THE RIGHT OF CONGRESS TO CONTROL THE

TRUSTS.

BY PHILANDER C. KNOX.

[Philander C. Knox, United States senator from Pennsylvania; born Brownsville, Pa., May 4, 1853; graduated Mount Union college, O., 1872; three years later admitted to bar, and in 1876 appointed United States district attorney for the western district of Pennsylvania; since 1877 has practiced law with James H. Reed, under the firm name of Knox & Reed, devoting attention especially to corporation law; appointed attorney general of United States April 9, 1901, by President McKinley; elected senator from Pennsylvania, 1904.]

The people by common consent have denominated the great industrial and other corporations now controlling many branches of commercial business, trusts. The technical accuracy of the term is unimportant, but indeed it is much more apt than might be supposed, when it is recalled that the essential difference between the old industrial trusts and the great corporations owning and controlling subsidiary ones is that in respect to the former the shares of independent corporations agreeing to act in harmony were lodged with a trustee who received the separate earnings and distributed them among the holders of trust certificates, while as to the latter, a corporation is created to take over the title to the stock or properties of the constituent companies and issue its own shares as the evidence of interest in the combination. The corporation owner of corporations invokes specific legal authority from the legislature of the state under which it is created.

President Roosevelt, in his first message to congress, said: There is a widespread, settled conviction in the minds of the American people that these trusts are, in many of their features and tendencies, hurtful to the general welfare. This springs from no spirit of envy or uncharitableness, nor lack of pride in the great industrial achievements that have placed the country at the head of the nations struggling for commercial supremacy. It does not rest upon a lack of intelligent appreciation of the necessity of meeting changing and changed

conditions of trade with new methods, nor upon ignorance of the fact that combination of capital and effort to accomplish great things is necessary when the world's progress is demanding that great things be done. It is bottomed upon sincere conviction that combination and concentration, while not to be prohibited, is to be controlled, and in my judgment this conviction is right.

These great combinations, now numbering thousands, are the instrumentalities of modern commercial activity. Their number and size alone appall no healthy American. We are accustomed to large things and to do them in a large way. We are accustomed to speak with a justifiable pride of our great institutions and what we have fairly accomplished through them. No right thinking man desires to impair the efficiency of the great corporations as instrumentalities of national commercial development. Because they are great and prosperous is no sufficient reason for their destruction. If that greatness and prosperity are not the result of the defiance of the natural rights or recorded will of the people, there is no just cause of complaint.

That there are evils and abuses in trust promotions, purposes, organizations, methods, management, and effects none questions except those who have profited by those evils. That all or any of these abuses are to be found in every large organization called a trust no one would assert who valued his reputation for sane judgment.

The conspicuous noxious features of trusts existent and possible are these: Overcapitalization, lack of publicity of operation, discrimination in prices to destroy competition, insufficient personal responsibility of officers and directors for corporate management, tendency to monopoly and lack of appreciation in the management of their relations to the people, for whose benefit they are permitted to exist. Overcapitalization is the chief of these and the source from which the minor ones flow. It is the possibility of overcapitalization that furnishes the opportunities for most of the others. Overcapitalization does not mean large capitalization or capitalization adequate for the greatest undertakings. It is the imposition upon an undertaking of a liability without a

corresponding asset to represent it. Therefore overcapitalization is a fraud upon those who contribute the real capital either originally or by purchase, and the efforts to realize dividends thereon from operations is a fraudulent imposition of a burden upon the public. When a property worth a million dollars upon all the sober tests of value is capitalized at five millions and sold to the public, it is rational to assume that its purchasers will exert every effort to keep its earnings up to the basis of their capitalization. When the inevitable depression comes, wages must be reduced, prices enhanced, or dividends foregone. As prices are naturally not increased but lowered in dull periods, it usually resolves itself into a question of wages or dividends.

While this condition may exist under any circumstances, it is exaggerated by overcapitalization in the illustrating case five to one. The overcapitalization securities enter into the general budget of the country, are bought and sold, rise and fall, and they fluctuate between wider ranges, and are more sensitive in proportion as they are further removed from intrinsic values, and, in short, are liable to be storm centers of financial disturbances of far-reaching consequence. They also, in the same proportion, increase the temptation to mismanagement and manipulation by corporate administrators.

