The Rise of Big Business: The Failure of Trusts and Cartels (continued)

0:00Despite the drive for monopoly, despite the mentality of many businessmen, monopoly is the key thing that will provide more efficiency and lower cost and higher prices and all that. Really, by the end of this period, we were talking about only oil, sugar and corn products were dominated by a single company. And steel was 60 percent, not 90, but there we also see the collapse of the US steel attempt.

0:36There's also, again, there's charming examples of what happens here. There's also the so-called whiskey trust. 80 small firms in the whiskey industry in the form of distillers and cattle heaters trust, in 1987. And the first thing they do is concentrate their production of 21 plants. They scrap the other plants. They figure they'll raise prices, cut production. And the price of whiskey was then raised, okay? So what happens? What happens is it stimulates a group of small, local, new firms suddenly popping into the whiskey business and undercut the stores and cattle feeders' trust. So what do you do? He has a distiller's and cattle feeder's trust. They're trying to form a monopoly. They desperately get all these guys together, they merge, and finally they find these crumbs suddenly pop up and undercut them. What do they do about it? Either they can ignore it, in which case they lose their monopoly, or they buy them out. But again, they can't keep buying out people forever, and so they went bankrupt in 1896. Again, just as triumphant. And they try that again. Another distiller's company tries it later, in the reach of a kind of a similar thing. They have a lot of competitors.

1:43The National Biscuit Company was formed in 1998 as a giant combination of three regional giant combinations.

2:13They tried their best to control prices and production, limit competition, buy out the competition, they tried to buy out every biscuit company that popped up, too expensive and they meant disaster in this process. And finally in 1901, this was only three years, but it was a very traumatic three years for the National Biscuit Company, and finally in 1901 they gave up. The National Biscuit Company gives up the idea of controlling prices for cutting production, raising prices, monopolizing everything, and saying, we've had it, we're almost bankrupt.

2:59they changed the idea of cutting costs of improving efficiency and not worrying too much about the competition having systematic marketing and so forth and improving the quality of the biscuit uh... they decided they were not going to buy out anybody else, the whole of them uh... and what they did when they decided not to buy out anybody else, they came up with a great invention, you need a biscuit, the first the phrase, the first consumer, the market innovation, the first guy to sell package cookies uh... package stuff for the consumer uh... package crackers, nobody really thought of that before before that, even when I was growing up, I'm not that old when I was growing up, you didn't really buy package stuff for the consumer much you went to the grocery store, you went to the grocery store, you bought the grocery store had a tub of butter and they had a bunch of pickle, a jar of pickle, and you sort of reach in, you say, well give me

3:46a slice off a quarter of a pound of butter, and the guy would hack away at his big tub there was no brickstone or firestone or other stuff, it was just butter We were deprived of a choice between brands. We couldn't pick between this kind of margarine, this kind of butter, and this kind of corn oil. It was just butter. You know, you went to the grocery store and there was this yellow stuff and they hacked it off. And this was the idea of consumer brands is very new. It's really a great thing because now we can pick, we can choose between Malamasi and Edith Biscuits and stuff like that. Some people, some of the health nuts around here might score in this, these choices. I think it's important that...

4:31Let me quote from the National Biscuit Company's annual report of 1901, announcing this change. They say, quote, When we look back over the four years, that was the four miserable years they've been in existence, when we look back over the four years, we find that a radical change has been wrought in our methods of business. When this company started, it was thought we must control competition, And to do this, we had to either fight competition or buy it. It was either drive it to the wall or someone would buy it. The first meant a ruinous war of prices, so I rejected that idea, and a great loss of profit. The second, a constantly increasing capitalization, buying more and more of these competitors. Experience soon proved to us that, instead of bringing success, either of these courses, if persevered in, must bring disaster.

5:17This led us to reflect whether it was necessary to control competition. We soon satisfied ourselves that within the company itself we must look for success. We turned our attention and bent our energies to improving the internal management of our business, to getting full benefit from purchasing our raw materials in large quantities, to economizing the expenses of manufacture, to systematizing and rendering more effective our selling department, and in both world things and before world things to improve the quality of our goods and the condition in which they should reach the customer. It became the subtle policy of this company to the buyout, no competition and this really sort of says it they didn't arrive at this through laissez-faire theory they arrived at it through hard-nosed empirical colleagues as Marxists would say, they were educated through struggle one of my brightest students that I've had in my foreign marketing history last year was converted from anti-trust-busting and laissez-faire by reading this report All right, we have a similar thing in agricultural machinery. Once again, J.P. Morgan, the Mephistophelian hand, J.P. Morgan, in work, tries to set up a monopoly in agricultural machinery, sets up the International Arvester Company, along with McCormick's.

