The performance of industrial securities in the depression of 1893-97 went far toward ridding the financial community of the idea that such securities generally lacked investment quality. This ship in investing sentiment was a factor of major significance in accelerating the merger movement, the promoters of which, in turn, broadened the market for industrials still further. This they accomplished by offering wide participations in promising ventures, by sweetening those participations through extensive recourse to preferred stocks, and by employing promotional techniques new to the field of industrial security marketing. The creation of a broad market for industrial stocks, hitherto highly inflexible administrative tools, meant vastly increased fluidity of ownership. By the turn of the century the transition was well under way from closely held, “inside” ownership of American business to semipublic, “outside” hands.
1 The U.S. Census for 1890 states that the fixed and current assets invested in manufacturing alone (a figure which therefore does not include the other types of industrial companies) was $6.5 billion, while the capital invested in railroads was $10 billion. The census readily states that its figures for manufacturing capital are probably incomplete.
2 The term “industrials” first began to appear in this country in 1889; in England the first written use, according to the New English Dictionary, was in an 1894 issue of the Daily News.
John Moody, affiliated with the banking firm of Spencer Trask & Company, had sensed a demand for an industrial manual in the mid-nineties. He vainly tried to interest his firm in publishing such a manual and then to persuade Henry V. Poor to add an industrial supplement to his railroad manual. But Poor saw no future in industrials, and the severe depression caused Moody to postpone action. Finally deciding to go ahead on his own, he had his volume ready for publication in 1900, just in time to profit from the culminating industrial and financial boom, when investors were seeking information and most corporations were seeking publicity and thus were willing to supply the information. (Conversation, John Moody with Marian V. Sears, 12 May 1955.)
3 Types of enterprises whose securities are not included in these categories: railroads, utilities, banks, insurance companies, investment companies, street railways, canals, shipping companies, express companies, pipelines, docks and warehouses, ferries, and land companies.
4 This figure should be compared with the capitalization of the leading railroads of the day. By 1889 each of the country's ten largest railroads had more than $100 million of net worth and the largest of them all, the Pennsylvania Railroad, had over $200 million.
5 A roughly similar breakdown in modern times would be: very large, over $1 billion; large, $100 million to $1 billion; medium, $5 million to $100 million; small, up to $5 million.
6 It is often not possible to obtain net worth figures for industrial companies in the 1880's. The Commercial and Financial Chronicle, while an extremely useful reference work for the whole period, is not exhaustive in listing companies formed or their capital structures. Consequently, we have often been forced to make estimates based on stated capital, total assets, net earnings, number of people employed, and the like.
7 An important exception to this pattern of development was the meat packing branch of the processing industry. These firms did not enter into a “trust” arrangement in the 1880's and did not become widely held in that period. Even the very large Armour & Company remained a partnership. Gustavus Swift incorporated his very large business in the 1880's and sold stock to his New England distributors, but the stock did not find its way into the hands of the public until the 1890's.
8 The cattle “trust” of the late 1880's, which ranked as very large, may be an exception. Little has been written about it, however.
9 Case studies made of these six “trusts” serve as the basis for these conclusions. Among the most useful sources on “trusts” and mergers of the period are the following: Dewing, Arthur S., Corporate Promotions and Reorganizations (Cambridge, 1914); Jones, Eliot, The Trust Problem in the United States (New York, 1921); Conant, Luther Jr., “Industrial Consolidations in the United States,” Quarterly Publications of the American Statistical Association (March, 1901).
To date, much of what has been written about the “trusts” has been economic theorizing. We need more complete studies based on the records of the constituent companies before we can draw final conclusions about the “trust” movement. Most writing has concentrated attention on why “trusts” came into being. Wherever attention has been given to why the constituent companies went out of existence the assumption has been made that the reason lay in the difficult competitive nature of the times. But research into the history of the large processing “trusts” has led us to believe that there were, in fact, a number of reasons why people sold out to the “trusts” and that in total these subordinate reasons were perhaps as important as the competitive factors that have heretofore received such exclusive attention.
10 As an exception, Standard Oil Company certificates typically had a market value nearly twice par, although there was little trading in them and they were not even listed on the Unlisted Department of the New York Stock Exchange.
