others, regulate the output generally and control
fS the price. Those concerns which refuse to join

the combination are crushed, if possible, by com-
petition. The certificate holders are not injured by the closing
up of this or that establishment belonging to the trust, since
their profits come from the whole organization and not from
any particular part. The holders of trust certificates elect trus-
tees annually, and with the performance of that function their
power ends. The trust certificates are watered to the point
where the rates of dividends will be very moderate, and then
sold upon the stock exchange like other stock.

This organization is called a trust because the stockholders
part with their voting power, and practically repose absolute
power in the trustees. The acts of the trustees and books of
account are usually not open to inspection by the certificate hold-
ers. No limit is placed on the amount of the trust certificates
that may be issued, and no question can be raised as to the exer-
cise of discretionary power by the trustees. There is practically
no limit placed upon the powers of the trustees in conducting the


The greatest trusts formed in this manner were the Standard
Oil Trust, the Cotton Seed Oil Trust and the Sugar Trust, but

there seems no longer to be any doubt that a trasv,
Trusts niegai formed in this way is illegal. Eecent decisions of

our courts have so declared, on the ground of
public policy. Hence it is that a large number of the trusts are
now adopting a different mode of organization that of the cor-
poration plan, as exemplified by the Diamond Match Company.
That company's plan was to organize one gigantic corporation
and have it buy up and own outright all of the competing manu-
factories, paying for them either in cash or shares of stock.

This form of organization, although called a trust,
corporations * s * n rea lity a great corporation, and it is certainly

better to have the large corporation than the trust.
The unlimited power possessed by the trustees in the case of a
trust, their concealment of the condition of the business, and the
secrecy of their acts, is dangerous not only to the financial wel-
fare of the certificate holders but also to the public.

There is another class of corporations, which are formed by
the consolidation of several corporations into one. The method
of forming such a consolidated corporation is to have the stock-
holders of two or more existing corporations vote to consolidate.
This gives birth to a new corporation. The old corporations
are merged into the new, and although the new corporation may

take the name of one of the old corporations, it

nevertheless bears the same relation to all of them.

The new corporation issues capital stock to the
stockholders of the consolidated corporations, sometimes share
for share, sometimes upon an increased capitalization. The new
corporation is liable for all the debts and obligations of each of
the consolidated corporations, and succeeds to all the property,
credits and effects which belonged to each at the time of the
consolidation. Notice must be given to the Secretary of State
of the action of the corporations in consolidating, and they must


record the proceedings resulting in the consolidation, with the
Secretary of State, and usually in the county where the principal
office of the corporation is maintained.

Industrial corporations are those which are engaged in the
manufacture of the great utilities of life, such as steam engines,
harvesting machines, electrical apparatus, steel or oil. By com-
bining these into a virtual monopoly, the waste and expense
incident to competition, such as numerous traveling salesmen,
advertising and office expenses are saved and thus the net profits
are greatly increased. Owing to the ability of the combine to
earn net profits greater than the total profits of the different
concerns, under the competitive system, the combine may be
capitalized for a much larger amount than the total
capitalization of the individual concerns. Most of
the large companies in the United States are
financed in New York, owing to the superior facilities there for
such transactions on account of its greatness as a financial center.
Suppose there are a dozen companies engaged in the same line
of business with a total capital, say, of $30,000,000. After look-
ing the field over carefully, and acquainting themselves with
the present and prospective earnings of the various properties,
the promoters conclude to combine these into a single corpora-
tion with a capitalization of $100,000,000. A corporation is
organized with a hundred millions capital, thirty millions of
which is to be preferred,* and seventy millions common stock.
A suitable name, suggestive of the business and comprehensive
in scope, is chosen. Arrangements are made by the promoters
with several bankers in Wall Street to take portions of this
preferred stock and pay cash for it. A block of the common
stock goes along with each sale of preferred stock as a bonus,
together with the privilege of naming a member of the board of
directors of the new company. Each of the old concerns is now

"Instead of preferred stock, bonds may be issued, and these would be
preferable in case the company expected to retire them.


bought up by the new company, payment being made in common
or preferred stock, or cash, or a combination of all of these, as
the parties may have previously agreed.* The new company
takes over all assets and assumes all liabilities of the old com-
panies and provides a working capital out of the sale of the
preferred stock. This done, the combination is effected and the
operation of the several properties continues uninterrupted under
the management of the new board of directors and officers.