6:47In 1902, this was supposed to be another great monopoly, tapping the efficiencies of giant-scale production, etc. What happened to the international harvester? A crummy situation, singularly unprofitable. There were fights between McCormick's and the Deerings that would emerge from this thing. There was a great deal of lethargy, there was poor organization, overconfidence, and there was a great decline in their shares of the market. In 1903, international harvester had 91% of the mowers in the country, reduced 91% of the mowers and 96% of the binders. By 1911, they were reduced from 96% to 87% of the miners and from 91% to 75% of the mowers. And the harvesters were reduced from 85% in 1902 to 64% in 1918.

7:32So, but by the time, you know, after 10, 20 years or over, international harvesters were being cut down systematically to size, so to speak. And the non-merged companies are going to expand. The competitors are not in on this great, tempted monopoly on the free market, such as Deere and company J.I. Case, expand and fill in the interstices, so to speak, of this operation. And to continue the story, in 1922, as I think I said, well, total farm machinery, international harvest are at 44% of the total farm machinery in 1922. By 1948 it had 23%. A steady decline, steady and happy decline for those of us who like to see this sort of thing happen. And also they would lag behind the new combine market, they were the last guys to get in the combines, behind an idea of rubber tire tractors and so forth and so on.

8:20and so on, behind again, in fundamental innovations in that particular industry.

8:33I mentioned something about Morgan, as I think Paul has touched on, before the late 1890s, the funds for these combinations came essentially from manufacturers themselves, pooling of their assets. After 1897, particularly in the famous great merger wave of 1897-1901, approximately, the great merger boom, essentially we have a key role of the Wall Street financiers in this thing, investment bankers, commercial bankers, the industrial stock market was just really coming in then, before that really the stock market was largely railroad bonds and government bonds, that sort of thing. So it was really these investment bankers, the Morgan pipes, promoted the great merger wave in 1897-1901. Okay, we also have the sugar trust.

9:28This is, I'm referring to the great article by Richard Zerbe on the sugar trust in Journal of Law and Economics. I mentioned before that he showed that there was no predatory price cutting, no attempt to be done by mergers. We had an increasing concentration of sugar in the 1860s, 1880s approximately, and one of the things that stimulated was an increase in the tariff, a high tariff of sugar. There were a lot of abortive cartels in the 1880s, and they collapsed once again. The same story begins to repeat itself. The sugar industry, although that was kind of a peculiar thing, it was largely concentrated in Brooklyn in that period.

10:13There were 10 firms, there was G. Rafferty, and it was heavily concentrated. There were 10 sugar firms in New York City, sugar manufacturers in the 1880s. Six of them were in Brooklyn, three of the largest were in Brooklyn. The key guy in the sugar industry in this period was Henry O. Havemeyer. Habermeyer Family, and Merck and Sugar Refining Company, and so forth. It was Habermeyer who coined the great phrase, the tariff is the mother of world trusts, as far as I know. It was Habermeyer who said, quote, the mother of world trusts is the customs tariff bill, the existing bill, which was the tariff of 1897, and the preceding ones have been the occasion of the formation of world-wide trusts. The idea, again, is you have to keep out foreign competition in order to be able to have any kind of successful trust at all.

11:01And there's a saga, the sugar trust saga can be pretty well outlined. As far as the tariff goes, kind of a cute thing here. We have the price of British sugar, British refined sugar plus the, first of all, British refined sugar plus transportation costs, in other words, the New York price of British sugar. 1885, 1886, 1889, and this is $4.70 a hundred weight.

11:55$4.99 a hundred weight. Now we have the price of British sugar, high in sugar, plus the power, which is what adds on top of the price, $8.38, a pretty large amount of power. The history of sugar in the United States has been a vast loophole from then up to the present day of government action. The real sugar price is $7.38, $8.38, $18.98.

