German and British Experience With Trusts

LAST June, Congress voted two hundred thousand dollars to prosecute violations of the Sherman Anti-Trust Act. During the past year, the federal government has prosecuted actions against several great railroad systems, and against combinations of dealers and manufacturers of beef-products, lumber, powder, licorice, sugar, oil, tobacco, fertilizer, elevators, salt, groceries, paper, drugs, ice, butter, cotton, and plumbers’ supplies. At present, appeals are pending in the Supreme Court of the United States, involving the fate of the Standard Oil Company and the American Tobacco Company, and of about a hundred other concerns and individuals engaged in the manufacture and sale of various products of petroleum and tobacco. Upon the decision of the court in these cases, as appears from a tabulation in Moody’s Manual, depend the validity and corporate life of 1198 ‘holding companies,’ with 8110 subsidiaries and $10,612,372,489 capital. This conflict between business enterprise, on the one hand, and the law-making and law-enforcing branches of the government, on the other, is to-day the most momentous fact in American industrial and political life.

To a foreigner, unmoved by the political passions which this conflict has unhappily engendered, this hostility toward industrial combination is incomprehensible. In Europe, combination is generally approved as a normal force in industrial development; and instead of prohibiting combination, the law — if legislation is found necessary — merely forbids specific fraudulent and wrongful practices, whether they occur in small businesses or in the largest combinations. A foreigner cannot fail to wonder, in the words of the Honorable Seth Low, ‘that a people who have constituted the greatest republic in history by the combination of many states should, even for a moment, deny to its own commercial agencies the opportunity of giving better service, by proceeding along the same lines’; for in Europe such development is heartily encouraged.

In Germany the trust movement is older than the Empire. Early in the sixties, combinations arose among the salt-producers and steel-rail manufacturers. After the industrial crisis of 1873, the movement toward consolidation became very conspicuous.

Until 1875, the states of Prussia and Anhalt owned all the mineral potash mines in Germany. Private manufacturers, however, worked up the raw material, and in 1876, after new mines had been opened by private companies, their destructive competition led them to make a temporary agreement upon prices. In self-protection, the states of Prussia and Anhalt, in 1879, formed a combination which lasted until 1883. Meanwhile, Prussia erected state factories to manufacture the product of her own mines, in order that she might strengthen her position to control prices. In 1883, the combination was extended until 1888; and Prussia, by virtue of her dominant position in the industry, obtained the right to veto any increase in the price of the product.

This combination, which has continued to the present time, has been operated with scrupulous regard for the public interest. By the terms of the combination agreement, the administrative powers of the combination were vested in an executive committee, composed of the representatives of all the mines and factories. A special selling agency, composed of two or three members, took charge of all the sales. All contracts were made through this agency, and the filling of the contracts was intrusted to the different producers, who were paid directly by the consumers. Each factory kept an account of the sums received, and from time to time an adjustment of receipts was made upon the basis fixed by the combination agreement. An increase of production could be compelled by the Prussian Minister of Commerce and Industry, after affording an opportunity for a hearing to the executive committee of the combination. In the first, instance, the executive , committee of the combination could fix the price of the product. The Prussian Minister, however, could veto any increase of price; and after hearing the executive committee, he could fix exceptionally low prices for German farmers. This right he has generally exercised so as to favor domestic agriculture at the expense of foreign trade, and to reduce the exportation of potash. By the terms of the combination agreement, the mine-owners were compelled to deliver a specified quantity of raw material to the manufacturers, and were forbidden to sell outside the combination. The manufacturers, on the other hand, were required to observe the rules of the combination regarding prices and production. Private concerns in the combination were compelled to deposit Prussian securities in large amount to guarantee the faithful performance of their agreements. The Prussian mineowners and manufacturers could leave the combination at the end of any calendar year and thus break the monopoly whenever it seemed desirable. These are the rules under which the potash combination has operated for nearly a quarter of a century.

Similar conditions prevail in the salt industry. In 1887, three combinations were formed, out of which grew the North German and South German salt kartells. Any member of these kartells may leave them at. will; but the members themselves are largely groups of plants which organized to escape the demoralization of prices after salt ceased to be a governmental monopoly, and there seems little desire to break away. One of the chief purposes and achievements of these kartells has been to extend the sale of salt as widely as possible, and to keep the retail price as low as is consistent with fair profits. To this end the managers have insisted that the profits of producers and wholesalers be limited to a figure fixed by the kartell.