Having completed the combination as outlined above, the
promoters find still left in their hands a handsome block of the
common and perhaps some of the preferred stock as their com-
pensation for putting the deal through. After the combination
is made the Wall Street bankers first place their preferred stock
on the market, and as the business of the new company is
known to be prosperous, the stock sells readily. Next the
common stock is offered and disposed of, its sale being aided by
that of the preferred stock.

The business of promotion is a species of agency especially
devoted to the organization of companies and the floating of

stocks and bonds. The promoter is one who has a
promotion financial acquaintance and knows where money for

various classes of investments may be secured. It
is almost necessary, however, in order to finance a large company
that a bank or trust company should be enlisted in the operation,
so that the sale of securities will be effected without any delay.

The bank or trust company acting in this capacity
Underwriting is known as an "underwriter," since it insures, or

underwrites, the sale or disposition of the se-
curities, taking itself such as it does not dispose of to other bank-
ers by a given time. In this capacity a prominent New York

*In estimating the values of the several plants, the common method is
to base the value upon the average earnings for a period of five years past,
as shown by the books. Thus suppose it is agreed that the property shall
be valued on a 10 per cent, basis, and the net earnings for five years aver-
age $30,000, the plant would be worth $300,000, due consideration being
given, of course, to the condition of the property.


banking house* has achieved a world-wide reputation, besides
reaping immense wealth from its operations. Sometimes the
promoters enter into contracts with one or more bankers to the
effect that the bank will buy a quantity of bonds upon the
property of the new company at a given price. These contracts
are then deposited with a trust company as collateral for a loan
sufficient to buy up the properties (the promoters having pre-
viously secured options on each property). After the properties
are bought, the Jbonds are issued and delivered and the loan is

Instances are not uncommon where consolidations are compli-
cated by reason of the companies which it is desired to combine
owning public franchises which are not transferable. The most
usual way of getting around this difficulty is for
the new company to hold the stock of the old com-
panies, or a majority thereof, in its treasury, and
to operate under leases from the old companies. This is the plan
followed in the case of the street railway systems in the north
and west divisions of the city of Chicago, where the situation
is still further complicated by a majority of the stock of two
companies holding such leases, being in turn held by still an-
other corporation the Union Traction Company.

The evil effects of trusts and monopolies can scarcely be
questioned, but it is far better to have the great corporation,
although it is in effect a trust, than to have a combination of
capital where its management is confined wholly to trustees
not accountable to stockholders. Publicity is both the prevent-
ive and cure for a great deal of rascality in the world. In case
of the great corporation, it pays its tax to the state, and is
subject to proper limitations. Creditors are able to judge of its
financial condition, and the public may determine whether it is

*J. Plerpont Morgan & Company. So successful has this firm been as
underwriters that other bankers readily accept bonds and stocks offered by
them, and thus through Uiem .promotion becomes comparatively easy.


conducting business within the limits of its charter. But
whether the trust is a combination formed under the purely trust
method, or a gigantic corporation, its objects are the same: the
creation of a monopoly and the control of the market. For this
reason public sentiment is hostile to it. Judge Thomas M.
Cooley, a few years ago, speaking of trusts, said:

"A few things can be said of trusts without danger of mis-
take. They are things to be feared. They antagonize a leading
and most valuable principle of industrial life in their attempt not
to curb competition merely, but to put an end to it. The case of
the leading trust of the country has been such as to emphasize
the fear of them, and the benefits that have come from its
cheapening of an article of commerce are insignificant when
contrasted with the mischiefs that have followed the exhibitions
in many forms of the merciless power of concentrated capital.

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