Part 19

Another factor which entered into the modern system of production, and a very important one, was that of capital. The factory could not be established or operated without considerable amounts of money or its equivalent, credit. The machinery which transformed the raw material into the finished product, the material itself, the very buildings in which the work was performed, the payment for the transportation which brought it together, the wages of the men and women engaged in the work, all required capital, and in large sums. The accumulation of this capital, its management, the keeping of accounts of cost of material and labor and of the finished product, required financial skill and acquaintance in the markets in which this capital could be obtained; for often the sums required were in excess of the quantity possessed by the individual who had invested his all in the buildings and machinery, and must needs borrow of some other capitalist the additional sums required for purchasing material and paying the wages of his workmen. Sometimes the owner of the capital preferred to supply it and take a proportionate share in the earnings of the factory, and thus developed the company. Then, as the business grew and the investments of various men in a single establishment increased, it became necessary for them to take an active share in the management 215 either in person or by representatives who became known as the “directors” of the work.

Thus arose the successors of the individual manufacturer, the company, and the corporation. Man must die and the death of an individual manufacturer, or the manager of a manufacturing firm or partnership, must affect disadvantageously the interests of the factory and its employes. Thus the importance of organizations which would continue unchanged in form and general management in case of the absence or death of any individual. This was one of the reasons for the establishment of the corporation. More important than this was the facility which it offered to holders of capital in sums large or small to invest their money in manufacturing without being compelled to give their individual attention to the industry in which the money was invested. The board of directors, which the investors might choose, managed the business either by personal attention or by the selection of competent and experienced persons for that service, and the investor felt assured that his money would be properly managed by the competent business men forming the board of directors and the experts whom these directors might employ to manage the details. Hence the corporation, under which the manufacturing establishments grew to enormous proportions, employing thousands and tens of thousands of people, and bringing material from the places in which it could be most cheaply obtained, investing money if need be in facilities for transporting and even producing the raw material, and cheapening the cost of production.

Another step which increased the importance of capital as a factor in the great manufacturing industries of the world came in more recent combinations of great corporations, in which a number of great manufacturing establishments agree to operate under one general management, thus adjusting production in the various lines of 216 manufacture to the general demand, existing supply and prospective consuming power of the markets, establishing systematic methods for exploiting and selling the finished product, and so further minimizing cost of production and distribution. This last combination, the corporation of corporations, is generally known as the “trust” or “combine,” and under it the great manufacturing industries of the world have reached their greatest development, the cost of production has been minimized, the field for the selection of the materials has been enlarged, and the area in which the products are offered for sale also greatly extended.

While these great organizations, made up by placing under one general management a number of great establishments manufacturing articles of like character, are doubtless able to reduce the cost of production and distribution and prevent production in excess of probable demand, it is also true that they are in many cases able to exercise a greater control over prices of labor, of material and of finished product than when operating singly.

Meantime the world’s supply of money for investing in manufacturing, and the industries which contribute thereto, greatly increased. The world’s gold production in the decade ending with 1840 averaged but 13½ million dollars per annum. Then, owing to the gold discoveries in California and a little later in Australia, the production so much increased that the annual average in the decade ending with 1860 was 135 million dollars per annum, or ten times as much as on the average in the decade ending with 1840. For the next 35 years the production averaged about 125 million per annum. Then, suddenly, through the discoveries of great gold deposits in Africa and Alaska, the production began to exceed 200 million per annum, then 300 million, and in 1906, 1907, 1908 and 1909 averaged more than 400 million per 217 annum, or as much in a single year as in the 40 years from 1800 to 1840.

Gold, unlike most other productions prized by man, is not consumed. It has enduring qualities; and the facility with which it can be transformed without material loss from one form for use to any other required form enables man to retain and accumulate a large part of the products of a long period. The wheat produced in one year is eaten before the next year is ended. The cotton crop of one summer is turned into clothing and worn to rags by the time another crop is ready for the factory and workshop. But the gold is conserved and utilized as money or the basis of money, and the accumulations of the recurring years merely increase the stock of that generally accepted medium of exchange. To be sure a small share, perhaps one-fifth, is used in manufacturing and the arts, and a small percentage lost in various ways; but probably three-fourths of the gold product enters circulation in the form of money or its equivalent, and thus increases very rapidly the world’s money supply.

