We are pleased to present, in installments, a very rare yet significant book written by former Congressman Henry George Jr.
Earlier installments are available at the Progress Report Archive.
more of CHAPTER 4, FURTHER TYPES OF PRINCES
Is it not plain that these directly or indirectly government-made or government-sanctioned privileges were the well-springs of Mr. Carnegie's fortune? Shorn of these advantages, how much progress toward a great fortune would he have made over the many men who were his early rivals, and who possibly knew more than he did about the actual processes of the manufacture of steel? He would have done well, for he had good abilities and the qualities of industry and economy. Doubtless he would have attained a handsome competence. But it is reasonably certain that he would not have become a multimillionaire.
Attention has been called to the sale of the Carnegie interests in the formation of the Steel Trust inflation. The formation of this trust gives a good illustration of another kind of privilege that has raised men to princely riches and power.
Early in 1901 Mr. J. Pierpont Morgan effected a merger of many of the great steel manufacturing plants of the country, taking the Carnegie Company as the nucleus, that company being perhaps the best equipped and managed, and certainly owning, location and quality together considered, the best ore and coal beds and natural gas supply.
The iron and steel trade for several years had been very prosperous along with general business. On the wave of prosperity Mr. Morgan, Mr. John W. Gates, Judge Moore and others had grouped together numbers of small plants into large companies, with a capital in each merger greatly exceeding the sum of the capitals of the companies so combined. But the steel trade being unusually prosperous, and the earnings being large, the public accepted the statements of the promoters that the merged companies could effect savings and acquire business impossible for the smaller competing concerns.
The promoters of these ventures were so successful that, Mr. Morgan taking the lead, they entered upon a project to merge the merged companies, with the Carnegie and some ore and railroad and steamship properties added. Ten great steel manufacturing companies and a big iron ore company were brought together. The combination was called the United States Steel Corporation. Stocks and bonds to the value of more than $1,300,000,000 were issued, in the purchase of the stocks and bonds of the merger companies. What were these merger companies worth? Professor Meade of the University of Pennsylvarna in his book on "Trust Finance," says that the amount of money actually invested in the various properties of the Steel Corporation has been estimated to be from $150,000,000 to $500,000,000. Mr. Byron W. Holt, editor of Moody's Monthly, the financial authority, has asserted that "the actual, visible assets of the United States Steel Corporation are only $300,000.000, or the amount of its bonds, and that all of both kinds of stock [more than $1,000,000,000 face value] is what is commonly called `water.'''
That is to say, the promoters of the merger put a capitalization on their huge combination which some persons believed to be three times, others nine times, the amount of actual money invested in the properties.
Mr. Charles M. Schwab himself, president of the United States Steel Corporation, in testifying before the industrial Commission at Washington in 1902, estimated that the mills and furnaces, railroads and cash assets of the corporation amounted to clse on to $600,000,000. Why then, he was asked, was the great company inflated with stock and bonds to an amount exceeding $1,300,000,000? Because, answered Mr. Schwab, the company owned or controlled natural opportunities worth at least $800,000,000 -- iron and limestone lands, coal and natural gas fields. These he averred, could not be "duplicated anywhere."
So there it was: either the promoters had formed a great monopoly of natural opportunities -- of land -- upon which to base their great steel trust; or else they were putting water in the milk, sand in the sugar. The probabilities are that the chief promoters really thought, as Mr. Schwab said -- that they had a practical monopoly of the best coal and ore lands and that that would, in normal limes, at least, give an advantage equivalent to the great stock anti bond inflation. Perhaps also they were willing to run the risk of an overestimate, since the public, and not they, was expected to carry the stock.
At any rate, Mr. Carnegie insisting on having bonds for himself and his friends in exchange for their Carnegie Company properties, the promoters sold common and preferred stock to the public at very high prices. But the prosperity boom unexpectedly slackened. Mills and furnaces slowed down or stopped. Earnings lessened; dividends shrank. And, as a consequence, down went the market price of the great trust's securities to half the face value of the aggregate of the bonds and capital stock; preferred stock, which had sold at par (100), going below 50, and common, which had sold at 55, going below 10.
Evidently the land ownership underneath the trust was not extensive enough. But since then the trust has been quietly absorbing coal and ore beds in many directions.
If the public had lost heavily by the oversanguine expectations of the promoters, the promoters themselves did not. Mr. Morgan had formed a large promoting syndicate. No formal public statement of the earnings of this group has ever been made, nor is it ever likely to; but from such occasional information as has appeared, experts in Wall Street matters compute that the syndicate's net profit from the sale of promotion stock must have been approximately $60,000,000, to which probably $40,000,000 more was added by stock manipulation; so that Mr. Morgan and his financial associates in the syndicate formed to promote this one trust are believed to have cleared about $100,000,000 within two or three years.