12:41We have practically a doubling of the price even with transport costs. Now we have the US price of US sugar, US refined sugar, $6.44, $6.12, $6.01, $7.64, $7.17 It's showing, I think, pretty clearly that the United States sugar refineries have had to close up shop pretty well. The huge tariff which makes English sugar uncompetitive and allows Habermeyer to do his dirty work trying to cartelize the sugar industry. The Sugar Trust, of course, is a sugar refining company, lobbying very heavily for higher tariffs on refined sugar and lower tariffs on raw sugar.

13:31The sugar industry has a peculiar situation. We buy sugar from Cuba, raw sugar, we refine it in the United States and we sell it. So the idea was to be a big free trade theorist when it comes to raw sugar and be a big American system theorist when it comes to refined sugar. And the fortunes of the sugar industry in this period can be directly related. In 1887, the so-called Sugar Trusts was formed, the American Sugar Refining Company, to be more specific, more accurate.

14:22and more accurately, with 80% of the total American sugar refining output, formed obviously under the stimulus of this big tariff, and Havermeyer again was obviously being completely accurate when he said that he would never even try to form a sugar trust without the high tariff, and what they tried to do was to lower production and raise price within and of course this tariff, you know, this tariff protection. So in 1888, they had originally 20 plants, 20 sugar plants in the sugar trust. They reduced it to 10. They put 10 out of business, either dismantling them or combining them in some way.

15:07And they operated at a very, only, much less than full capacity even with the, just half of the plants. And in 1888, they already dropped. In one year after this cartel arrangement, even within the tariff war, in one year's time, the American sugar refining company's share of the market had fallen from 80% to 73%. Especially on the west coast, they had fallen to 50%. Because what happened is, on the west coast, the Hawaiian sugar manufacturer, the so-called sugar king of the sandwich islands, Klaus Speckles, enters the sugar industry. In California, he zips Spreckel's in the California because here, boy oh boy, here's this guy, Havonlein, he's raised the sugar prices, a lot of profits here, let's produce some sugar refineries.

15:54And so Spreckel's begins to build sugar refineries on the west coast. So not only do they have, you know, not only is this the feat of purpose, the Havonlein's purpose of having this monopoly cartel kind of situation, but he's faced with a permanent pain in the neck, which is Spreckel's, you know, a permanent new competition coming up, which wouldn't have been cool into being without this, you know, the original higher price. The price of, before this attempted monopoly, the price of sugar had been falling, from 1881 it was 9.2 cents a pound, this represents a fall, before the attempted trust, the trust comes in 1888, the price goes up from 7 cents to 7.6 cents, and bingo, Spreckel nips in, And now we have a problem. The production of Spreckels and the other independents increases from 8,000 barrels a day to 10,000 barrels a day.

16:54And we wind up with a sugar trust. By 1889, the sugar trust has only 66% of total sugar output. In other words, in two years, the American sugar refining company's share of the market falls from 80% to 66%. Spreckel pops up with new plants and the price of sugar against the fool finally goes down about 4.7 cents As a whole it's happening and the sugar trust tries to buy Spreckels out and he does buy Spreckels out and we have an American sugar refining company in 1892, a newly reorganized company which has brought Spreckels and six other people and now has 95% of the sugar production. Okay, we brought Spreckels out, we're in great shape, we have 90% of the production product.

17:42There's only two independents left in the great 1892 merger. There are only two independents left, one small plant in Boston which is making only 500 barrels of sugar a day and another two teeny plants in Louisiana that are making 400 a day. It's practically nothing. Otherwise, there was only beet sugar, which was only about 4% of sugar production in those days. That was very little. So here is, okay, we finally have the reorganized thing, we bought Spreckles out, we have as great a Spreckle to have in our alliance. Now what? Well, all sorts of old sugar hands are going to come back into the business. Hey, we've got higher prices, we've got higher profits, and we have two gentlemen named Adolf Siegel and Frederic Hippel. I went into the business of producing sugar plants, building sugar plants, so that the sugar mining company would have to buy it.

18:28Once again, we have this so-called blackmail arrangement. It's really a great thing. You have to really be a good sugar manufacturer. All you have to do is to build a plant, and then some guy has to buy it. Takes it off your hands. So, at one time the sugar plants were pretty sore, but they found out they bought a plant from Hipple Seagull. They found out there was no water supply there, and the whole thing was hardly anything. No equipment, it was a big rip-off, as we would say.