Meantime the systems built up in the business world by which business is performed with mere pieces of paper which represent the gold and silver accumulations have greatly multiplied the available stock of money; and the ease with which it may be transferred from place to place, from country to country, and from continent to continent also adds to its availability and frequency of use in the world’s transactions. The supply of that article which the manufacturing and business world terms “money,” whether in the form of gold, silver, paper, credits, instruments of exchange, or otherwise, has increased beyond accurate computation. The world’s stock of gold has, according to the estimates of experts, doubled in the last 25 years; and it is probable that the supplies of other forms of currency; which serve as money; have increased quite as rapidly.

All of this increase in the world’s supply of money has increased the 218 amount available for investment in manufacturing, and the increased use of machinery meantime in that industry has required great increases in the investment. While there are no ways of accurately measuring the world’s investments in manufacturing, it is practicable to do so in the case of the United States, the only country which regularly takes a census of its manufacturing industries. Its figures for the census years from 1850 to 1905, as to number of establishments, persons employed, wages paid, capital invested and value of product, are as follows:

======+==========+=========+===========+========+=========+========= | | | | Wages | Cost of |Value of Census|Establish-| Capital,| Wage- | Paid, |Material,|Product, year.| ments, | million | earners, |million | million |million | number. | dollars.| number. |dollars.| dollars.|dollars. ------+----------+---------+-----------+--------+---------+--------- 1850 | 123,025 | 533 | 957,059 | 237 | 555 | 1,019 1860 | 140,433 | 1,010 | 1,311,246 | 379 | 1,032 | 1,886 1870 | 252,148 | 2,118 | 2,053,996 | 776 | 2,488 | 4,232 1880 | 253,852 | 2,790 | 2,732,595 | 948 | 3,397 | 5,370 1890 | 355,415 | 6,525 | 4,251,613 | 1,891 | 5,162 | 9,372 1900 | 512,254 | 9,817 | 5,308,406 | 2,322 | 7,345 | 13,004 1905 | 533,769 | 13,872 | 6,157,751 | 3,017 | 9,498 | 16,867 ------+----------+---------+-----------+--------+---------+---------

It will be seen from a study of this statement, which compares conditions in the manufacturing industries at each recurring census from 1850 to 1905, that while the number of establishments in 1905 was four and one-third times as many as in 1850 the number of wage-earners was six and one-half times as many, the wages paid twelve and one-third times as much, the value of the product sixteen and one-half times as much and the capital employed twenty-six times as much.

This gives at least a suggestion as to the growth of investment in manufacturing. So far as relates to the United States, the only country for which we have statistics on this subject, the enormous increase in the use of costly machinery in manufacturing has increased the sums required for carrying on the industry, and machinery has in a marked degree been substituted for man in the factory operations. 219 The number of wage-earners employed increased, it will be seen, a little more than fivefold while the capital employed increased twenty-fivefold. The tendency to bring the manufacturing industries into large establishments is also shown in some degree in the fact that while the number of establishments increased but about threefold the number of employes increased fivefold and the value of the manufactures turned out increased twelvefold.

Even these figures do not, however, give a complete view of the relative growth in the number of large manufacturing establishments, the capital invested and the product turned out, because of the fact that the census enumeration of “manufacturing establishments” includes hand and household industries, such as blacksmith shops, wheelwright and wagon repair shops, boot and shoe repairers, harness makers, tailor shops, dress making, millinery, carpenter shops, custom, saw and gristmills, etc., etc., in all of which the capital invested or the product per establishment at this time averages probably little more than formerly. It is in the greater establishments, the factories, that the increase in investment and in producing power per factory has occurred. The Census of 1905, which was by law confined to manufacturing establishments conducted under the factory system, and that exclusive of neighborhood and mechanical industries, found that the number of establishments manufacturing for the general market and not merely for local orders or neighborhood consumption, and which could thus be considered as manufacturing establishments conducted under the factory system, was but 216,262, while under the former method of including hand and neighborhood industries the number of establishments would, it is estimated by the census, have been in 1905, 533,769. The 216,262 establishments enumerated as “conducted under the factory system” employed $12,686,000,000 capital and 5,470,321 wage-earners, or an average of 25 each, and turned out 220 $14,802,000,000 worth of manufactures; while the 317,506 smaller establishments, the “hand and neighborhood industries” formerly included in the general census returns, are estimated as having employed $1,186,000,000 of capital and 687,430 wage-earners, or an average of about 2 employes each, and turned out $2,066,000,000 worth of manufactures.

