Matthew Josephson

Big Trusts and Big Crises

(1934)

 



Note

These are two extracts from Chapter 16 and Chapter 18 of The Robber Barons. The theme is the recurrent crises of capitalism shaken by all sort of excesses: financial speculation, overproduction, labor exploitation. The author is quite sympathetic to the animal spirit of capitalistic entrepreneurs but cannot hide the unpleasant aspects of this economic system. And this makes the book worthy to be read in its entirety.

 


 

Chapter 16


1893 : Panic !
Like the tropical hurricane or the earth tremor, it breaks always with fearful suddenness for the great masses of men. Business men who yesterday were affluent tear up the day’s newspaper and fall sobbing at the feet of their wives, crying, “We are ruined !” So the reminiscences and engravings of the time picture the ravages of these regularly recurring economic storms. Behind the heavy red or green velours curtained windows of the thousands of middle-class American parlors, the national melodrama is reenacted in its familiar, classical form. A warm glow of gas lamps floods the rich interior with its bric-a-brac, its gilt and burled walnut furniture, its lacy doilies and what-nots. There is an ornate marble fireplace, and over it the legend : In God We Trust. Here sits the master of the house, with his plump cheeks, his full, curling mustaches, his fine Prince Albert, facing his wife, long-corseted, elegantly dressed in her gorgeous velvet robe. On her face there is a look of composed alarm ; upon his one of rending anguish. For ruin has fallen upon their house. Tomorrow their hopes, all their worldly possessions, their home with its Oriental bric-a-brac, gas lamps, what-nots, must disappear all together in the gulf of bankruptcy.

In reality the wreck of the small undertaker, pathetic though it seems, is of little moment compared with the mass effects of depression upon the general populace. Chiefly it signifies that transfer of individual fortunes, that expropriation of pygmy capitals by giant capitals which is so greatly hastened with each renewed phase of the economic cycle.
Sometimes his individual folly or greed leads a man to the graveyard of business ; but more often nowadays it is the consequence of a “deliberate mismanagement,” skillfully applied under the system of absentee ownership. Large railroads and other enterprises, plunged in reckless expansions, are now seen by the disillusioned to have “officially overstated” their income, to have paid dividends out of capital, and to have given a semblance of extraordinary value to securities which were in fact worthless. At the beginning of 1893, the National Cordage Trust declares a 100 per cent stock dividend, in addition to its usual payments at the rate of 10 per cent in cash per annum. The investors who had entrusted their savings to this corporation are filled with joy. But a few weeks later, in May, the insolvency of the company is announced, a receiver is appointed, and the treasury is found to be empty. The mishaps of the Santa Fe and Baltimore & Ohio railroads, to mention only a few of the great enterprises that collapsed with incredible suddenness, showed a mismanagement and waste of capital no less grievous than that of National Cordage. Yet these alarming and cruel “deflations” do not seem to afflict giant fortunes, whose owners, forewarned and forearmed (as may be judged), pass calmly through the crisis to emerge relatively enhanced in strength.

Sore losses are met by the middle class of savers and investors; but for the hosts of workers in cities and mills, or tillers of farms, the excesses of individual heads of overcapitalized enterprises result in more drastic and extensive derangements. As grains and stocks crash, factories and commercial houses to the number of 15,000 shut their doors, and 500 banks are plunged in bankruptcy, the “flight of capital” and the hoarding of gold mounts in pace with stark fear and hysteria. Through the whole economic organism, now more close-knit and interdependent than ever before, the general dislocation and paralysis is quickly transmitted. Uncomprehending the farmer stares at his cotton which is nearly worthless, his corn which he must use for fuel. And with even less comprehension the laborer feels his thinning pay envelope, or in extreme penury leaves the bitter hovel which he and his family may no longer occupy, to join in those mass uprisings which color the time : the great strikes in the industrial cities or the coal fields, the burning of railroad cars, the combats with soldiers. And before the year is out, while William Bryan thunders against the “Goldbugs in Washington,” “General” Jacob Coxey’s “Industrial Army,” uniformed in rags, but with flags and banners flying, begins its long march across the country to offer the President a “petition in boots.”