19:00So this continues on, and by 1894, with the same cost, only two years after the American sugar refining company has 95% of total sugar production, by 1894 they have only 85%, they drop 10% in two years, and the price starts falling again, because they have to compete for these new independents popping up. 1895-1996, they try it all over again. They have a new cartel arrangement between the old sugar refining company, the old have-a-minus, reckless people, the new guys, and they have now a cartelization covering 90% of production. The price of sugar then goes up. The price of sugar had fallen during this competitive period from 4.8 cents to 4.1 cents a pound, and now went up to 4.5 cents a pound. Raise the little bit. So everything is hunky-dory about a year, and then a new guy enters the picture, a new old sugar guy who sort of dropped out of the business and done something else, Klaus Dorscher, and the Arbuckle brothers, the ancestor of the famous Fatty Arbuckle, and a little bit more stupid Fatty Arbuckle, so the Arbuckle brothers at Dorscher enter the business, they've been here, they take advantage of the high power-ups, they take advantage of the higher prices, the higher profits, they're going great cheap, great guns, and they begin to win,

20:14We turn that on the competitive struggle by 1898, which is only two years later. They're down to 75% of the output. The price of sugar falls again. Essentially, Arbuckle, by the way, broke the cartel with a lower cost and superior product. Arbuckle developed the idea of coffee packaging. Sugar was usable for coffee, which apparently hadn't been thought of very much before.

21:11in the authentic case of the sabotageous plant. And we have another great merger. In 1902, we have a new merger, American Sugar Refining Company with 90% of the total output. We're back up finally, painfully again at 90%. Profits went up, sugar price went up, 5.3 cents. And once again we start up, the west coast pops up again, California pops up again, the Hawaiian sugar plantations pop up again, a new Hawaiian guy starts building plants in California, shipping the sugar to California in the farm rate, and that doesn't work either.

21:58and also the beet sugar people, it hasn't been heard from before, now begin to zip into the market, I mean, prices of sugar are going up, profits are going up, let's start selling beet sugar. There also has been a higher tariff for fine sugar in 1897, which also prompted them to enter this picture. So all of a sudden we have a little beet sugar interest, we have the Louisiana cane sugar people, we have to increase their production. and uh... so in the sugar trust field they have to start buying up the beet sugar companies they start racing around to try to buy these people off, they're becoming a threat well, as I say, none of this really worked uh... again we have the same sort of pattern the uh... 1902 when the final, when this final beet sugar thing was 90% of the total output uh... by 1905 they only had 70% of the total output, by 1907 they had 60% In 1911 they had 54% and beet sugar kept popping up more and more and was raising their share of 4 to 14%.

23:07And also in cane sugar more competition comes up. Spreckels comes up again, other plants come up, California. And so, by 1905, as I said, we're down to 70% and 60% to 54%. The great sugar trust didn't work. After all these constant headaches, after buying out people, and all the rest of it, the thing collapsed. Because we didn't have a government promotion or encouragement in the cartel, a government enforcement in the cartel. The refined sugar price begins to fall, once again, from 5.3 cents down to about 4.4. They tried to have an international cartel agreement, that didn't work either, and as we'll see again, once again, World War I, just as in the steel industry, just as World War I brought joy to the hearts of Judge Gary, so in the sugar industry, World War I brought joy to the hearts of the sugar manufacturers. They finally came into their own.

24:06World War I brought joy to the hearts of many people in the United States, not those, of course, who were killed.

24:18Habermeyer, again, had another quote on the tariff of Habermeyer. He said that the sugar refining had to build up under, quote, enormous protection. If I had a tariff, I doubt if we should have dared to take the risk of forming the trust. I certainly should not have risked all I have in a trust unless the business had been protected as it was by the tariff. But even with the tariff protection, the thing collapsed. They finally, what they finally had to do was simply keep the price low, keep the profit margins low, and not keep stimulating increased competition, which of course is about the whole thing, but anyways they gave up the idea really of trying to establish a monopoly and the price.

25:09Well, I think...

25:16I think I'll stop at this point. I have a little bit more on the failure of the trust and cartel. I'll deal with it tomorrow and probably won't start it on a progressive... a progressive period attempts to counteract the winds of the free market.