In 1910, the Reichstag passed a statute which, in effect, enacted into law the rules of the potash combination agreement. This statute fixed the amount of production and the maximum price of the product; provided that every two years the production of each concern must be redetermined, on the basis of the demand for the preceding years, and required that any concern producing more than its allotment must pay a prohibitive governmental charge.

In 1881, a combination was formed of the coal-mines of the Westphalian District. Subsequently, a firm organization of coke manufacturers was formed, called the Westphalian Coke Syndicate. Various local combinations of coal-dealers proved so successful that, in 1893, the Rhenish-Westphalian Coal Syndicate was incorporated for the purpose of selling the coal, coke, and briquettes produced in Western Germany. All the mine-owners agreed to deliver their entire output to the syndicate, which undertook to market the entire product and to distribute all orders received among the different mine-owners, according to their output. At the end of the year, a general reckoning was made, and mine-owners who had delivered more than their required share paid over to the syndicate a sum sufficient to make their profits proportional, which sum was distributed among those who had delivered less than their entire share. For breach of this agreement, the mine-owner became liable to a large fine.

The German iron trade was organized no less efficiently than the coal trade.1 With equal rapidity, combinations were formed in other branches of German trade. As early as 1880, international combinations between German producers and foreign producers were organized. In 1897, forty-one such combinations existed, including in their membership concerns in England, Austria, and South America, as well as in Germany. During the years from 1888 to 1901, the t rust movement in Germany exceeded in importance that in the United States. In 1897, there were in Germany about two hundred and fifty known and identified combinations of national importance, not including single concerns which had attained trust size, and local combinations and associations or speculative rings. The chemical industry showed eighty-two such combinations, the iron industry eighty, the stone and clay industry fifty-nine, the textile industry thirty-eight, and the paper industry nineteen.

As regards the industries concerned, and the relative proportion of trade affected, the German movement toward consolidation is fairly comparable to the American trust movement. Both demonstrate the natural and inevitable tendency toward combination. The Industrial Commission of the United States reported to Congress in 1901 that ‘in Germany it is probable that the movement has extended as far as in the United States; and that the combinations there, speaking generally, exert as great power over prices, over wages, and in other directions, as they do here,’ Speaking of the Rhenish-Westphalian Coal Syndicate, the Commission stated that ‘that form of organization seems, on the whole, to have been very successful and to have brought about what is, perhaps, on the whole, the largest and most effective combination in Germany, if not, indeed, in the world.’ A comparison is fairly invited, therefore, between the American attitude toward trusts and the treatment of trusts in Germany.

In response to an inquiry of the American Consul-General at Berlin, Doctor Ernest von Halle, professor in the University of Berlin, who wrote the well known authoritative book entitled Trusts in the United States, declared: —

‘I do not hesitate to say that, according to my opinion, Germany would be already in the midst of a dangerous industrial crisis but for the modifying and regulating influence of our kartells, in most branches of production and distribution. The country, with its dense population and increasing capital that seeks employment, could not stand that reckless speculation that would result from unrestrained competition. Modern production, by means of steam-driven machinery, cannot stand unlimited competition, which too often leads to the destruction of the value of large capital. Machine production requires close technical regulation, and does not admit of economic anarchy. So the effect of kartells seems to have been to initiate a more harmonious industrial system, permitting promoters to invest their capital in many instances with ease and safety, where without combinations they might have been too timid to assume the risks of competition. The relatively low quotations of German consols and other public securities may be partly attributed to the great number of safe investments in kartellized industrial undertakings. . . . Opposition to

trusts has nowhere been made a plank of political platforms, or been used in election contests. Among officials, scientists, and lawyers, kartells are not considered unwholesome or objectionable per se. The Supreme Court of the Empire (Reichsyericht), in March, 1898, officially recognized the economic justification of combinations, and their right to legal protection, unless they use unlawful methods of checking competitors who decline to join them.’