Corporations and joint stock or other associations, depending upon any statutory law for their existence or privileges, trading beyond their own state, should be required to do business in every state and locality upon precisely the same terms and conditions. There should be no discrimination in prices; no preferences in service. Such corporations serving the public as carriers and in similar capacities should be compelled to keep the avenues of commerce free and open to all upon the same terms and to observe the law as to its injunctions against stifling competition. Moreover, corporations upon which the people depend for the necessaries of life should be required to conduct their business so as regularly and reasonably to supply the public needs. They should be subject to visitorial supervision, and full and accurate information as to their operations should be made regularly at reasonable intervals. Secrecy in the conduct and results of

operation is unfair to the non-managing stockholders, and should, as well for reasons of state, be prohibited by law. If these serious evils were eradicated and a higher measure of administrative responsibility required in corporate officers, a long step would be taken toward allaying the reasonable apprehension that the unchecked aggression of the trusts will result in practical monopoly of the important business of the country.

Less difficulty is encountered in describing the mischief of trusts than in suggesting a rational and practical remedy. The constitution provides (section 8, article 3): The congress shall have power to regulate commerce with foreign nations and among the several states and with the Indian tribes. Congress, July 2, 1890, enacted that every contract, combination in the form of a trust or otherwise, or conspiracy in restraint of trade or commerce among the several states is illegal, providing punishments and conferring jurisdiction upon federal circuit courts to prevent and restrain violations of the act. It was commonly supposed at the time of the passage of this act that its provisions forbade the existence of trusts that were engaged in monopolizing the production throughout the country of various articles of general consumption, and the government shared in this view. Action was begun by the United States against what was known as the sugar trust. This was a corporation of the state of New Jersey, which had acquired the stock of a number of sugar refining corporations in another state by an exchange of its own shares for the shares of the vending stockholders of those companies. It was formed, as its charter stated, for the purpose of "buying, manufacturing, refining, and selling sugar in different parts of the country."

The government's contention was that the purpose of the purchase was to acquire a substantial monopoly of sugar refining, and as the product was for sale and distribution among the states and to foreign countries, that the arrangement was a violation of the law cited. The contract challenged was one vesting in the trust the last of the independent refineries but one in the United States, thereby giving it the almost complete monopoly of a necessary of life. Its control

was 98 per cent of the whole. The Supreme court decided that as the monopoly was in the production or manufacture of sugar, and its sale or distribution among the states and to foreign countries was but incidental thereto, it was not within the prohibition of the law, saying that manufacturing, although it precedes commerce, is not a part of it, and that the act only applied to restraints of commerce.

This distinction is easily understood when it is recollected that commerce means intercourse, transmission, communication, transportation; and commerce among the states, the regulation of which rests in the federal power, means, as the term implies, that this intercourse shall be between or among the states. Manufacturing, on the other hand, does not imply or necessitate intercourse among the states, but implies a situs or place for its operations. In a subsequent case the government destroyed a combination known as the Addyston Pipe combination, but upon the ground that it was a conspiracy among independent producers of pipe to restrain its sale and distribution among the states. The combination in this case operated directly upon interstate commerce.

These cases seem to define the scope of the anti-trust law and show how little there is now left for the statute to operate upon. It is not enough, it seems, that a trust or corporation owning corporations exists, or that it is engaged in interstate or foreign commerce, for its mere engaging in commerce is not prohibited, or that it monopolizes production throughout the country, or that it is formed to restrain or monopolize business within a state, or destroys competition in buying or selling within a state, or that by any of these things it indirectly affects interstate commerce with a practical restraint or monopoly, to bring the corporation or its particular transaction within the emphatic clauses or under the drastic penalties of the anti-trust law. What seems to be necessary is to establish by legal proof in court a combination for the direct monopolizing or restraining of what is strictly interstate commerce, and to prove this against combinations whose affairs are conducted upon the best legal advice as to what is and what is not obnoxious to the law, by methods secret or ingeniously contrived to avoid the letter of the law.