Disaster now literally seems visited upon the whole nation ; but it comes no longer through an Act of God, evil season, war or flood, or through weakening energy and skill of the people. It comes, though the whole continent still cries out for productive enterprise, because those who lead in such enterprise have no further wish to produce or to construct.
They, the barons of industry, are now in the grip of the “rich men’s panic” (as the panic of 1893 and others were vaguely but truthfully called). No longer captains of industry “enriching others while they enrich themselves,” they wish only to see to their pecuniary interest, to vie with each other in converting all their capital investments into ready money or gold — so far as possible. Yesterday, they had been engaged in “over-saving” as J.A. Hobson interprets it. They had been setting aside more and more capital with which to pay for long-term improvements, drains, railroads, ponderous new machinery ; they had been preparing themselves ever for the day when they must bring forth still greater quantities of cotton cloth or steel, while making no provision that the buying power of the community increase enough to consume such quantities. The decline of such buying power, the stage when all prices and wages seemed to them “too high” had brought a sudden cessation of such capital investment or “saving,” and in its train “glut” and stagnation. Now, as J.A. Hobson interprets it :

The true excess shows itself in the shape of idle machinery, closed factories, unworked mines, unused ships and railway trucks. It is the auxiliary capital that represents the bulk of over-supply, and whose idleness signifies the enforced unemployment of large masses of labor. It is machinery, made and designed to increase the flow of production of goods, that has multiplied too fast for the growth of consumption. (The Evolution of Modern Capitalism, 1906)

Evidences of uncontrolled capital investment were the doubling of railroad indebtedness, in many cases, between 1880 and 1890, the tremendous increase in the size and range of industrial combinations of all sorts. But what else could be done under a scheme of distribution which brought to a few men incomes of from ten to twenty millions per annum, while even the skilled among the underlying population enjoyed a purchasing power of no more than $500 a year — and this by no means stable ? And even this mass purchasing power would be undermined by the masters. “The workmen now earns the equivalent of a barrel of flour each day,” William Vanderbilt had complained to the stockholders of the New York Central Railroad in advocating wage reductions. Yet at the same time preparations of all sorts were made to produce and market more flour, more goods, more railroad services than the people could afford to use.

The intimate statements, the authorized documents of the time show us that the income of the captain of industry is often so great that he literally cannot consume it himself or cause it to be consumed. Thus Murat Halstead tells us that toward 1890, a year before he died, Jay Gould’s income was approximately ten millions of dollars a year. “Mr. Gould cannot begin to use even a small portion for his own personal use — even a small part of the interest which his dividend money alone would yield. He must reinvest it, and he does reinvest it. It is safe to say that he takes this money . . . and buys other securities.” In other words, he makes new capital investments.

In the case of the Vanderbilts, we are also told that they applied their immense income from two hundred millions of securities to capital investments in new railroads lines, in opening more coal mines, and in introducing new machinery which diminished hand labor.
We see Rockefeller also prompted by the same irresistible impulse — extending new pipe lines, erecting new terminals, building tank ships, acquiring new factories. “The more the business grew,” Rockefeller states, “the more capital we put into it, the object being always the same : to extend our business by furnishing the best and cheapest product.” Another industrialist states that “the first wedge calls as a rule for the second, and so the great railway I was building made further and further demands upon me. To satisfy these I extended my activities. . . .” And Andrew Carnegie, who said that he hoped that the time would come when he would no longer have to expand his business, remarks that he always found that “to put off expanding would mean retrogression.” We find him in 1885 reconstructing and altering his Pittsburgh works radically, so that steel may be produced more swiftly, with fewer hands. We find him later investing more capital in changing from the Bessemer converter to the improved open-hearth furnace — and always he, like Gould and Vanderbilt and others of their rank, seeks to resist the tendency of wages to rise and keep pace with the increasing prosperity and productivity of industry.

“They extended their activities.” During the whole period the race between overcapitalized industries continued; railroads in addition to those already existing tried to reach Chicago or the Pacific through undeveloped territory. Industrialists, coming upon new machinery which gave them an advantage, tried to despatch rivals whose methods were obsolete, always adding to the output and the improvement of their plants far beyond the needs of the existing population or its current purchasing power. From beginning to end their whole policy of management, as Hobson has commented, served to spread “underconsumption,” to make depressions “deeper and more lasting.”

The approach of “hard times” was pretty largely foreseen by the more important captains of business enterprise, not because they possessed supernatural sight, but because they were posted at the very nerve-centers of the industrial system. Not only were they generally able to escape the heaviest blows of adversity and stand “like a rock against the wave,” but the end of the storm would see these powerful figures more solidly entrenched, the field swept clear of opposition.

In the Northwest we see Hill accumulating cash in the treasury of his railway, while watching uneasily the federal government’s fiscal policies. As fear of suspension of specie payments spread, we find Jim Hill hoarding, “always quietly on the watch.” In the notes of Clarence Barron, Samuel Hill, son of the railroad magnate, recalls the time of the Baring failure :

In May, 1890, James J. Hill told me : “We are going to have a panic next September. It will take five years to get over it.” He had advices daily from every capital of Europe. At that time he predicted within four days the exact date of the panic. Then he had nothing in his box. As he said, “Not a pound of meal.” He had only cash. He had sold everything in Great Northern and Northern Pacific. Perhaps he had $50,000,000.