What does this vast sum of money rspresent? Earnings from Iabor? Yes; but whose labor? Surely not the syndicate's. It represents almost purely a power of appropriation possessed by these gentlemen. Tbey took this great sum and gave nothing in return. It surely represents a powerful privilege, or perhaps it would be more accurate to say that it represents two classes of privileges, one of which is used to exploit the other.
For, as has been shown, underneath the Steel Trust lay the coal and ore beds. Without possession of these, there could have been no hope of forming such a trust. But possessing these, the promoters obtained a legal right to issue stocks and bonds on them, and that right, as they employed it, became an added privilege. For they had incorporated the United States Steel Corporation under the laws of New Jersey, turned the plants over to that corporation, then gave a large share of the stock to themselves for so-called promotion services, and proceeded to sell that stock to the public at top-notch prices. The laws of other States would not have permitted these promoters to do the things the New Jersey laws allowed, Indeed, it may truthfully be said that these very Steel Trust promoters had been the chief men to shape the New Jersey statutes in this regard. And with what result? United States Assistant Attorney-General Beck, during his argument for the Federal Government in the Northern Securities merger suit, put the matter sententiously. The Northern Securities Company was an offspring of the New Jersey law. Mr. Beck said that that State had won "a bad preeminence for its reckless sale of corporate privileges to secure petty fees." He continued: --
Ex-United States Assistant Attorney-General Whitney has pointed out that until the last sixty years almost every corporation was formed by a special act of Legislature, while at present they are formed under the authority of general laws (Yale Review, May, 1904). The holding company idea germinated in New Jersey in 1888. It was a device for enabling a few men to control majority interests in several or many large corporations. The process of organization under it is simple. Three men, perhaps clerks of some trust-organizing corporation, with money furnished them for that purpose, file a paper with the State authorities and pay a fee. They get a certificate in return, which makes them into a corporation for whatever purposes they like with whatever power New Jersey is able to give them; and, as has been stated, these powers are extraordinarily broad.
Such rights as this piece of paper obtained in this way confers upon them these three men turn over to the men who had requested their services and furnished to them the necessary cash. The new holders of the paper become the company, and all that this company has to do thereafter is to purchase with its own stock the stock of other companies, collect dividends therefrom, and divide the proceeds. This was almost exactly the way in which, to use the descriptive language of Receiver Smith, that "artistic swindle," the United States Shipbuilding Company (Shipbuilding Trust), was organized.
As Mr. Whitney describes, this "holding" principle operates in the United States Steel Corporation, to wit: Under the deliberately created devices of the New Jersey Corporation Act, a minority, perhaps a very small minority, of the stockholders of that corporation can control the latter. The Steel Corporation controls the stock of the Illinois Steel Company, which in turn controls the stock of the Elgin, Joliet and Eastern Railroad Company, and these are commingled with a hundred others, all bound together in an intricate system upon a similar plan.
Mr. Justice Brewer of the United States Supreme Court, in a public address dealing with the concentration of corporate power, has ironically said, "We cannot trust ourselves to hold our own stock."
To outsiders the handling of such enterprises may look complicated, but in their essence they are simple. For instance, a large promoter sends word to his friends to buy the controlling interest in certain railroads. This controlling interest is then sold at a handsome advance to a merger syndicate composed of the same and a few more friends. This merger syndicate sells at a profit to an underwriting syndicate composed largely of these same men with others added. Each of these steps has helped to evolve a mountain of bonded debt and an ocean of stock water. This mountain of bonded debt and ocean of stock water is "placed" on the market. That is, it is "unloaded" upon the public.
Mr. J. Pierpont Morgan stands at the head of Princes of Incorporating and Financing Privilege. He is a banker, yet his largest gains have not come from banking, properly speaking, but from colossal speculation. His word is a mandate in the financial world. If he undertakes to form a "blind pool," it is "blind" indeed. No one is told anything. He does not waste time to explain his plans. He simply sets down the names of certain banks, trust companies, insurance companies and individuals, with the relative portion of the millions for which each shall be permitted to subscribe. He writes, perhaps with a blue pencil on the first bit of paper that comes to hand, a few lines, it may be in almost illegible characters. That scrawl may represent a purchase or an allotment in millions and is esteemed by its holder to be as good as gold in hand. It is not necessary to know what Mr. Morgan has done, is doing, or is going to do. It is only necessary to be counted in as one of his pool. Addition, multiplication, division and silence; that is all it looks like to even an insider, for Mr. Morgan does not condescend to talk. In the promotion of the United States Steel Corporation the Morgan syndicate probably divided, as has been explained, $100,000,000 of what in Wall Street are called "profts."
The rampant corporate welfare of the 1990s got started by the manipulation of New Jersey laws a century earlier.