11 For example, in the New York legislative investigation of the sugar refining “trust,” H. O. Havemeyer testified that there was no unity of control whatever; “all corporations attended to their own business,” but, having possession of the stock, the trustees “could put in such officers as they liked.” State of New York, Senate, Report of the Committee on General Laws on the Investigation Relative to Trusts, 1888, “Proceedings,” p. 31. See also U.S. House of Representatives, Committee on Manufactures, Report in Relation to the Sugar Trust and Standard Oil Trust, Report No. 3112 (Washington, 1889); U.S. Industrial Commission, Report on Trusts and Industrial Combinations, XIII (Washington, 1901); U.S. House of Representatives, Special Committee on the Investigation of the American Sugar Refining Company, Hearings and Report No. 331 (Washington, 1911).
12 Not long after the cotton oil “trust” was established by midwestern and southern firms, important New York interests were able to acquire enough shares to effect a change in management.
13 Standard Oil, earliest of the “trusts,” was the last to convert to the holding company form (1899).
14 See Evans, George Heberton, “The Early History of Preferred Stock in the United States,” American Economic Review (March, 1929, and March, 1931).
15 Out of the first 100 companies listed in the “Commercial & Industrial” section of the (London) Stock Exchange Official Intelligence for 1890, 38 had preferred stock issues. At about this time a number of English-owned companies, especially breweries, were organized in the United States with preferreds figuring prominently in their capitalization. For an early use of preferred stocks in Germany, see Hunt's Merchants' Magazine & Commercial Review (Nov., 1859), p. 586.
16 The precise limits of the period are October, 1889, when the first “trust” (cotton oil) incorporated, and May, 1893, when the market for new issues was suddenly blighted by financial panic.
17 We have arbitrarily considered a preferred stock to be of investment quality if it was issued by a company of at least medium size, if it was being referred to in the financial journals, and if it was paying dividends. Much of the information in this section was gleaned from the circulars of brokers who were advertising preferred issues for sale. Baker Library at the Harvard Business School has a remarkable collection of early brokers' circulars.
18 There were, however, only five large or very large mergers in that period which did not issue preferreds: Illinois Steel Company, Lake Superior Consolidated Iron Mines, National Wall Paper Company, New York Biscuit Company, and Celluloid Company.
19 In the 27 May 1893 issue of the Commercial and Financial Chronicle, “Investors' Supplement,” an article on “Preferred Stocks of Industrial Companies” discusses the variability and occasional indefiniteness of the terms of certain preferred stock issues.
20 During the years 1890-1893 the New York Stock Exchange listed about as many new industrial preferreds as new railroad preferreds and with about the same range in size.
21 Note the varying uses of the word trust. The successive derivations are as follows. If a man trusted another, he placed his money in a trust fund in the other man's care. When the other man established a company to handle a number of trust funds, he called it a trust company. The Central Trust Company was one of these. When the owners of a group of industrial enterprises surrendered their securities to a committee of so-called trustees, they called the resulting combination a “trust” (we have put the word in quotation marks to indicate our wish to use the term in this narrow and specific sense). Laws set up to deal with large industrial combinations, of which the “trusts” were the earliest examples, were called antitrust laws. There is still another use of the word trust to mean any large industrial combination, but this use is careless and inappropriate.
22 The cotton oil “trust” brought in the prominent railroad banking house of Winslow, Lanier & Company; the sugar “trust” sought assistance from Kidder, Peabody & Company.
23 The inadequacy of working capital to meet seasonal needs was so great in the cotton oil “trust” that it had been relying on large short-term loans and had refrained from paying dividends even when making a profit. The new corporation met this deficiency by marketing $4 million in debenture bonds to raise permanent working capital. The sugar corporation authorized, but did not issue, $10 million in mortgage bonds. Another example is the $2 million bond issue marketed by J. P. Morgan & Company in 1896 for the Studebaker wagon enterprise (later the Studebaker Corporation). Most industrial bond issues in that period ranged from $2 to $4 million and were therefore substantially smaller than the issues of preferred stocks.
24 As a matter of passing interest, the brokers frequently supported their efforts to sell industrial preferreds by the statement that the selling industrialists had agreed to retain their common stock ownership and their interest as managers for a specific period of time. In later mergers, the industrialists often sold their entire interest in their companies, and the public was assured that these men had agreed not to re-enter business in competition with the merger for a specified number of years.
25 Possibly one of the first lectures on industrial securities delivered at an American university was given by F. W. Hopkins, a partner in S. V. White & Company, at Yale in November, 1890. See Commercial and Financial Chronicle (8 Nov. 1890), p. 636.
26 The way the brokerage houses sought to get national distribution of their securities was to place subscription lists at scattered banks and trust companies. A list of banks participating in two or more industrial preferred stock distributions in the years 1890-1893 indicates the geographical spread: New York Guaranty & Indemnity Company (New York), Farmers' Loan & Trust Company (New York), Franklin Trust Company (Brooklyn), Old Colony Trust Company (Boston), First National Bank (Chicago), and First National Bank (St. Louis). The most active bank in this field was the New York Guaranty & Indemnity Company (soon to become the Guaranty Trust Company).