These are no doubt boastful statements and should not be swallowed entire; yet they indicate the tactics clearly. Hill, according to letters in Pyle’s biography, had also foreseen the failure of the rival Northern Pacific line which he longed to control, saying to his partners, “That company has run its length.” The depression, he judged accurately, would be more massive, more prolonged than ever before, because everything was “built-up,” we were “no longer a frontier country. . . .”

January 24, 1890, the brilliant Harriman wrote to the directors of his railroad, the Illinois Central, urging severe retrenchments. “It would be unwise at this time to pass any resolution adopting a policy for a large expenditure of money. . . . Our whole force should be devoted to making and saving money.” Thus while the Erie, the Baltimore & Ohio, Northern Pacific, Union Pacific, Reading, Sante Fe, and a hundred and forty-nine other roads capitalized at $2,500,000,000 collapsed, Harriman’s road went through the panic with no lack of resources. Then as the crisis deepened and passed its climax, we note also how Harriman was in position to use the chances it offered. Taking command of the huge but bankrupt Union Pacific, he would, according to the statement of Otto Kahn, levy great sums from his associates for equipment and improvements because “labor and materials were then extremely cheap.”

During the crisis those barons who had the largest war material, the heaviest reserves, the strongest positions at the “narrows” of trade, pressed their advantages without stint. The collapse of the ambitious Reading Railroad in the Pennsylvania coal regions would be the occasion for the Morgan-Vanderbilt combination to sweep together into one monopoly the mines and carriers of this field. The loss of gold from the federal Treasury in 1894 would furnish the chance for the pool of money-lenders which Morgan headed to make loans to the government at its own terms. In the year of the panic, finding opponents gathering in force to share his profits, Carnegie would break suddenly from the steel pool and cut prices sharply, saying to his rivals : “I can make steel cheaper than any of you. The market is mine whenever I want to take it.” In short, the more powerful the monopoly, such as that of Carnegie in steel, or of Rockefeller in oil, or of Havemeyer in sugar, the more they extended their domain over the industry they exploited, holding their margin of profit firm, while using to the full the demoralization of the raw-materials industries which fed into their own.

Carnegie, for instance, not only expanded the capacity of his mills several times in the five years after 1893, but also made provisions for enormously increased sources of raw iron ore at low prices. The powerful alliance of the Carnegie and Rockefeller interests in the Lake Superior ore business, John Moody holds, “caused a great fall in the price of iron ore and forced many small producers to the wall. Their holdings were thereupon bought in by the Carnegie and Rockefeller combination.”

During all this period of economic misery, the great Trusts, as Montague concludes in his painstaking study of their activities “were scarcely inconvenienced.” Their steadfast growth, their large-scale economies and their stability, revealed how much they were on the side of destiny.

 


 

Chapter 18


The Super-Trust was a reality; the long-awaited “billion-dollar corporation” with all its congeries of industries, its medley of mills and properties of all sorts, its 168,000 workers, and its vast tonnage production, was at last put together at Morgan’s bidding, and was formally introduced to the world on April 1, 1901, as an investment proposition. For though the economic purpose of “integrating” and stabilizing the steel trade upon a nation-wide plan was implicit in this “greatest of commercial transactions” the real motive of the investment banker now showed itself as overweighing all other possible social or technical considerations. The real business at hand was, through a species of inflation, to extract from the mass of middle-class investors a price in payment for stocks and bonds exceeding even the fabulous prices which Morgan had paid for the capital of the divers steel works.

Against tangible assets of $682,000,000 possessed by the “United States Steel Corporation,” Morgan underwrote and offered for sale whole masses of new securities : $303,000,000 in mortgage bonds; $510,000,000 in preferred stock; and $508,000,000 in common stock; making a grand total of $1,321,000,000 to be taken from the community’s savings, as the economist would say, and poured into “long-term capital investment.” But of this capital approximately half represented purely “water”; two-thirds of the preferred stock, and all of the common could be accounted for only by “good-will.” Now this “good-will,” though it might have held some value — as for instance the “Carnegie” name or brand in a competitive situation — actually disappeared in a monopolized market. Whatever Morgan had paid under compulsion for his collection of “good-wills” — to men like Carnegie and Gates — was now worthless; multiplied they were worthless still. In addition, the repeated fees to promoters of the underlying Trusts (such as Federal Steel and American Steel & Wire), when added to Morgan’s syndicate fee of $12,500,000 and subscription profits of $50,000,000, footed up to a grand total of $150,000,000 as the cost for launching the completed steel Trust. Promotion costs plus “good-will” would be imbedded forever in the capital structure of the steel industry, exacting immense fixed charges annually upon the whole community in the shape of interest payments and dividends. To support this inflated capital, to carry these charges, a levy would be made and resolutely maintained by keeping a profit margin as high as possible; the price system must carry the load of fictive debt. One of the ways in which this was done is suggested by the manner in which steel-rail quotations were held stationary for thirteen years after the formation of the steel Trust, at $28 per ton.
The wonder of it was that the toil of nearly 200,000 non-union laborers working twelve hours a day would support this burden; the wonder of it was that the country, growing by leaps and bounds, needing steel in a thousand forms, would willingly pay toll to the bankers who commanded this key industry without owning it.