It will thus be seen that the larger manufacturing establishments, those “conducted under the factory system producing articles for the general market as distinguished from the product made upon order for a customer,” are those proper to be included in a study of the development, capital invested, persons employed, wages paid, material used and value of the product turned out. Unfortunately a study in this form cannot be extended over any considerable term of years, because of the fact that the United States census only began in 1905 to make this distinction or separation of the true “factory” from the great mass of establishments turning out manufactured products. It did, however, present in 1905 an estimate for the year 1900 of the number of establishments properly comparable with those enumerated in the factory census of 1905. This estimate puts the total number of “establishments conducted under the factory system” in 1900 at 207,562, and in 1905 at 216,262, an increase of but 4.2 per cent in the number, while the capital employed in 1900 was $8,979,000,000, and in 1905, $12,686,000,000, an increase of 41.3 per cent; the wage-earners in 1900, 4,715,023, and in 1905, 5,470,321, an increase of 16 per cent; wages paid in 1900, $1,736,000,000, and in 1905, $2,266,000,000, an increase of 30.5 per cent; materials used in 1900, $6,578,000,000, and in 1905, $8,504,000,000, an increase of 29.3 per cent; value of product in 1900, $11,411,000,000, and in 1905, $14,802,000,000, an increase of 29.7 per cent.

It will thus be seen that even in the recent period, 1900 to 1905, the percentage of growth in “capital invested” was greater than in any 221 other important branches of the industry, the increases being: in capital 41.3 per cent, in wages paid 30.5 per cent, in value of product 29.7 per cent, and in number of wage-earners 16 per cent, while the number of establishments increased meantime but 4.2 per cent. It is thus apparent that although the tendency of the past thirty years has been distinctly toward an enlargement of the factory through the increase in capitalization rather than an increase in the number of establishments, that tendency still continues as the most distinctly marked characteristic of the development of the period 1900 to 1905.

Unfortunately the facilities for comparing the capitalization, product, etc., in 1905 with that of earlier years only extends, in its relation to all the factory industries, to the Census of 1900. In a few of the important industries, however, it is possible to compare conditions in 1900 with those of earlier censuses. The Census of 1900 shows that the number of boot and shoe factories in the United States fell from 1,959 in 1880 to 1,600 in the year 1900, while the capitalization increased from an average of $21,957 per factory to $63,622 per factory, the number of wage-earners from 57 to 89 per factory, the wages paid from $21,951 to $36,985 per factory, and the value of the year’s product turned out from $84,763 per factory to $163,142 per factory. In cotton goods the number of establishments in 1880 was 1,005, and in 1900, 1,055, the capital per establishment in 1880, $218,412, and in 1900, $442,882, the number of wage-earners in 1880, 185 per establishment, and in 1900, 287, the wages paid in 1880, $45,387 per establishment, and in 1900, $80,180, the value of product in 1880, $209,901 per establishment, and in 1900, $362,349. In iron and steel the number of establishments was in 1880, 699, and in 1900, 668, average capital per establishment in 1880, $294,652, and in 1900, $858,371, wage-earners per establishment in 1880, 197, and in 1900, 333, wages paid per establishment in 1880, $78,020, and in 1900, 222 $180,869, value of product turned out per establishment in 1880, $418,583, and in 1900, $1,203,545. In woolen goods the number of factories fell from 1,990 in 1880 to 1,035 in 1900, the capital per establishment increased from $48,289 in 1880 to $120,180 in 1900, and the value of the product increased from $53,755 per establishment in 1880 to $114,425 in 1900.

It will be seen from the figures above presented that in these four great industries the tendency from 1880 to 1900 was distinctly in the direction of reduction of the number of factories, and a greater increase in capitalization than in that of persons employed, wages paid or in value of product turned out; while the figures covering the operations of the entire factory system for the period 1900 to 1905 also show a continuation of this same tendency toward a greater growth in capital than in persons employed, wages paid or value of product turned out.

V. TRUSTS AND COMBINATIONS.

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, 223 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 224 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 225 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 226 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.”

As to the effect of trusts upon wages it may be said that up to the present time no very strongly marked change is perceptible in the matter of rates of wages paid by the trusts as compared with other employers in the same line. Doubtless the combinations of numerous establishments under one general management have reduced the numbers of employes in certain lines, but in those lines in which the trusts 227 require labor for the carrying on of their work no marked changes in the rates of wages have been developed as a result of the combinations. In steadiness of employment for the men and women engaged in the work of the establishments it seems probable that the trusts or great combinations of this character offer certain advantages, since their business is less liable to fluctuations than that of the smaller, and even in the absence of orders they are more likely to continue work accumulating stocks for future use than is the small manufacturer with limited capital or credits. In the matter of relations with the labor organizations certain of the trusts have made long time agreements with the labor organizations, thus adding to the steadiness of employment, though in some cases the trusts have declined to recognize the demands of labor organizations.