The German Government emphatically favors the trust form of industry. In the Prussian Reichstag, in 1900, a member charged that the Coal Syndicate had greatly increased the price of coal and coke, and urged the ministry to take action against the Syndicate. Herr Brefeld, Minister of Trade and Commerce, replied with a careful review of prices and trade conditions, and concluded as follows: —

‘No one can justly make complaints against the workings of the Syndicate. It has had the result of making the development of prices and wages more even, steady, and certain than it was formerly. I am firmly convinced that if the Syndicate had not existed we should now have prices less satisfactory than those which we have had, and that we should hereafter have to complain of a depression in prices.’

But the strangest contrast to American conditions is presented by the German laws and the decisions of their courts. While the American states have been vying with one another in passing lax corporation laws, Germany, through strict corporation laws, has rigorously and successfully been eliminating fraudulent corporate methods and encouraging the growth of sound business enterprise. The Germans have enacted no prohibitory legislation on the subject of trusts. Instead of hounding industry with barbarous anti-trust statutes, they have favored in the utmost degree combinations designed to prevent ruinous competition and to attain industrial efficiency. The German courts have valiantly assisted the efforts of the German lawmakers. How different from the procrustean laws of trade which American anti-trust legislation compels our courts to enforce, is the sensible business logic of this opinion of the German Reichsgericht: —

‘When in a branch of industry the prices of a product fall too low, and the successful conduct of the industry is endangered or becomes impossible, the crisis which sets in is detrimental, not merely to individuals, but to society as a whole. It is in the interests of the community therefore that inordinately low prices should not exist in any industry for a long time. The legislatures have often, and recently, tried to obtain higher prices for products by enacting protective tariffs. Clearly it cannot be considered contrary to the interests of the community when business men unite with the object of preventing or limiting the practice of underselling, and the fall of prices. On the contrary, when prices for a long time are so low that financial ruin threatens the business men, their combination appears to be not merely a legitimate means of self-preservation, but rather a measure serving the interests of the entire community.’

Thus did the highest court in the German Empire expound the law in consonance with modern economic development. The reference to protective tariffs has almost an American sound, and is respectfully commended to the attention of every American Congressman.

In the case just quoted the lower court had held — as most American courts, under present laws, would have to hold — that an agreement whereby several producers bound themselves to sell their product through a joint selling agency was unlawful and could not be enforced. But the Reichsgericht reversed this decision and upheld the agreement.

Since this decision was rendered, the Reichsgericht has also upheld the validity of the agreement upon which the great Rhenish-Westphalian Syndicate was created.

Turning to Great Britain, the tendency toward combination appears, in many industries, to have distanced both Germany and the United States. Particularly is this true in the textile trades. The history of the great thread combination of J. and P. Coats is a classic in trust literature.

In 1826, James Coats built at Paisley a small mill for the manufacture of sewing-thread which, under the control of three generations of able business men, expanded until it reached throughout the world. In 1890, the business was turned over to the limited liability company of J. and P. Coats for £5,750,000. This combination acquired the mills at Paisley, and also the Conant Thread Company, with works at Pawtucket, Rhode Island. In 1895, the combination acquired Kerr and Company of Paisley, and in 1896 it purchased Clarke and Company of Paisley, James Chadwick and Company of Boulton, founded in 1820, and Jonas Brook and Company of Meltham, established in 1810. These four great rivals had for some time been allied through the Central Thread Agency, which marketed the products of all its members; and it was the successful working of this association that led to their permanent consolidation. J. and P. Coats thus controlled sixteen plants, including mills in the United States, Canada, and Russia; and sixty branch houses, and one hundred and fifty depots; and employed five thousand working people. Since then, the company has acquired a coal-mine, and control over the supply of cotton through the purchase of an interest in the Fine-Cotton Spinners and Doublers’ Association. Its capital stock has been increased to £12,000,000, and throughout this period its dividends have ranged from twenty to fifty per cent.

