Matthew Josephson

The Origin of the Trusts




Matthew Josephson presents here the arrival of the trusts as an instrument, invented by the banking and business élite, for controlling the market and avoid "ruinous competition". The process of concentration and centralization of control would re-shape the scenario of the American economy for the decades to come, away from the classic model of a capitalism made of entrepreneurs operating in a free competitive market.



Up to 1881 the forty-odd companies controlled by Rockefeller and his partners formed a kind of entente cordiale bound by interchange of stock. This form of union being found inadequate or impermanent, the counsel of the Standard Oil Company, Samuel C. T. Dodd, came forward with his idea of the Trust. By a secret agreement of 1882, all the existing thirty-seven stockholders in the divers enterprises of refining, piping, buying or selling oil conveyed their shares "in trust" to nine Trustees: John and William Rockefeller, O. H. Payne, Charles Pratt, Henry Flagler, John Archbold, W. G. Warden, Jabez Bostwick and Benjamin Brewster. The various stockholders then received "trust certificates" in denominations of $100 in return for the shares they had deposited; while the Trustees, controlling two-thirds of all the shares, became the direct stockholders of all the companies in the system, empowered to serve as directors thereof, holding in their hands final control of all the properties. The Trustees could dissolve any corporations within the system and organize new ones in each state, such as the Standard Oil of New Jersey, or the Standard Oil of New York. Nor could any outsiders or newly arrived stockholders have any voice in the affairs of the various companies. The Trustees formed a kind of supreme council giving a centralized direction to their industry.
Such was the first great Trust; thus was evolved the harmonious management of huge aggregations of capital, and the technique for large-scale industry.

Dodd, the resourceful philosopher of monopoly, defended his beautiful legal structure of the "Standard Oil Trust" both in a pamphlet of 1888 and in an argument before a Congressional committee of that year. It was but the outcome of a crying need for centralized control of the oil business, he argued. Out of disastrous conditions had come "cooperation and association among the refiners, resulting eventually in the Standard Oil Trust [which] enabled· the refiners so cooperating to reduce the price of petroleum products, and thus benefit the public to a very marked degree.
In these arguments, learned economists of the time, such as Professor Hadley, supported Dodd. The Trust, as perfected monopoly, pointed the way to the future organization of all industry, and abolished « ruinous competition. » [*]

From their headquarters in the small old-fashioned building of 140 Pearl Street the supreme council of an economic empire sat together in conference like princes of the Roman Church.
Here, in utmost privacy, confidential news brought by agents or informers throughout the world was discussed, and business policies determined. The management and responsibility was skillfully divided among committees: there was a committee on Crude Oil, a committee on Marketing, on Transportation, and numerous other departments. By these new processes markets or developments everywhere in everybody's business were followed or acted upon.

Every day the astute leaders rounded together by Rockefeller lunched together in Pearl Street, and later in a large and famous office building known as 26 Broadway. No one questioned the preeminence of John D. Rockefeller, though Charles Pratt usually sat at the head of the table. The aggressive Archbold was closest to John D. Rockefeller. His brother William Rockefeller, an amiable mediocrity, but immensely rich as well, and long trained in the use of money, depended most upon Henry H. Rogers. Rogers took a more dominant place in the management with the passing years.
He is described by Thomas Lawson as «one of the most distinguished-looking men of the time, a great actor, a great fighter, an intriguer, an implacable foe.»

These, together with Brewster, Barstow, J. H. Alexander and Bostwick, were the leaders who carried on their industrial operations throughout the world like a band of conspiratorial revolutionists.
But "there was not a lazy bone nor a stupid head" in the whole organization, as Miss Tarbell has said. Behind them were the active captains, lieutenants, followers and workers, all laboring with the pride, the loyalty, the discipline and the enthusiasm born of the knowledge that "they can do no better for themselves" anywhere than under the "collar" of the Standard Oil. Freed of all moral scruples, curiously informed of everything, they were prompted by a sense of the world's realities which differed strongly from that of the man in the street. They were a major staff engaged in an eternal fight; now they scrapped unprofitable plants, acquiring and locating others; or now they gathered themselves for tremendous mobilizing feats during emergencies in trade. They found ways of effecting enormous economies; and always their profits mounted to grotesque figures: in 1879, on an invested capital of $3,500,000, dividends of $3,150,000 were paid; the value of the congeries of oil companies was then estimated at $55,000,000.
Profits were overwhelmingly reinvested in new "capital goods" and, with the formation of the Trust, capitalization was set at $70,000,000. By 1886 net earnings had risen to $15,000,000 per annum.

"Hide the profits and say nothing!" was the slogan here. To the public, prices had been reduced, it was claimed. But after 1875, and more notably after 1881, despite the fluctuations of crude oil· a firm tendency set in for the markets of refined oil products. Upon the charts of prices, the rugged hills and valleys of oil markets turn into a nearly level plain between 1881 and 1891. Though raw materials declined greatly in value, and volume increased, the margin of profit was consistently controlled by the monopoly; for the services of gathering and transporting oil, the price was not lowered in twenty years, despite the superb technology possessed by the Standard Oil. Questioned on this, that "frank pirate" Rogers replied, laughing: «We are not in business for our health, but are out for the dollar.»

While the policy of the monopoly, as economists have shown, might be for many reasons to avoid maximum price levels - such as invited the entrance of competition in the field - it was clearly directed toward keeping the profit margin stable during a rising trend in consumption and falling "curve" in production cost.
Similarly, in perfecting its technology, the Trust was guided by purely pecuniary motives, as Veblen points out, and it remains always a matter of doubt if the mightier industrial combinations improved their service to society at large in the highest possible degree.
As often as not it happened that technical improvements were long delayed until, after a decade or more, as in the case of Van Syckel's pipe line of 1865, their commercial value was proved beyond a doubt. It was only after rivals, in desperation, contrived the pumping of oil in a two-hundred-mile-long pipe line that Rockefeller followed suit. So it was with the development of various by-products, the introduction of tank cars, etc.

The end in sight was always, as Veblen said, increase of ownership, and of course pecuniary gain rather than technical progress in the shape of improved workmanship or increased service to the community. These latter effects were also obtained. But to a surprising degree they seem accidental by-products of the long-drawn-out struggles, the revolutionary upheavals whence the great industrial coalitions sprang.

The greatest service of the industrial baron to business enterprise seemed to lie elsewhere, as Veblen contended. « The heroic rôle of the captain of industry is that of a deliverer from an excess of business management. » It is a « sweeping retirement of business men as a class from service … a casting out of business men by the chief of business men. »

John D. Rockefeller said that he wanted in his organization « only the big ones, those who have already proved they can do a big business. As for the others, unfortunately they will have to die. »




[*] Dodd explains (in Combinations, 1888) its origin: « It was a union not of corporations, but of stockholders .... From time to time now persons and capital were taken into this association. As the business increased new corporations were formed in various States, some as trading companies, others as manufacturing companies. In some cases the stocks of these companies were placed in the hands of Trustees instead of being distributed to the owners. Out of this grew what is known as the Standard Oil Trust. »


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