25:36Get back to the failure of the trust and so forth. By the early 1900s, as Walter Block raised the question, how come these guys didn't learn about it? Forrest mentioned the Morgan, I think it was a very good statement, about the Morgan's benefiting from commissions, forming trusts, etc. etc. But various businessmen were beginning to see as early as 1900 that the trust thing doesn't seem to be working. Various theoreticians, so to speak, in business. For example, in the iron and steel industry, as I think I might have mentioned, numerous independent firms pop up after U.S. Steel was founded and they start to share in the alleged profits and mergers and so forth. And Iron Age, the magazine of the iron and steel industry, writes writes about this, rather sadly, in September 20, 1900, and says, this is especially true, this collapse of the merger because of new firms coming in and competing, this is especially true where the combination is naming, as they put it, or fixing, confessively high prices

26:55for its goods and is at the same time under heavy expenses on account of buying out competitors or subsidizing them to keep out of the market. Iron Age saw this thing as early as 1900, even before the final U.S. Steel merger. On November 19, 1900, Iron Age again says, The most serious problem that confronts trust combinations today is competition from independent sources. When the papers speak of a cessation of operation in certain trust industries, they fail to mention the awakening of new life in independent plants. So they're seeing this. I mean, the more thoughtful members of the business community were already latched onto this even as early as 1900. There are other trusts that the same thing happens to. There's, for example, the Wallpaper Trust, which breaks up rather quickly in about eight years or so.

27:50The Continental Company Limited, formed in 1899 or 1900, controlling 95 percent of the sales of screw doors and windows, dissolved in one year, one crummy year from its commanding height of 95 percent of the business, dissolves, why? Because of growing competition due to the high prices that they were trying to charge and their failure to achieve any kind of real economies, you know, of course. I also second Forrest McDonald's statement about the cheap money, that's a very important point about the, which stimulates, stimulates the merger movement of that period. Benjamin M. Anderson's great work, economics and public welfare, also points to this as being one of the key things that spurred this merger movement.

28:40A couple of other cases, I don't want to bore you with too many cases, but I find them kind of fascinating. The Leather Trust. Here we have a highly competitive industry making sole leather. We have a lot of small firms, very little capital required to invest in any particular firm. And they're mostly concentrated in southern New York and Pennsylvania. Five of the largest firms get together and form the U.S. Leather Company in 1893, controlling 58% of the tanned sole and 72% of Hemlock tanned and 45% of Union tanned and so forth. As a matter of fact, when it was formed in 1893, the U.S. level of company was the largest capitalized firm in the country at the time, totaling $130 million of capital.

29:31The Standard Oil Trust, for example, the Standard Oil in New Jersey is only $102 million at that point. So what do they expect of tanners? They expect that the end of competition would bring them high prices, prosperity, high profits and economies of large-scale production. Yet, what happens to the U.S. weather company? Almost immediately, they lose $1.3 million, like that. No dividends on their common stock. Their profits continue to be very low. The stock collapses. Why is that? Well, it was a business slump. Also, they over-expanded their assets. They found that they couldn't raise their prices because the small tanners that were competing with them were very well entrenched.

30:24There were a lot of independents, there were a lot of large Oakland Union tanners because they really only sort of controlled the hemlock tanning. And they found out that the small businesses often had very superior management to them. And the end of this saga, which took 11 years, by 1904, the US leather company quote reorganized on quote, in other words goes bankrupt, that was the end of the leather trust. There's also the saga of the cornstarch trust, I think I mentioned yesterday, there were three companies, three leading industries where there was almost a monopoly, oil, cornstarch and sugar. The cornstarch, we have a highly competitive industry, we start with a highly competitive industry with falling prices, and so forth, we have, they form around 1890, they form a national starch manufacturing company, a merger of 20 starch factories, controlling about 70% of the total starch output, including the largest single factory in the business.

31:29So, what happens? Well, what happens is they get severe competition suddenly coming in from Western Bulk Starch. Two kinds of starch, apparently. Bulk Starch going to manufacturers, and Bulk Starch just went to the consumers. So, they find severe competition from Western Bulk Starch, and then they find that after five years, see what happens is one of the guys who merged with them, one of the large firms merging to form the largest factory, I should say, forming this national starch manufacturing The Duryay-Glencove Manufacturing Company, Duryay Family, and they sign this thing saying for five years we're not going to enter the business. Well, five years are up, Duryay zips into the business again, builds new plants, more competitive, more newer than the previous ones, and becomes highly competitive.