An example of the causes and methods of the combination of kindred manufacturing interests under one general central organization is found in the United States Steel Corporation as described by J. Russell Smith, in his “The Story of Iron and Steel.” No industry, he says, is naturally so uncertain and consequently so competitive as the steel industry. The demand for the product is fitful and uncertain because most of it goes into new constructions and new enterprises, and these are notorious for the spurts and depressions of demand which affect them…. The uncontrolled iron and steel market can make wild rises unknown to many commodities, because it is difficult to suddenly increase the amount of manufactures in response to sudden demand. A wave of prosperity sends a thousand industries which must have iron and steel clamoring, begging for steel. When the industrial sky darkens purchases of iron and steel cease as suddenly as they began and the price must tumble if the output is sold. These were the normal conditions through which all steel makers lived down to the depression of 1893-98. The numerous independent manufacturers thought that if 228 they could get together and agree upon prices they could improve their condition. Attempts to achieve this in the form of pools provided that each of the makers of a certain material should make a stipulated proportion of the product to be sold at an agreed price, and if a factory made more than its share, the owner made a cash payment to the pool. The weak part of these pools was their absolute lack of power of coercion, and the further fact that no member had faith in the other.

The failures in the attempt at price control resulted in the consolidation of many companies, formerly rivals, under one control. The chief companies which later became members of the United States Steel Corporation formed two distinct groups, each group classified according to the product. One group included the manufacturers of unfinished steel, such as ingots, billets, plates and slabs, and included the Carnegie Steel Company, the Federal Steel Company, and the National Steel Company. Other companies which purchased the product of these manufacturers of unfinished steel and turned it into the finished state included the American Tin Plate Company, the National Tube Company, the American Steel and Wire Company and others. The first thought which came to the minds of this finishing group when hard times compelled them to cut down costs was to cheapen their raw material (such as pig iron, steel ingots, billets, etc.) by becoming manufacturers of their own pig iron. The Carnegie Steel Company had already done this and had obtained facilities for transporting the ore to the coal fields of Ohio and Pennsylvania and facilities for transforming the ore into the classes of material which it supplied. The Carnegie Steel Company thus became independent of other companies in the supply of its fuel, its ore, and the transportation of the same, and all of the requirements of operation. When the finishing companies announced their purpose to also supply themselves with the 229 same facilities for producing their own raw material through the ownership of ore lands, transportation, facilities for smelting, manufacture of pig iron and the steel which they themselves required, the raw materials group could not view this operation with unconcern. It meant the loss of their market and necessity of seeking new markets in the United States or in foreign countries. As a consequence, the companies designated as the raw materials group, making pig iron, steel billets, etc., announced that they would establish their own finishing plants and thus compete directly with the group of companies which had formerly occupied the field without interference by the great organizations transforming the ore into the earlier processes of pig iron and steel billets. Mr. Carnegie announced that he would build a finishing mill in northern Ohio at the end of his ore railway which would eclipse anything that the world had ever seen and would be in equipment without a rival in the world. The Federal Steel Company increased its holdings of ore and coal, of upper-lake railways, and of lake steamers, and prepared to establish its plants for turning out finished products. Thus was threatened a doubling of the capacity of production of iron and steel in all of its stages, a capacity already far beyond that of the markets of the United States. Pools had failed, and the earlier trusts, aiming at monopolizing each line of the iron trade, had in the first temporary depression come face to face with the immediate prospect of ruinous competition among themselves. Then came the supreme effort at controlling prices through the creation of the most stupendous corporation that man has yet dared to launch--the United States Steel Corporation. This combination included most of the companies of both groups referred to--the producers of unfinished steel and those transforming the same into the finished product. The combination formed under the leadership of Mr. J. Pierpont Morgan 230 controlled two-thirds of the steel output of the country.

The new company began business in April, 1901, and a comparison of prices since that date with those of earlier years shows regularity and steadiness of prices rather than any marked decline or advance. “This price-steadying,” says J. Russell Smith, “is of incalculable benefit to the independent manufacturer (as well as to the combinations) even when it limits the heights to which a price spurt will go. Rapidly rising prices start a feverish, intoxicated condition of the market very pleasant while it lasts, but followed by a more unpleasant reaction; therefore the Trust tries to keep sober and keep its little brothers sober also, and all are profiting by the new temperance…. Despite its efforts at control, the Trust is not as near monopoly as it was the day it began. The four full years of its operation, 1902-1905, inclusive, did not indicate any increased share of production. The bulletin of the American Iron and Steel Association shows that during these four years there was an almost universal decline in the percentages of iron and steel products made by the Trust.”

VI. THE IRON AND STEEL INDUSTRY.