from 5 to 10% of the entire output of a country in any special line of goods might at times find it impossible to supply goods promptly. Large customers who might thus be embarrassed are more ready to deal regularly with an establishment controlling 75 to 90% of
the output, if they can in this way be sure of having their orders
attended to promptly. It is stated that the American Sugar Refining Company on this account has been able to secure, with considerable regularity, one-sixteenth of a cent a pound more on its refined
sugars than the independent refiners, the latter being frequently
compelled to cut their prices to that extent in order to make sales.
9. Owing to the fact that the introduction of goods into new markets, especially into foreign markets, is a matter of time, expenditure of energy, and of money, the large establishment with great capital has in this particular also a decided advantage. The Standard Oil Company, and American Tobacco Company, and other similar establishments, have thus been able to open up new markets in Europe, in Japan, China and other portions of the Far East more readily by far than individual producers along those lines could have done. This stimulus to the foreign trade acts also beneficially to the domestic trade, inasmuch as the exportation of part of the product tends to keep prices somewhat higher at home, and as the added demand for the raw material influences its price, thus creates a demand for labour along many lines.
10. The combination also frequently saves for its stockholders considerable sums from its wiser dealing with credits, and this in a way also that is beneficial to the entire business community. When competition is very severe among different establishments, the managers, in order to increase their sales, will not infrequently grant credit somewhat unwisely. The combination controlling a large part of the market is not so tempted, and moreover has the power to bring needed pressure to bear upon delinquent debtors more readily, so that losses from bad debts are much less frequent.
Besides the special savings that serve as reasons for the formation of combinations, certain special favours at times lead to their formation.
1. The protective tariff is most frequently cited as such a favour. By the protection which a protective duty gives against foreign competition, it doubtless often furnishes the occasion for the formation of trusts. If a large amount of capital is tempted into the industry through the profits promised by the tariff, and therefore competition amongSpecial Favours to Combinations. the various establishments becomes fierce, it is much easier for them to form a combination with the certainty of good profits, provided the domestic competition can be overcome, if they are certain that foreign competition also is to be excluded. On the other hand, it would hardly be right to speak of the tariff as in this case the direct cause. In other industries not protected by the tariff the same fierce competition leads to the formation of combinations. The tariff is simply an encouraging condition. The removal of the tariff would not destroy the combination unless it destroyed the industry at the same time; but, on the other hand, the removal of a protective tariff might very easily prevent the abuses of exorbitant prices which might be exacted by a combination protected by the tariff.
2. It is doubtless true that combinations have a good many times been encouraged by special discriminating rates of freight granted by the railways or other transportation agencies. There is, of course, a certain economic advantage to the railways in having goods despatched in large quantities by consigners who are able to supply their own cars, loading and unloading facilities, &c. Railways on that account often prefer to deal with large firms, and, other things being equal, are willing to give them some special rates. These concerns also are likely to have rather better credit than the smaller ones, so that dealing with them ensures prompt pay and cheaper collection of accounts. The competition among the different railways also for the freights which an important customer can furnish leads to cutting of the rates in their favour. These special rates, however, whether justified from the business point of view or not, are beyond any question from the social point of view, often a very grave injury. A manufacturer who receives these special favours can build up a business substantially monopolistic in its extent, whereas his rival of equal or even of greater ability, and equally skilful as a manufacturer, would be ruined if he did not receive like rates. The injustice of such discriminations and their evil effects on the community have been recognized by legislatures and courts in America, and they are practically universally forbidden. It remains beyond question true that they are, notwithstanding, very frequently granted.
In recent years in the United States there can be little question that the formation of the great combinations has been much encouraged by the opportunities, which promoters were able to seize, of making for themselves large profits. The movement towards combination was so fully recognized and the advantages in many cases so palpable, that a well-informed and skilful promoter was often able to persuade a large proportion of the manufacturers in some special industry to combine. In preparing the plan for such combination, the Promotion.promoter has in many cases seen to it that he himself first bought the properties which he could very shortly turn over to the combination at high rates of profit; or else he has been able to persuade the new corporation to issue large amounts of stock, of which considerable proportions were given to him in return for his services. It has been true in many cases that these securities have been speculative in nature, but nevertheless the promoter has often reaped in this way large rewards. The possibility of this profit has doubtless stimulated his activity in urging the combinations.
Associated with the promoter in the organization of these combinations have usually been bankers or other financiers who stood ready, for an amount of stock or other promised profit sufficiently large to compensate them for their risk, to furnish to the combinations cash sufficient to start the business and to provide other needed capital. Usually theThe Underwriter. form of underwriting employed has been this : A promoter engaged in the formation of a combination and needing a certain fixed sum in cash, would make an arrangement with a bank to sell to it at a price agreed upon such portions of a named amount of stock as were not disposed of to other customers before a certain fixed date. For example, the bank might agree to furnish one million dollars in cash (£200,000) in return for say four millions of stock (£800,000), or to purchase itself at a fixed price all the remainder of the $4,000,000 stock unsold at the date agreed upon, the bank itself to become the sales agent. In those circumstances the bank would naturally use its best endeavours to sell the four millions of stock to other customers at the price agreed upon, say twenty-five dollars, or £5, per share. So far as it failed of disposing of the entire amount, it would take the remainder itself. For taking these risks, naturally the bank has almost invariably asked a very high commission, and not infrequently it has been asserted that the managers of the banks have been given a special bonus for themselves privately, in addition to the rates of profits granted the bank.
These large amounts of stock that are paid to the promoter and the financier for the purpose of bringing about the organization of a large trust, lead, of course, to what is called over-capitalization. What the proper basis of capitalization for a manufacturing industry should be, is a matter that cannot perhaps easily be determined by a definite The Basis of Capitalization.principle which shall be applicable in every case. The laws that have been most strict on the subject attempt to limit the capitalization to the "actual cash value" of the business, by that being understood at times simply the cost of the plant itself with the running cash capital needed. On the other hand, most business men think that it is a wiser plan, and on the whole equally just, to capitalize a business on the basis of its earning capacity, regardless of what the plant may have cost. When, as has been frequently the case of late years, in addition to this cash value of the plant and the cash itself which may have been paid in, large sums of stock are issued also for properties which may be in themselves highly over-valued, and for the services of the promoter, the financier and others, we can see that the capitalization must be far above what may ordinarily be considered a paying basis. On the other hand, if the element of monopoly enters into the business to any noteworthy extent, the prices of the product may be kept so high that fair dividends may be paid even on this high capitalization. That the tendency towards increasing the capital has been very strong there can be no question, and a penalty is apt to be paid for this somewhat reckless financiering. As soon as a slight depression in business comes, so that it is perfectly evident not merely that dividends cannot be paid on the common stock, but that in all probability both the deferred stock and the bonds, if any have been issued, will also have to go without interest, it may be necessary to reorganize many of these combinations and to start them anew on a much lower capitalization.
When the person organizing the combination is himself an active business man, and has the intention of himself directing the affairs of the combination, another The element besides that of personal profit very frequently enters into the problem. Most strong men like to take responsibility and to be dominant in The Industrial Manager.affairs. When, owing to the advantages of combination that have been enumerated above, the prospect of a virtual monopoly seems certain, provided due skill in management is exercised, it is natural that the manager should wish to bring about the combination in order that he may himself have the satisfaction of being in substantially absolute control of the entire industry in a country, or possibly even in the world. The ambition thus to dominate in a great industry is akin to that of a statesman, and there can be little question that this pride of power and the desire to control the destinies of others has been a more or less conscious element in the formation