Meanwhile, the thread concerns outside the Coats combination were combining. In 1897, fourteen firms, including companies located in France and Canada, combined to form the English Sewing-Cotton Company with a capitalization of £2,250,000, and made an alliance with J. and P. Coats, who took £200,000 of the stock. The English Sewing-Cotton Company next absorbed the great. Glasgow firm of R. F. and J. Alexander, and purchased L. Ardern of Swetport; and, in 1898, organized the American Thread Company, which acquired thirteen American firms and was capitalized for £3,720,000. The closeness of this great combination appears from the fact that the English Sewing-Cotton Company took a majority of the common stock of the American Thread Company, and J. and P. Coats took £100,000 of preferred shares; and when, in 1899, the English Sewing-Cotton Company increased its capitalization to £3,000,000, the American Thread Company purchased 125,000 shares of the new issue. This alliance completely controlled the thread industry, not only in Great Britain, but throughout the world.

In 1899, the Calico Printers’ Association was incorporated, taking in fiftynine firms and companies, comprising eighty-five per cent of the trade in Great Britain, with a capitalization of £8,226,840. In 1900, the Bleachers’ Association was formed, taking in fifty-three concerns capitalized at £6,820,096.

In 1898, the Fine-Cotton Spinners and Doublers’ Association was formed for the consolidation of thirty-one concerns producing spun Sea Island cotton. Subsequently, mills were purchased in France — a Lille company and the Delebart Mallet Fils Company, — and more mills and a colliery in England. Up to 1905, the company comprised upwards of fifty associated concerns, and was capitalized for £7,250,000. The union between the Fine-Cotton Spinners and Doublers’ Association and J. and P. Coats, already referred to, has effected the strongest textile combination in the world.

These examples of combination were duplicated in the experience of the iron and steel trade. Beginning in 1881, and continuing with varying success until 1887, the producers of Cleveland pig iron and Scotch warrants, in their local metal exchanges and at their quarterly association meetings in Birmingham, combined to prevent overproduction and ruinous competition, and to sustain reasonable prices. Similar combinations existed as early as 1886 in the Scotch malleable iron trade. In 1883, the famous International Rail Syndicate was formed, which included all but one of the eighteen British steel-rail manufacturers, all but two of the German manufacturers, and all the Belgian manufacturers. This syndicate dissolved in 1886. Various temporary combinations of British steel-rail manufacturers organized and dissolved during the next eighteen years. In 1904, to meet ruinous competition from Germany, which was dumping rails abroad at thirty shillings less than the home price, an agreement was made between the rail-makers of Great Britain, Germany, Belgium, and France, by which the foreign trade was syndicated for three years on the basis of 1,300,000 tons annually. Great Britain obtained a priority in the home market, and fifty-three per cent of the foreign trade; and the rest of the foreign trade was thus apportioned: twenty-eight per cent to Germany, seventeen per cent to Belgium, and the rest to France. The United States Steel Corporation and several other American corporations are understood to have become parties to this agreement, in 1905, and to have obtained thereby a priority in the American market.

One phase of British industrial combination particularly impresses the American observer — the working agreements between naturally competing firms, which bring them into a loose but effective alliance. In America, since the passage of the Sherman Anti-Trust Act, such agreements and alliances have been condemned by the courts and denounced by legislatures more bitterly than has the ordinary single-combination form of trust. It was by breaking up a similar alliance in the Addyston Pipe Case, in 1898, that Judge Taft, while on the federal bench, paved the way for the great trust-smashing suits that have followed. In Great Britain, however, this form of combination seems especially favored. A great English authority has declared: ‘We may expect, in no very remote future, to see the iron industry governed by loose federations of great power, each large firm belonging to a number of associations according to the variety of its products; and there is a final possibility that these may unite into a general union on the lines of German Stahlwerksverband.’

An excellent case in point is the development of the historic firm of Bell Brothers and their allied companies. In 1844, Bell Brothers began the manufacture of Cleveland pig iron, and during the succeeding half-century they acquired collieries, iron-mines, rolling-mills, steel plants, and railway connections, all of which were valued at upwards of £1,270,000. Meanwhile, their rivals Dorman, Long and Company had established themselves in the manufacture of bars and angles, had purchased the Britannia Works, and had entered upon the manufacture of girders and open-hearth steel. In 1899, Dorman, Long and Company acquired the sheet-iron works of Jones Brothers and the steel-wire works of the Bedson Wire Company. In 1900, they employed three thousand men in all their plants, and turned out three thousand five hundred tons of finished material weekly, and had begun a rolling-mill and steel-making. Competition between Bell Brothers and Dorman, Long and Company being threatened, Dorman, Long and Company, in 1902, increased their capital stock and acquired a controlling interest in Bell Brothers. In 1903, Dorman, Long and Company acquired the ordinary shares of the Northeastern Steel Company, capitalized at £800,000, and owning a Bessemer plant and rolling-mills. The total capital involved in all these transactions amounted to £3,309,549.