32:19And it's the relative output of National Star Manufacturing Company 6. 1899, they started it, they try it again, D'Orier included this time, we have the United Starch Company, which included the union of the four biggest box starch companies at the time. And in 1900, the whole group merges, the United Starch Company, the old National Starch Manufacturing Company and the US Glucose Company all merged into one giant, gigantic national starch company. The National Starch Company now has 90% of the box starch in the country and 75% of the total starch. Box and bulk. So they're pretty young. They think of themselves in pretty good shape. They expect big monopoly profits and so forth. What happens? Profits are low. Profits are coming. They find the marketing costs are very high, doing very well. And what happens is the rise in the price of corn, which they're trying to affect Shifts, the mills were buying starch, they tried to raise the price of cornstarch, the mills start buying potato starch, a new gimmick suddenly pops in, which has not been monopolized.

33:36In addition to that, independent mills, independent cornstarch, pop up new hydraulic processes, better, you know, lower cost plants, and more rapid production and so forth. The profits for National Starch Company fall, and very quickly they're down to 40% of the share of the market from their original 90.

34:05There's also the glucose trust. There's an obscure technological connection between starch and glucose, which I'm not going to go into, because I'm feeling rather shaky ground, feeling the technology of starch and glucose. The glucose industry, and the glucose firm was trying to make a form of pool in 1885, from 1885 to 1890, big glucose pooling. And they assigned quotas of production to each plant, every plant gets its allocated quota. And we have first the American Glucose Company, which has 65% of the glucose market. But, so what happens? Well, newer manufacturers come in, they increase their production, and they try to bring them into the quota system that means each member of the American Glucose Company team has to cut their production and we wind up with all these headaches and in a very short amount of time, a few years, the American Glucose Company is down 45% from its original 65% of the market One of the things that happens is the Chicago sugar refining company breaks the pool, just breaks it away and starts increasing its production and cutting prices

35:14Engages in severe competition with the American Glucose Company, which even sinks more rapidly. So in 1897, they try, okay, we'll bring them all together. And they have a mighty consolidation of six large companies into the Glucose Sugar Refining Company, worth $40 million and controlling 85% of the glucose market. This time, a Chicago sugar refining company back in as the largest plant. And the American Glucose Company is also included, so we have this mighty merger. and they raise the price of glucose. First they're making high profits, yippee, they're in. So what happens? Well, it stimulates the high profits, stimulates new manufacturers entering the industry. And new glucose firms pop up. The Illinois Sugar Refunding Company, National Scarch Company, the Charles Paper Glucose Company, which cuts prices of the candy manufacturers, and the New York Glucose Company, which is essentially a standard oil subsidiary.

36:06In 1901, only four years after they reformed with 85% of the market, they're down to 45% of the market and making severe losses, and their stock prices are collapsing, and so forth. Finally, in 1902, if they haven't given up yet, another consolidation takes place promoted by the Bankers of the Glucose Sugar Refining Company, the National Sugar Company, the Charles Pope Company, Illinois Sugar Refining Company, and New York Glucose Company, I think half of their stock. They're one giant company, a corn products company, capitalized at 76 million dollars with 80% of the starch and glucose market.

36:54And they expect boy oh boy now they're going to have high profits, they have this virtual monopoly, they scrap many of their plants to reduce production. So what happens? Very, very quickly, once again, new starch factories, new glucose factories nip in the market. The Peel Brothers Company, Warner Company, the corn products company finds itself again with declining profits. Again, the high cost of corn, again, the corn market limits the market for corn. By the second year of the corn products company, and their suffering heavy losses, their stock prices collapse and by 1903, which is one year after the corn product company was formed with 80% of the market, they're down to 45% of the entire starch glucose business, which apparently has not been consolidated.

37:42They're down to 45% and their stock has collapsed. By 1906, a new consolidation takes place. The corn products company New York Glucose Warner and St. Louis Glucose enter the corn products refining company with 91% of the market, excuse me, 91 million dollars and 74% of the market accept. At this time they decide they're not going to try to raise prices, they're not going to try to buy up all the competitors, they're going to stick to low-cost production and distribution and sort of go the way of the national biscuit company and become a regular company and not try to be a monopoly. That's essentially the corn product who co-starred Saga.

38:21Quick survey of the saga.