The amalgamation of the steel companies represented “progress,” was a predestined step toward a more centralized and coöperative economic system. But under the leadership of finance-capitalism inherent contradictions developed by which much of the gains were forfeited. The flotation of the steel Trust was characteristic of the recklessness with which capital was poured into heavy industry during years of frenzied finance with no thought of maintaining the buying power of the masses of consumers. Thus the tremendous overproduction of “future goods,” plant, machinery, raw material in their several processes, would set the stage for chronic depressions. There would be a few Trusts, making mountains of pig iron and cotton cloth, harvester machines and biscuits, which only Mr. Morgan or Mr. Rockefeller could pay for but could not use, while millions of potential consumers were held workless and penniless. And then to augment profits the great Trust would introduce new labor-saving machinery, a more intense division of labor, year after year, thus demobilizing additional masses of consumers.

Under the command of the investment banker, the industrial monopoly reached its final stage of large-scale production; yet in the face of such great technical advantages, ways were found of nullifying much of the social gain to the community at large. How superior was the United States Steel Corporation to the preceding competitive system in a social sense we shall never know. Certainly this question which would be asked in a society ruled by workers and their engineers never entered the minds of the Morgans, Garys, Schwabs.
We do know, for instance, that Schwab (in his private correspondence with Frick) actually indicated a cost to the Carnegie works of $12 per ton for steel rails, then selling at $23.75.
The new Trust, which domestically found it necessary to bring about “moderate” increase in the price of steel rails to $28 per ton, became in a great degree more “inefficient,” judging by the yardstick of price, than the old Carnegie company.

Nevertheless there were halcyon days at Wall and Broad streets in the spring of 1901.
There had been a “favorable” balance of trade in the three preceding years ; the country was prosperous, and the bankers’ syndicate easily gathered together a (pledged) fund of $200,000,000 with which to float the new steel stock. As the Morgan circular announcing the sale of the securities went forth, salesmen were thrown out over the country, a buzz of excitement and anticipation was created, so that the first days of trading in U.S. Steel resulted in huge turnovers. The old master, Jim Keene, at the head of a battalion of stockbrokers, created a “churning” activity for steel, under cover of which quantities of the common stock might be landed upon the public. One of the leading floor-brokers who carried on this exhilarating work has recalled that the stock pool would each day “sell 100,000 shares to the public and buy back only 10,000.”

All was well, and Mr. Morgan departed for European watering resorts to refresh his health.
The world’s press was loud with stories of the “Economic Emperor”; in music halls in America the song was chanted :

It’s Morgan’s, it’s Morgans,
The great financial Gorgon’s …

In the meantime a huge bubble was being blown in Wall Street, as a host of new steel millionaires, from Pittsburgh and elsewhere, descended upon New York and tossed their quickly won fortunes overnight into the market. After them followed a wild crowd, such as Wall Street had never seen — clerks, servants, waiters thronging the streets about the Stock Exchange, buying into the new Morgan Trust, one after another.

But the older, cooler heads among the steel masters, men like Henry Frick and Phipps of the old Carnegie Steel Company, quietly, cunningly sold out their holdings, contemplating with fear the Niagaras of “water” flowing into Wall Street, the stupendous bureaucracy of the Super-Trust in steel, the impending dangers for the national savings. For instance, Harvey says :

Mr. Frick was unquiet. He . . . appreciated the danger of the company’s heavy overcapitalization. . . . Careful study . . . convinced him that declines in earnings were inevitable, and he began to liquidate his holdings.

Carnegie, according to gossip, jested, half in earnest, that he would recapture his steel company by foreclosure, since he had been paid chiefly with its first mortgage bonds. . . .
But soon the whole house of cards was to be rudely shaken from top to bottom by a cataclysm of epic proportions which engulfed the House of Morgan only four weeks after its triumph in steel.

 


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