These examples of combination are especially helpful to a rational understanding of the American trust situation, because they have all developed without the aid of tariffs, and in the face of unhindered foreign competition, and unaffected by any legislation whatsoever on the subject of combinations or trusts. The justification of the trust movement cannot better be established than by the trust movement in Great Britain.

The British attitude toward trusts has never been hostile. The Industrial Commission of the United States found that, aside from the universal phenomenon of hostility among a few radicals against every kind of wealth, no antipathy existed against trusts, and that ‘the strong feeling on the subject, which has been manifested for some years in the United States, seems to have found only a very faint echo in England.’ Trusts have never been a political issue in Great Britain. On the whole, the British view their trust development with complacency and satisfaction.

The secret of this peace and contentment— so different from the political and industrial turmoil in which the anti-trust crusade has plunged our own country — is not hard to find. While Congress and the various state legislatures were enacting the most stringent legislation to repress the trust movement, the English were recognizing and accepting the economic necessity of combination.

The divergence of the policies of England and the United States is striking. Prior to the early eighties, neither country had passed any laws on the subject, and by the unwritten law of the courts of both countries, restraints of trade which were general or unreasonable were invalid. In the United States, this doctrine was subsequently pushed to the extreme, and enacted by Congress and by the legislatures of three fourths of the states into drastic statutes, prohibiting not merely unreasonable restraints of trade, but also every kind of restraint of trade, large or small, particular or general, whether by combination or otherwise.

In England, a diametrically opposite course was pursued. No new laws were enacted or even agitated, and the unwritten law of the courts was actually relaxed, in deference to the economic changes of the time. In 1894, four years after Congress enacted the Sherman Anti-Trust Act, while American legislatures were passing antitrust laws with enormous penalties, the House of Lords, sitting as the highest Court of Great Britain, escaped the incongruities which have embarrassed law and business in the United States, and announced the new and broadened view which ever since has harmonized English law with English business. The occasion of this pronouncement by the House of Lords was an action to test the validity of the contract by which Nordenfelt, the famous manufacturer of guns and ammunition, sold his entire plant, patents, business and good-will, to the MaximNordenfelt Company. The transaction was alleged to be in restraint of trade, and therefore void. The House of Lords held that it was valid, and Lord Morris stated the new doctrine as follows: —

‘The weight of authority up to the present time is with the proposition that general restraints of trade are necessarily void. It appears, however, to me, that the time for a new departure has arrived, and that it should be now authoritatively decided that there should be no difference in the legal considerations which would invalidate an agreement whether in general or partial restraint of trading. These considerations, I consider, are whether the restraint is reasonable and is not against the public interest. In olden times all restraints of trading were considered prima facie void. An exception was introduced when the agreement to restrain from trading was only from trading in a particular place and upon reasonable consideration, leaving still invalid agreements to restrain from trading at all. Such a general restraint was in the then state of things considered to be of no benefit even to the covenantee himself; but we have now reached a period when it may be said that science and invention have almost annihilated both time and space. Consequently there should no longer exist any cast-iron rule making void any agreement not to carry on a trade anywhere. The generality of time or space must always be a most important factor in the consideration of reasonableness, though not per se a decisive test.’

Thus was removed, decisively and forever, from the British industrial world, the cloud that has been gathering and ominously hanging over the American industrial world.

The results of the trust policy of Germany and England — if let-alone treatment may be called a policy — are everywhere conceded to be fortunate. The Industrial Commission of the United States reported: ‘There is, relatively speaking, little objection to combinations in Europe, and in some countries the governments and the people seem to believe that they are needed to meet modern industrial conditions. . . . There seems to be no inclination toward the passage of laws which shall attempt to kill the combinations. That is believed to be impossible and unwise.’