38:27Okay, and I have some overall assessments here of this thing. Of the nearly 100 companies of this type, consolidated trust companies formed in 1899, 1900, By 1900, in other words, after one year, three quarters were not paying dividends, three quarters were in badge financial shape. Most of the hopes of the promoters, at least the hopes of being to the public were not realized. New competition comes pouring in in almost all of these cases. In the various overall figures, Coco points out in his Triumph for Conservatism that of the 50 largest corporations in 1909, By 1919, ten years later, seven had dropped out of the top 100, and by 1929, 20 had dropped out, 20 of the 50 had dropped out of the top 100, not just the top 50.

39:18Of the 100 largest corporations in 1909, 47 had dropped out of the top 100 by 1919, and 61 had dropped out by 1929. So we have a very mobile kind of situation, a very high turnover of the top corporations in this period. Arthur Dewing has done a great, excellent quantitative study of what happened to these trusts. It was reprinted, finally, in his mammoth two-volume work, which unfortunately is just considered a corporate finance textbook, so nobody ever really reads it. It's called Financial Policy of Corporations, which I commend the intention of. Fascinating book. Huge number of huge long footnotes in the old tradition. Arthur S. Dilling, D-E-W-I-N-G It's the old-style classical footnote. You go on for about five pages and you have footnotes onto the footnote. I like that, as all people can take it. You don't have to read the footnotes.

40:22Dewey's overall assessment, his statement on the subject for going in quantitative thing, He says that the climax comes about really by 1901, a little bit by 1901, there's a scattering number of more solid trust formation until 1903, and more or less stopped by then. And he says, well, the trust turned out badly, they didn't suppress competition, they didn't realize big economy, large scale economy, investors didn't realize their expectations, the prices of the stock steadily declined, the promoters found a large amount of security The theory didn't remain unsold, few paid any dividends, many of the trusts actually collapsed and were actually going bankrupt. But doing this, he took a random sample of 35 of these trusts, industrial solidations, of approximately, I don't know, it's kind of obscure exactly how many there were, certainly over 130, maybe as high as 260, a little vague.

41:24At any rate, he took a random sample of 35 industries, these kinds of trust consolidations. He compared the earnings of the constituent competing parts, competing firms, before the trust was formed with the anticipated earnings declared by the promoters or the bankers when the trust was being formed, with the earnings for the first year after the trust was formed and then 10 years after that. So in other words, you take what happened to the individual companies before the trust And what happened after the trust was formed? We found out on the average that the earnings just before the trust were 25% higher than the earnings the first year after the trust. You know, having to take an average 25% collapse.

42:10And also that the earnings before the trust were more than the average earnings for the first 10 years after the formation of the trust and even for the 10th year. So as late as 10 years after the trust was formed, they're still making less profits than the original firms did before the whole thing was conceived. The estimates of the promoters, as far as the estimates of the promoters and bankers went, the expectation of what would happen in the large-scale economies, supposedly in cooperation replacing competition, these estimates of the promoters and bankers were 50% higher than the actual first-year earnings. So in other words, the actual earnings before the trust were 25% higher than the earnings afterwards and the promoter's expectation averaged 50% higher than what actually happened.

42:55And it can also be considerably higher than the first 10 years' worth of earnings. The promoters overestimated even for the 10 years ahead. Let's start taking another set of, statistically, another way. Of these 35 trusts, 13 had first year earnings equal to the pre-trust and 22 had first year earnings less than pre-trust earnings. And this is also about the same ratio for the first 10 years after the trust was formed. In fact, only four had earnings equal to the anticipation of the promoters of B35. What we're looking at in another way, earnings after the trust were expected to be 40% higher than before the trust.

43:44Now, the average expectation by the promoter and the bankers, etc., were that you're going to have a 40% increase in earnings once you have this consolidation. But actually, you have 20% less in the first year and 10% less for the first 10-year period. This gives you sort of the range of what happened. Ludwig goes into some of the reasons for this very interesting discussion. He says the pools were too high. They expected economies of large-scale production. His expectations were based on a pure analogy, as I mentioned last night and the night before. If bigger is better, then biggest is best. This turns out to be incorrect. This argument from analogy is incorrect. They assume there was no limit to economies of scale. scale. There seems to be no limit to successful organization size. And also you point out that when you have this trust, everything is routinized and bureaucratized. You eliminate creativity as we were talking about a couple of days ago. And you eliminate the input of