27 Since this article concerns only the manner in which industrial securities passed from inside ownership to outside or public hands, it does not treat specifically with the growing inclination of industrial companies, even some of the most closely held, to admit their employees to stock ownership.
28 Other examples: American Tobacco Company, Swift & Company, United States Leather Company, National Cordage Company, and United States Rubber Company.
29 Bankers Magazine (Aug., 1890), p. 95.
30 By a series of transmutations this company has become today's Dillon, Read & Company.
31 One of the earliest industrial preferreds issued by a manufacturing company in this country was put out by Thomson-Houston in 1889 and privately distributed by Lee, Higginson. This issue was exchanged on a share-for-share basis with the new preferred issue put out by General Electric in 1892 (see Table 1).
32 The United States Leather merger, largest of its day, was the work of a group of manufacturers who stated that they wished to prepare for their retirement by bringing their properties together under the management of younger men. There was at first very little effort to market the stock to the public.
33 Several mergers occurred during the depression but most of them were industrialist-promoted and made no use of financial middlemen. A surprising number had no connection with New York or New Yorkers. The securities of only one, the Consolidated Ice merger of 1895, measured up to investment quality.
34 See Kirkland, Edward C., A History of American Economic Life (New York, 1951), p. 366, and Campbell, E. G., The Reorganization of the American Railroad System, 1893-1900 (New York, 1938), pp. 26–28.
35 A good record was also made by the recapitalizations. All the recapitalization preferreds marketed by investment bankers maintained their dividends.
36 Flint had tried earlier to promote a merger among electrical manufacturers, but without success.
37 The only earlier merger of a pattern similar to that of the later period was the National Starch Manufacturing Company of 1890, organized by Chester W. Chapin. Curiously enough, Chapin seems to have taken very little part in the mergers of 1898-1902.
38 Usually industrialists were sufficiently eager to sell to be willing to extend the options, but not the hardheaded Andrew Carnegie, who, at a slightly later date, was to make the Moore brothers forfeit a whopping million-dollar option when they were unsuccessful in arranging a Carnegie-centered merger of steel companies.
39 By 1902 a common expectation was that the preferred would sell for $85 and the common for $35. See our article on the International Mercantile Marine merger of 1902 in the December, 1954, Business History Review.
40 See Redlich, Fritz, The Molding of American Banking: Men and Ideas (New York, 1951), Vol. 2, Pt. II, p. 371.
41 Not until the spring of 1903 did the accumulation of securities glut the market, thus contributing to the depression that was then developing and bringing to an end the turn-of-the-century merger period.
According to Shaw Livermore, and in contrast to the general view on this subject, a high proportion of the mergers in the 1889-1905 period were financial successes. See Livermore, Shaw, “The Success of Industrial Mergers,” The Quarterly Journal of Economics (Nov., 1935), p. 68.
42 On a sample day in 1903, trading was reported in 136 industrial commons, of which a third were the issue of companies still existent in 1955 with little change in name. On the same day trading was reported in 83 preferreds, of which a quarter were the issues of companies still existent and still financed by preferred stock.
43 These general statements are based on a page-by-page examination of the Commercial & Financial Chronicle and the Boston News Bureau for those years, but summary figures do not include projected mergers that came to nothing. Another useful source for this period is the United States Investor.
44 This fraction is based on the number of mergers. If capitalizations are taken as the base and Morgan's mergers excluded, these four promoters account for about two-fifths of the business, or more than twice the amount accounted for by all the investment bankers apart from Morgan. The Morgan mergers were so extraordinarily large that, when added to the group, their capitalizations account for about half the total.
45 It should be pointed out that the largest merger of all, United States Steel, was initiated not because of competitive stress but because an individual, Andrew Carnegie, wanted to liquidate his sunk investment in steel properties. It is our belief that J. P. Morgan became interested in the Carnegie properties in two stages: (a) when he learned, at the famous Simmons dinner, that the profit outlook for the steel industry made a public sale of steel securities look promising and (b) when he learned that Carnegie would accept bonds in full payment, thereby obviating the need for a public issue to raise money for the purchase of Carnegie's properties. However, such a huge bond issue posed a problem, for the underlying structure had to be large and impressive to support so much debt. It may have been the need for a balanced financial structure as much as anything that led Morgan to approve the huge capitalization that United States Steel came to have.
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