Simple specific statutes, directed merely against the plain evils of corporate management and business competition, and not affecting the legitimate and normal forms of industrial growth, have accomplished these results. The possibility of political corruption by corporations scarcely exists in Great Britain. The Standing Orders of both Houses of Parliament require that private bills — that is, bills which grant any corporate privileges or affect any private rights—must undergo a quasi judicial procedure. Thus, all bills that confer any powers on railways, tramways, electric-lighting, gas or water companies, must be introduced on petition, instead of on motion. Notice of such bills must be given by advertisement to all persons interested, three months before the meeting of Parliament, and copies of the bills must be deposited in the Private Bill Office of the House of Commons, where memorials from opponents may also be filed. Only after these requirements have been fulfilled is the petition presented to the House. After the second reading of the bill, it is referred to a committee, which grants hearings to the promoters and the opponents, and takes testimony under oath regarding every clause of the bill, and finally reports the bill back to the House with its opinion, where its future progress is like that of any public bill. Every private bill must be in charge of a parliamentary agent, who is required to register his name with the proper parliamentary official and to give a bond in a considerable sum to secure his obedience to the Standing Orders. No statement regarding any private bill can be circulated in the House, unless signed by a registered parliamentary agent, who is held personally responsible for its accuracy. Under this procedure, Parliament is as immune from corporate corruption as are the courts. By further providing that candidates for office cannot exceed a fixed scale of lawful expenditure, and by requiring an exceedingly exhaustive account of contributions and expenditures, political corruption by corporations is wellnigh completely prevented.

Coercion, force, and fraud are the particular methods by which monopolists try to effect their purposes. These methods are as truly anarchistic in the realm of business as assassination is in the field of politics. Each of them, unless specifically forbidden and punished, destroys every condition of healthy competition. Each is sometimes resorted to by obscure and unsuccessful competitors, as well as by occasional conspicuous and successful concerns. In Great Britain, as well as in Germany, these practices are punished by simple, specific statutes. Whether the offender be great or small, he is governed by the same law.

Strict corporation laws, in comparison with which ours grow pale, compel fair dealing with investors, and publicity to stockholders and the state.

These obvious remedies, which prevent specific fraudulent and wrongful practices, whether they occur in the smallest concerns or in the largest trusts, have proved, in Germany and England, a complete solution of the trust problem.

In the United States, trust evils have been increased and intensified by foolish statutes, which prohibit every form of combination. As President Roosevelt said of the Sherman Anti-Trust Act: ‘It is a public evil to have on the statute-books a law incapable of full enforcement, because both judges and juries realize that its full enforcement would destroy the business of the country; for the result is to make decent men violators of the law against their will, and to put a premium on the behavior of the willful wrongdoers.’ Until American anti-trust legislation ceases to prohibit all combination in restraint of trade, and seeks merely to prevent specific wrongful practices, which through fraud, coercion, or force violate legitimate business competition, the trust problem of America must continue to embroil politics and business.

  1. The Consolidated Pig Iron Syndicate, organized in 1897, had its head office in Düsseldorf, and combined three subsidiary syndicates — the Rhenish-Westphalian Syndicate, formed in 1894, the Association for the Sale of Pig Iron of the Siegerland, formed in 1896, and the Comptoir of Lorraine and Luxemburg, formed in 1896. The Ingot and Billet Steel Syndicate, known as the Hallbzeng-Verband, organized in 1897 and 1898, also had its head office in Düsseldorf, and included the steel works of the Moselle, the Saar, the Luxemburg, the Rhine, and Westphalia. In the same building with this syndicate was the Consolidated Girder Syndicate, organized in 1899 and comprising three subsidiary syndicates — the South German Girder Syndicate, formed in 1884, composed of the rolling-mills of the Saar District and of Luxemburg, the Girder Syndicate of the Lower Rhine and Westphalia, whose operations extend to Northern Germany, and finally the Peine works in Hanover, which supply Eastern Germany. The Wire Rod Syndicate, formed in 1896, had its head office at Hagen, Westphalia. The Plate Syndicate, projected in 1897 and incorporated in 1898, had its head office at Essen-on-the-Ruhr. The Drawn Wire Syndicate, organized in 1899, located at Hamm, in Westphalia, and operated in Northern and Northwestern Germany, Saxony, Silesia, and South Germany. — THE AUTHOR.