44:43intelligence by each, the creative intelligence of each individual entrepreneur and you're replacing it by this bureaucratic kind of setup, which can't be replaced by automatic Automatic Routine Processes and he points out the management ability is scarce, entrepreneurial ability is scarce, something which these guys didn't realize. And he says the loyalty to each of their firm was weakened, the individual entrepreneur, no one really gave a damn, he was part of this huge, solid organization. And the personal touch, the personal salesman role was weakened and so forth and so on. Also, as he pointed out, this very large size is often a disadvantage, a handicap in competing with smaller and more mobile competitors. I mentioned the pushcart probably. He didn't. He's a little squarer than that. At any rate, it's that sort of analysis.

45:36He also points out that this very large size often raises the price of raw material too much. You get very big and you start to keep buying this raw material, you raise the price. In the meantime, the small competitors can shop around in secret, sort of make secret deals with the raw material suppliers. Also, the small competitors have a lower overhead so they can nip out in poor years, they can sort of get out of the business or reduce their production in small years, and then nipped back in in good years and is again more mobile in this competitive contest. Also, he didn't point this out, but I'll add to this, there's been very interesting studies of it in the last 10-15 years. This fits in with our creativity discussion.

46:24It's usually considered by orthodox historians. Consider while in the 19th century most of the big inventors, the inventors of great new products and processes, were small and they were small businessmen or also independent, you know, people hickering their laboratory in the basement. But now in the 20th century all the really big inventions have to come from big corporate, huge corporate R&D kind of processes. Turns out it's not true. It's still true in the 20th century the major inventions, the really fundamental creative inventions, are still being made by small independent guys in the backyard or in small laboratories and small firms. There have been several studies of this which I commend your attention. John Jukes's, Jukes, Sayward and Stallerman's great work, Sources of Invention, I think is in the library here, goes through a systematic study of all the top inventions of the 20th century and shows that the largest part of them are still done by small types, Small people, small firms, and also others like Schmuckler and Nelson and a whole bunch of other people have done studies of invention and anything pretty successfully.

47:34I mentioned Xerox and Polaroid. It's one of the heroic cases, which I sort of use for my students. Students have to have some sort of a grabber, something which is relevant in close days to their concerns. One of my favorite examples of this is the great invention in modern times in the shaving field, which is the Teflon coated razor blade. Before this happened, Gillette had a huge proportion of razor business. They were advertising everywhere, of course. Every sporting event for the last 40 years, all my life, has been Gillette tech, worldwide sports, or whatever. So, and yet, despite this, we have this teeny little company in England, Wilkinson Sword Company.

48:21Purely as a by-product, so I'm stumbling into this. Develops this Teflon-coated blade so they can use it as the other processor, stainless steel blade or whatever. Coated with Teflon. And they produce it, they don't really care about blades. They're throwing it away, they're giving it away as a package deal to promote their swords. The only thing I'm really interested in is swords. Beautiful swords, you know, sharp and all the rest of it. We also have a couple of blades we'll throw in to show you how great swords we make. And I remember this as my own personal experience because they didn't want to promote it. And they had a little teeny office in Madison Avenue. You have to walk up, not in the swanky part of Madison Avenue, but the sort of lower Madison Avenue. You had to walk up two, three flights to go to a little office. And the word got around purely by word of mouth.

49:37There's another heroic example of small enterprise invention, competition busting through the cake of custom. So large scale, because the business is big, does not necessarily make it more competitive, more efficient, more innovative. And doing another great book, which sums up a lot of the glucose and starch and leather I've been impressed throughout by the powerlessness of mere aggregates of capital, the whole monopoly. I've been impressed too by the tremendous importance of individual innate ability or its lack in determining the success or failure of any enterprise.

50:26With these observations in mind, one may hazard the belief that whatever quote trust problem exists, will work out its own solution. The doom of the inefficient waits on no legislator regulation. It is rather delayed thereby. Restrictive regulation will perpetuate the inefficient cooperation by furnishing an artificial prop to support natural weakness. I love that solid social Darwinism rhetoric. By furnishing an artificial prop to support natural weakness, it will hamper the efficient by impeding the free play of personal ambition. OK, from this point, this concludes my lecture, second block of lectures, so to speak, on big business and the rise of big business and the fall of the trusts.